Pub. 11 2021-2022 Issue 3

coloradobankers.org 20 By Myron Schwarcz and Keith Ash SRM (Strategic Resource Management) Fed’s Durbin Proposal Creates More Confusion Than Clarity B anks that issue debit cards should brace for challenges if the Federal Reserve moves ahead with a plan to amend certain regulations for card- not-present transactions. The Fed has proposed clarifications to the Durbin Amendment’s Regulation II, including a requirement that card-not-present transactions must be capable of being processed across at least two competing networks. While the agency has suggested that the change would be “non- substantive” in terms of new obligations and compliance, there are concerns that, with no further clarifications, the implications for issuers could be very substantive from contractual, financial and compliance perspectives. When Reg II was created, the Fed believed the market for card-not- present transactions was not mature enough to have solutions to back two unaffiliated networks for online transactions. While some domestic debit networks now support card-not- present transactions, the business case for enablement is murky, and certain issuers have elected not to opt-in. The Fed has said it feels such practices are inconsistent with Reg II and must be addressed with this clarification. What are the concerns for issuers? Practicality is a big consideration. Depending on how the Fed interprets the two-network requirement, the proposal has raised questions around the compliance obligations that issuers will need to monitor. How can issuers ensure that every merchant accepts both of their card payment networks? Does an issuer need to support all merchants even if one is considered high risk? How will innovation be handled if only one network supports an emerging capability? The proposal could prove to bedevil community banks. If card-not- present volume shifts from national card networks to regional networks, smaller issuers could run the risk of failing to meet certain contractual obligations and commitments with their networks. That could eventually contribute to more consolidation among smaller banks. While the current conversation is limited to Durbin’s requirement that issuers make at least two network options available for all debit transactions, industry advocates used the comment window to revisit broader interchange grievances. Retail associations and merchants want the Fed to step in and mandate