Durbin Wants To Know How Well His Debit Card Fraud-Prevention Adjustment Is Working

In the wake of recent data breaches at Target Corp. and other retailers, U.S. Sen. Richard Durbin, author of a famous amendment that regulates debit card interchange, and an ally want to know how well a provision in the amendment that gives a debit card issuer an extra penny in interchange for taking fraud-control measures is working.

Durbin, of Illinois and the No. 2 Senate Democrat, and U.S. Sen. Al Franken, D-Minn., sent a letter this week to new Federal Reserve Board chairwoman Janet L. Yellen asking her to look into that and related issues by March 12. And in a series of questions, Durbin and Franken suggest that the Fed should have a role in overseeing the implementation of Europay-MasterCard-Visa (EMV) chip cards and other technologies that eventually will replace fraud-prone magnetic-stripe cards in the U.S.

A small part of the massive Dodd-Frank financial-reform law of 2010, the Durbin Amendment cut the average interchange of regulated debit card issuers—those with $10 billion or more in assets—by about 50%. One of its provisions, however, allowed the Fed, which Dodd-Frank charged with writing regulations to implement the amendment, to set an “adjustment” that would give an issuer a bit of extra interchange provided it took effective fraud-prevention measures.

The Fed set that adjustment at 1 cent, and made it fairly easy for any regulated issuer to get. According to Durbin, who had sought issuer-specific determinations of their eligibility for an adjustment, all an issuer has to do is tell the debit card networks that it has implemented policies and procedures “reasonably designed” to prevent fraud. In their letter, Durbin and Franken decry the lack of oversight on fraud prevention by bank regulators in verifying such claims.

“The Board’s rule does call for an annual review of the effectiveness of an issuer’s policies and procedures, but the rule lets the issuer be its own reviewer,” the letter says.

Durbin and Franken then ask Yellen to answer a series of questions about what the Fed and other federal bank regulators that have some role in enforcing the amendment are doing regarding fraud prevention. They ask about what information regulators receive from banks, whether any issuers have actually demonstrated that they have effective fraud-reduction procedures, and what regulators’ plans are for monitoring them.

The senators also take note of the ongoing debate over whether U.S. EMV cards should require PIN authentication, as is common in other countries. Many retailers support PIN use, but some banks and especially Visa Inc. have downplayed its future role. Durbin and Franken suggest in a final question that perhaps government should inject itself into the debate about that and related issues: “Does the Board believe that fraud prevention will be enhanced if the Board and other agencies play a role in overseeing the implementation of EMV or similar technology?”

A federal judge last summer overturned the Fed’s Durbin rule, saying the Board failed to follow Congress’s intent on its major provisions that besides interchange and fraud address transaction routing to give merchants more network choices. The Fed is appealing, and the current rule remains in effect during the process.

The letter is drawing mixed reactions in the payments industry. “Durbin and I think Franken are taking the opportunity to engage in some gratuitous bashing of the industry,” says consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures. “They want the Fed to be more activist.”

But another industry advisor, Steve Mott of Stamford, Conn.-based BetterBuy Design, praised the senators. “This letter is right on the money—asking the right questions to get to accountability on the fraud issue,” Mott says by email. “The plain fact is that issuer experiences with managing fraud are all over the map, and if a good solution does arise, the bigger banks are reluctant to share it with the rest of the banking industry.”