Observers Split on Banking Groups’ Effort to Get the Fed to Extend Time for Debit Compliance

Industry opinions are mixed regarding a move by banking trade groups to plead for more time to act on a ruling issued in October by the Federal Reserve. The ruling orders all banks to comply by July 1 with an 11-year-old requirement that merchants have a choice of at least two networks for all debit transactions, online as well as in-store. One of the networks can’t be Mastercard if the other is Visa, and vice versa.

Four banking trade groups plus The Clearing House Payments Co., a processing platform owned by the nation’s biggest banks, sent a letter to the Fed Feb. 10 asking that the deadline for compliance be extended 18 months to Jan. 1, 2025. The Fed’s deadline, the groups argue in their letter, allows debit card issuers “insufficient time to undertake time-consuming and resource-intensive efforts to change their core banking software and payments infrastructure.” These issuers include “thousands of community banks and credit unions” that lack the technical resources larger institutions enjoy, the letter says.

This argument may or may not get a sympathetic hearing at the Fed, but it is already dividing experts in the payments industry. Proponents of the deadline’s extension argue the compliance burden on small banks was not given enough consideration as the Fed mulled its order.

“Many smaller community banks and credit unions simply do not have technical staff and are completely reliant on their third-party technology providers to prioritize their development needs.  As banking solutions become increasingly complex, there is a need to create small-bank exceptions and differentiated timelines when new rules require technology change,” argues Sarah Grotta, a payments-industry expert with banking experience.

Besides The Clearing House, the groups behind the industry’s letter to the Fed include the American Bankers Association, the Consumer Bankers Association, the Credit Union National Association, and the National Association of Federally Insured Credit Unions.

As might be expected, the Merchants Payments Coalition released a statement on Tuesday opposing any extension of the Fed’s deadline. The MPC has long been a proponent of the  Durbin Amendment to the 2010 Dodd-Frank Act, which mandates that issuers offer merchants a choice of at least two networks for debit card routing. The Fed issued a final rule in June 2011 to enact the amendment for U.S. financial institutions, with an April 1, 2012, effective date.

Over the years, the law has been observed more often for in-store transactions than for those occurring in e-commerce, where banks and the two global networks have argued that alternative systems are not always prepared to offer PINless debit, or online transactions without the PIN codes users enter for in-store transactions. This is a contention many experts and the alternative networks themselves dispute.

Now even observers who have long opposed the Durbin Amendment argue banks should stop pleading for time and comply with the Fed’s July 1 deadline. “I’m not sympathetic to the idea there’s a U.S. debit issuer that’s had insufficient time to comply with the law,” notes Eric Grover, proprietor of Intrepid Ventures, a payments consulting firm based in Minden, Nev. “The law did not say, and the Fed implementing the law did not say, that online debit transactions were exempt from the routing-choice mandate.”

With its October “clarification,” Grover contends, the Fed made “clear what the law and its initial rule had made clear more than a decade ago, but that apparently some issuers chose to ignore or to willfully misunderstand.”

For observers like Grover, the issue is obedience to the law, even if, in their view, the law is bad. “To be sure, the Durbin Amendment is bad law,” he argues. “It should be repealed. But if we live under the rule of law, regulators must neutrally, not selectively, enforce the law, whether the regulators and those subject to the law think it’s bad or good law.” The banking groups arguing for an 18-month extension, he says, would better spend their time arguing for repeal rather than “pleading with the already accommodating regulator to further defer enforcing it.”