Fed Issues FAQ’s on Durbin, Network Routing Rules May Increase Costs for Prepaid Issuers (March 14, 2013)
March 14, 2013
The Federal Reserve Board this week provided last-minute clarification on debit card routing rules under the Durbin Amendment and on the General Use Prepaid Exemption that experts say could give prepaid issuers heartburn, just about two weeks before the regulation’s April 1 effective date. Under a “Frequently Asked Questions” heading, the Fed outlined new procedures prepaid card issuers must comply with that many may not be prepared for, Terrence P. Maher, partner, Baird Holm LLP, tells Paybefore. The new guidance could be “very disruptive” for issuers, especially those that issue gift cards, loyalty, award and promotional cards, he warns.
The new guidance is creating a “firestorm” among prepaid card issuers, adds Judith Rinearson, partner, Bryan Cave LLP.
The Fed’s latest guidance on the Durbin network exclusivity and routing provisions appears to suggest that to add a second PIN-debit network option, as Durbin requires, issuers must either include the cardholder’s PIN for use with the second PIN debit network when delivering the card materials to consumers or require that the cardholder go through an activation process and PIN selection before the card can be activated, Maher says. “The assumption was that if the issuer enabled the PIN debit network in the card, and informed the cardholder how they could select a PIN, that was sufficient” to meet the Durbin requirements, he explains. Card issuers typically send PINs separately from card materials, for fraud protection, he notes. If prepaid card issuers default to the second option, they would need to set up all card programs to include stickers with card-activation instructions, and make sure their processors are set up to handle card activation and PIN selection for all cards issued, he adds. This could represent “significant additional expense” for gift card issuers and “hassles” for cardholders, Maher says. Maher doubts that most prepaid card issuers have configured their programs to be in compliance with the Fed’s new guidance on PIN management, and the limited time frame before the rules take effect is a concern.
There is also bad news here for e-wallet issuers relying on automatic refills to a prepaid card from a bank account and similar “decoupled debit” programs, according to Rinearson.
The Fed’s FAQ provides that the interchange fee exemption is lost if the issuer provides an automatic “top-up” feature for the prepaid card from another account if the prepaid card balance falls below a certain predetermined level, Maher explains. “If the issuer seeks to maintain its prepaid exemption, the cardholder would need to take specific steps to ensure the transfer of funds each time he wanted to add value to the prepaid card” Maher says.