WASHINGTON, D.C. -- The Merchants Payments Coalition criticized the Federal Reserve for making merchants pay for fraud prevention even if banks donï¿½ï¿½t prevent fraud. Although the Fed found that merchants bear 41% of signature debit fraud losses and 74% of such losses for "card-not-present" transactions, its rules now require them to pay fees that cover 100% of fraud-prevention costs incurred by issuing banks.
Under debit-card reform that took effect in October, the Fed was to ensure that banks actually take effective steps to prevent fraud and decide how much of the cost of preventing fraud the merchants and the banks should bear. Instead, the Fed rule rewards banks with more merchant funds if they self-determine that they prevent fraud. That will not be effective and regulators should have to find that the banks actually reduce fraud before they get more funds.
U.S. banks lag much of the rest of the industrialized world in technology to make card transactions safer and remain mired in 1970s-era technology, in part because the less-safe transactions (signing for a debit card purchase rather than using a PIN number) have historically been more profitable for the banks.
The coalition believes it is unfair for the Fed to saddle merchants with the costs resulting from this purposely outdated technology. Instead the Merchants Payments Coalition believes that with this ruling the Fed is abdicating its regulatory role and simply allowing more money to flow to banks that issue debit cards.
Nothing in todayï¿½ï¿½s ruling actually decreases fraud. This is inherently unfair to merchants who already bear nearly half the cost of preventing fraud.
The Federal Reserve Boardï¿½ï¿½s final rule, which goes into effect Oct. 1, allows non-exempt issuers to collect a 1-cent fraud prevention adjustment on debit card transaction revenues, so long as issuing banks self-certify that they meet the Fedï¿½ï¿½s fraud prevention standards. This fee, in addition to a 0.7% fee for fraud prevention costs already included in the interchange fee, would place the entire cost of fraud prevention on the backs of merchants.
This final rule the Fed announced Friday is the same amount as the preliminary rule. The Fed is responsible for the details of enforcing debit reform passed by Congress in 2010 as part of the Dodd-Frank bill created to prevent another financial crash.