A provision in the regulatory reform law that received scant attention during the protracted debate in Congress is already generating more business at some debit networks.
While most of the haggling surrounding debit reform focused on interchange rates, the law also includes a clause that bars issuers from requiring that transactions be routed across a single network, or over multiple networks that are controlled by the same company (see story).
In its most narrow reading, the so called no-exclusivity section seems to be aimed at Visa Inc. and MasterCard Inc., and the handful of banks that offer their cards and are not connected to any other debit networks.
But experts say the law is so broad — and so vaguely worded — that it could also require significant changes to many banks' debit programs, including restricting the widely used exclusive debit arrangements, or even forcing issuers to distribute cards that are affiliated with both Visa and MasterCard.
In the near term, some banks are establishing additional relationships with debit networks.
"We absolutely do think there's some upside with our NYCE network," Gary Norcross, the chief operating officer for Fidelity National Information Services Inc., said during the Jacksonville, Fla., payments technology vendor's earnings conference call last week. Fidelity owns the PIN debit network NYCE Payments Network LLC.
Neil Marcous, NYCE's president, said some issuers have already agreed to connect their debit cards to his network in response to the provision, though he would not name any of them.
"Some are clearly organizations that are in an exclusive position with" Visa and MasterCard, he said, and need to offer another option. "The exclusivity clause as we read it, and as most people we've had dialogue with understand it," requires banks to "offer two avenues on a card."
Discover Financial Services, which operates a competing PIN debit network, also is expecting a boost in business.
David Nelms, Discover's chairman and chief executive, told analysts on a conference call last month that the no-exclusivity provision was designed to "encourage competition" within the debit industry and could lead to "a favorable outcome" for his company's Pulse network.
However, the true impact of the provision likely is limited, because few banks use only a single debit network.
Of debit cards from the 50 largest issuers, about two-thirds are linked to multiple, nonaffiliated networks, according to Lee Manfred, who consults on payments as a partner with First Annapolis Consulting in Linthicum, Md.
"Depending on how the interchange rules get promulgated, the nonexclusivity rule … may be a nonevent," Manfred said.
Because the bill was signed into law only last week, there is still plenty of uncertainty about how the clause will be interpreted.
The law instructs the Federal Reserve Board to create regulations stating "an issuer or payment card network shall not directly or through any agent, processor, or licensed member of a payment card network, by contract, requirement, condition, penalty, or otherwise, restrict the number of payment card networks on which an electronic debit transaction may be processed" to one network or two or more networks that are "owned, controlled, or otherwise operated by" affiliated networks.
Most executives have interpreted that to mean that debit cards must be connected to at least one network other than those operated by Visa or MasterCard (depending on the brand on the card).
Cards that do use a single system, and would be impacted by the new law, are most likely to handle signature debit transactions through Visa and PIN debit purchases across the San Francisco payments company's Interlink network, or to use MasterCard's systems' for signature payments and its Cirrus PIN debit network. (Discover, which also offers both PIN and signature debit systems, could also fall into this category, but it accounts for only a small share of the debit market.)
Both Visa and MasterCard declined to provide executives to discuss the law.
"The language is pretty broad. We are going to have to wait for the regulators to tell us exactly what it's supposed to mean," said Paul Tomasofsky, the president of Two Sparrows Consulting LLC in Montvale, N.J.
Because it has yet to be clarified, some payments experts say the law, in its most strict interpretation, could even force issuers to connect their cards to at least two different networks to handle signature debit transactions.
Duncan Douglass, a partner with the law firm Alston & Bird LLP in Atlanta who works on payments topics, said such a reading could lead to cards linked to both Visa and MasterCard, or even Discover.
However, he said such an outcome was likely not the intent of the law.
"The plainest meaning of the language is that having at least two unaffiliated payment card networks available to process a debit transaction" whether they are PIN or signature debit systems, "gets out of the exclusivity restriction," Douglass said.
The law could also affect exclusive debit arrangements, in which issuers contract with only a single PIN debit network, typically receiving lower transaction rates in exchange for sending more volume across the system.
Tomasofsky said those deals will "be very difficult to do," because merchants will now be able to route debit card transactions over the network of their choice, so long as it is equipped on the card.
Tien-tsin Huang, an analyst with JPMorgan Chase & Co., is skeptical how much of an impact the provision will have on Visa and MasterCard, given that least-cost routing is already practiced by many merchants today.
The PIN networks operated by Visa and MasterCard "are commonly cheaper on interchange than rival PIN networks, suggesting that Visa/MasterCard would be likely winners, not losers under least-cost routing," Huang wrote in a research note last month.
Because of that, merchants would likely continue to route transactions over Visa and MasterCard's PIN networks when applicable, Huang suggested.
Another wrinkle is that "not all issuers offer PIN debit," said Michael Kelly, the general manager of ACCEL/Exchange, a PIN debit and ATM network owned by the Brookfield, Wis. banking technology vendor Fiserv Inc. "There are still issuers that are signature-based debit only, and probably north of 60% of all merchants still don't offer PIN at the point of sale."
If such issuers would be required to add another network, which most suggest would be PIN-based, "it's not clear to me what adding" a PIN option "would accomplish if the majority of merchants don't take PIN and not all issuers offer PIN," Kelly said.