With the fate of debit interchange rates wrapped tightly in legal red tape, the payments industry is facing uncertainty at a time it can least afford it.
"Do you think PayPal is sitting around waiting to see what happens on debit interchange?" asks Madeline K. Aufseeser, senior analyst with Boston-based Aite Group. "PayPal and other disruptors like Square offer ways to get around all of this."
American Express and Discover continue to develop new products, and prepaid card marketers are aggressively pursuing new audiences, likely denting debit business in the process, Aufseeser adds.
Key aspects of how to handle debit transaction routing and issuer revenue are up in the air until a federal judge determines his next move in light of the Federal Reserve Board's decision to appeal the decision that it had capped debit interchange fees too high. U.S. District Court Judge Richard Leon on July 31 ruled in favor of merchants who filed the lawsuit in response to the Fed capping debit interchange at 24 cents.
The legal uncertainties are an indication "the existing business model is outdated" and the industry needs a new philosophy and a lot of technology updates, Aufseeser says.
Though it wasn't a major topic during Wednesday's hearing, Judge Leon's ruling also invalidated the Fed's implementation of the Durbin amendment's mandate that merchants have a choice of routing networks for debit transactions.
The card brands and regional PIN debit networks have been addressing the technology needs of this rule as it applies to EMV-chip cards. The issue is unique to the U.S., because no other EMV countries have multiple debit networks from which to choose.
"We're moving along to resolve the routing issue, but this [legal ruling] has certainly injected new uncertainties," says Randy Vanderhoof, director of the EMV Migration Forum. The independent Smart Card Alliance last year created the EMV Migration Forum to address the technical and legal issues surrounding the U.S. migration to chip-based payment cards.
"We are not sure if the federal ruling will become clear in the next weeks, months or even longer," Vanderhoof says.
In addition to the legal uncertainties, the major hang-up continues to be whether the card brands and PIN networks can resolve the issue of who would be in control of the common application identifier for EMV debit routing technology. The card brands want to control their own technology, while the PIN networks seek an independent governing body.
It's too early to say if the PIN networks would seek a move into the signature debit business if final legal rulings present that opportunity, Vanderhoof says.
Visa declined to comment on the appeal or the routing issue at this time. MasterCard did not respond prior to deadline.
Douglas Kantor, a member of the legal team from Steptoe & Johnson representing merchant groups in the rate-cap case, declined to comment on specifics of the case, saying only, "We'll pursue the next steps in this appeal process and hope for results to come quickly."