Even if the Federal Reserve Board does not backtrack sharply on its debit-fee cap as a result of last week's court ruling, the legal battle has created fresh uncertainty that may have some U.S. issuers questioning their long-term strategy.
When debit fees were first capped two years ago, rewards-heavy debit cards were scrapped or redesigned to accommodate the drop in revenue. Issuers today also face the European Commission's proposal to cut rates for both debit and credit transactions.
"A dangerous situation is brewing here and banks have to starting thinking long-term about implications to their card portfolios," says Brian Riley, senior research director and analyst with Boston-based CEB TowerGroup.
Until the Federal Reserve Board follows the court's instructions to lower the debit-fee cap or appeals the ruling, the court verdict leaves too much unresolved for banks to decide how to approach debit issuance and the switch to EMV-chip cards, says Nick Holland, senior payments analyst for Javelin Strategy & Research.
"The uncertainty has implications going forward, because some financial institutions may contemplate dropping out of debit, and instead seek alternative revenue streams," Holland says.
Retailers were quick to praise their victory in court last week when U.S. District Judge Richard Leon ruled the Federal Reserve Board set rates too high, while banks expressed fear about another slash in revenue.
Issuing banks also aren't sure what the ruling will mean for the work that has been completed on establishing a common application identifier for routing EMV debit transactions under the Durbin amendment's mandates.
Banks may again say they are not willing to pay for EMV card issuance because of Durbin-related losses, especially now that those losses could be even more significant, Holland says.
The Fed capped interchange for debit transactions at 21 cents, after initially suggesting the rate would be capped at 12 cents, a sharp decline from its earlier 42-cent average.
It's possible banks would be hesitant to issue EMV cards at a cost of $4 each, when they issue mag-stripe cards for less than a dollar, but they would also consider other ways to cut costs to offset Durbin losses, says Dan Heimann, manager of solutions for payments in the U.S. for payment gateway ACI Worldwide.
The card brands set a deadline of Oct. 1, 2015, for most retailers to accept EMV cards to avoid a shift in fraud liability. With this deadline looming, issuers are likely contemplating how they could shave fraud costs by switching to PIN debit transactions if the interchange is lowered to 12 cents, says Heimann, who also is a member of the EMV Migration Forum steering committee.
"Issuers have to take a hard look at EMV and the timelines, but there will be pressure from a global perspective," Heimann says. "Americans are causing big [fraud] problems for European banks with their mag-stripe cards."
For the time being, merchants and acquirers will be even more vocal about needing an extension on the liability timeline, Heimann says.
They will point to the multiple network routing issue and what may come of that situation if the Fed changes its response to the Durbin amendment, he adds.
"Some [stakeholders] say we may end up with two unaffiliated signature networks and two unaffiliated PIN networks as routing options because this is what was meant by the Durbin ruling for keeping competition open in the first place," Heimann says.
The judge's ruling should not invalidate anything that has previously taken place to establish the common AID because the technology driving it will be needed regardless, Heimann says.
"That is a pet peeve of mine when someone says EMV technology is somehow not achievable with Durbin," Heimann adds.
The common AID tries to "preserve what happens today" in debit routing, because if all networks had their own application, it would call for "a lot of intelligence in the terminal" to route the transactions to the proper network, Heimann says.
There is little doubt that the uncertainty over debit fees and routing could lead to another option for banks: Sit and wait.
"The potential is there that banks will do nothing to advance EMV, and that is probably the right thing to do now," Javelin's Holland says.
Even though banks have indicated that EMV will be their top priority for the next three years, "If there is no clarity on EMV, they will do nothing," Holland adds.