Debit Networks Form Organization to Work on EMV As Court Mulls Durbin Decision

Ten U.S. debit networks have formed the Debit Network Alliance LLC, an organization meant to ensure they have a competitive stake in the debit industry following the U.S. payment-industry migration to the EMV chip card standard, expected within a couple of years.

The new group has sprung up as an appeals court considers a federal-court decision this summer that ordered the Federal Reserve to rewrite its rules implementing the Durbin Amendment. The decision has cast uncertainty on the debit business, and especially on how the industry can make the EMV standard work with U.S. debit cards.

The Alliance, founded by AFFN, ATH, Co-Op Financial Services, Jeanie, NETS, NYCE, Presto!, Pulse, Shazam, and Star, wants to ensure the same competitiveness that exists today continues following the EMV migration, says Paul Tomasofsky, executive director of the Alliance and president and executive director of the Secure Remote Payment Council, an association. While all 10 debit networks in the Debit Network Alliance are members of the council, not all council members are part of the new company because they are not debit networks, he says.

“Our objective is to maintain the same competitive atmosphere we have today pre-EMV in a post-EMV market,” says Tomasofsky. “EMV could change that if not done in an industrywide way.”

Debit networks, including Visa Inc.’s Interlink and MasterCard Inc.’s Maestro, have to contend with altering the EMV standard to accommodate the Durbin Amendment, which requires that merchants have multiple routing choices for debit transactions.

Plus, debit networks have to wait to for the appeal process to play out on a decision in July by Judge Richard J. Leon of the U.S. District Court for the District of Columbia, who said the Fed misread the Durbin Amendment’s clear language in crafting its debit-interchange limit of 21 cents plus 0.05%, plus a penny allowed for fraud losses. That rule took effect in October 2011.

The Fed’s routing rule, which requires at least two unaffiliated networks for each card, also violates the intent of the law, Leon said, arguing that the statute requires that each transaction offer at least two networks for each authentication method, PIN or signature. The Fed’s routing regulation took effect in April of last year.

EMV incorporates a so-called application identifier (AID) that specifies card type (credit or debit) and is proprietary to each major network. This does not allow for the kind of merchant-driven network choice mandated by Durbin—unless one of the networks opens up its proprietary AID to the industry or the industry agrees on a common AID. Both MasterCard and Visa have proposed to do the former, while the regional debit networks that formed the Debit Network Alliance have proposed the latter.

Both Visa and MasterCard are invited to become participants in the Alliance, Tomasofsky says. Neither Visa nor MasterCard responded to a Digital Transactions News inquiry. “Every debit network in the United States is welcome to become a participant in the Debit Network Alliance,” he says.

There has been some agreement between the two camps. This summer, for example, the regional networks agreed to let applications from Visa and MasterCard work on U.S. chip cards with the common AID. Apps run under the AID and control such functions as offline and online authorization and security.

But the regional systems maintain their insistence that ownership of the common AID must be held equally by all networks, with each network having an equal voice in governance. That leaves the ultimate resolution of the issue unclear while a major deadline—a mandated shift in fraud liability from issuers to merchants that aren’t equipped to accept EMV cards—looms less than two years away.

Formation of the Debit Network Alliance is significant because it demonstrates a commitment to move forward by the debit-network industry, says Terry Dooley, executive vice president and chief information offer at the Johnston, Iowa-based Shazam Network.

“We have offered several solutions that we feel will meet everybody’s desire,” Dooley says. “That’s been a back-and-forth process.” Dooley says the debit application identifier issue is more of a business matter than a technical obstacle.

The new association is “exactly what the industry needs now, which is a coming together of the debit networks,” says Ron Mazursky, director of the debit-advisory service at Maynard, Mass.-based Mercator Advisory Group Inc., a payments consulting firm. “We still have to wait until January for the appellate court review of Judge Leon’s opinion. Right now, the technology doesn’t allow for what the judge has requested,” Mazursky says. “We need some sort of accommodation to allow for that, a solution that will work on all cards.”