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Preparing for Regulation II

By: Chuck Fagan, President and CEO, PSCU

In October 2022, the Federal Reserve issued a final ruling on Regulation II (Durbin Amendment), which requires two unaffiliated networks on a debit card and sets a cap on debit interchange rates. In this ruling, the Fed clarified that the two unaffiliated network requirement also applies to the Card Not Present (CNP) environment and announced an implementation deadline of July 1, 2023.

PSCU has been very public in our opposition to the Durbin Amendment and our belief that it should be repealed. The Durbin Amendment took critical resources away from smaller financial institutions including the credit unions we serve, who, while they were exempt from debit interchange cap provisions, still saw significant declines in interchange revenue. As a result, these financial institutions were forced to offset the interchange revenue losses by raising other fees consumers pay (including monthly service fees and minimum balance fees). The Durbin Amendment hit the least affluent American the hardest, leading to an additional one million underbanked Americans.

As we move towards the implementation deadline of July 1, we continue to work closely with our clients to ensure they are compliant and – more importantly – prepared for the financial and fraud impact that the new Regulation II changes will have on their business. Looking ahead, we expect the following impacts:

  • Financial institutions will see a rise in fraud and chargebacks. Most CNP volume flows over the dual message networks today, which have built and refined sophisticated risk tools since the beginning of online commerce. This is a wholly different environment than face-to-face commerce and requires the merchant, network and issuer to collaboratively fight fraud. As more volume flows over networks that have historically seen little CNP volume, we expect a significant rise in fraud that our clients will have to manage from an operational and risk standpoint.
  • Clients will see lower revenues from CNP Transactions. The purpose of this regulation is to drive issuer revenues down to benefit merchants. As more transactions move from the dual message networks (which historically have higher interchange) to PIN networks (with lower interchange), there will be a corresponding financial impact – including lower revenues and less available funding for investments in systems.
  • Clients will need to optimize their authorization and fraud policies for their second network. Current CNP authorization and fraud policies generally assume most of those transactions come via dual message networks. Similarly, authorization and fraud policies for transactions coming through PIN debit networks assume most of that volume will be Card Present, which has lower fraud rates. Issuers will have to refine their authorization and fraud policies to account for CNP transactions coming through PIN debit networks, incorporating the higher risk associated with these transactions.

We also remind our financial institution clients that there is no need to change their Card Present configurations; these regulatory clarifications only apply to the CNP space. As an example, financial institutions that have not turned on PINless for Card Present do not need to enable at this point, as doing so would likely have a negative financial impact.

We will continue to support our financial institutions and help them comply with the regulation, even as we continue to voice our opposition to it. Large retailers cannot continue to profit off the hardships of smaller American businesses and consumers.

Charles E. (“Chuck”) Fagan III has served as PSCU’s president and chief executive officer since April 2015. In this role, he leads the strategic direction of the company and oversees all aspects of PSCU’s operations, ensuring the delivery of best-in-class payments solutions, service, data security, and successful growth for the company’s Owner credit unions.

His career in the credit union industry spans over three decades. Prior to rejoining PSCU, Fagan served as president and chief executive officer of the Credit Union Executives Society (CUES), a membership association dedicated to educating and developing credit union executives and emerging leaders, from January 2013 to April 2015. He is an advocate for the credit union industry and an active member of the community. Currently, Fagan serves as a member of Visa’s Executive Client Council, a member of the Florida Chapter of the American Cancer Society’s CEOs Against Cancer and a member of the Advisory Board for the College of Business and Economics at Longwood University. 

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