ABA: Prepaid Issuers Must Create Plan to Comply with Durbin, Talk to Regulators (April 1, 2013)

Many debit and prepaid card issuers are scrambling to make provisions as of today with debit card routing rules under the Durbin Amendment and the General Use Prepaid Exemption. Issuers were caught off guard as a result of FAQs, representing a Federal Reserve Board staff clarification of the requirements, released quietly by the Fed in mid-March on the eve of the rules’ April 1 effective date. The Fed’s guidance on the Durbin network exclusivity and routing provisions caused “a bit of a surprise” to debit and prepaid card issuers that were not prepared to provide cardholders with a PIN for immediate use with their cards, Nessa Feddis, vice president and senior counsel with the American Bankers Association, tells Paybefore. Durbin requires all debit cards provide merchants with a second, unaffiliated debit network, which in most cases requires a PIN. Most debit issuers mail a PIN separately to cardholders, but some provide PIN selection online or through telephone channels, and in cases where consumers fail to select a PIN, that represents a violation of the Durbin rule, she says.

The real challenge for complying with the Fed’s latest guidance is for gift card issuers, Feddis adds. “Most gift cards don’t have a PIN because gift cards aren’t usable at ATMs,” and adding a PIN for customers’ immediate use “will require some system and process changes,” she says. “We’re advising card issuers to review their systems and create a plan with the goal of ensuring compliance, and issuers should talk to their regulators to make sure they understand what they must do and explain they are working diligently to comply” with the rule, Feddis advises. It is clear that for prepaid cards, in particular, the Fed’s rule “is not consumer-friendly,” she adds. The Durbin rule is administratively enforced, so issuers need to work directly with regulators, she says. So far there doesn’t appear to be any exception to the rule for card issuers, despite the inconvenience, Feddis says. “The Fed doesn’t have the ability to change the effective date or the regulation itself without putting it out for public comment, which would take months.”

Many in the prepaid industry would call the FAQs that are launching potentially significant changes in prepaid card packaging and processes more than an inconvenience—as millions of dollars of already distributed prepaid cards and their packaging are on the line, as well as the feasibility of continuing to provide uninterrupted access to some gift and loyalty and promotion cards, as well as to government benefits.

A number of organizations with a stake in the prepaid market have called or visited the Fed to ask for relief from the unanticipated requirement included in the FAQs. Although there are reports that the Fed staff is sympathetic to the difficulties of the prepaid industry and is considering further clarification of its position, there is unlikely to be regulatory relief in the immediate future. 

Stay tuned to Wednesday’s issue of Pay Gov for more details.