Apple Pay is violating the Dodd-Frank Act’s Durbin amendment, retailer groups say — at least the way Apple’s mobile payments system is currently implemented — and the groups are calling on Apple, Visa and MasterCard to meet the requirements of the law, American Banker reported on Monday (April 6).
The problem: Durbin requires that merchants have payment routing options for debit-card transactions that aren’t affiliated with Visa and MasterCard, and which presumably have lower fees. But merchants complain that Apple Pay doesn’t let them choose how the tokenized transactions are routed — and as a result, they’re discovering that Apple Pay transactions are costing them more than regular plastic payment-card swipes.
The accusations come after a month of complaints and finger-pointing over Apple Pay-related fraud, lack of usage by iPhone owners and failures of merchant support — and there’s no lack of finger-pointing on this issue either.
While legal and technical opinions vary, all the players — merchants, card networks, processors, card-issuing banks and acquiring banks (which accept transactions for merchants) — seem to agree on two things: First, there are ways for Apple Pay and other mobile payments systems that use tokens to obey the Durbin requirements. And second, whoever’s fault it is, it’s not theirs.
For example, merchant groups say they can’t choose less expensive routing because Visa and MasterCard haven’t provided technical information for them to do that. Mercator Advisory Group VP Tim Sloane agreed — “The problem is the merchants do not yet have a mechanism to see that alternative network,” he said — but Sloane suggested it’s the acquiring banks that should be providing merchants with the necessary routing tables.
And while Merchant Advisory Group CEO Mark Horwedel said merchants “as a practical matter, don’t have the options that Durbin affords them” because they’re effectively locked into the networks of Visa and MasterCard, which operate Apple Pay’s tokenization technology, both First Data’s STAR Network and Fiserv’s Accel now say they can also handle Apple Pay transactions.
Meanwhile banking groups said they haven’t heard any complaints about the issue from their bank members, so they don’t view it as a problem. An unidentified attorney interviewed by American Banker suggested it’s the merchants’ fault because they “decided to accept transactions in a way that only gives them one network. The merchant has opted to use an online technology where only one network is available. It doesn’t mean that the issuer or the networks are precluding other types of transactions.”
That’s simply wrong, said National Retail Federation general counsel Mallory Duncan: “The Fed made it very clear that it was their intention that merchants were to have access to multiple [forms of] routing regardless of the configuration of the product.” According to the Federal Reserve’s rule implementing Durbin, that requirement “applies to any supplemental device, such as a fob or token, or chip or application in a mobile phone, that is issued in connection with a plastic card, even if that plastic card fully complies with the rule.”
While the finger-pointing is likely to continue, the problem may not, said former big-bank executive Tom Noyes, who now leads a recently launched data-marketplace startup called Commerce Signals. “Over the next six months, this shouldn’t be an issue anymore,” Noyes said. “The other networks will be able to work with Visa and MasterCard to be able to make this work.”