Open-Loop Prepaid Programs Escape Unaffiliated Network Trouble Thanks to Appeals Court
Date: March 21, 2014
The open-loop prepaid industry got a good start to its weekend today thanks to the Unites States Court of Appeals for the District of Columbia Circuit.
The appeals court overturned the Judge Leon decision that would have reduced interchange on debit cards and required two unaffiliated routing options for merchants for each form of authentication available on a card. The Leon decision did not pose a big threat to the prepaid industry from an interchange perspective, since it did not change prepaid exemptions. But if every open-loop prepaid card were forced to include at least four unaffiliated networks on the card, the industry would have been under real pressure.
While the major networks have all said that they will comply with all laws and regulations, they have not done much to enable dual signature networks on cards. This means that unaffiliated routing options have been left to the PIN debit side. This has raised expenses on prepaid cards as they have had to enable multiple PIN networks and include PINs on some cards where before it was not necessary. Open-loop gift cards have been particularly hard hit. Most banks say that gift cards have been a convenience product that they offer to their customers to keep them from going elsewhere for open-loop cards, and not a revenue producer. J.P. Morgan Chase stopped selling open-loop gift cards last September, right before the holiday rush. While Chase stated it got out of the business because it was a small compared to other business lines, it’s likely that the increased costs of operating the program post-Durbin Amendment influenced the decision.
For companies offering other types of open-loop cards, such as general purpose reloadable cards, tax-refund cards, and incentives cards, this ruling will also come as a relief. A change to the rules requiring more routing options would have required them to reissue cards to their entire portfolio, assuming that the dual routing requirements for each form of authentication would be worked out in a timely manner.
In addition, were the routing requirements to be upheld, it would have reduced the value of being connected to Visa or MasterCard because the card would be attached to both networks. American Express and Discover would have been unaffected by the rulings because they are three-party networks and therefore excluded from the provisions of the Durbin Amendment. Issuers have said that the multiple routing options have made offering card-based rewards more tricky because the routing may take place over a network that is not participating in a rewards scheme, but because the cardholder has no choice in the routing of the transaction, they expect their rewards regardless of whether or not the transaction was one that was part of the incentives program.
Perhaps one of the most important benefits of this ruling is that it eliminates uncertainty about the future of the economics of these programs. There is a possibility that the retailers will try to appeal the ruling once again, but it seems that the issue is settled for now. This means that the industry can get back to worrying about other legal and regulatory issues, and perhaps move ahead with plans for their programs that may have been put on hold in the wake of the Leon decision.