Durbin Amendment Update Industry Responds to Fed’S Final Debit Card Rules

Jul/Aug 2011

pulsationsThe Debit News MagazineSM Durbin Amendment Update Industry Responds to Fed’s Final Debit Card Rules

fter a delay of more than two months, on June 29 the The final rules, known as Regulation II, incorporate some Federal Reserve Board released its final interchange, trans- significant adjustments to the proposal released by the FRB last Aaction routing and network exclusivity rules, as required by December – most notably, an increase in the regulated inter- the Durbin Amendment. Originally slated to be issued on April change cap from the $0.12 originally proposed to $0.21, plus an 21, 2011, the rules were delayed as Federal Reserve staff reviewed ad valorem component of 5 basis points (bps) of the transaction the more than 11,000 official comments it received on the pro- value to cover fraud losses. In addition, an interim final rule, when posed rules. implemented, will enable financial institutions that meet certain (continued on page 10) PULSE Participant Survey Financial institutions rate the network on transaction switching, fraud prevention, acceptance ULSE periodically commissions surveys of its financial institution participants through independent research firms to learn more about the challenges debit card issuers are facing, and to better understand participants’ satisfaction with PULSE Pproducts and services. Earlier this year, Analytica, Inc. conducted a survey of 160 PULSE participants representing a wide range of financial institution types, sizes and geographical locations. (continued on page 8)

PULSE Platform The Impact of 2011 PULSE Upgrade Change on Fraud Conference: Page 4 Detection The Changing Page 5 Nature of the Debit Industry Page 6 VIEW FROM THE TOP

Dear PULSE Participant,

n June 29, 2011, the Federal Reserve Board issued its final rules for implementation of the Durbin Amendment, which became law as part of the Dodd-Frank Wall Street OReform and Consumer Protection Act. The final rules include significant adjustments to the proposal released by the FRB last December, as outlined in the lead story in this issue. Based on initial reaction to the Federal Reserve’s final debit interchange rules, it appears none of the stakeholders in this issue is happy with the regulation. Merchants are displeased that the regulated interchange rate is nearly twice the Fed’s original

Dave Schneider proposal. Regulated issuers and networks are concerned that the rate is a substantial reduction to the current average interchange, and less than the 27 cents identified in a comment to the Fed by a group of eight banking and credit union associations as the actual cost of a debit transaction. Even “Regardless of the Board of Governors seemed dissatisfied when they cast their votes on the final rule on June 29. Governor Daniel Tarullo said, “I’m positive there are many merchants, issuers, consumers and how any of us networks which would want to change much of what has been proposed, just as some of us at the Board may want to do … [But] we have to act in accordance with the language of the statute.” feels about the Governor Sarah Bloom Raskin added, “I want to underscore my colleagues’ unease with this kind of regulatory intervention. Indeed, when a regulator has to intervene in a market to better align regulation, it’s a pricing with costs, that market must be working somehow less than competitively. We didn’t create fact, and PULSE is this market. We didn’t craft the Durbin Amendment. We’re only doing what Congress has directed.” Governor Elizabeth Duke voted against the rule altogether, her primary concern being the here to help guide effectiveness of the small issuer exemption. Regardless of how any of us feels about the regulation, it’s a fact, and PULSE is here to help you through the guide you through the changes that lie ahead. We have identified work we need to do as a network to comply. In particular, we will be making changes to our rules to ensure compliance with the regu- changes that lie lation’s requirement for merchant-directed routing. We also are working with issuers that have ahead.” agreements with PULSE for PIN debit network exclusivity to design solutions that comply with the new requirements. Finally, we will be implementing a pricing structure that reflects the regulated interchange rate for issuers subject to that regulation and utilizes the interchange exemption for small issuers. Further details about the network rules revisions and pricing changes have been communi- cated to network participants’ primary PULSE contacts. Please contact your PULSE account manager if you have any questions about the changes that are outlined in these communications. As always, thank you for your continued support of PULSE.

Sincerely,

Dave Schneider President

All debit all the timeSM 2 PROFESSIONAL DEVELOPMENT On-Demand Chargeback Webinars Available, Fall eForum Scheduled ULSE participants looking for updates on current chargeback Insights & Solutions eForum issues and trends found an abundance when they attended PULSE will host its third eForum in October. This moderated, Pthe recent PULSE Debit Performance Webinar Series, interactive webcast will focus on current fraud trends and provide Understanding Chargebacks Results in Decreased Fraud. The webinars strategies to help mitigate loss. An opportunity for live Q&A will be were among PULSE’s highest rated in recent memory. To learn available throughout the webcast. Further details will be distributed more about these sessions, see the article on page 4. to network participants soon. All three webinars in the series are now available on-demand in the Professional Development section of the PULSE website. Both the archived recordings and printable presentations are accessible for Insights & Solutions replay or download at no charge. As with all PULSE webinars, these sessions can be used for in-house training at your institution to further develop employees’ knowledge of the payments industry. Connect with Us On-demand replays www.pulsenetwork.com/DPWS www.pulsenetwork.com/eForum

Professional Development information www.pulsenetwork.com/pd [email protected]

PULSE 30-Year Evolution: Value Through Innovation

ore than 30 years ago, the New Payments Products founders of PULSE established Strategic Business Initiatives Ma network designed to serve the PULSE established as Regional ATM Switch 1981 best interests of the entire financial com- PULSE PAY® PIN POS Debit launched 1985 munity. This forward-thinking business Automated adjustment system 1988 approach resulted in the introduction of numerous products and services over PINless bill payment 1995 the years. Signature debit support 1996 1997 Acquired GulfNet Connect with Us 2001 Acquired Money Station PULSE Products & Services www.pulsenetwork.com/public/about.html 2002 Acquired TYME PULSE Durbin Amendment Resource Center In-house processing platform 2003 www.pulsenetwork.com/debitregs Stored value 2004 Discover Financial Services acquired PULSE 2005 China UnionPay acceptance

JCB interchange agreement Discover® Debit signature debit 2006 LINK interchange agreement

DebitProtect® fraud detection system Recurring PINless bill payment Perks Everyday® debit rewards 2007 2008 Discover Financial Services acquired Diners Club Intl

PULSE Select® Surcharge-free ATM Network PULSE Global Cash Access Network 2009

PULSE® Internet PIN Debit BC Card (South Korea) interchange agreement PULSE PAY® Choice 2010 DinaCard (Serbia) agreement 2011

3 p u l s e n e t w o r k . c o m PULSE Completes Major Platform Upgrade

ULSE completed a significant upgrade minor but important changes before all of its processing platform in May. The processors were moved on May 16. When Pnetwork transitioned its online switch the day came, all processors were transi- transaction processing environment to new tioned to the new environment in a very Blade servers at the Riverwoods and Ohio short time frame, with 94 percent of con- data centers, and built a state-of-the-art nections being restored within 12 minutes. testing and development platform. This was an enormous technological These new platforms represent a achievement. considerable investment in supporting the PULSE has a number of other major future growth of PULSE and its participants. They enable the technology projects under way, including an integrated process- network to deliver improved transaction processing performance, ing platform. This project includes new data warehouse/analytics, as well as significantly increased processing capacity. fee billing, settlement and dispute processing platforms, which “The transition was a success, due not only to the efforts of will be implemented in stages over the next few years. These sys- many employees but also to the cooperation and assistance of tems will provide network participants with a more informative network processors,” said Tony Zeis, PULSE Senior Vice President presentation of the data they receive from PULSE today, as well as of Switch Services. “Countless hours were spent preparing for and enhanced visibility into the details of their PULSE participation. completing the migration, and it paid off.” These technology investments – which participants will hear A “dress rehearsal” was conducted beforehand with four more about in the coming months – will give PULSE the flexibility processors, allowing us to test our migration protocol and make to provide a wide variety of future service enhancements. Understanding Chargebacks = Decreased Fraud 2011 PULSE Debit Performance Webinar Series Gives Solid Pointers he PULSE Professional Development provided a detailed update of Visa and Part 3: Manage and Measure Program is designed to provide our MasterCard reason codes, including The third installment of the series T network participants with guidance new international codes. concentrated on the value of tightening and insights they can use daily, as well as The presenters emphasized the up back-office management and tracking in developing long-term strategies. importance of documentation, as well as fraud metrics, as well as the latest trends “When we talk to our participants resisting “tunnel vision” for the top four in data breaches. While studies show a about where they need support, the reason categories in use. Instead, they steady decline in the number of records one subject that surfaces more than any recommend taking time when possible compromised from a six-year high in 2008, other is chargebacks,” said Cindy Ballard, to find the code that best fits the incident, data breaches persist. Executive Vice President of PULSE. which reduces the likelihood of rejection. Despite best efforts and relative “Financial institutions are constantly The discussion on reason codes was successes at thwarting fraud, crooks requesting information about managing followed by questions from the audience, continue to develop new ways to obtain chargebacks and minimizing the losses resulting in a helpful dialogue for the personal information that can be parlayed that can result.” majority of the webinar. into financial fraud and identity theft. The PULSE addressed these concerns panel also underscored the need to strike by dedicating the 2011 PULSE Debit Part 2: Fraud Trends a balance between accentuating the safety Performance Webinar Series to charge- Session 2 of the series explored current of products and services while educating backs. The three-part series zeroed in on and emerging trends in fraud perpetration. cardholders on taking precautions to help key components of chargebacks, including While online merchants were identified as protect themselves. reason codes, emerging trends and cutting the biggest chargeback segment today, The chargeback webinar series was fraud losses with strategies for day-to-day presenters acknowledged a bright side, designed to provide a comprehensive chargeback management. Experts Andrew noting that online fraud has declined since analysis of the core fundamentals of Benjamin, TSYS Director of Business 2008. However, ATM and POS compromises chargebacks. The expert panel shared Development; Tom Cain, TSYS Director of continue, and the growing mobile pay- real-world tools to help streamline pro- Risk Management; and Paul Tomasofsky, ments market will usher in new opportuni- cesses and mitigate losses, and advised President of Two Sparrows Consulting, led ties for fraud. chargeback personnel to cultivate a net- the sessions. This session also tackled the potential work of peers to share best practices. effects of new legislation on the charge- All sessions are available for on-demand Part 1: Reason Codes backs arena. For instance, will financial playback. Part 1 of the series took a deep dive institutions be able to afford effective fraud into chargeback reason codes. Following prevention efforts once the final Durbin Connect with Us a brief overview of current chargeback rules take effect, or will the responsibility Replay sessions & download presentations statistics, Benjamin and Tomasofsky shift to merchants and cardholders? www.pulsenetwork.com/pd

All debit all the timeSM 4 The Impact of Change on Fraud Detection By Rich Rezek Retail Decisions, Inc.

he technology of fraud perpetration The fraud landscape has advanced tremendously in also changed when the T recent years. While the technology equipment used to of fraud prevention has also progressed, perpetrate fraud criminals are continuously seeking to gain became easy to obtain. an advantage by increasing the sophistica- Skimmers, tiny cameras, tion of their attacks. keypad overlays and This is the nature of the fraud control other items are readily life cycle. As criminals become familiar with available for purchase weaknesses in card and payment technol- on the Internet. For ogy, the cost of fraud losses increases. This $1,500, anyone can buy drives the industry to develop and imple- card readers, writers, ment solutions to reduce fraud. As these embossing equipment and 100 blank cards analyze use by cards, terminals and solutions become effective and drive online. Criminals can install a card skimmer merchants in any combination down losses, the cycle begins again. New at a restaurant or retail location one day • Geospatial measurement of trans- weaknesses are found, the new technolo- and use the stolen card data just days later. action distance from home, or gies are cracked and fraud begins to rise Skimming technology is advancing as distance between card-present until newer solutions are developed to well. Skimmers can be wired or wireless, transactions mitigate it. and designed for point-of-sale or ATM use. • “Positive” and “negative” lists (lists Routine fraud involving a stolen pay- Small battery-operated skimmers can hold of cards on which you should allow ment card is now easy to detect and stop up to 5,000 account numbers. Criminals transactions – such as when a with simple rules such as “velocity” limits, also can implant a chip directly into POS cardholder notifies your institution of which identify multiple transactions in equipment, holding up to 1,000 account international travel – as well as those rapid succession. But in the past 5 to 10 numbers. on which you should not) years, the fraud problem has changed Other trends in fraud perpetration rapidly, making fraud detection and pre- include: Preventing subsequent fraudulent vention much more challenging. • Fraudsters focusing efforts in transactions requires: areas that do not use chip and PIN • Easy-to-implement customer-specific Evolution of Fraud Attacks technology, such as the U.S. rules changes, with careful manage- First, there was the theft of individual • A growing number of “one and done” ment of changes, monitoring of rules cards, pick pockets or a single clerk stealing fraud events worldwide and a process for rules exceptions card numbers to get some new shoes. • Increasing fraud at the ATM • Rapid, proactive analytics that In the last 10 years there has been an • The use of stolen cards to purchase compare current and historical data to increase in the theft of massive amounts gift cards reveal compromise and fraud trends, of consumer information through data • Customer relations challenges combined with regular review of breaches. The types of data stolen vary resulting from card-not-present confirmed fraud and subsequent widely, ranging from names, addresses fraud (as are common with online updates to rules and decisioning and card numbers to Social Security purchases) • Communication of trends both numbers, account numbers and other internally and externally to educate financial information. Fraud Detection and Prevention Tools account holders, confirm suspicious More recently, the change in the fraud What is required to combat these transactions and improve analyst landscape is the organization and speed of modern fraud attacks? Preventing the first decisioning the criminals involved. Financial fraud is fraudulent transaction requires a powerful • Effective re-issuance strategy and now perpetrated by highly sophisticated real-time decision engine and real-time rapid shutdown of accounts when organizations. In a major data breach in neural-based transaction scoring. Elements necessary 2009, money mules were hired to withdraw of this technology include: money from ATMs using stolen card data • Entrance criteria (rules about which Dealing with Change and store the money in safe deposit boxes transactions require scanning) In today’s environment, fraud strategies and train station luggage lockers. Within • Sub-second decisioning on need to rapidly shift with geographic, 12 hours, $9 million in cash was withdrawn transactions in-flight portfolio, ATM, merchant and other data. from 2,100 ATMs in 280 cities worldwide. • Multi-anchored velocity controls that Confirmed fraud is your best window to learn how fraudsters think and behave. Rich Rezek is Vice President of Client Relations at Retail Decisions, where he manages customers using ReD fraud detection Identifying trends from your data and software and assists them in developing fraud detection and operational strategies to manage their risk. He has worked in the creating fraud rules will help save your electronic payments industry since 1993 and has experience that spans card issuing and acquiring, as well as traditional and institution money. alternative payments. His background includes positions with transaction processing software providers, merchant acquirers, ISOs and fraud prevention companies.

5 p u l s e n e t w o r k . c o m Regulation. Education. Motivation.

2011 PULSE Conference Addresses Biggest Industry Challenges

ptly named Debit Evolution, the Steenberg, Senior Vice President and PULSE President Dave Schneider 2011 PULSE Conference in April Director of Debit and Rewards at Citizens transitioned into an insightful discussion highlighted the dynamic nature Bank, shared his viewpoint as a $132 of the future of debit. Focusing on debit’s of the payments industry. The billion commercial bank holding company enormous success, Schneider led the three-dayA conference, set in New that will be directly affected by new group through tips on how to approach Orleans, addressed a broad spectrum interchange regulations. their business differently to maximize of topics relevant to the electronic Patricia Hewitt, Director of Mercator profitability and loyalty. He encouraged payments business, including new Advisory Group’s Debit Advisory Service, his audience to regulations and the latest fraud develop- and John MacAllister, Founder of Dorado segment ments. With a speaker lineup as diverse Industries, rounded out the panel, each customers as PULSE’s participant mix, the sessions bringing 25 years of payments industry through offered enlightening ways to enhance experience to the discussion. The group detailed your debit program. parlayed their individual expertise into analysis of how sound advice for financial institutions and when they struggling with the implications of the use debit, new regulations. among other preferences. He Motivational Opening Sessions then suggested taking this analysis a step Best-selling author Tim Sanders further and tailoring programs to fit each opened day two of the conference with group’s specific needs. Schneider his inspirational assessment of how total emphasized the dynamic nature of the confidence leads to success. Sanders payments industry and the consumers believes success flows to people who who use our products and services. Your possess “mojo” – a sweeping sense of success, he said, depends on evaluating total confidence that expectations will be debit programs continuously to deter- Insights & Solutions Forum exceeded, and that there is enough to go mine what practices work and which ones This year’s Insights & Solutions around. Sanders illustrated his belief could use a retooling. Forum was dedicated to The Durbin through stories about business leaders Amendment and the New Era of Debit. who weathered the recession not with a Debit-centric With new regulations still on the horizon sense of fear, but rather with an uplifting Concurrent Sessions at the time, promising to deliver sweep- sense of gratitude, generosity and Nine concurrent sessions enlight- ing changes, the U.S. payments industry support that trickled down through their ened participants on a wide variety was challenged to rethink the way it does entire workforce. He summed up the of topics. Upon registering for the business. A panel of experts moderated essence of his presentation, Mojo Rising: conference, attendees were asked to by Leah Henderson, PULSE Executive How to Rise Again, with three tenets: vote on which of three suggested topics Vice President of Sales and Account restore they would most like addressed at the Management, explored ideas for adjust- confidence, PULSE Conference. An overwhelming ing to the Durbin Amendment fallout and establish majority selected chargebacks. This poll maintaining profitability in a post-Durbin trust and give resulted in a panel discussion titled marketplace. until it hurts. Preventing Fraud Loss Through Effective Nancy Crouch offered her perspec- Chargeback Management. Three industry tive as Director of Card Services for experts tackled the latest chargeback American Airlines Credit Union, a $5.2 billion financial institution that is not subject to interchange restrictions under Regulation II. In contrast, Chris Van

All debit all the timeSM 6 Regulation. Education. Motivation.

2011 PULSE Conference Addresses Biggest Industry Challenges

and fraud trends for card transactions. Special Conference Features of PULSE. “The PULSE Conference is a The group then analyzed current industry Throughout the conference, attend- professional development service we processes to help formulate effective ees had several opportunities to network provide to help financial institutions fraud mitigation solutions. with peers in the exhibit hall, as well as remain at the forefront of our evolving Other sessions featured various at meals, a Jazz Club Party featuring industry, and it would not be possible strategies aimed at refining business Deacon John and the Ivories, and a without the gracious contributions of practices, engaging consumers and charity golf event benefiting Café Recon- our speakers and the support of our maximizing debit profitability. cile. Participants were able to stay participants.” connected during the conference using Revealing Closing Session social media outlets including Twitter, Connect with Us Best-selling authors of Freakonomics LinkedIn and YouTube. Top industry Debit Evolution Sessions On Demand and SuperFreakonomics, Stephen Dubner suppliers were on hand in the exhibit hall www.pulsenetwork.com/pd and Steven Levitt, closed the conference throughout the event, showcasing their Future PULSE Professional with an offbeat view of how the world products and services, from the latest in Development Opportunities works. They operate on the belief that technology to seasoned, reliable solu- www.pulsenetwork.com/pd figuring out tions. Visit the PULSE YouTube channel to [email protected] what motivates view interviews with selected exhibitors. Exhibitor Interviews people is the “In this new era of debit, it has never www.youtube.com/user/PULSEisDebit key to devising been more important to keep pace with effective the ever-changing marketplace,” said business Cindy Ballard, Executive Vice President strategies that deliver results. Levitt, an economist, and Dubner, a journalist, combine their analytical and investigative skills to back up their theory with real-life evidence, declar- ing that the proof is in the data. In other words, they focus on what people reveal, not what they say. The duo regaled the audience with colorful, if unconventional, stories and delivered insightful, real-world business solutions for attendees.

$500 Discover Gift Card Winners Debbie Humphries First Victoria National Bank Victoria, Texas Benny Trevino First Technology Services Abilene, Texas

6 7 p u l s e n e t w o r k . c o m PULSE Participant Survey (continued from page 1)

In the area of offering new products and services, last year the network launched PULSE Internet PIN Debit after a successful pilot of the product. In addition, a web- based data warehouse, analytics and reporting tool, the PULSE Debit DashboardSM, will be made available to financial institution participants later this year. This easy-to-use tool will allow participants to analyze their PULSE transaction activity and benchmark their debit programs against peers, thus enabling them to make more-informed decisions about their debit portfolios.

Communications Network communication was also addressed in the participant survey, with 95 percent of respondents indicating they were satisfied with the amount of commu- “Results from our participant surveys help us better under- nications they receive from PULSE. Communications tools for stand our participants’ priorities and our performance as a service keeping participants current on PULSE updates and industry provider, as well as the challenges and opportunities financial insti- developments, such as PULSATIONS and the PULSE website, also tutions face,” said Cindy Ballard, PULSE Executive Vice President. received high ratings. In addition, nearly 80 percent of respon- “That helps guide our strategies and deliver greater value.” dents either said PULSE has very good communications or offered no suggestions for improvements. Performance Ratings “I think PULSE does an excellent job with communications,” The survey asked participants to rate, on a scale of one to 10, said one respondent. “It’s certainly one of their strengths.” the importance of several PULSE services, as well as the network’s Email is by far the most preferred method of receiving informa- effectiveness at providing those services. A “10” indicated tion from PULSE, favored by 88 percent of respondents. Nearly extremely important and a “1” indicated not at all important. In 70 percent said they have utilized the PULSE website to gain terms of its importance, effectiveness at switching and settling information on upcoming webinars and conferences, to access transactions was rated 9.32 on average. Other highly valued fraud alerts and legislative updates, and to use the PULSE ATM services included protection from fraud and risk, and providing Locator. cardholder access to ATMs and PIN debit terminals, which rated at 9.31 and 9.30, respectively. Also ranking above 9 were providing Payment Product Innovations revenue for switched transactions and the degree to which the Survey participants were asked a variety of questions about PULSE staff is responsive to participants’ questions and helps payments industry innovations. The innovations that have had resolve problems. the most positive impact on their organizations were debit card Survey respondents gave PULSE high effectiveness ratings in growth and mobile banking. Almost 30 percent cited debit card most categories surveyed, but there were three areas identified for growth, and 15 percent mentioned mobile banking. improvement: protection from fraud and risk, the cost of services “The growth of the debit environment has had a significant and offering new products and services. impact on us and on revenue,” cited one respondent. Another To address participant concerns about fraud and risk, PULSE said, “The advent of mobile banking and the ability to function continues to invest in fraud mitigation. In 2010, custom fraud alert payments through your phone has had the biggest impact.” rules were added to the DebitProtect® fraud detection service. Other important innovations mentioned by participants And earlier this year, the network launched DebitProtect Forum, included fraud detection products and services, remote deposit an online fraud prevention networking community that offers and online banking. participants a secure means of exchanging information about fraud incidents and prevention techniques with one another, and Putting the Feedback to Use with PULSE Fraud Operations staff. Further enhancements are For PULSE, conducting a participant survey periodically is planned and will be announced in the near future. about more than just learning how we are doing. The goal is to PULSE also has evaluated its fee structure in light of the final learn lessons that produce better products and customer service. Federal Reserve rules implementing the Durbin Amendment. For “Gaining insights into our performance as a network and ser- issuers that are subject to the Federal Reserve’s interchange restric- vice provider, directly from our financial institution participants, tions, we will continue to offer a highly competitive all-in value has proven very valuable to PULSE,” said Ballard. “We take the proposition. For issuers with less than $10 billion in consolidated responses we get from our participants about our services and assets, the fee structure for both PULSE PAY® and DIscover® Debit performance to heart. Our participant survey gives us constructive will utilize the exemption for small issuers and offer superior value. feedback that we can then turn into action items in order to con- tinually improve our performance and enhance our services.”

All debit all the timeSM 8 ® ® PULSE Select /MoneyPass DNMDEBIT NEWS MINUTE Access to Thousands of Surcharge-free ATMs Nationwide Spam Fraud Down, Targeted Phishing Up 400% PaymentsSource Cyberfraud has shifted from mass attacks to targeted “spear phishing” incidents in which stolen information is used to lure consumers into revealing further details. According to a Cisco Systems report, the volume of spam emails fell from 300 billion in June 2010 to 40 billion in June 2011. Resulting fraud losses declined from $1.1 billion to $500 million over the period. Meanwhile, losses from the targeted attacks that have made data breaches so devastating grew from $50 million to s federal regulations put pressure on overdraft and interchange income, $200 million. financial institutions are looking for enhanced services to help attract and keep account holders. One such service is the PULSE Select/MoneyPass A French Banks Agree to Cut Debit Surcharge-free ATM Program. Imagine being able to offer to your existing and potential account holders Card Interchange in October surcharge-free use of more than 20,000 ATMs across the country. Whether they American Banker are across town or in a different time zone, cardholders can access their money at A consortium of French banks agreed to program ATMs in grocery stores, gas stations, convenience stores, restaurants and cut debit card interchange on transac- many other convenient locations. tions within the country by as much as The PULSE Select/MoneyPass program allows participating institutions to offer 36 percent in response to a government cardholders free ATM access through a national network that includes more than price-fixing investigation. Groupement 1,300 financial institutions. When you join the PULSE Select program, your cardhold- de Cartes Bancaires CB, which accounts ers can visit www.pulseselect.net, where they will be able to locate convenient for about two-thirds of the country’s card surcharge-free ATMs almost anywhere in the U.S. transactions, will adopt the new rates The website is just one of the marketing resources made available to PULSE Select October 1. Complaints from merchants participants. The program also offers statement inserts, tent cards and decals at a and two French retail trade associations in nominal cost. 2009 and 2010 reportedly prompted the Joining the program can pay off for your institution, as well as your account investigation by France’s Competition holders. Cardholders of participating institutions don’t pay a surcharge at program Authority. ATMs, and your institution can earn revenue by assessing fees to the cardholders of non-participating institutions. In addition, when a MoneyPass cardholder from another financial institution uses your ATM, your institution receives higher Only 5% of Consumers interchange revenue than is available today. Further, if your institution currently Use Cellphones to Pay provides surcharge fee rebates to some or all account holders, PULSE Select can ConsumerReports.org reduce or eliminate those expenses. Despite hype over phone-based e-wallet PULSE Select is a win-win solution for financial institutions and your account services, consumers are not embracing holders. Whether at home or across the country, your cardholders have access to phone-based payments yet. In a recent their money, and your institution gains the opportunity to boost ATM revenue and nationally representative survey by maximize the value of your debit program. Consumer Reports National Research PULSE Select replaces PULSE’s former surcharge-free ATM alliance, Select ATM®, Center, only 5 percent of respondents had which is being phased out effective September 30, 2011. The program is open to all used their cellphone to pay for at least PULSE financial institution participants. one everyday purchase in the previous month. Ten percent said they had used Connect with Us other fairly new forms of payment, such Learn more about PULSE Select/MoneyPass as billing purchases to their home phone 800-420-2122 or cellphone accounts. www.pulsenetwork.com/pulseselect

Order PULSE Select marketing materials www.pulsenetwork.com Select “PULSE Marketplace” under Quick Links (login required)

8 9 w w w . p u l s e - e f t . c o m Durbin Amendment Update (continued from page 1)

Impact on Interchange for Regulated Issuers Based on the Fed’s nal standards, issuers will receive no more than $0.24 for a $40 average ticket ($0.23 interchange, plus $0.01 fraud adjustment)

$0.24 Costs Excluded from Final $0.01 + $0.01 fraud prevention Regulation Calculation Interchange Cap adjustment Based on Allowable Costs $0.02* • Corporate overhead expenses Assumes a $40 average ticket (e.g., executive compensation, legal, HR, internal audit, branch Allowable Costs operations) • Account relationship costs • Authorization (e.g., account setup, customer • Clearing & Settlement due diligence, online banking $0.12 • Dispute processing enrollment, customer acquisition) $0.21 + Transaction processing Allowable Costs hardware, software and • Debit program costs (e.g., card production and • Authorization associated labor delivery, marketing, network • Clearing & Settlement + Network connectivity $0.12 membership, R&D) • Dispute processing + Network switch fees + Transaction monitoring • Other per-transaction costs + Fraud losses (5 bps)* (e.g., payment guarantee & NSF, cardholder rewards, cardholder inquiries) Draft Regulations Final Regulations

*Ad valorem adjustment for fraud losses Source: First Annapolis fraud prevention requirements to earn an after April 1, 2013). Networks must comply to take steps to address those problems additional $0.01 per transaction. with the network exclusivity restrictions within the very limiting confines of the The interchange restrictions for debit by October 1, 2011. enabling statute. This is certainly an card issuers with consolidated assets of “The regulation’s prohibition on routing improvement from what the board $10 billion or more take effect October 1, restrictions also eliminates the ability of proposed, particularly since it includes 2011, giving the industry additional time an issuer or a network to require routing other costs and some recognition of to comply with the requirements. Small based on the card issuer’s or network’s those due to fraud.” issuers (those that, together with their affili- preferences,” said Duncan Douglass, head Fred Becker, President of the National ates, have assets of less than $10 billion), of Alston & Bird’s payments practice. “In Association of Federal Credit Unions, said, government debit card programs, certain addition, within certain limits, the regula- “Regrettably, Main Street and consumers reloadable general-use prepaid cards and tion gives merchants control over debit will pay the price for this Draconian rule.” ATM transactions remain exempt from card transaction routing, including via A statement by Independent the regulation’s interchange requirements. predetermined routing tables.” Community Bankers of America Chairman Also exempt from the interchange and Sal Marranca and ICBA President and CEO network exclusivity requirements are so- Industry Reaction Cam Fine expressed continued concern called “three-party” networks (also known Financial institutions and merchants about the small issuer exemption. as closed-loop networks), in which the alike were disappointed by the rules. While “We are deeply troubled that the system operator is acting as both network financial institution associations think the Fed did not include specific enforcement and issuer. regulation goes too far, merchant organiza- provisions in the final rule to ensure tions don’t think it goes far enough. In a community banks receive the benefit Routing and Network Exclusivity statement following the Federal Reserve’s of the statutory small bank exemption.” Debit cards must participate in at least announcement, American Bankers On the merchant side, National Retail two unaffiliated networks so that transac- Association President and CEO Frank Federation President and CEO Matthew tions will have at least two independent Keating said, “The final rule still represents Shay said, “We are extremely disappointed. routing channels. The two unaffiliated a 45 percent loss in revenue that banks use While the rate will provide modest relief, it networks could be one PIN network and to provide low-cost accounts to our cus- does not go far enough.” one signature network (the most common tomers, fight fraud and maintain our effi- Links to the final rules, as well as news configuration), two PIN networks or two cient U.S. payments system. This remains a and analysis on the Federal Reserve’s signature networks. real concern to banks everywhere, and the announcement, are available in the PULSE The network exclusivity restrictions consumers and communities they serve.” Durbin Amendment Resource Center. take effect April 1, 2012 for most debit Bill Cheney, President of the Credit cards, and April 1, 2013 for certain health Union National Association, released a Connect with Us and other benefit cards subject to IRS rules, statement about the rules, saying, “The PULSE Durbin Amendment and for general-use prepaid cards that Federal Reserve listened to the real Resource Center have been reloaded (or 30 days after being concerns of credit unions and other small www.pulsenetwork.com/debitregs reloaded if the first reload occurs on or issuers with the proposal and attempted

All debit all the timeSM 10 Industry Foundation Honors Texas Banks ULSE congratulates the winners of First Capital Bank of Texas, N.A., Fort Hood National Bank: The bank the 2011 Cornerstone and Leaders in Midland: The bank developed the Invest offers programs and classes to address the PFinancial Education (LiFE) Awards, in a Child program that matches a bank unique financial concerns of soldiers and sponsored by the Texas Bankers employee with an at-risk student for an their families. A Pre-Deployment Program Foundation. The Cornerstone awards entire year. Each student receives one hour prepares soldiers and families for a long- recognize community contributions, and of math tutoring each week, bringing up term separation from home. Consumer- the LiFE awards acknowledge efforts to the students’ grades and increasing their related issues regarding common financial provide community financial education. confidence and enthusiasm. mistakes and fraud scams are addressed in “The awards are a testament to the the Fort Hood Financial Readiness Program. dedication of these banks to their account Sterling Bank, Houston: Sterling holders, as well as the importance of these Bank developed the upGrading Texas Southside Bank, Tyler: Providing institutions to the communities they serve,” Classrooms project to help teachers edu- financial education in the Tyler community, said Denise Stigge, PULSE Vice President cate students and improve graduation Southside Bank partnered with other of Association Relations. rates. Ten grants of $500 were awarded organizations to stress the importance of All of the winners of both awards are to teachers in League City to help pay financial education and good credit. The PULSE network participants. for materials and supplies. An additional bank taught elementary students about 28 grants were given to teachers in high- business and government, educated new 2011 Cornerstone poverty schools in Houston, Dallas and home buyers and conducted workshops San Antonio through the bank’s annual on credit and bank products for community Awards Thanksgiving program. church groups.

First National Bank Texas, Killeen: The Yoakum National Bank: With its Money bank brought the national Lemonade Day 2011 LiFE Awards Mouse Kids’ Club, the bank hopes to teach program to Killeen and Fort Hood to teach children good savings habits, introduce children the value of money and proper Community Bank, Fort Worth: Through them to banking and make them comfort- money management. In starting their first its participation in the Teach Children to able handling their money. A savings business (a lemonade stand), children learn Save program, the bank educated almost account program for children 12 and to set goals, develop a business plan, 1,000 children about the basics of savings, younger encourages club members to establish a budget and give back to the spending and budgeting. And through the make regular deposits. The bank’s initial community. Get Smart About Credit program, bank goal to open 100 accounts in a year was employees provided lessons on credit reached in just five months. First State Bank, Athens: To celebrate issues to high school students and employ- th its 75 anniversary, the bank gave back ees of a local grocery store and church These and countless other financial to programs that make a difference in group. institutions play critical roles in the lives of Henderson and Kaufman counties. Each their account holders and the success and bank employee selected a non-profit prosperity of the communities they serve. organization to receive a donation of $250. PULSE applauds this year’s award winners, More than $20,000 was distributed to and all the institutions that make a differ- 37 organizations. ence in their communities.

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PULSATIONS is produced bi-monthly by PULSE. Please send information for the newsletter to: PULSATIONS Editor PULSE 1301 McKinney, Suite 2500 Houston, TX 77010 [email protected] PULSATIONS can be viewed on the PULSE website at www.pulsenetwork.com/PULSATIONS.

Seconds with... Cindy Ballard Executive Vice President, Communications & Marketing Help From Our Friends Operating a payments network is a complex business. We have Operations Committee – Made up of representatives from the usual responsibilities of attracting and retaining customers, processors and financial institutions, this committee advises PULSE maintaining and improving operations, managing finances and on important issues related to network operations. We work creating new products. We also do business in very different ways closely with the members to test ideas and plan initiatives such with a wide range of payments industry participants. as our recent platform upgrade (see related story, page 4). This We provide transaction services to financial institutions and committee is chaired by Harold Hardin, Information Security their cardholders. We enable merchants to accept cards from Officer for Trustmark National Bank. those institutions. We work closely with processors to mutually develop our businesses. And we partner with service providers Payments Security Council – Our newest committee guides and vendors to bring the latest technologies to our customers. PULSE on issues and developments related to payments fraud. Succeeding in this complex environment is not something Members share information on fraud trends, experiences and we do alone. It requires assistance and support from our network successes. They recently pilot-tested our DebitProtect® Forum participants. This assistance is provided through three advisory before it was launched network-wide. The Council is chaired by committees, an overview of which follows. NIck Anderson, Senior Vice President of Operations for Trustmark.

Financial Institution Oversight Committee – This committee PULSE owes an enormous debt of gratitude to the individuals was created following PULSE’s acquisition by Discover Financial who give freely of their time and effort to participate in these Services in 2005, and advises the organization on key issues. It committees. I have no doubt that we are far more successful serves as a strong voice for all PULSE financial institutions, provid- today as a result of their experience and expertise. ing guidance on trends and developments in the industry. The committee is chaired by Paul Olivier, Executive Vice President of Frost Bank.

IN CLOSING

ULSE and its parent company, Discover Financial Services, JDRF – PULSE employees will participate in the Walk to Cure take pride in their commitment to the communities in which Diabetes in Houston on October 29. With our support, the Juvenile Pthey operate. PULSE supports a number of community out- Diabetes Research Foundation will continue to be a leader in the reach initiatives throughout the year, many of which have been search for a diabetes cure. highlighted in this space. Below is a summary of 2011 activities. Elves & More – In December, PULSE employees will participate Discover Success in Schools – For the third consecutive year, in the annual Elves & More bike building event. The organization PULSE employees volunteered at our adopted school, Houston’s supplies bicycles to underprivileged children in the Houston area Dodson Elementary, to distribute PULSE-donated backpacks and as an incentive to stay in school and out of trouble. school supplies to students in August. Look for further details about these events in future issues Houston Food Bank – As part of Discover Cares Month in of PULSATIONS. September, PULSE employees will volunteer at the Houston Food Bank, preparing food to meet the needs of undernourished citizens in the Houston area.

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