Apple Pay violates federal law, retailers say

Apple Pay is in violation of the Durbin Amendment to the Dodd-Frank Act, according to retailer groups including the National Retail Federation.

The issue is how easily merchants can choose routing options with lower fees in the face of fast-changing technology, reported American Banker.

This controversy follows disagreements about fraud related to Apple Pay, lack of Apple Pay usage and failures of merchant support, reported Merchants said Apple Pay doesn't allow them to choose how the tokenized transactions are routed. As a result, Apple Pay transactions cost them more than those with regular plastic payment cards.

"Merchants, as a practical matter, don't have the options that Durbin affords them in all of these instances, including tokenized transactions with Apple Pay," Mark Horwedel, CEO of the Merchant Advisory Group, told American Banker.

"It's my view that Apple Pay is breaking the Fed's regulation," said Douglas Kantor, a partner at Steptoe & Johnson. He has represented merchants in the interchange fight.

The amendment was inserted by Sen. Richard Durbin, D-Ill., into the 2010 Dodd-Frank Act. It requires issuers to give greater access to certain PIN networks, not just Visa and MasterCard. However, merchants and payments experts said that requirement is being violated as retailers have not been able to use other networks in situations such as those including NFC and other contactless transactions, like Apple Pay and online commerce.

While the retailers are blaming banks, card networks and Apple for a system developed behind closed doors and refusing to divulge certain details, financial companies say merchants have been slow to adapt their technology to use additional card network options. For example, some PIN networks, including STAR and Fiserv's Accel, promote that they can facilitate Apple Pay transactions.

"The problem is the merchants do not yet have a mechanism to see that alternative network despite the fact that that alternative network is associated with the card," said Tim Sloane, VP of payments innovation at Mercator Advisory Group.

Blaming the unavailability of the PIN networks in part on major card networks, Mallory Duncan, general counsel for the National Retail Federation, said they helped develop the tokenization system used to make Apple Pay transactions secure.

That system "essentially hides the other competitive networks from the merchants when a debit transaction is used. The effect is that the competition, which the Durbin Amendment required that the merchants be offered, is essentially blocked," Duncan said.

To this point, the banking industry has remained mostly silent about the merchants' claims about Durbin compliance issues in the new mobile payments channels. A number of financial services industry groups declined to comment for the American Banker story, and Apple, Visa and MasterCard did not respond to requests for comment.

Banks are not aware of compliance issues stemming from Apple Pay, said Steve Kenneally, VP, American Bankers Association. "If there were concerns that this was in conflict with the Durbin routing requirements we would do whatever we could to make sure we're in compliance. However, we have not heard of this concern from our members. Banks aren't skirting anything. We're interested in complying. We're also not interested in addressing a problem that doesn't exist."

For more:
-See this American Banker article
-See this article

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