The US Federal Reserve on Monday approved regulations that clarify that banks and credit card networks are legally required to give retailers a choice between two unaffiliated networks over which to route debit card transactions regardless of whether purchases take place in-store or online.
- The updates specify that debit card issuers should enable at least two payment card networks to process all debit card transactions, including "card-not-present" transactions, such as online payments.
The Fed statement: The final rule underscores that debit card issuers should enable at least two unaffiliated networks to process debit card transactions. Importantly, input received in connection with the proposal suggests that many debit card issuers, and especially most community bank issuers, are already compliant with the final rule. In response to public comments, the final rule also includes certain changes that make it easier for debit card issuers to determine whether they are in compliance with the final rule. The final rule will encourage competition between networks and incentivise them to improve their fraud-prevention capabilities.
The background: Retailers in the US were given the right to choose which payment networks process debit card transactions in 2010, when Congress passed the Durbin Amendment in an attempt to end Visa and Mastercard’s virtual monopoly over the debit processing market.
- Under that law, banks that issue debit cards must enable them to be processed over at least two unaffiliated networks.
- That typically means Visa or Mastercard plus one of a dozen independent networks like Star, Shazam or NYCE that offer equal or better security and other benefits but lower fees.
- The requirement has been widely implemented for in-store transactions, where a PIN can be entered to access the independent networks, and has helped save retailers and their customers an estimated $9 billion a year.
- But a combination of Visa/Mastercard rules and financial incentives have pressured banks to not enable the “PINless” capability required for the cards to be processed over independent networks online, where a PIN cannot be entered. As a result, all but about 6% of online debit transactions are processed over Visa and Mastercard.
- Retailers have argued that the lack of online routing options violates the Durbin Amendment, and the Fed agreed in 2021.
- The Fed proposed new regulations that clarify that the routing choice requirement applies to online and other “card-not-present” transactions the same as in-store transactions and that card issuers must enable their cards to be processed on at least two networks regardless of where they are used.
- Debit and credit card “swipe” fees that banks and card networks charge to process transactions totalled $137.8 billion in 2021, according to the Nilson Report.
- The fees are among most merchants’ highest operating costs and drive up prices paid by consumers by about $900 a year for the average family.
- Debit card fees alone totalled $32.6 billion last year, with payments processed over Visa and Mastercard accounting for $28.1 billion of the total.
How they reacted:
The Federal Reserve has declared once and for all that a debit transaction is a debit transaction no matter where it takes place and that merchants have the right to choose the network that offers the best service, strongest security and most reasonable fees. Congress ended Visa and Mastercard’s virtual monopoly over debit transactions a decade ago, and this decision makes clear that the law applies the same for in-store and online transactions—the result that Congress mandated in the first place.
— Leon Buck
Vice President for Government Relations, Banking and Financial Services
National Retail Federation
This ruling is particularly important given the dramatic shift to e-commerce during the pandemic and the increased use of mobile apps and digital wallets for in-store purchases. These transactions account for a rapidly increasing share of our nation’s economy and the Fed has closed a major loophole that allowed them to escape the competition intended by Congress. Card networks should have to compete the same as any other business.
— Doug Kantor
Executive Committee member
Merchants Payments Coalition
