WASHINGTON, August 11, 2021 – A Federal Reserve proposal making it clear that merchants can choose which payment networks process their online debit card transactions is needed because major banks and networks continue to interfere with competition for debit business a decade after legislation was passed by Congress to fix the problem, the Merchants Payments Coalition said today.
“The very reason Congress passed the Durbin Amendment is because the U.S. payments market was broken, and the largest banks and card networks are trying to keep it that way,” MPC said in formal comments filed with the Federal Reserve Board of Governors. “It is imperative that the Board move forward and clarify its regulations in order to protect the competition and merchant routing choice that was intended by Congress.”
MPC filed comments as the Federal Reserve considers proposed regulations intended to make it clear that routing choice required under the 2010 Durbin Amendment applies the same to online transactions as in-store transactions.
MPC said the issue is especially important given the increase in online shopping and the use of contactless payments and mobile wallets during the past year.
“As merchants have adapted to serve their customers during the pandemic, there has been a dramatic shift to e-commerce as well as mobile apps and wallets that has made the lack of online routing options a more pressing issue than ever,” MPC said. “Economists estimate that the lack of routing costs merchants and their customers billions of dollars each year.”
Under the Durbin Amendment, banks are required to enable all debit cards to be processed over at least two unaffiliated networks – typically Visa or Mastercard plus one of a dozen independent debit networks such as Pulse, Star or Shazam that offer better security and lower fees. Implemented for many in-store transactions, routing choice has helped save merchants billions of dollars, with an estimated 70 percent of the savings passed along to consumers.
In response to merchants’ concerns, however, the Fed acknowledged this spring that some of the largest banks have failed to enable or have even disabled the “PINless” technology required to route transactions to debit networks online, where a PIN usually cannot be entered. The lack of enablement blocks the right of a merchant to choose between competing networks and violates the Durbin Amendment, the Fed said. The practice has resulted in only 6 percent of online debit card transactions being processed over competing networks, according to the Fed.
A clarification proposed by the Fed in May says the routing choice requirement applies to online as well as in-store transactions and would require that banks allow competing networks a chance to handle debit transactions.
In today’s comments, MPC requested that the Fed further clarify that access to competitive debit networks must be enabled regardless of what kind of authentication – such as signature, PIN, PINless or biometrics – is used. A debit network should be allowed to process transactions with any form of authentication its system supports, MPC said.
MPC also repeated its earlier call for the Fed to lower the debit card swipe fees large banks are allowed to charge. Under the Durbin Amendment, debit swipe fees charged by banks with more than $10 billion in assets must be “reasonable” and also “proportional” to banks’ costs. Regulations set by the Fed in 2011 allow large banks to charge up to 21 cents per transaction plus an extra 1 cent for fraud prevention and 0.05 percent of the transaction amount for fraud loss recovery. Banks can charge more if they set the fees themselves rather than following fees set centrally by Visa and Mastercard, but no major banks have done so.
A Fed survey found banks’ average cost of processing debit transactions was about 8 cents as of 2009. But a new survey released in May found the cost had fallen to 3.9 cents as of 2019. That means the proportion of the 21-cent figure has more than doubled, from about 2.6 times banks’ cost to 5.4 times the cost.
“The current rate far exceeds what is reasonable and proportional to issuer costs,” MPC said. “It is time for the Board to reduce the regulated debit rate to reflect issuer costs more accurately and to adhere to the intent to the law.”
The Merchants Payments Coalition represents retailers, supermarkets, convenience stores, gasoline stations, online merchants and others fighting for a more competitive and transparent card system that is fair to consumers and merchants.