On Friday (May 7) The Fed published a Notice of Proposed Rulemaking that if passed, would restate Regulation II to ensure that all issuers adopt a dual message debit option on their debit cards, (referred to as PINless debit), so merchants have ease of access to at least two unaffiliated networks for e-commerce transactions. I wrote a quick overview which you can find here if you are interested.
Here’s what Bloomberg had to say about the announcement:
At the heart of the issue is the Fed’s Regulation II, which requires banks to put two unaffiliated networks on every debit card they issue. Retailers, in turn, are supposed to have the ability to choose which network handles a transaction.
But, in recent months, merchants have become increasingly vocal about their inability to route online — or “card-not-present” — transactions over alternative networks, blaming banks that issue the cards for not enabling two networks for such spending.
“Card-not-present transactions have become an increasingly significant portion of all debit card transactions, and technology has evolved to enable multiple networks for these transactions,” Fed staff said in a memo to the central bank’s board. “Despite this, two unaffiliated payment card networks are often not available.”
The Fed said in its statement that it’s also clarifying that it’s the responsibility of the bank that issues the debit card to ensure at least two networks are available for online purchases.
As you can imagine, merchants are really cheered by this news. The National Retail Federation sent out a press release announcing their support of the proposed clarification. Here’s a snippet from their announcement:
The National Retail Federation welcomed today’s announcement by the Federal Reserve that it plans to clarify that banks must allow retailers to decide where to route online debit card transactions for processing the same as they do with in-store debit transactions.
“When Congress said routing was up to merchants, that meant wherever the purchase was made, not just in stores,” NRF Vice President for Government Relations, Banking and Financial Services Leon Buck said. “With the accelerated shift to online spending during the pandemic, this issue is more important than ever. The lack of routing ability has cost retailers billions of dollars, and that’s an added expense small businesses can’t afford as they work to recover from the economic impacts of COVID-19.
This point of clarification is not entirely unexpected. What I believe to be a more ominous part of the announcement for debit card issuers is the Fed statement:
The Board will continue to review the parts of Regulation II that directly address interchange fees for certain electronic debit transactions in light of the most recent data collected by the Board pursuant to section 920 of the EFTA and may propose revisions in the future.
So, the Fed is not done yet. I suspect that a new, lower, regulated cap to debit interchange for covered issuers is in the offing.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group
