As reported in the Wall Street Journal, Senator Dick Durbin (D-IL), who championed regulated debit card interchange rates for banks with greater than $10 billion in assets in an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, is asking for further regulation of debit cards. Now 10 years later, he has asked the Federal Reserve to re-look at the fees charged to merchants in light of technology advancements that Mastercard and Visa have made that make routing transactions to the EFT debit networks such as Accel, Pulse, Shazam, Star and others more difficult for merchants.
The Federal Reserve is way ahead of the Senator. It has already been looking into this and holding meetings with networks, banks and merchant advocates. Notes from these meeting can be found posted to the Federal Reserve’s website which you can find here and here. Additionally, the FTC has had conversations with the global debit networks regarding their practices, too, as outlined in this article from Bloomberg Law.
As more consumer purchasing activity goes online and through contactless cards and wallets, merchants find it more difficult to route their transactions to the EFT debit networks, sending more activity to the global networks which can increase the merchant’s overall cost of processing. As explained in the Wall Street Journal:
In a letter to Fed Chairman Jerome Powell, Mr. Durbin said practices by the large card networks and debit-card issuers are diminishing competition in the online payments marketplace and costing merchants potentially billions of dollars. The letter, which Mr. Durbin’s office sent late Friday, asks the Fed to determine whether the major card networks and debit-card issuers have a shared incentive to limit the transactions processed by lesser-known debit-card networks. The Wall Street Journal reviewed a copy of the letter.
U.S. retailers and restaurants cannot afford to pay unnecessarily high fees for debit card transactions at a time when they have been hit hard by the pandemic and its economic effects,” said the letter, which was also signed by Rep. Peter Welch (D., Vt.).
The pandemic has also changed consumers’ payment preferences, and that in itself has caused some businesses to pay higher fees. More card purchases are occurring online and with digital wallets. Payments in stores are also shifting to cards that are tapped at stores’ payments terminals rather than inserted, as people try to avoid touching surfaces.
Merchants do have routing choices, said Jeff Tassey, board chairman of the Electronic Payments Coalition, which represents card networks and issuers. “There’s nothing to suggest anyone isn’t fully adhering to the debit marketplace rules,” he said.
During the pandemic, online and contactless payments have helped small businesses to stay open, he said. “Independent PIN debit networks failed to innovate and make the necessary investments in technology,” he said. “Now, at a time of rapid change and disruption, [they] are asking the government to force the transfer of intellectual property…developed through substantial investments by the payment networks and financial institutions.”
What is interesting is that more purchases made in digital channels are made with credit cards, not debit cards. But if credit card interchange were regulated to the same level as debit cards, consumers would lose credit card rewards and that would make Mr. Durbin very, very unpopular.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group
