WASHINGTON–The Federal Reserve has finalized updates to its rule concerning debit card transactions, specifying that debit card issuers should enable at least two payment card networks to process all debit card transactions.
That includes "card-not-present" transactions, such as online payments. The final rule, which is substantially similar to the proposal issued in 2021, was hailed by a retailers’ trade group, which said networks will now have to compete online, not just in-store.
The Fed noted that by law it is required to make rules ensuring that debit card issuers give merchants the opportunity to choose between at least two unaffiliated networks when routing debit card transactions.
“When the board initially issued the rule in July 2011, the market had not developed solutions to broadly support multiple networks for card-not-present debit card transactions,” the Fed said. “Since that time, technology has evolved to address these barriers. However, some debit card issuers have not yet enabled at least two unaffiliated networks for merchants to choose between when routing such transactions. This issue has become increasingly pronounced because of continued growth in online payments.”
According to the Federal Reserve, the final rule underscores that debit card issuers should enable at least two unaffiliated networks to process debit card transactions.
Many ‘Already Compliant’
“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,” the Fed said. “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 incentivize them to improve their fraud-prevention capabilities.”
The final rule does not modify requirements concerning interchange fees, which the Fed said it will continue to review in light of the most recent debit card industry cost data it has collected. It added it may propose to modify these requirements in the future.
The final rule will be effective July 1, 2023.
Retailers Respond
In response, the National Retail Federation said it “welcomed” the clarification by the Fed.
“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,” said Leon Buck, VP-government relations, banking and financial services with the National Retail Federation. “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. It’s welcome news that will benefit small businesses and their customers across the nation.”
The trade group noted retailers 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 NRF said.
“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,” the NRF stated. “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, according to the Fed.”
‘More Than $100 Billion’
The retailers’ group said debit and credit card “swipe” fees that banks and card networks charge to process transactions totaled $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 totaled $32.6 billion last year, with payments processed over Visa and Mastercard accounting for $28.1 billion of the total.
NAFCU Response
"The Fed’s final rule on Regulation II fails smaller financial institutions, the credit union industry at-large and ultimately consumers. The Fed’s rule mandating debit card issuers to enable at least two payment networks for debit transactions will force small issuers to allow transactions over riskier networks, increasing fraud costs for our nation’s community financial institutions," said NAFCU President and CEO Dan Berger. "NAFCU and its member credit unions have seen little good come out of Reg II or the Dodd-Frank Act for that matter – including the failed Durbin Amendment. Imposing this final rule would increase implementation and fraud costs for smaller financial institutions, on top of everything else they’re battling with inflation, all for the benefit of big box stores and big online retailers such as Amazon. NAFCU and our members will continue to engage the Fed and Congress to underscore the negative impacts of this rule.”