WASHINGTON–The nation’s retailers are welcoming a Federal Reserve announcement it plans to clarify what financial institution must pay retailers to decide where to route online debit card transactions for processing the same as they do with in-store debit transactions.
NAFCU issued a statement in response that the Fed decision does little to "aid American consumers."
“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 following the Fed announcement. “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.
“NRF has raised this issue with the Fed repeatedly, and we are glad to see the Board of Governors take action,” Buck continued. “This move will help bring about the competition that is needed to bring these fees under control. Card processing costs ultimately drive up prices for consumers and cannot be allowed to continue to grow.”
The retailers’ group noted the 2010 Durbin Amendment requires U.S. banks that issue debit cards to enable the cards to be processed over at least two unaffiliated networks. That means either Visa or Mastercard plus one of a dozen competing debit networks such as Star or Shazam that offer equal or better security and other benefits but lower fees, the NRF stated.
Changes Since Durbin Amendment
When the Durbin Amendment was passed, processing a debit card purchase on networks other than Visa or Mastercard required entering a PIN on an in-store terminal, leaving those two as the only option for online transactions. But the NRF noted that since that time debit networks have developed the ability to process transactions without a PIN, but said many card-issuing banks have not enabled “PINless” capability on their cards.
“Although technology has subsequently evolved to address these barriers, data collected by the board and information from industry participants indicate that two unaffiliated networks are often not available because some networks do not enable two networks,” the Fed said in a statement. “The absence of at least two unaffiliated networks for (online) transactions forecloses the ability of merchants to choose between competing networks when routing such transactions, an issue that has become increasingly pronounced because of continued growth in online transactions, particularly in the COVID-19 environment.”
Fed Update
The Fed has proposed an update to its regulations clarifying that the routing option applies to online and other “card-not-present” transactions and saying card issuers must enable their cards to be processed on at least two networks regardless of whether they are used in-store or online.
In addition to online transactions, retailers’ ability to route in-store transactions has been limited by the increased use of mobile apps and contactless cards to pay for purchases because neither allows for the use of a PIN, the retailers’ group alleged.
Merchants’ ‘Highest Costs’
According to the NRF, citing data from the payments consulting firm CMSPI, the ability to route transactions and another Durbin Amendment provision capping swipe fees for debit cards from the nation’s largest banks at 21 cents per transaction have saved merchants $9.4 billion a year.
“But the lack of routing options online has cost merchants between $2 billion and $3 billion since the beginning of the pandemic, according to CMSPI,” the NRF said.
The NRF added that debit and credit card fees are among merchants’ highest costs after labor and drive up prices paid by consumers by hundreds of dollars a year for the average family. Card processing fees totaled $116.4 billion in 2019, up 88% over the previous decade, according Nilson Report figures cited by the group.
NAFCU Response
In response to the announcement, NAFCU President/CEO Dan Berger said, "The Federal Reserve’s decision to reopen Regulation II for comment, even for the purpose of ‘clarification,’ does little to aid American consumers who have yet to see the interchange promises of merchants realized in the form of lower prices.Interchange caps introduced by the Durbin Amendment have only rewarded merchants who now want to distort the competitive landscape further by restricting credit union members’ freedom to use the safe, affordable, and innovative payment options they want."