Oct 5, 2022
New fed debit card regulations mean networks will have to compete online, not just in-store

The National Retail Federation welcomed the Federal Reserve’s approval of regulations that clarify that banks and credit card networks are legally required to give retailers a choice between two unaffiliated networks over which to route debit card transactions regardless of whether purchases take place in-store or online.

“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,” NRF Vice President for Government Relations, Banking and Financial Services Leon Buck said. “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.”

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 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. 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, NRF told the Fed last year. As a result, all but about 6% of online debit transactions are processed over Visa and Mastercard, according to the Fed.

Retailers have long argued that the lack of online routing options violates the Durbin Amendment, and the Fed agreed in 2021. The Fed proposed new regulations that clarify that the routing choice requirement applies to online and other “card-not-present” transactions the same as in-store transactions and that card issuers must enable their cards to be processed on at least two networks regardless of where they are used. The final version of the regulations were approved by the Fed today.

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.

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