For more than a decade, merchants have had the right to choose where to route debit card transactions for processing. Landmark legislation passed by Congress in 2010 ended Visa and Mastercard’s near-monopoly over debit processing and introduced competition that has saved retailers and their customers over $9 billion a year.
While routing has worked well for in-store transactions, the same cannot be said for ecommerce. That’s because most banks have not enabled the “PINless” capability needed for their debit cards to be routed online. That leaves Visa and Mastercard as the only option for most transactions, with just 5 percent of online debit purchases routed over competing networks like NYCE, Star or Shazam that can offer stronger security, better service and lower fees.
After years of complaints, however, the Federal Reserve is finally drafting new regulations clarifying that merchants’ routing rights apply the same online as they do in stores and effectively telling banks to remove any barriers. The Fed announced its plans in May and is currently seeking comments.
Unfortunately, banks and the card industry are flooding the Fed with comments arguing against the new regulations. If the false and misleading claims being made aren’t countered, this opportunity to protect retailers’ rights and bring the same competition to online commerce we now have in-store could be lost.
Merchants need to write to the Fed today and let officials know how important debit card routing is for their businesses, especially small retailers who can least afford the enormous “swipe” fees charged by Visa, Mastercard and card-issuing banks.
NRF held an advocacy briefing on the proposed new regulations last month, and has set up an action page where retailers can send a customizable letter to the Fed explaining how they are impacted by swipe fees and the importance of being able to choose the network that processes their transactions.
Comments must be received by the Fed by August 11, so time is of the essence. With banks submitting hundreds – perhaps thousands – of comments, retailers must do the same to be heard.
The scarcity of online routing has cost retailers billions of dollars, and NRF raised the problem with the Fed repeatedly before the agency agreed to update its regulations.
The issue has become more important than ever with the accelerated shift to online shopping during the pandemic. The increasing use of contactless cards and mobile payments means many in-store transactions are affected as well, because those transactions also can’t be routed unless PINless capability is enabled.
Routing rights were established under the Durbin Amendment, which required that debit cards be able to be processed over at least two unaffiliated networks – Visa or Mastercard plus a competing network. When Durbin was passed, most independent debit networks required a PIN to be entered, but most can now be used without a PIN, both to accommodate online shopping and to speed in-store checkout lines. Banks have been slow to adapt, however, with fewer than half enabling PINless.
In addition to routing, NRF has called on the Fed to lower the 21-cent cap on debit card swipe fees also established under the Durbin Amendment. A Fed survey found banks’ average cost for processing debit transactions had fallen to 3.9 cents as of 2019, down from 8 cents before Durbin was passed. The cap has nonetheless stayed the same, giving banks windfall profits as retailers continue to struggle.
Even with the cap and in-store routing, debit card swipe fees amounted to $24.3 billion as of 2019. As one of most retailers’ highest costs, debit and credit card swipe fees drive up prices paid by the average household by hundreds of dollars a year.
The Fed’s agreement to clarify routing rules is an important step toward regulators recognizing the card industry should not be allowed to run its business like a monopoly. But the proposed new rules will only become final if retailers unite to show the Fed it has made the right decision. Do not let this opportunity slip by.
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