Monday, May 10, 2021
Word of the proposal comes on the heels of a lawsuit alleging that the Fed erred in capping debit card interchange under the Durbin Amendment and that the 10-year-old cap of 22 cents should be set lower.
Debit card pricing has long been a bone of contention between retailers and the card networks. The Durbin Amendment—authored by Senator Dick Durbin , D-Ill.—aimed to address the problem by directing the Fed to cap interchange fees collected by all but the smallest debit card issuing banks. The Fed’s Regulation II sets out the cap formula, as well as other rules, most notably a requirement that merchants be given a choice of two unaffiliated networks for routing debit card payments.
But retailers have continued to balk, arguing that the caps are too high, and more recently, that Visa and Mastercard have conspired with debit card issuers to block retailers from routing so-called PINless debit card payments (common to CNP merchants) through less expensive regional ATM/POS networks, like NYCE and Shazam.
The Fed revealed in a just-published report that debit interchange rates have remained relatively stable since Reg II took effect in 2011. In 2019, the period covered by the report, the average interchange fee for covered transactions processed over single message (PIN) networks was 24 cents, while covered transactions processed through dual-message (signature-authorized) networks was 22 cents.
Average interchange for exempt signature authorized transactions (those involving debit cards issued by small banks and government agencies, as well as reloadable general purpose prepaid debit cards) rose from 51 cents in 2011 to 54 cents in 2019, the Fed reported. At the same time, average interchange for exempt transactions cleared through the ATM networks fell from 31 cents to 25 cents.
Signature-authorized transactions accounted for the bulk of debit card payments—65.4 percent of the volume and 66.7 percent of value—in 2019, the Fed said. And these dual-message networks have seen faster volume growth since 2017. But CNP transaction volumes are picking up steam. At 17.9 percent, volume growth for CNP debit card payments far outstripped the 4.2 percent increase in card-present debit card payments in 2019, the Fed reported.
Back in 2011, when Reg II took effect, there was a dearth of solutions for CNP debit card solutions. But the Fed left the door open to further regulation should technologies and solutions take hold as the market matured. Times have changed, and the technology now exists to support network choice for CNP debit card payments, the Fed said in its May 7 request for comment on the proposed Reg II changes.
In a memorandum explaining the proposed changes, the Fed noted that CNP debit card growth “has accelerated further in the Coronavirus-19 (COVID-19) environment as consumers have shifted from in-person to remote purchases.” Yet the majority of debit cards issued cannot support CNP routing through PIN networks. The Fed said its data indicates that covered issuers accounting for nearly half of all debit card payments, and half of all CNP debit card payments, saw no CNP debit card transactions routed through PIN networks in 2019.
“A failure by an issuer to enable at least one unaffiliated single-message network for card-not-present transactions, combined with the common industry approach of only enabling one dual-message network on each card, results in only one network – the dual-message network – being available to process card-not-present transaction. In this situation, merchants do not have routing choice for such transactions,” the Fed wrote.
The Fed added that it views “these practices by issuers for card-not-present transactions as inconsistent with the prohibition on network exclusivity in Regulation II because they restrict the number of payment networks on which card-not-present transaction can be processed to fewer than two unaffiliated networks.”
So, the Fed is proposing to amend the official commentary explaining how the Reg II network choice requirement applies in the current market by clarifying that the network choice requirement applies to CNP transactions and that issuers must enable at least two unaffiliated card networks to process these transactions.
The Fed’s hand may have been forced by Sen. Durbin. Last summer he sent a letter to Fed Chairman Jerome Powell expressing a “need to address PINless debit competition” and whether the card brands and large bank issuers are stymying merchants who want to use lower-cost ATM/POS networks for processing CNP debit card payments.
The proposal also comes on the heels of news that the Department of Justice is investigating claims that Visa violates federal antitrust laws by limiting debit card routing choice.
In a statement, the National Retail Federation welcomed the Fed’s proposed changes. “This move will help bring about the competition that is needed to bring these fees under control, said NRF Vice President Leon Buck.
The Fed’s proposal came just days after a group of retailers filed a lawsuit in a federal district court in North Dakota claiming the Fed-imposed cap on debit interchange was set too high from the get go.
“The Fed allowed fees that were much too high in the first place,” Stephanie Martz, NRF’s chief administrative officer and general counsel said. “Since then, banks’ costs have fallen steadily but the Fed has refused to make adjustments, letting the problem grow even worse.”
The lawsuit was filed in U.S. District Court in Bizmark by the North Dakota Retail Association and the North Dakota Petroleum Marketers Association. The NRF is not a party to the lawsuit, but Martz is co-counsel on the case.
“North Dakota merchants are willing to pay a reasonable fee for a service, but they’re tired of seeing Wall Street banks stick their hands in the pockets of local businesses,” said Mark Rud, president of the joint associations.
The Durbin Amendment instructed the Fed to cap debit interchange at rates that were “reasonable” and also “proportional” to costs incurred by banks processing debit card payments. Only incremental costs incurred authorizing, clearing and settling transactions were to be considered, according to the Durbin Amendment.
But the lawsuit claims the Fed “flouted” Congressional intent by factoring fixed costs, along with fraud losses, transaction monitoring and network processing fees, into the cap calculation. The interchange cap under Reg II “grows less reasonable and proportional with each passing year,” the lawsuit argues.
Today, debit card interchange is nearly six times average costs, compared to less than three-times average costs back in 2011, the NRF has asserted. The organization sued the Fed shortly after Reg II was adopted arguing the cap exceeded the “reasonable” level Congress intended. A trial judge agreed in 2013, but that decision was overturned by an appeals court in 2014. The NRF tried to get the U.S. Supreme Court to overturn that decision, but the high court declined to take up the case.
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