Wednesday, October 5, 2022
In a related development, the Federal Reserve finalized changes to its rules requiring merchant choice in debit card routing.
The Durbin-Marshall legislation would require the Federal Reserve to issue regulations ensuring that merchants get to choose which networks process their credit card payments, and only one of the choices can be Visa or Mastercard. That could create a potential boon for debit networks like Star and NYCE, as well as the American Express and Discover networks.
Like the Durbin Amendment, which instructed the Fed to cap the fees charged retailers for debit card processing, the new legislative proposal would apply only to cards issued by the largest credit card issuers – those with over $100 billion in assets.
Similar legislation was introduced in the House, in September, by Representatives Peter Welch, D-Vt., and Lance Gordon, R-Texas.
"In a well-functioning market there is competition and choice. That does not exist in our current credit card market," Rep. Welch said in a statement. "This bipartisan bill will correct that and bring much needed competition to the Visa-Mastercard duopoly."
Sens. Durbin and Marshall have proposed attaching their legislation as an amendment to the National Defense Authorization Act, which the Senate is slated to start considering on Oct. 11.
A separate amendment to the funding bill that has been offered by the two lawmakers calls for a study of processing fees paid by military commissaries and veterans. Federal law permits certain categories of veterans (such as Purple Heart and Medal of Honor recipients and those with service-related disabilities) to shop at base commissaries and use base recreation facilities, but they must pay the processing fees when they use a credit or debit card to pay for those activities.
The Defense Authorization Act establishes funding for the military and defense programs. A similar funding bill passed the House in July, without any amendments mentioning credit cards. Once the Senate approves its defense bill, the two chambers of Congress must seat a conference committee to iron out differences in the two chambers' bills.
Retailers have generally praised the move to mandate credit card routing choice, while lobbyists for financial institutions and the card companies have panned it.
Nearly 1,700 merchants and more than 230 trade associations signed a letter sent by the Merchants Payments Coalition to all members of the House and Senate in September urging passage of the Credit Card Competition Act. Visa and Mastercard "bar their competitors from even having a shot at business with banks that issue their cards," the letter stated. "This blocking of competition drives up prices for merchants and consumers, harms security and strangles innovation."
The Electronic Payments Coalition isn't buying it. A Washington-based group that lobbies on behalf of financial institutions and the card networks, the EPC labelled the legislation a "cynical attempt" to enrich the largest retailers at the expense of other participants in the system.
"We know that not a dime in savings will be passed on to consumers because we've seen this story before," said Jeff Tassey, the EPC's chairman, referring to the Durbin Amendment to the Dodd-Frank Act, which regulated debit card interchange. "Small banks and consumers are going to be the biggest losers, where the cost of banking will go up, popular cash back and rewards programs will disappear, fraud will likely explode, and millions of Americans could lose access to credit altogether."
Sachin Mehra, Mastercard's CFO, when asked about credit card routing legislation during a recent symposium put on by Autonomous Research, said it raised issues of equity. "Is this equitable from a consumers standpoint, and from the standpoint of a company like Mastercard that has invested heavily in building out our safety and security capabilities, and acceptance capabilities?" he asked.
"It's our job to make sure we spend the time and energy to educate stakeholders on how we believe this will adversely impact consumers and what the consequences of this will be," Mehra added. "That's what we're spending our time and energy on."
While credit card routing choice continues to be debated, the Fed tightened its regulation of debit card routing.
The Durbin Amendment, when it was enacted more than a decade ago, instructed to Fed to not only regulate debit card interchange, but to ensure that merchants get to choose from at least two unaffiliated networks for debit card processing. At the time, most debit card payments were card-present transactions, which merchants could choose to route through regional EFT networks, like Star and NYCE.
As ecommerce sales have soared, however, so, too, have online debit card payments. To accommodate this growth in demand, the EFT networks developed PINless debit technology that supports alternative authentication techniques, like address verification service (AVS) and Card Verification Value (CVV). But most of the nation's largest debit card issuers have not enabled routing for online debit card transactions. As a result, just 6 percent of online debit payments get routed through the regional networks, according to the Fed.
On Oct. 4, the Fed finalized updates to the rule set that carries out Durbin Amendment mandates to specify that debit card issuers must enable at least two unaffiliated networks to process all debit card payments, including card-not-present transactions.
"The final rule will encourage competition between networks and incentivize them to improve their fraud-prevention capabilities," the Fed said in a statement. The final rule takes effect on July 1, 2023. 
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