As pandemic-scarred consumers increasingly shun traditional shopping experiences and make more purchases remotely, the long-simmering dispute between U.S. banks and merchants over debit card fees is intensifying.
The latest flare-up stems from the nine-year-old federal rules that govern transaction routing, and how they should apply in an environment where e-commerce transactions account for an ever-larger share of debit card spending.
Federal Reserve Board Chairman Jerome Powell said last month that the COVID-19 pandemic has brought additional attention to the issue of whether Visa, Mastercard and major card-issuing banks are circumventing the Fed’s rules, particularly in situations where debit-card users do not enter a four-digit personal identification number.
The rules were designed to ensure that merchants have a choice of at least two unaffiliated networks over which transactions can be routed. Retailers usually prefer to send debit-card purchases over a network other than Visa or Mastercard because doing so is typically less expensive. But some large banks’ debit cards do not currently give merchants the choice of using a smaller network in situations where the shopper does not enter a PIN.
The question for the Fed, which declined to comment for this article, is whether the requirement for routing choice should be enforced only when consumers swipe a piece of plastic at the cash register, or in a broader range of settings. (Aside from making purchases online, consumers also often use debit cards for telephone purchases and for recurring monthly payments, such as gym memberships.)
Powell’s comments came in an Oct. 9 letter to Sen. Richard Durbin, D-Ill. Durbin is an ally of the retail industry who authored the 2010 law that not only required routing choice, but also capped debit-card swipe fees at banks with more than $10 billion of assets. In the letter, Powell said that the Fed will continue to consider and evaluate the PIN-less debit issue, but he did not commit to any particular action.
Powell was responding to a July 24 letter from Durbin and Rep. Peter Welch, D-Vt., in which they asked the Fed to consider potential enforcement actions.
The Democratic lawmakers also requested that the central bank play a coordinating role with other agencies, such as the Federal Trade Commission, that share jurisdiction in ensuring that financial institutions do not engage in anticompetitive practices. The FTC
Any government intervention would likely benefit not only retailers, but also smaller debit networks such as Star, NYCE and Pulse, while hurting Visa, Mastercard and some card-issuing banks.
A Durbin aide said this week that efforts to work around the Fed’s debit card routing rules have been a persistent problem. “It’s kind of a Whac-A-Mole game,” this person said. “So we just continue to have to be vigilant.”
Banks and the large card networks, meanwhile, contend that they are in compliance with the rules.
“The Durbin Amendment required choice, not technological parity,” said Jeff Tassey, chairman of the board of the Electronic Payments Coalition, whose members include Visa, Mastercard and card-issuing banks and credit unions.
When the Federal Reserve first issued regulations on debit-card routing choice, online commerce was a bit of an afterthought.
In 2012, 88% of U.S. debit card transactions were conducted in person, according to survey data from the Fed. By 2018, that share had shrunk to 77%. It has likely fallen substantially further this year, as e-commerce has boomed.
The virus has also fueled the growth of contactless payments, which are conducted in person but do not require shoppers to enter their four-digit codes. Some 44% of consumers who used contactless payments this year started doing so because of concerns about COVID-19, according to a recent survey by Phoenix Synergistics.
A decade ago, smaller debit networks were generally unable to handle transactions unless the consumer entered a PIN. But the use of PINs in the e-commerce arena never gained steam, so the smaller debit networks made technological upgrades in order to handle PIN-less purchases.
“The world has since changed, and the networks have changed, too,” said Sarah Grotta, a debit payments expert at Mercator Advisory Group.
Still, U.S. merchants are currently able to route less than half of all PIN-less debit transactions over a network other than Visa or Mastercard, according to CMSPI, a payments consulting firm that works exclusively with retailers. An analysis by CMSPI found that U.S. retailers would have saved $3.1 billion in fees this year if PIN-less debit functionality were made fully available.
“Standards are being implemented into the market in a way that either limits routing choice or degrades the quality of the transaction data,” the Debit Network Alliance, which represents smaller networks such as NYCE and Pulse, said in a written presentation to the Fed in January.
“Regulators should specify that debit routing choice applies to emerging payment channels and points of acceptance, including e-commerce.”
Large banks seem more likely than smaller institutions to be holdouts in allowing PIN-less debit transactions to be routed to smaller debit networks. “Our data suggests that enablement amongst smaller banks is much higher than among the larger banks,” said Callum Godwin, the chief economist at CMSPI.
A source familiar with the smaller debit networks’ thinking said that certain larger financial institutions may be responding to financial incentives established by Visa and Mastercard that are designed to drive transactions onto their own networks. “That’s really probably the biggest reason why issuers are not enabling PIN-less,” this person said.
In many cases, smaller banks have extensive relationships with firms such as Fiserv, which owns the Star and Accel debit networks, and FIS, which owns the NYCE network.
Visa, Mastercard, Fiserv, FIS and Discover, which operates the Pulse network did not provide comment for this article. The American Bankers Association also declined to comment.
But in comments to the Fed last year, the ABA and other trade groups that represent banks and credit unions showed little sympathy for merchants, arguing that large ones in particular have already reaped the vast majority of the benefits from the Durbin Amendment.
“Further adjustments, ostensibly to refine the implementation of Durbin’s mandates, are likely to have additional and unpredictable distortionary market effects and exacerbate the damage done by existing rules,” the industry groups wrote.
