Industry groups are asking the Federal Reserve to give banks more time to comply with a new rule requiring all transactions to be able to run through multiple networks.
In October, the Fed
Yet, the American Bankers Association, Consumer Bankers Association, Credit Union National Association, National Association of Federally-Insured Credit Unions and The Clearing House — a payment processing company owned by the largest banks in the country — say the Fed has not given debit card issuers enough time to meet the requirements of the new rule.
"The rushed timeline for these efforts will create unintentional negative consequences for consumers while banks and credit unions are forced to reprioritize implementation of the final rule over other consumer-oriented and security-focused improvements," the statement reads.
The final rule gave banks nine months to get into compliance, with an effective date of July 1, 2023. In a joint letter sent Monday afternoon, the groups asked the Fed to extend the deadline by 18 months, pushing the effective date to Jan.1, 2025. Failing to do so, the groups argue, puts consumers and broader financial stability at risk.
The letter notes that to meet the obligations of the new rule, some debit card issuers will have to change out their core banking software and overhaul their existing payments infrastructure. Because so many community banks and small credit unions rely on third-party processors for these functions, the deluge of institutions looking to add additional debit networks puts card issuers at the mercy of their vendors.
Already, the letter states, some banks are finding themselves being pressured into adopting the debit network of their current core processing providers, a shift that hinders competition rather than fostering it.
The industry groups also argue that the resources required for this shift are taking away from other initiatives, such as free checking and fraud prevention.
The letter cited the Fed Board Gov. Michelle Bowman's dissent to the rule change. In October, she questioned what the total cost impact of the added network requirement would be on smaller banks, noting specific concerns around compliance costs and fraud.
Regulation II was originally enacted as part of the Dodd-Frank Act of 2010. It was intended to give merchants a way to control processing expenses by ensuring they had multiple networks to choose from. The latest update comes as e-commerce makes up an ever greater share of debit card purchases, having more than doubled its share of consumer spending from 10% in 2011 to 23% in 2019, according to Fed research.
Bank advocates have opposed the change from the beginning, submitting comment letters during the rulemaking process and raising similar concerns at the time of final adoption.
Meanwhile, the Fed's rule change was cheered by retailers, who argued that the lack of uniformity between in-store and online purchases undercut the spirit of the regulation.
The Merchants Payments Coalition, or MPC, an advocacy group that represents various types of retailers on payments issues, has been a leading voice for a multiple-network requirement for online purchases. The discrepancy between the treatment of online and in-person transactions under Regulation II cost merchants billions of dollars in fees, the organization said.
On Tuesday, the MPC pushed back against the banking groups' request, arguing that card issuers have had ample time to prepare. In a response letter, the group noted that the rule change has been in the works for two years, and that banks and credit unions should have been started preparing for this change after Dodd-Frank.
"They've already had their delay and shouldn't be allowed to continue dragging their feet," MPC executive committee member and National Association of Convenience Stores General Counsel Doug Kantor said in a written statement. "This is just a stalling tactic to let them continue operating under a virtual monopoly rather than having to compete like other businesses. The time for competition over online debit transactions has come, and implementation should take effect as scheduled."
A spokesperson for the Fed confirmed that the central bank received the letter on Monday afternoon but declined to provide a response to the issues raised.
