More than half a dozen financial trade organizations are criticizing the Federal Reserve’s proposal to make at least two unaffiliated debit networks available on every debit card issued in the United States, including for card-not-present transactions.
However, opposition isn’t unanimous, and support for the change is coming from the U.S. Department of Justice and a payment provider that says the plan is needed to ensure competition.
Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed 11 years ago, requires issuers to make available at least two independent debit networks on the cards they issue so merchants have a choice of debit networks when processing transactions. However, this requirement is seen as ineffective for online and other card-not-present transactions. According to the U.S. Department of Justice, that’s because many large issuers have not implemented necessary technological changes to permit debit networks other than Visa and Mastercard to process transactions. The board’s proposal is intended to clarify that the Durbin amendment’s two-debit-network requirement applies equally to such transactions.
Paul Waltz, president and CEO of financial services and payment provider SHAZAM, noted earlier this summer that his organization “has long advocated for dual-routing requirements because it keeps the playing field level and fosters an environment where community financial institutions can compete and thrive.”
“This acknowledgement by the Fed … is significant because it recognizes and acknowledges the restrictive practices and challenges in the industry, particularly as online transactions continue to increase in the Covid-19 environment,” he said.
The American Bankers Association and five other banking trade groups requested in a letter earlier this month that the Fed withdraw the proposal, at least until “a proper analysis on the impact of any rulemaking on routing and exclusivity” is done, adding that the changes would especially impact smaller issuers and community financial institutions and undermine their ability to compete against larger institutions.
“We did not anticipate a new mandate that would require us to undertake distracting, time-consuming efforts to change our core network infrastructure,” they wrote in the letter to the Fed. “The proposal is particularly surprising given that the primary beneficiaries of the board’s action would be large multinational retailers that have experienced double-digit profitability increases during the pandemic, not small businesses.”
“Our members remain committed to vigorously opposing any attempt to undermine the payments system at the expense of consumers,” they added. “The proposal presents a threat to consumers, issuers and the U.S. payments system and should not be permitted to go into effect.”
The Independent Community Bankers of America is not a signer on the letter.
If the Fed moves forward with the proposal, the ABA recommended the removal of the requirement for issuers to “enable” multiple networks on their cards and instead return to the original language that issuers “allow” the option. Also, the ABA requested the specification of the transaction types that must be capable of being routed on multiple networks; and the establishment of a four-year timeframe for issuers to comply with the rule to accommodate the vast logistics of doing so.
In an online statement earlier this month, the ICBA said the Fed should not update the regulations without first completely analyzing the possible impacts of the changes on consumers and financial institutions.
“While the Durbin amendment is poor public policy that has been empirically proven to harm consumers and the viability of local financial institutions in favor of ‘big box’ and large e-commerce retailers, community banks continue to comply with its provisions,” ICBA President and CEO Rebeca Romero Rainey said.
The DOJ has stated the proposal could increase competition “by lowering one of the many barriers to entry and expansion that new or smaller competitors face in this important segment of the debit card industry.” However, the Justice Department also called on the board to consider whether the proposal is drafted broadly enough to cover all card-not-present transactions and said “incumbent industry participants may attempt to circumvent the proposed rule.”
“We commend the board for its efforts to promote competition in this important part of the debit card industry by ensuring that smaller debit networks will have a greater ability to compete for merchants’ business,” said Acting Assistant Attorney General Richard A. Powers of the Justice Department’s Antitrust Division. “There is limited competition to process online and other card-not-present debit transactions — which in 2019 accounted for over $1 trillion in transaction value.”