Federal Reserve changes to debit card rules will help competition

We're supporting regulatory changes proposed by the Federal Reserve to clarify that certain debit card routing practices by banks are "inconsistent" with the 2010 Durbin amendment's requirement that merchants be given at least two routing choices unaffiliated with the Visa or Mastercard payment networks. Choices are pro-competition and pro-innovation and would lower costs to merchants and, ultimately, prices to consumers.  And isn't "inconsistent" perhaps another way to say "against the law?" Cover graphic by frankieleon via Flickr, some rights reserved. 

Picture of a debit card

We’re supporting regulatory changes proposed by the Federal Reserve Board to clarify that certain debit card routing practices by banks are “inconsistent” with the 2010 Durbin amendment’s requirement that merchants be given at least two routing choices unaffiliated with the Visa or Mastercard payment networks. Choices are pro-competition and pro-innovation and would lower costs to merchants and, ultimately, prices to consumers.  And isn’t “inconsistent” perhaps another way to say “against the law?”

U.S. PIRG supported the so-called “Durbin amendment” offered by Senator Dick Durbin (IL) to the Dodd Frank Act in 2010. The amendment capped debit card swipe fees imposed on merchants by big banks and required that merchants be given at least two choices to route their debit card transactions through an unaffiliated payment network. Of course, we would have preferred that the amendment apply to both debit and credit card fees and rules, but it was still a tremendous victory for competition and choice against an entrenched oligopoly, Visa and Mastercard, which is enabled by the powerful Wall Street mega-banks that issue the vast bulk of all debit and credit cards. 

U.S. PIRG’s comment letter in the Debit Card Routing docket is available here. Excerpt from our comment:

“Much of the bank, credit union and card network complaining about the Durbin amendment, especially during the implementation of Regulation II, had focused on its cap on certain debit card swipe fees. Now, they defend their defiance of the Durbin amendment’s much more important routing requirements. The Durbin amendment was always about more than stopping excessive rent-seeking. It was also designed to promote the development of a competitive payment network marketplace. The Notice of Proposed Rulemaking sends an important signal that conduct inconsistent with the Durbin amendment will not be tolerated.”

The Merchant Payment Coalition’s comment explains further:

“As merchants have adapted to serve their customers during the pandemic, there has been a dramatic shift to e-commerce, as well as mobile apps and wallets, that have made the lack of routing options for merchants a more pressing issue than ever. Economists estimate that the lack of routing costs merchants and their customers billions of dollars each year, with payments consulting firm CMSPI placing the amount at $2 to $3 billion annually. 

The very reason Congress passed the Durbin Amendment is because the U.S. payments market was broken, and the largest banks and card networks are trying to keep it that way. It is imperative that the Board move forward and clarify its regulations in order to protect the competition and merchant routing choice that was intended by Congress.”

The FRB staff’s memo supporting the proposed rule points out that since passage of the Durbin amendment and Regulation II, innovation by unaffiliated networks, including “PINless debit,” which is a new technology used in online (card-not-present) transactions, has not been enabled by card-issuing banks:

“In the decade since the adoption of Regulation II, spurred by the growth in online commerce, card-not-present transactions have become an increasingly significant portion of all debit card transactions, and technology has evolved to enable multiple networks for these transactions. Despite this, two unaffiliated payment card networks are often not available to process card-not-present transactions, such as online purchases, because some issuers do not enable multiple networks for such transactions. Staff members view such an outcome as inconsistent with Regulation II’s requirement that at least two unaffiliated networks be available to process each debit card transaction.” [Emphasis added.]

Importantly, the directors of the Federal Trade Commission’s Bureaus of Consumer Protection, Competition and Economics have also filed a supportive staff comment to the FRB’s docket. The FTC has authority over payment networks, including Visa and Mastercard, but not over the card-issuing banks:

“FTC staff applauds the Board’s proposed clarification, which addresses some issuers’ failure to fully recognize that card-not-present (“CNP”) transactions are a “type of transaction” under the existing Regulation II. FTC staff submits this comment both to endorse the proposed clarification and to suggest additional revisions that will strengthen the rule. In particular, the Board should adopt revisions that ensure that debit card networks do not create incentives for issuers to evade Regulation II’s clear mandate that there be two unaffiliated networks available for each type of debit transaction, with each network a commercially reasonable alternative for merchants. We urge the Board to prohibit debit card networks from paying incentives to an issuer based on how electronic debit transactions are routed by merchants using that issuer’s debit cards.”

Most substantive comments are filed at the last minute and are not yet available on the FRB docket comment page. Visa and Visa Inc.’s comment filed 23 July is a notable exception. We comment on it in our PIRG comment:

“Visa’s filed comment in this docket asserts that “among some or all historically PIN-based debit networks, the ability to support card-not-present transactions is relatively new and untested in the marketplace. […] Of course, the actual claim here is belied by the fact that running a transaction without a PIN is not a new and untested practice. Signature-based debit transactions without a PIN are exactly what Visa does all the time. Visa simply doesn’t want competition from unaffiliated PIN debit networks that have developed competitive PINless transaction technology for online transactions.” 

The payment networks pre-date BigTech’s Amazon and Google, yet have many similarities as “multi-sided platforms.” Payment networks get revenue from both consumers (interest, other fees) and merchants (swipe fees paid by merchants that accept cards are generally a small merchant’s second highest cost). Most of the merchant swipe fees are returned to card-issuing banks, which then return most of the money to some cardholders as rewards. In other countries, swipe fees are prohibited or strictly regulated. Only in the U.S. are swipe fees rising. That’s due to unchecked, anti-competitive market power, not innovation. 

Although the Fed and FTC are independent agencies, both the Fed’s proposed clarification and the FTC’s support of it are important steps to implement President Biden’s recent Executive Order on promoting competition in the economy. We look forward to working with the Fed, the FTC and others on making the U.S. economy more competitive and more innovative. Let’s start with the big banks, and their practices that are “inconsistent” with the competition laws.




Ed Mierzwinski

Senior Director, Federal Consumer Program, PIRG

Ed oversees U.S. PIRG’s federal consumer program, helping to lead national efforts to improve consumer credit reporting laws, identity theft protections, product safety regulations and more. Ed is co-founder and continuing leader of the coalition, Americans For Financial Reform, which fought for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including as its centerpiece the Consumer Financial Protection Bureau. He was awarded the Consumer Federation of America's Esther Peterson Consumer Service Award in 2006, Privacy International's Brandeis Award in 2003, and numerous annual "Top Lobbyist" awards from The Hill and other outlets. Ed lives in Virginia, and on weekends he enjoys biking with friends on the many local bicycle trails.