Federal Reserve promotes competition in debit card markets

Debit cardPhoto by frankieleone via flickr | CC-BY-2.0

All consumers — including cash customers — pay more at the store and more at the pump due to high bank “merchant discounts” merchants pay to accept credit and debit cards. Small portions of the merchant discount go to the card network, the payment processor and the merchant’s bank. The bulk of the discount, ranging from 1%-4%, is known as the “swipe fee” and goes to the consumer’s bank. The fee is lowest on “classic” debit cards and highest on rewards credit cards. So, all customers, including cash customers, pay for some consumers to receive rewards.

On Monday, the Federal Reserve completed a debit routing rule requiring that merchants be given more choices by banks to route their transactions for payment. The choices must include at least two debit card networks unaffiliated with the consumer’s bank. PIRG supported the rule, as we explained in our 2021 article “Federal Reserve changes to debit card rules will help competition.”

The rule is required by an amendment authored by Senator Dick Durbin (D-IL) to the 2010 Wall Street Reform and Consumer Protection Act addressing the high prices merchants pay to accept debit cards. As the Fed explained Monday, the Durbin amendment required it:

“to make rules ensuring that debit card issuers give merchants the opportunity to choose between at least two unaffiliated networks when routing debit card transactions. When the Board initially issued the rule in July 2011, the market had not developed solutions to broadly support multiple networks for card-not-present debit card transactions. Since that time, technology has evolved to address these barriers.”

We expect the new rule’s choices will both promote innovation and force the dominant payment networks, Visa and Mastercard, to compete more on the swipe fees merchants pay and are forced to pass on to all customers in the form of higher prices.

The credit card market is much larger than the debit card market. My op-ed, Consumers need credit card reform, on the Payments Dive website, explains how the Credit Card Competition Act, bi-partisan legislation authored by Durbin and Sen. Roger Marshall (R-KS), will accomplish the same goal for credit card markets as the new Fed rule does for debit cards.