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’An Easy Switch’: US Fed Dual-Routing Set To Take Effect

June 30, 2023
A US requirement mandating card issuers to enable dual routing for online transactions is set to come into effect on Saturday (July 1) and experts believe the switch should go smoothly.

  • "There is no reason that any issuer should not be ready because the world around them is ready" - expert says
  • Fed rule considered to have a significant impact

A US requirement mandating card issuers to enable dual routing for online transactions is set to come into effect on Saturday (July 1) and experts believe the switch should go smoothly.

Starting this weekend, US card issuers will be required to enable merchants to choose between at least two unaffiliated networks when they route card-not-present (CNP) debit transactions, such as e-commerce payments, mobile payments or in-app payments.

Although the dual-routing requirement has been enabled for card-present debit payments for over a decade in line with the Durbin Amendment, the Federal Reserve rule clarifying that the requirement applies to the CNP environment as well will come into effect on Saturday.

The rule has been a big win for merchants and domestic networks who had argued that the Durbin Amendment was always meant to include all types of debit card transactions regardless of whether the card was present or not.

Experts now agree that most market participants have made the necessary adjustments to enable full compliance with the rule when the deadline passes.

An easy switch

“I don’t see any reason why issuers shouldn’t be ready” said Callum Godwin, chief economist of merchant payment consultancy CMSPI, noting that the market had more than eight months to prepare for implementation.

“It’s very simple in terms of switching on PINless functionality,” he said.

“It shouldn’t be a case of having to reissue cards since the cards have been issued to enable dual routing since the 2010 Durbin Amendment. It could be done remotely and very quickly.”

Although the technological side of the implementation may be relatively straightforward, there have also been concerns that certain networks, along with some large issuers, may not be supporting alternative routing for CNP transactions.

This was primarily the case with Visa’s Interlink and Mastercard’s Maestro brands, which meant that financial institutions that chose to have an exclusive relationship with Interlink or Maestro as their unaffiliated network had no ability to enable routing of CNP transactions, unlike other networks such as SHAZAM, NYCE, Pulse or STAR.

However, changes to these networks have been made since the Fed rule was finalised in October and issuers were given until this July to ensure enablement.

“We are now in an environment where all the existing debit networks support both card-present and CNP transactions,” said Keri Crane, advisory technical product manager of the Card Processing Solutions division of US IT firm Jack Henry.

According to Crane, all networks have now updated their systems and have worked with their issuers to change the parameters to enable those types of transactions.

“There is no reason that any issuer should not be ready because the world around them is ready,” she noted.

If an issuer was not ready, “it would likely mean they were choosing not to have the appropriate enablement settings with network relationships on their card”, Crane added.

A significant change

Although large merchants typically argued the rule was always made to be applied to CNP transactions, there were few incentives in the market to make the necessary investment in the updates as long as e-commerce and online transactions represented a small portion of payments.

However, CNP debit card transactions have grown steadily over the last decade, from about 10 percent of all debit card transactions in 2011 to 23 percent in 2019, and it was further accelerated during the coronavirus pandemic.

For example, in its first-quarter earnings call for 2023, Visa said it registered a 65 percent growth in US CNP spend compared with 2019.

This increase drew attention to the fact that some large issuers were not allowing CNP transactions to route through an alternate network across these channels.

According to the Fed, in 2019, only 6 percent of CNP debit transactions went through an alternative network, which was in sharp contrast to its 40 percent share of card-present transactions.

This is now expected to change as the Fed rule takes effect and experts are optimistic that it will make a significant difference.

“When the analysis was done in the past, only a small number of transactions were able to go through an alternative network because some large issuers were not supporting it,” Crane said.

But once expanded network routing options are available for all CNP debit transactions, it is expected to create a knock-on effect.

“With this announcement, the market should get back on track. Processors will develop functionality, merchants will then switch on,” Godwin said.

This is a significant opportunity for merchants, which may save them $3bn annually, CMSPI estimated.

Although the effects of the change may not necessarily be immediately felt on July 1, one source states they expect it to be “a continued evolution of CNP transactions shifting from the card brand on the debit card to the domestic debit network”.

According to Carol Specogna, SVP of network business at Fiserv, which owns debit card networks STAR and Accel, there is increasing awareness in the market, which means merchants are interested in routing to the “back of card” networks as an opportunity to reduce expenses and improve authorisation rates.

Specogna said she saw an “excellent collaboration” among acquirers, networks and issuers which should ensure that all stakeholders are prepared for additional routing options on July 1.

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