Mastercard Breached US Debit Card Rules, FTC Says

January 6, 2023
The US Federal Trade Commission alleges that Mastercard has been blocking the use of competing networks for online debit card payments in breach of federal regulations.

The US Federal Trade Commission (FTC) alleges that Mastercard has been blocking the use of competing networks for online debit card payments in breach of federal regulations.

According to the agency, Mastercard was “flouting the law” by setting policies to block merchants from routing e-commerce transactions via alternative payment card networks.

Specifically, the FTC says Mastercard used its control over the tokenisation process to block the use of competing payment card networks.

Tokenisation adds an extra layer of security to card transactions by replacing the cardholder’s primary account number with a series of numbers. Mastercard’s policy requires tokenisation every time a cardholder loads a Mastercard-branded debit card into an e-wallet.

The FTC argues that card issuers nearly universally use Mastercard to generate tokens and the card giant refuses to provide conversion services to competing networks.

As a result, only Mastercard can convert the tokens to the associated account number which practically prevents rival networks from competing with Mastercard in e-commerce transactions.

According to the agency, this violates the Durbin Amendment to the 2010 Dodd-Frank Act and its implementing regulations, which mandate dual routing on debit card transactions.

This is the first time the agency has used its powers to enforce the debit card rules.

Under the proposed consent order, Mastercard must provide competing networks with the customer’s personal account number that corresponds to the tokens.

The order also bans Mastercard from taking any action to prevent competitors from providing their own payment token service or offering tokens on Mastercard-branded debit cards.

“This is a victory for consumers and the merchants who rely on debit card payments to operate their businesses,” said Holly Vedova, director of the FTC’s Bureau of Competition.

“Congress directed the FTC to enforce this part of the Dodd-Frank Act and prevent precisely this kind of illegal behaviour,” she stressed.

Commenting on the action, Lina Khan, FTC chairwoman, said the conduct “deprived both businesses and customers of the lower prices and greater innovation that fair competition delivers”.

Retailers have also welcomed the FTC order.

“Congress said a dozen years ago that networks have to compete over debit card transactions, and this is another important step in making sure that finally happens,” said Leon Buck, vice president for government relations, banking and financial services at the National Retail Federation.

He added that the association will “carefully review” the order to ensure that it “achieves its intended result of making the card industry play by the rules”.

The American Bankers Association (ABA), however, raised concerns against using the Durbin Amendment as an “open-ended justification for technology mandates”.

The banking association argues card payments save merchants money and keep prices low, and that consumers do not bear these costs.

“The Durbin Amendment did not entitle merchants to obtain all payments technologies that have been invented or may be invented at any point in the future regardless of their freely made choices in the market,” the trade groups said in an August 2021 letter to the Fed.

Debit cards are by far the most widely used non-cash payment method in the United States, with more than 80 percent of American adults holding at least one debit card. These cards are used to make more than $4trn in purchases every year, according to the FTC order.

Although the Dodd-Frank Act requires banks to enable at least two unaffiliated networks on every debit card, the rule was primarily focused on in-store transactions.

At the time of implementation, e-commerce represented a relatively small fraction of total debit card payments and there was uncertainty as to whether the technology would be able to enable dual routing in online transactions.

However, in recent years, the volume of debit card purchases made online has grown significantly and new technological solutions arose.

It was only in October that the Fed finalised a rule that explicitly mandates dual routing for online transactions.

According to Buck, the FTC order “goes hand in hand with the Federal Reserve making it clear this year that routing rules apply the same online as they do in-store”.

Mastercard did not reply to a request for comment by the time of publication.

Visa is also subject to an investigation by the FTC which is looking at whether Visa’s actions restricted merchant choice in debit card routing in potential violation of the Durbin Amendment, the card giant said in its annual report.

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