US Banks Ask For Debit Card Rule Delay Until 2025

February 16, 2023
US financial institutions ask the Federal Reserve to postpone a rule that mandates dual routing on debit cards used for online purchases until 2025.

US financial institutions have asked the Federal Reserve (Fed) to postpone a rule that mandates dual routing on debit cards used for online purchases until 2025.

The rule, which is the last piece of the 12-year-old Durbin Amendment that has not yet been put into effect, would require issuers to enable at least two unaffiliated payment networks for card-not-present (CNP) debit card transactions, such as online purchases.

Although the 2010 law established the dual routing requirement for debit card purchases in general, in practice online transactions were typically not included due to initial technical difficulties and the low share of CNP transactions in overall debit card purchases at the time.

However, as online transactions grew significantly in recent years, the Fed clarified that the requirement does apply to all debit card transactions, including CNP.

The regulator gave the industry nine months, until this July, to prepare for implementation.

In a letter sent to the Fed, a group of industry associations now asks the regulator to postpone the effective date of the rule by one and a half years, to January 1, 2025.

The letter was signed by the American Bankers Association (ABA), The Clearing House (TCH) and various other trade associations which “together represent virtually all of the nation’s regulated financial institutions”, the document says.

They argue that the rule, which affects 8,000 small institutions according to the Fed’s own estimates, provides insufficient time to undertake time-consuming and resource-intensive efforts to change their core banking software and payments infrastructure.

These changes often include selecting, contracting with, onboarding and testing potential vendor solutions while prudently managing operational and security risks, the letter says.

“The rushed timeline for these efforts will create unintentional negative consequences for consumers while banks and credit unions are forced to reprioritise implementation of the final rule over other consumer-oriented and security-focused improvements.”

Additionally, as processors are aware that issuers have a legal obligation to adopt these changes in a short period of time, they have started to leverage this position.

According to the letter, some processors have told issuers that “the only way the processor can operationalise the required changes prior to the effective date is by requiring issuers to enable the processors’ affiliated debit networks”.

“These types of requirements, which would leave many issuers with just one choice of debit network, run counter to the spirit of the final rule, which is intended to encourage competition,” the group says.

Meanwhile, they note that some issuers may need to reissue cards at a time when there is a significant global shortage of chips.

Market experts are recommending that issuers maintain three to six months of advance EMV chip inventory and avoid marketing programmes or initiatives that require card re-issuance due to global market shortages, the associations say.

In response to the plea, the merchants’ lobby group, the Merchants Payments Coalition (MPC), pointed out that the general legal requirement was enacted in 2010 and the Fed process to issue the clarification began two years ago.

The fact that the industry did not adopt the rule as soon as it had a chance or prepared for it in time should not be an excuse for further delay.

“Congress told banks and card networks a dozen years ago to implement routing choice for all debit card transactions and that meant both in-store and online,” MPC executive committee member Doug Kantor said in an email statement.

The card industry has “already had their delay and shouldn’t be allowed to continue dragging their feet”, Kantor added.

“This is just a stalling tactic to let them continue operating under a virtual monopoly rather than having to compete like other businesses.”

The success of the dual routing requirement for in-store purchases is underpinned by the 40 percent market share of transactions handled by competing networks such as NYCE, Star and Shazam in 2019.

By contrast, only 6 percent of the CNP transactions were routed through competing networks in the same year, according to figures from the Fed.

“The time for competition over online debit transactions has come, and implementation should take effect as scheduled,” Kantor stressed.

The bankers’ letter was sent to the Fed board as well as Fed governor Michelle Bowman, a Trump nominee and the first person to fill the community bank seat on the board.

In October, Bowman was the only member of the Fed board who voted against the clarification. She said at the time that serious questions remained over the impact of the rule on community banks, particularly with respect to fraud and the cost of compliance.

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