US Finalises Debit Card Routing Rule As Credit Card Bill Goes Before Congress

October 5, 2022
The US Federal Reserve has finalised a rule requiring competitive debit card routing for online payments, while a bill intended to mandate a similar provision for credit cards is making a move in Congress.

The US Federal Reserve has finalised a rule requiring competitive debit card routing for online payments, while a bill intended to mandate a similar provision for credit cards is making a move in Congress.

October has kicked off with good news for merchants, less so for card issuers. On Monday (October 3), the Fed finalised its long-awaited rule on debit card routing. The Fed specifies that debit card issuers should enable at least two payment card networks in all debit card transactions, including card-not-present transactions, such as online payments.

The update follows the Fed’s findings that merchants often do not have the choice to double route card-not-present transactions.

Although this was not a pressing issue when the original rules were issued in 2011 and there were no market solutions to broadly support double routing for online payments, the lack of choice has become increasingly pronounced with the steady growth of online payments over the last decade.

The consultation provoked a record interest, including fierce opposition from bank lobby groups. Nonetheless, the final rule is “substantially similar” to the proposal issued last year, the Fed said.

Many bankers raised concerns about the compliance burden, especially on community banks; however, the Fed said the input they received suggests that most community bank issuers are already compliant with the final rule.

The central bank also pointed out that although this final rule does not look into interchange fees, “the Board will continue to review interchange fee requirements in light of the most recent debit card industry cost data collected by the Board and may propose to modify these requirements in the future”.

The Fed voted 6-1 in favour of finalising the rule, with governor Michelle Bowman voting against. Bowman was nominated by former President Donald Trump and is the first person to fill the community bank seat on the Fed board.

Bowman said community banks raised “substantial concerns” during the consultation.

“Although the Board has attempted to identify the likely effects of the proposed rule based on available information, I believe that significant questions remain about how the rule will affect banks, and particularly community banks, with respect to both fraud and the cost of compliance,” the governor said in a statement.

Her worries were echoed by the American Bankers Association (ABA), whose CEO Rob Nichols claimed the rule has “multiple flaws”.

“The final rule could also trigger a reissuance of debit cards at a tremendous cost and burden for community banks, and the nine-month implementation period is unrealistic,” Nichols said.

Nonetheless, one could argue that double routing has been mandated by US law for more than ten years and should have been enabled for online transactions as soon as technological solutions made that possible.

Merchants, the main beneficiaries of the double routing provision, welcomed the final rule.

“Congress ended Visa and Mastercard’s virtual monopoly over debit transactions a decade ago, and this decision makes clear that the law applies the same for in-store and online transactions — the result that Congress mandated in the first place,” the National Retail Federation (NRA) said.

Senator Richard Durbin (D-IL), author of the 2010 debit routing legislation, also supported the Fed rule.

The Senator said that “For years we have worked to bring fairness and competition to debit and credit card swipe fees, and this is a big step forward."

"The Federal Reserve’s rulemaking is a win for competition and good news for Main Street merchants and consumers who are tired of big banks and giant card networks trying to rig the game," he added.

Credit cards proposals advance

Meanwhile, a bill that would mandate double routing on Visa and Mastercard credit cards has got a fresh chance in Congress.

Durbin, who has recently introduced the Credit Card Competition Act, has submitted an amendment to the National Defense Authorization Act (NDAA) 2023, the US defence spending bill, seeking to attach his credit card proposals to it.

The legislation has faced fierce criticism from bankers and credit unions from the very beginning, while merchants are actively campaigning in favour.

Commenting on the proposed amendment, ABA's Nichols reiterated that the bankers’ group will “aggressively oppose this misguided bill and ask every lawmaker to reject including it in the NDAA”.

In a separate amendment, Durbin would direct government agencies to report on how much military commissaries pay banks and card networks to process card transactions, and how much of that cost is passed on to veterans in the form of an extra fee for using a credit or debit card.

The Merchants Payments Coalition welcomed the proposed amendments.

“These amendments would reveal how much swipe fees are costing our nation’s active duty military and veterans and introduce competition that would bring these fees under control,” said the NRA.

“Swipe fees drive up prices for all Americans but it’s outrageous that Wall Street megabanks should profit on the backs of heroic men and women who’ve put their lives on the line for their country and come home wounded or disabled.”

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