Federal Reserve Protects Competitive Market for Retailers to Choose Debit Networks

The U.S. central bank announced that the credit card networks’ routing screens violate the law.

November 04, 2016

WASHINGTON, D.C. – Yesterday the Federal Reserve Board published a clarification of Regulation II which implements debit swipe fee reform. One part of Regulation II protects retailers' ability to choose which payment network to use for their debit transactions.

Prior to debit reform taking effect in 2011, the dominant card networks (Visa and MasterCard) often paid banks that issue their debit cards an incentive for those banks to block competitive networks (such as Star, Pulse, NYCE, Shazam and others) from those cards. That often left retailers with no choice of network when transmitting debit information to complete payments. The Durbin Amendment to the Dodd-Frank Wall Street Reform Act, as one part of reforming debit fees, barred this practice. It said that the dominant networks and banks could not limit the number of networks available to handle a card's transactions to fewer than two competitors. And, it said networks and banks could not do anything to "inhibit" merchants' choice of which network to use.

In spite of these provisions of the law, Visa introduced requirements along with its push for retailers to accept chip cards that required merchants to give up their ability to choose the network they wanted to use. It did this through requiring that part of the debit transaction process include a customer selection of either "Visa Debit" or "US Debit" as the payment. Customers were confused by these choices (in part because "US debit" does not exist). Visa then required that when a customer selected "Visa Debit" that the transaction had to be sent to Visa.

Visa's requirements dramatically increased its business at the expense of its competitors (and at the expense of merchant choice).

The Fed's clarification announced that these Visa requirements violate the law. According to the Fed, Visa (and MasterCard) cannot require that customers make a selection of network (one that they do not understand). The selection of network under Regulation II is given to the merchant accepting the debit card.

This is a major win for NACS members and other merchants, as well as for the smaller networks that compete with Visa and MasterCard for merchant business.

"We appreciate the move by the Federal Reserve to clarify its rules and protect competition among debit networks and merchant choice," said Lyle Beckwith, senior vice president government relations for NACS. "This is the right way for the Fed to protect the free market competition that debit reform intended."

The Fed's clarification appears as a frequently asked question on its website with the Fed's answer. The full text of the FAQ clarification is as follows:

“Q4. After a debit card with an EMV chip is inserted into a point-of-sale terminal, some terminals prompt the cardholder to choose between applications, one that routes to at least two unaffiliated networks and another that routes to a single network. Does a payment card network comply with section 235.7 of Regulation II if it requires the merchant to allow the cardholder to make the choice of EMV chip application, one of which routes only to a single network?

A4. No. Section 235.7(b) of Regulation II implements the requirement in section 920(b)(1)(B) of the Electronic Fund Transfer Act that a ‘payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person that accepts or honors debit cards for payments to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions.’ A payment card network inhibits a merchant's ability to route electronic debit card transactions if it, by network rules, standards, specifications, contractual agreements, or otherwise, requires the merchant to allow the cardholder to make the choice of EMV chip application on a debit card, where one application routes only to a single network. Such a requirement is not compliant with section 235.7 of Regulation II because it prevents the merchant from directing the routing of electronic debit transactions. (Added November 2, 2016)”