WASHINGTON—Consumer payment practices have changed with the pandemic as more purchases are made online, and Sen. Richard Durbin of Illinois and Rep. Peter Welch of Vermont are asking the Federal Reserve to probe allegedly anticompetitive practices by large networks like Visa and Mastercard that are forcing merchants to pay excessive debit-card fees, reports the Wall Street Journal.
In a letter sent to Fed Chairman Jerome Powell on Friday, Durbin said practices by the large card networks and debit-card issuers are diminishing competition in the online-payments marketplace and costing merchants potentially billions of dollars. The letter asks the Fed to determine whether the major card networks and debit-card issuers have a shared incentive to limit the transactions processed by smaller debit-card networks.
The Durbin amendment, a part of the 2010 Dodd-Frank Act, is the namesake of the Illinois senator. It is best known for capping the swipe fees the largest banks can charge merchants when customers pay with debit cards. It also requires that merchants have the option of choosing from at least two unaffiliated debit-card networks to route transactions. Some debit-card issuers appear to be violating that part of the act, Durbin claims, though he didn’t name specific banks or other card issuers. As NACS Daily reported in April, swipe fees are retailers’ second highest operating expense behind labor.
“U.S. retailers and restaurants cannot afford to pay unnecessarily high fees for debit card transactions at a time when they have been hit hard by the pandemic and its economic effects,” said the letter.
The pandemic has changed consumers’ payment preferences, resulting in more online card purchases and more frequent use of digital wallets. Payments in stores are also shifting to cards that can be tapped at a payment terminal, rather than inserted, as shoppers try to avoid touching surfaces. The result is that some businesses are paying higher fees.
Merchants have said that these types of purchases limit their ability to route debit-card transactions on networks beyond Visa and Mastercard when those brands are on the front of the card, as compared with what they would generally pay on lesser-known networks like Shazam or NYCE.
From March through early May, online and other card-not-present debit-card purchases made up an estimated average of 24% of total U.S. debit- and credit-card payments, according to CMSPI, a merchants’ payments consulting firm. That was a jump of 14% as of Feb. 28.
Merchants do have routing choices, said Jeff Tassey, head of the Electronic Payments Coalition, which represents card networks and issuers. “There’s nothing to suggest anyone isn’t fully adhering to the debit marketplace rules,” he said.
During the pandemic, online and contactless payments have helped small businesses stay open, he said. “Independent PIN debit networks failed to innovate and make the necessary investments in technology,” he said. “Now, at a time of rapid change and disruption, [they] are asking the government to force the transfer of intellectual property…developed through substantial investments by the payment networks and financial institutions. Simply put, the independent PIN debit networks want to access the full benefits of the advanced payment networks, and merchants want to pay the cheaper PIN debit prices for those benefits.”
In recent months, merchant trade groups, including NACS, the National Retail Federation and FMI, which represents the food industry, have spoken with congressional members’ offices about the issue.
Merchant lawyers and trade groups say both networks and issuers have played a role in the routing restrictions. Most networks beyond Visa and Mastercard are so-called PIN debit networks. When consumers shop in stores and type in their PIN at checkout, those transactions generally travel over a PIN network. Online purchases are harder to route this way. Few merchants use technology that lets shoppers input their PIN online. Also, some issuers haven’t enabled PIN-less functionality on their debit cards.
That functionality would allow debit transactions to be processed without the need for cardholders to type in their PIN. When that functionality isn’t turned on, the transaction will usually go through Visa and Mastercard automatically. The absence of fully available PIN-less functionality costs U.S. merchants at least $2 billion a year in debit fees, according to CMSPI.
The letter said federal intervention might be necessary “to prevent what appears to be the anticompetitive practice of major debit card issuers refusing to enable PIN-less debit functionality on their cards.”
Debit-card purchases on mobile wallets are also difficult to route over other networks. They generally involve tokens that are created by major networks that replace a card’s number when a payment is processed. Those networks can translate the tokens back into the actual account number to allow for the purchase to proceed. Merchants can send those payments to the PIN debit networks, but those networks then must contact the major network on the front of the card, such as Visa, to decode the token. Merchants and some smaller networks say the process is difficult to execute.
Network fees that merchants pay for online debit-card transactions average an estimated 0.28 percentage points, compared with 0.20 points when a debit card is presented at checkout, according to CMSPI.
Both Visa and Mastercard have declined to comment on Durbin’s letter, the Journal reports.