NACS Urges Federal Reserve to Protect Routing Rights

The convenience store industry calls on the Fed to lower debit fees.

August 12, 2021

Customer Using Debit Card

WASHINGTON—NACS filed comments yesterday calling on the Federal Reserve Board to swiftly finalize its proposed clarification that would preserve a retailer’s routing choice on debit transactions. In May, the board issued its proposed clarification to Regulation II, which enforces the Durbin Amendment, stating that issuing banks must enable two networks on card-not-present transactions in concurrence with the law.

“For too long, debit card issuers and networks have failed to adhere to the terms of Regulation II because they have not made available two networks to process debit transactions on large numbers of debit transactions. NACS hopes that the board’s clarification will be implemented swiftly and end these failures,” NACS states in its letter.

NACS championed the Durbin Amendment, which was passed into law in 2010. The law introduced competition in the debit marketplace by requiring that each debit card have two unaffiliated network routing options enabled for a retailer to choose between. However, this has not been properly implemented as major card brands have continually tried to block competing networks, and issuing banks have only enabled one network on certain transactions. Specifically, with the move toward online, mobile and contactless payments, issuing banks have failed to honor the routing requirements in Regulation II on these types of card-not-present transactions, which is a violation of the law.

“The absence of at least two unaffiliated networks for card-not-present transactions forecloses the ability of merchants to choose between competing networks when routing such transactions, an issue that has become increasingly pronounced because of continued growth in online transactions, particularly in the COVID-19 environment,” states the board in its proposed clarification.

In addition to ensuring that two networks are enabled on any type of transaction, NACS called on the board to clarify that the two networks on the card must be enabled for all methods of authentication—both PIN and non-PIN.

“NACS members often lack network choices on fuel dispenser transactions because the issuing banks have not enabled networks that compete with Visa and Mastercard to handle PIN-less transactions (which are common at self-serve fuel pumps). This problem can be overcome by the board making clear that issuing banks must enable the networks on their cards for all methods of authentication those networks can handle,” states NACS. 

NACS ended its letter by calling on the Fed to lower the debit interchange fee to an amount that is “reasonable and proportional” to card issuers’ cost as is required by law. A decade ago, the board set the debit fee at 21 cents (plus 0.05% of the transaction amount plus one cent for fraud prevention costs). Yet the issuers’ costs have drastically decreased since that limit was set, with their average cost being 3.9 cents.

“There is simply no justification in the law for the limits set in Regulation II to so dramatically exceed issuer costs,” NACS states in the letter.

In addition to NACS, many NACS member companies filed comments, as did the Merchants Payments Coalition, of which NACS is an executive committee member.

The board will review all public comments before finalizing its clarification.

NACS and the Merchants Payments Coalition have continually fought for more competitive, transparent card systems and have called for addressing the lack of competition in the payments market. Last month, they welcomed an executive order on competition signed by President Joe Biden, and in March, Visa and Mastercard announced another postponement of a scheduled swipe-fee hike until April 2022 due to pressure from NACS, lawmakers, retailers and other trade groups.