Federal Reserve Clarifies Debit Rule

The agency says routing provisions should apply to card-not-present transactions.

May 10, 2021

e-commerce credit card checkout

WASHINGTON, D.C.—The Federal Reserve Board is seeking comments on proposed changes to Regulation II, which enforces the Durbin Amendment, to ensure that the debit routing provisions apply to card-not-present transactions.

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.

In recent years, there has been a surge in card-not-present transactions with the increase in online, mobile and contactless payments. While the intention of the law was to ensure that a merchant’s routing options were preserved on all debit transactions, this has not been the case.

The major card networks have sought to block retailers’ routing choice on card-not-present debit payments. NACS believes the blocking of routing options is in violation of the law and has urged policymakers to respond. In Friday’s notice, the Federal Reserve clarifies that it intends for routing options to apply to card-not-present debit payments.

“Although technology has subsequently evolved to address these barriers, data collected by the Board and information from industry participants indicate that two unaffiliated networks are often not available to process card-not-present debit card transactions because some issuers do not enable two networks for those transactions. 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 Federal Reserve’s notice.

The Federal Reserve’s proposal underlines the responsibility of issuing banks to enable network routing options on debit cards.

“The proposed revisions would further clarify the responsibility of the debit card issuer in ensuring that at least two unaffiliated networks have in fact been enabled to comply with the regulation,” the Fed said.

Swipe fees are the second highest operating cost of the convenience store industry. NACS intends to file comments on the proposal on behalf of the industry and encourages retailers to file individual comments as well.