WASHINGTON—As the U.S. Senate confirmed Federal Reserve Chairman Jerome Powell for another term yesterday, the Merchants Payments Coalition called on the Fed to finalize a year-old proposal clarifying that merchants can choose which payment networks process debit card transactions regardless of whether purchases are made in stores or online.
“It’s been a full year since the Fed said it wanted to resolve this issue once and for all, and the Senate has now given Chairman Powell a vote of confidence to act on what’s best for the American economy and consumers,” said Leon Buck, a member of the MPC Executive Committee and vice president for government relations, banking and financial services at the National Retail Federation.
“The time for action has come,” Buck said. “The Fed has made it clear that Visa, Mastercard and big banks are standing in the way of competition, but the higher costs that come with lack of competition have been allowed to continue. With swipe fees acting as a multiplier effect on near-record inflation in the past year, the urgency has only increased. We hope this confirmation will prompt the Fed to move forward.”
NACS is an executive committee member of the MPC. At a Senate Judiciary Committee hearing on swipe fees last week, NACS General Counsel Doug Kantor testified on behalf of the convenience store industry and the MPC. Kantor noted that U.S. merchants paid $138 billion in credit and debit card processing fees in 2021, a “huge jump” from the $110.3 billion paid the year before.
Yesterday, the MPC also called on the Fed to update out-of-date regulations that allow big banks to charge debit card swipe fees that are five times their cost of processing transactions.
“These fees far exceed what Congress intended and the Fed has the proof,” Buck said. “Small businesses and their customers are continuing to suffer every day that goes by.”
Earlier, the Senate confirmed Fed Vice Chairwoman Lael Brainard and Board of Governors members Lisa Cook and Philip Jefferson.
Powell’s confirmation comes just over a year after the Fed proposed regulations last May that would clarify that banks must enable all debit card transactions to be processed over at least two unaffiliated networks—including at least one competing network such as NYCE, Star or Shazam—rather than just Visa or Mastercard’s networks. The independent networks, which already process ATM transactions and many in-store debit transactions, charge lower fees but have only about one-fifth the fraud of Visa and Mastercard, according to the Fed.
The routing option was required under legislation passed by Congress in 2010 and has helped save merchants billions of dollars a year on in-store transactions since taking effect in 2011, with an estimated 70% of the savings passed on to consumers. But some of the nation’s largest banks have failed to enable routing for online transactions, blocking merchants’ right to choose and violating federal law, according to the Fed. The practice has resulted in only about 6% of online debit transactions being processed over competing networks, according to the Fed.
NACS and the MPC submitted comments on the proposal last August, saying routing is “a more pressing issue than ever” because of increased ecommerce during the pandemic. MPC called on the Fed to adopt the proposal but to further clarify that access to competitive networks must be enabled regardless of what kind of authentication—such as signature, PIN, PINless or biometric—is used.
The Fed also said last May that banks’ average cost of processing debit transactions had fallen to 3.9 cents as of 2019, down from about 8 cents in 2009. That means the 21 cents banks with $10 billion or more in assets are allowed to charge per transaction is now 5.4 times the average cost—up from 2.6 times when the regulation was adopted. Banks can charge as much as they like if they set the fees themselves rather than following fees set centrally by Visa and Mastercard, but no major banks have done so.
Banks and networks charged merchants—and ultimately their customers—$32.6 billion in debit card swipe fees in 2021, up 22% from the year before, according to the Nilson report. When credit and gift cards are included, swipe fees totaled $137.8 billion in 2021, up 24% over 2020 and more than doubled over the previous decade.
Credit card swipe fees remain one of the highest operating costs for convenience store retailers after labor, according to NACS State of the Industry data. In 2021, overall card fees paid by the convenience store industry were $13.5 billion, up 25.6% in 2021 versus 2020 ($10.7 billion), NACS SOI data indicate.
The Merchants Payments Coalition represents convenience stores, gasoline stations, retailers, supermarkets, online merchants and others fighting for a more competitive and transparent card system that is fair to consumers and merchants.