FTC Reportedly Probes Visa, Mastercard Over Debit-Card Routing

The commission is looking into whether security tokens are limiting debit-card routing competition.

October 18, 2022

ALEXANDRIA, Va.—Visa and Mastercard are reportedly being investigated by the Federal Trade Commission (FTC) over whether the card companies’ security tokens restrict debit-card routing competition on online payments, reports the Wall Street Journal.

The FTC wants to know if the information that Visa and Mastercard send when they enable an online payment to be processed over a different network has been limited. If this practice is happening, the chances that the card’s issuing bank would reject the transaction increase. The commission is also reportedly investigating whether the card companies are restricting routing choice after a shopper stores their debit-card information on a retailer’s website, app or on pay tab buttons.

The Durbin Amendment requires the ability for debit-card transactions to be processed over at least two unaffiliated card payment networks. That way, retailers have the choice to process debit cards over a network that chargers lower swipe fees.

However, the FTC has been recently focused on tokenization and if routing challenges are stemming from the Visa and Mastercard’s security tokens.

When shoppers store their payment information in a digital wallet, such as Apple Pay, the 16-digit card number is replaced with a token, which is a line of random numbers, and the token is usually provided by the network listed on the card. The token is then sent to the payment networks when a purchase is made.

However, when a debit-card number is replaced with a token, only the card issuer can read the token so that it can be reassociated with the original card number, making it easier to be processed over a card issuer’s network. But the card issuer could unscramble the token and allow it to be processed over a different payment network.

“This setup reinforces Visa and Mastercard’s position at the center of huge volumes of payments—even the payments that merchants might want to send over other networks,” writes the Journal.

Earlier this month, the Federal Reserve issued new rules making it clear that merchants’ right to choose which payment networks process trillions of dollars in debit-card transactions each year applies the same online as it does in stores and must be honored by banks and card companies.

“This move will bring badly needed competition to our nation’s broken payments market,” said NACS General Counsel Doug Kantor. “When Congress said merchants had the right to route debit transactions to the processor of their choice, they meant all transactions, not just those in stores. The Fed has followed through on Congress’ intent and made it clear that big banks’ evasion of competition must stop. Visa, Mastercard and their bank members should not be allowed to shut out other networks that can do the job more efficiently and more securely.”

“This ruling is particularly important given the dramatic shift to e-commerce during the pandemic and the increased use of mobile apps and digital wallets for in-store purchases,” Kantor said. “These transactions account for a rapidly increasing share of our nation’s economy, and the Fed has closed a major loophole that allowed them to escape the competition intended by Congress. Card networks should have to compete the same as any other business.”

“The final rule will encourage competition between networks and incentivize them to improve their fraud-prevention capabilities,” the Fed said in yesterday’s announcement.

NACS filed comments in support of the Fed’s proposed clarification, and many NACS members did as well.

Debit-card swipe fees cost merchants and their customers $32.6 billion in 2021, with payments processed over Visa and Mastercard accounting for $28.1 billion of the total, according to the Nilson Report. When all types and brands of cards are included, credit- and debit-card swipe fees totaled $137.8 billion, more than doubling over 10 years. The fees are most merchants’ highest operating cost after labor, driving up consumer prices and amounting to $900 a year for the average family.