Fed Should Not Delay Increasing Competition for Online Debit Transactions, Merchants Say

“The time for competition … has come, and implementation should take effect as scheduled.”

February 16, 2023

WASHINGTON—The Merchants Payments Coalition (MPC) said the Federal Reserve should turn down a request from banks to delay implementation of its long-sought clarification that merchants’ right to choose which payment networks process debit card transactions applies the same online as it does in stores. NACS is a founding member of MPC.

“Congress told banks and card networks a dozen years ago to implement routing choice for all debit card transactions and that meant both in-store and online,” said Doug Kantor, NACS general counsel and MPC executive committee member. “That law has saved merchants and their customers billions of dollars for in-store transactions, but the card industry has continued its anticompetitive practices when it comes to online transactions. They’ve already had their delay and shouldn’t be allowed to continue dragging their feet. This is just a stalling tactic to let them continue operating under a virtual monopoly rather than having to compete like other businesses. The time for competition over online debit transactions has come, and implementation should take effect as scheduled.”

The Fed clarified in October that a 2010 law requiring that banks give merchants a choice between Visa or Mastercard and at least one other unaffiliated network to process debit transactions applies to online purchases, contactless cards and digital wallets the same as traditional in-store transactions. The Fed said Visa, Mastercard and banks cannot block merchants’ access to a competing network, and that routing choice applies regardless of the type of authentication used, including signature, PIN, PINless or biometrics.

The move came a year and a half after the Fed first proposed the clarification, and the Fed has given banks until July 1 to comply. But five banking organizations, led by the American Banking Association, sent a letter on Friday asking that the effective date be postponed until January 1, 2025.

Routing choice has been successful with in-store purchases, where competing networks like NYCE, Star or Shazam handle 40% of transactions. Studies show competition has saved merchants billions of dollars a year and that about 70% of the savings have been passed on to consumers. But merchants have long complained that banks have not enabled debit cards to be processed over competing networks when used online, and that Visa and Mastercard have offered banks financial incentives that discourage them from doing so. Banks have also failed to enable routing options for most transactions with contactless cards or digital wallets.

As a result, all but 6% of online debit card transactions are still processed by Visa and Mastercard even though other networks offer lower fees and have about one-fifth as many fraudulent transactions, according to the Fed.

In December, the Federal Trade Commission joined the Fed in addressing the issue, saying Mastercard had blocked routing choice by tokenizing online debit card data and refusing to detokenize it for competitors. The FTC ordered Mastercard to make account numbers and other data available going forward.

MPC filed comments on the FTC’s settlement with Mastercard, expressing “concerns about the proposed settlement and believe[s] more must be done to ensure that the debit market benefits from competition in a manner required by Regulation II.”

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 and had more than doubled over the previous decade. The fees are most merchants’ highest operating cost after labor, driving up consumer prices and amounting to over $900 a year for the average family.

Convenience store swipe fees were $14 billion in 2021, a 26% increase over the year prior.