The Biden administration wants to loosen the grip that Visa Inc. and Mastercard Inc. have on routing debit card payments in online transactions and the billions in so-called interchange fees that come with it.
The Justice Department’s Antitrust Division and the Federal Trade Commission last week endorsed a May proposal by the Federal Reserve to reopen Dodd-Frank Act rules that capped the fees retailers pay and required banks and other debit card providers to offer more payment network choices for routing transactions.
The Fed wants to expand the 2011 rules to cover rapidly growing “card-not-present” transactions—primarily online shopping and automatic bill payments—to rein in alleged anticompetitive behavior by giants like Visa and Mastercard, which process roughly 75% of all debit transactions.
The Fed’s earlier rules faced stiff opposition and years of litigation from retailers that said the regulations weren’t tough enough. Banks, card networks, and others oppose the Fed’s efforts this time around.
In 2019, interchange fees across all debit and general-use prepaid card transactions totaled $24.3 billion, according to the Fed. So expect a bumpy road as the central bank moves forward.
What Are Interchange Fees?
Interchange fees are transaction fees that a retailer pays when a customer uses a debit card. The card-issuing bank, other payment processors, the retailer’s bank, and payment networks like Mastercard and Visa all take a cut of the fees that are paid.
The Dodd-Frank Act’s Durbin Amendment directed the Fed to write rules limiting interchange fees. The 2010 law also required that banks and other card providers offer at least two unaffiliated payment networks for routing transactions—meant to allow merchants to choose the less costly option.
The Fed’s 2011 rules capped fees at 21 cents plus five basis points of each transaction, and also allowed an additional one cent fee per transaction for fraud prevention, where applicable.
But the rules didn’t take effect until 2014, after retailers challenged the fee caps as too high, among other issues. A federal appeals court ultimately upheld the rules, but changes in the card payment market reduced their effectiveness.
What’s Happened Since Dodd-Frank?
Retailers have complained that costs for debit payments have climbed during the transition from magnetic strip cards to chip-embedded, or EMV, cards, which allow networks like Visa and Mastercard to charge different sets of interchange fees.
A flood of litigation has followed.
Kroger Co., Wal-Mart Stores Inc., and Home Depot Inc. sued Visa in 2016 for allegedly forcing them to use customer signatures on chip-embedded debit card transactions, rather than PINs, which are less costly to process.
In April 2021, Visa disclosed that the DOJ’s Antitrust Division is probing incentives the company offers to banks that route more debit-card spending through its network.
Both the DOJ and FTC lauded the Fed’s May 7 proposal for having the potential to reduce costs for merchants and ultimately save consumers money. Both agencies said the rule is in line with President Joe Biden’s July 9 executive order to foster competition in a host of industries, including financial services.
What Are Retailers Saying?
The National Retail Federation said in an Aug. 10 comment letter to the Fed that retailers and consumers have saved around $9 billion per year since the 2011 rules went effect, despite their limitations.
But the rules didn’t touch online transactions or anticipate new technologies like Apple Pay, which allow consumers to make debit payments using their phones. So retailers have been asking for an update to Regulation II, the technical name for the interchange rules.
In fact, the Fed should go farther with its proposal, they say.
Retailers say Visa and MasterCard have used security measures like tokenization, a process that randomizes a debit card’s identifying number, to prevent their cards from being processed on smaller payment networks selected by retailers. That’s made it harder for retailers to use networks such as Pulse, Shazam, Star, and others, according to the NRF.
Without tightening up the Fed proposal, retailers fear the same types of problems will occur for online shopping and other card-not-present transactions.
Retailers also continue to say the 2011 fee caps are too high. In May, two North Dakota-based retail industry groups sued the Fed to scrap the limits.
What’s Next for the Fed?
Banks and the card networks are gearing up for a fight if the Fed finalizes its proposal in the coming months. The comment period on the May proposal closed Aug. 11.
Visa said in a July 23 comment letter that the Fed’s proposal would put consumer data at risk by putting it on newer, smaller payment networks that might lack the same security. Visa also opposed expanding the requirements for two unaffiliated payment networks to online transactions.
That expansion would be a massive new expense, particularly for smaller card issuers and banks, Visa said.
The American Bankers Association and other several other industry groups raised their own concerns about security and compliance costs in their Aug. 11 comment letter.
They vowed to “vigorously oppose any attempt to undermine the payments system at the expense of consumers.”