As payments players begin to feel the effects of the Federal Reserve’s update to its debit routing rule, Mastercard and Fiserv executives offered opposing views on the issue during conference appearances last week. 

Linda Kirkpatrick, president of the Americas for Mastercard, called Regulation II potentially “harmful” for consumers during an appearance at the Citi Fintech Conference last Wednesday.

In 2022, the Fed updated a debit card processing rule to stress the requirement that multiple networks be available for routing transactions, including online. That took effect July 1, 2023.

The Fed’s clarification has had implications for the two biggest networks, Visa and Mastercard, as well as owners of smaller rival networks. 

Visa in January reported a slowdown in U.S. payments volume growth that it attributed partly to the impact of the Fed’s clarification of Reg. II.

No. 2 card network Mastercard hasn’t seen a material impact on its business due to Reg. II, but it “presents challenges,” particularly for consumers, Kirkpatrick said. 

Meanwhile, payment processing giant Fiserv last month reported it had signed more than a dozen large e-commerce clients following the Fed’s clarification of the debit routing rule, including Uber and eBay. Fiserv owns debit networks Star and Accel.

That’s because merchants may opt to route transactions on a lower-cost network, which can compromise security, Kirkpatrick contended. “Whenever that decision is made, based on cost versus security, it can be harmful to the consumer, that, frankly, is none the wiser,” Kirkpatrick said.  

Although Mastercard will follow the regulation, “we actually believe that our services and our ability to drive a safer environment, an environment with higher authentication, greater tokenization will ultimately prevail,” Kirkpatrick said. 

The CEO of Fiserv, however, painted the issue as a matter of “client choice,” and said the company has ensured its networks would have the capabilities needed to compete. 

“All we’re doing is competing for transactions,” said Fiserv CEO Frank Bisignano during an appearance at the Evercore ISI Payments & Fintech Innovators Forum last Wednesday. “And the only people who ever make the decision are the clients.” 

Bisignano called the Fed’s clarification “appropriate” and “rational.” When it clarified the rule in 2022, the Fed acknowledged the rise of online payments increased the need to do so. 

“There was nothing odd about the change,” Bisignano said. “It might have taken 10 years for the change, but somebody finally figured out, well, there’s a bunch of (e-commerce) transactions that don’t live by the same rules as card-present transactions.” 

Snagging some online debit routing, such as the Uber and eBay wins, “is really accretive for us,” Bisignano said. When asked when he expects those developments to move the needle on revenue for Fiserv, Bisignano didn’t specify but noted, “we expect debit volume to be helpful to us.” 

Additionally, the Fed has proposed a rule change that would lower the cap on the amount debit card issuers can charge for processing a debit transaction, another effort Kirkpatrick called harmful. 

When interchange is “artificially capped or reduced, it’s harmful to consumers, full stop,” she said. Mastercard seeks to explain to regulators that interchange is more than just the cost of processing a debit transaction; it’s also factoring in the costs of customer service and fraud, she said.

“These are largely undervalued and need to be considered with respect to regulation of debit,” Kirkpatrick said. Those are among the points Mastercard plans to highlight in its comment letter to the Fed on the debit, she added. The deadline for comments on that proposal is May 12.

By Caitlin Mullen on March 4, 2024
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