Retailers oppose banks seeking more time on debit routing rule

Banks requested a delay in implementing a debit routing rule, but a retail and merchant trade group argued it's high time the card issuers comply

A group of banks asked the Federal Reserve Board Friday to give them another year and a half to implement a debit routing rule, but a merchant and retail trade group argues they’ve had plenty of time to comply.

The bank groups, including the American Bankers Association, the Consumer Bankers Association and the Credit Union National Association, waved a host of reasons in their letter as to why they shouldn’t have to meet a July 1 deadline to satisfy the rule. The rule would force card issuers, most of which are banks, to offer merchants more than one debit routing option.

It’s a regulation that went into effect as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, but there’s been more than a decade of haggling over whether the requirement should apply to online transactions as well.

The Fed in October voted to approve a rule clarification that states that the regulation does apply to those card-not-present situations and gave the issuers until July 1 to satisfy the requirements. 

In their letter, the bank groups contended that it’s not enough time for issuers, especially smaller banks, to put the technology in place and that the short timeframe would force them to sign more expensive contracts with vendors, or possibly install adjustments that would leave consumers at risk. Instead, they asked the Fed to make the rule effective Jan. 1, 2025.

“Such time pressure also places issuers at a disadvantage during contract negotiations, as processors and their subsidiary debit networks may leverage the issuer’s legal obligations and short deadline for compliance as effective leverage to force concessions from issuers, increasing issuer costs and fraud liability and potentially compromising reliability and security for consumers,” the bank trade groups said in the letter.

The Fed proposed clarifying the rule last year because it said evidence all too often showed competing networks were not available for routing debit card transactions, contrary to a 2011 rule requiring them to be.

“The final rule will encourage competition between networks and incentivize them to improve their fraud-prevention capabilities,” the Oct. 3 Fed statement said.

The Fed’s move last year was another blow to the big card networks that process card payments, namely Visa and Mastercard, and to the banks that issue the cards. Sen. Dick Durbin, a Democrat from Illinois, has long led a campaign to introduce more competition into the card network arena, and federal agencies have pressed that antitrust angle for years. 

In December, the Federal Trade Commission ordered Mastercard to stop blocking rival debit networks and provide customer account data to other networks so they could process debit transactions.

Durbin last year introduced legislation aimed at bringing similar competition to the routing of credit card transactions. The bill failed to pass, but a spokesperson for the senator has said he plans to reintroduce it this year, even though its prospects are likely worse with the House now under Republican control.

Loosening the grip of Visa and Mastercard on processing card transactions would save retailers and merchants money with respect to the fees they pay those networks for processing services. They contend that they could pass cost-savings to consumers.

Debit fees cost merchants $32.6 billion in 2021, and all credit and debit fees were $137.8 billion that year, more than doubling over the prior decade, the MPC said in a Tuesday press release, citing the industry research consulting firm The Nilson Report.

In its release, the Merchants Payments Coalition opposed the banks’ request for a deadline extension. The merchant and retail trade group argued in the release that it’s high time the card issuers and networks adhere to regulations put in place years ago. National Association of Convenience Stores General Counsel Doug Kantor contended they don’t deserve any additional time.

“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 Kantor, who is also an 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.”

By Lynne Marek on Feb 15, 2023
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