September 20, 2021
As the Federal Reserve considers a move to increase competition among the payment networks that process billions of dollars in online debit card transactions each year, the agency has been flooded with letters and emails from merchants that support the plan, and banks that oppose it.
But amid the hundreds of comments, the positions of two government agencies, the Department of Justice and the Federal Trade Commission, stand out. While merchants and banks each have a stake in the debate, the DOJ and FTC are neutral parties — and both have come out squarely in favor of competition. Their willingness to comment on a Fed rulemaking is unusual and demonstrates the degree to which there are important antitrust and competition principles at stake here.
When the nation’s two top agencies charged with ensuring fairness and open competition say the market is broken, it’s time to listen. They have made it clear that the time for competition in the debit market — and perhaps the entire payments market — has come.
“Given the importance of this segment, increasing competition for online debit transactions could have a very significant impact on the U.S. economy as a whole,” the DOJ said.
In separate letters, the agencies note that many banks have failed to enable debit cards to be processed over networks other than Visa or Mastercard for online purchases, and that the card giants have paid financial incentives or taken other steps to block competition.
“Such actions eviscerate merchant routing choice,” the FTC said.
At issue is a Fed proposal clarifying that merchants’ right to choose which payment networks process debit transactions applies the same online as it does in stores. The 2010 Durbin amendment in the Dodd-Frank Act requires banks that issue debit cards to enable transactions to be processed over at least two unaffiliated networks — Visa or Mastercard plus one of a dozen independent networks like NYCE, Star or Shazam that offer better security and charge lower fees.
For the most part, the requirement has been a success in stores, where a customer’s use of a PIN gives the merchant access to the independent networks. This has saved merchants billions of dollars, 70% of which was passed on to consumers. But some in-store transactions, and almost all of those completed online, are still not subject to competition because many of the largest banks have not enabled the “PINless” technology required for online transactions to be routed to independent networks.
Routing choice was made more important than ever by the acceleration of online shopping during the pandemic. The shift has brought banks and the two global card brands an unearned windfall. The Fed proposal could save merchants and consumers $2 billion to $3 billion a year, according to the payments consulting firm CMSPI.
The DOJ, in its comment letter, said competition for online debit processing is “very limited,” with “entrenched incumbents” Visa and Mastercard accounting for over 90% of transactions. “Lacking competitive alternatives, merchants must pay higher transaction fees that are passed on to consumers in the price of goods and services.”
The Fed’s proposal “has the potential to increase competition by lowering one of the many barriers to entry and expansion” and could “help merchants reduce their costs and save American consumers money,” the DOJ said.
The FTC said lack of routing options comes largely because Visa and Mastercard routinely give financial incentives to card-issuing banks in return for driving transactions to the two networks. The incentives encourage banks to “evade” the “clear mandate” of the Durbin amendment by not enabling online routing to independent networks.
The FTC recommended that the Fed “expressly prohibit” routing incentives to make issuers less likely to “circumvent” Durbin. Citing technical differences between types of transactions, the DOJ said a Fed clarification must cover all transactions to “reduce ambiguity.”
Citing another example of blocking routing, the FTC said Visa at one point violated the law by requiring merchants using EMV chip card readers to have customers choose between Visa and other processors rather than letting merchants choose.
“This episode highlights the importance of clear rules,” the FTC said. “It is difficult to predict in advance all the ways that issuers and networks might devise to inhibit merchant routing choice.”
This, too, is significant. For the FTC to so clearly state that banks and card networks are likely to try to circumvent the law is a stark reminder of just how broken the payments market remains today.
The routing debate comes as Americans pay the highest “swipe” fees for debit and credit card processing in the industrialized world, with overall card fees paid by U.S. merchants now totaling $110.3 billion a year, according to the Nilson Report. The fees are among merchants’ highest expenses and they drive up prices by hundreds of dollars a year for the average family.
Congress passed the Durbin amendment because the multitrillion-dollar U.S. payments market was broken, and the DOJ and FTC have shown that the card industry has repeatedly found ways around those reforms. Even as the Fed clarifies its rules, the DOJ and FTC are clear that the broken payments system means banks and networks remain likely to try to exploit loopholes to maintain their dominance
The monopolistic and anticompetitive nature of the card payment market remains a huge, problematic drag on the U.S. economy. The DOJ and FTC recognize it. Hopefully, the Fed will help to deal with it by bringing more competition to debit card payments.
General Counsel NACS
MPC Executive Committee member