Merchants Push The Fed On Debit’s Routing And Pricing Rules

Oct 22, 2021

Merchants’ “lack of routing choice” in e-Commerce costs them “billions of dollars each year”, according to the Merchants Payment Coalition (MPC). The MPC is a trade group that represents gasoline, supermarket, convenience store, as well as other retail chains. 

Larger merchants have been pressing for the Fed to make much-needed changes to the current rules that govern transaction routing and pricing. 

Earlier this year, on May 7, the Fed welcomed comments for a “proposed clarification” to its rules on enforcing the 2010 Durbin Amendment that determines that merchants can have two “unaffiliated networks” in order to route card-not-present transactions. 

Evidently, there have been numerous claims from merchants that larger banks were sending online debit transactions to Mastercard or Visa networks first, instead of alternative debit switches like NYCE, Pulse, or Shazam. It is a widely known fact that alternative systems offer considerably lower pricing and better security.  

A Decades Long Debate

A debate has been waged for decades in terms of how much credit network behemoths Mastercard and Visa can charge for their credit and debit transactions. Debit transactions were reeled in by regulations, thanks to the legislative efforts by Illinois Democratic Sen. Dick Durbin. 

Despite litigation efforts over many years, credit card transactions are still less regulated. A total of six merchant groups have filed comments in support of the Fed’s proposal to clarify the debit routing rules. The Connecticut Food Association expressed their views in the following statement from the association’s president, Wayne Pesce:

“While my members are overwhelmingly utilizing competitive routing for instore transactions, they do not enjoy the same access to competitive debit networks when the card is used online and in mobile transactions, The Board’s proposed clarification will do that, and simply clarify that Visa and MasterCard must compete for retailer business, regardless of where the transaction happens.”

Many merchants have cited the massive shifts to online purchasing as a result of the pandemic. COVID-19 is also blamed for the rising costs of doing business. Both the cost of accepting debit cards as well as the growing barriers to accessing competitive networks is impacting businesses as well as customers. 

The Opposing Side

On the other side of the coin, almost 30 people sent in a form letter opposing the clarification of the Fed’s rules. They argued that it would “negatively impact” community banks. 

A letter from Jodi Deuser on a June 24 letter stated:

“My community bank is particularly vulnerable to regulatory changes which combine new compliance costs with reductions in fairly-earned revenue. This expansion of the routing requirement to all card-not-present transactions and accompanying mandate that we accept PINless transactions effectively creates a price cap on the revenue community banks receive to participate in these transactions.”

An Ongoing Issue

Currently, a very small percentage of online debit transactions are routed to “alternative switches” because a few of the largest banks do not have the technology that can send payments “without accompanying PINs” to those systems.

The MPC argued that the Fed should “lower the cap” that the Durbin Amendment has placed on the fees that large banks can charge merchants for all their debit transactions.  

Under the current law, those institutions that have more than $10 billion in assets are limited to a fee of no higher than 21 cents, an allowance of a penny for fraud prevention, and .05% of the sale to recover fraud losses.

Long Road Ahead

Merchants have long argued that the Fed’s pricing allowance for banks has been “too liberal” based on the language of the law. What’s more is that they have paid “billions” more than they should have, if the Fed actually complied with the Durbin Amendment

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending on the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

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A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

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