Fed Weighs Changes to Debit Rules as Swipe-Fee Battle Rages On

The Federal Reserve is weighing changes to its rules governing debit cards as the battle over the fees merchants pay each time a consumer makes a purchase intensifies.

The central bank on Friday asked for public comment on an amendment that would require banks to make sure two payment networks are available on their debit cards for online purchases.

At the heart of the issue is the Fed’s Regulation II, which requires banks to put two unaffiliated networks on every debit card they issue. Retailers, in turn, are supposed to have the ability to choose which network handles a transaction.

But, in recent months, merchants have become increasingly vocal about their inability to route online -- or “card-not-present” -- transactions over alternative networks, blaming banks that issue the cards for not enabling two networks for such spending.

“Card-not-present transactions have become an increasingly significant portion of all debit card transactions, and technology has evolved to enable multiple networks for these transactions,” Fed staff said in a memo to the central bank’s board. “Despite this, two unaffiliated payment card networks are often not available.”

The Fed said in its statement that it’s also clarifying that it’s the responsibility of the bank that issues the debit card to ensure at least two networks are available for online purchases.

While Visa Inc. handles the lion’s share of debit-card transactions in the U.S., alternative networks often charge a lower fee. These smaller, lesser-known networks -- with names like Shazam, Pulse and Star -- charge an average of 24 cents per transaction, compared with 32 cents for debit spending routed over Visa’s network, according to data compiled by the Federal Reserve.

The difference sounds like pennies, but it’s all part of the $100 billion-plus that merchants pay each year to process electronic payments. Retailers spent more than $24 billion to accept debit and prepaid cards in 2019, a 7.4% increase from a year earlier, according to a separate report the Fed released on Friday.

“The banks and dominant card networks are abusing the payment system at the expense of merchants,” Austen Jensen, senior vice president of government affairs at the Retail Industry Leaders Association, said in an emailed statement. “It is high time this ends. RILA is encouraged by the Fed’s rule-making announced today and looks forward to working with the Fed to see a final rule enacted.”

The Fed’s latest move comes after two lobbying associations representing merchants in North Dakota sued the central bank, asking the court to vacate its rule that caps debit-card swipe fees at 21 cents for cards from the largest U.S. banks.

The lawsuit came as the fees merchants pay to process both credit and debit cards have soared in recent years. Meanwhile, the Fed has found that banks’ costs for processing debit-card payments have dropped by half. The cost was 3.9 cents per swipe in 2019.

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