Federal Reserve solicits comments on debit routing update

To make clear that debit card issuers should allow merchants a choice for routing card-not-present debit payments, the Federal Reserve is seeking public comment on proposed changes to Regulation II.

The regulation allows the government to cap interchange fees on debit transactions for larger issuers, as well as to allow merchants to reduce costs by offering the choice of an independent debit network at the point of sale.

In announcing the public comment period, the Fed emphasized that this choice isn’t as widely available for card-not-present transactions. This lack of support eliminates “the ability of merchants to choose between competing networks when routing such transactions, an issue that has become increasingly pronounced because of continued growth in online transactions, particularly in the COVID-19 environment,” the Fed said in its Friday announcement.

The proposed revisions would state that card-not-present transactions are a “particular type of transaction” for which two unaffiliated payment card networks must be available, the Fed said. Additionally, the proposed revisions would clarify the responsibility of the debit card issuer.

The issue was brought to forefront when Federal Reserve Board Chairman Jerome Powell responded late last year to a letter from Democratic leaders requesting that enforcement actions be taken against the card brands not complying with the law, initially established in 2010. Powell indicated that the Fed would be looking into the debit situation.

The Federal Trade Commission had also brought attention to the matter by probing Visa and Mastercard’s debit transaction routing process.

Various merchant groups have not only pushed for lower interchange rates and thus supported the enactment of Reg II, they have also seen the need for tighter enforcement on the routing issue for online transactions.

The Merchant Advisory Group, which informs merchants of trends and regulations in the payments industry, said in a media statement that it is “supportive of the recently released clarification from the Federal Reserve Board of Governors which states the need for two unaffiliated networks be available for all debit transactions.”

“This move further injects competition and transparency into the market and allows for a more balanced payments system,” the group said.

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