The Fed Makes It Final: All Issuers Must Offer a Choice of Unrelated Networks for All Debit

The Federal Reserve said late Monday it has completed work on a clarification that reinforces a more than decade-old requirement that issuers enable a choice of at least two competing networks for online debit card transactions. The release follows months of research and investigation by the Fed and will go into effect July 1.

The announcement, which the regulator characterized as an “update” to its regulations enforcing the 2011 Durbin Amendment to the Dodd-Frank Act, answers years of complaints by merchants that issuers and processors were effectively shuttling all of their online traffic to a single network, typically Visa or Mastercard.

This practice, merchants have said, raised their transaction costs and violated the language of the law. Issuers and processors have maintained the practice is necessary in many cases where competing networks are unable to handle so-called PINless debit, or online transactions without the PIN codes cardholders enter to authenticate themselves in physical stores. By contrast, merchants have complained for more than a decade that debit card issuers have largely evaded Durbin, which requires a choice of at least two “unaffiliated” networks for both offline and online transactions.

“The industry has been waiting for this announcement for a long time,” says Sarah Grotta, an independent payments-industry analyst. The Fed has been deliberate in arriving at Monday’s clarification, she said, adding, “It’s been a year since the Fed said this is the direction they were going in.”

Merchant trade groups, which have long protested what they see as an effective absence of network choice in e-commerce, celebrated the Fed’s announcement.

“This ruling is particularly important given the dramatic shift to e-commerce during the pandemic and the increased use of mobile apps and digital wallets for in-store purchases,” said Doug Kantor, general counsel for the National Association of Convenience Stores, in a statement. “These transactions account for a rapidly increasing share of our nation’s economy and the Fed has closed a major loophole that allowed them to escape the competition intended by Congress. Card networks should have to compete the same as any other business.”

E-commerce sales account for 14.5% of all U.S. retail sales, up from 9% five years ago, according to the Census Bureau. But Fed research found that so-called single-message networks—systems that combine authorization and settlement in a single electronic message—processed 6% of all online, or card-not-present, transactions in 2019. By contrast, these networks handled some 40% of all in-store transactions that year. Single-message networks are seen as competitive alternatives to dual-message networks such as Visa and Mastercard. Such national networks include major systems such as NYCE and Shazam.

Now, with the Fed’s Monday announcement, “all issuers need to ensure they have a PINless debit option. Many do, but many do not,” said Grotta. While PINless debit is seen as a way to support merchant choice, it is not required by the Fed’s revised rule.

Issuers that lag may have only themselves to blame, say some observers. “The Fed’s original implementation of the Durbin Amendment was crystal clear,” notes Eric Grover, a payments analyst and consultant who opposed the Durbin Amendment. “The fact that some debit issuers chose not to comply with the law to enable at least two debit networks for all transactions offline and online is appalling, notwithstanding that it’s bad law.”