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The Federal Trade Commission disclosed on Wednesday that it is investigating whether payment card network rules and practices violate the debit card transaction-routing provisions of the Durbin Amendment in 2010’s Dodd-Frank Act. It’s uncertain, however, whether the investigation goes beyond what Visa Inc. said the FTC requested of it in September regarding a Visa service that switches debit transactions.
The FTC confirmed the existence of the investigation in a progress report to Congress about its duties under Dodd-Frank and the Durbin Amendment. The commission does not regulate banks, but has new authority over non-bank companies affected by the Electronic Fund Transfer Act, which Dodd-Frank’s Section 1075 amended.
“Based on information collected to date, FTC staff has begun an initial investigation to determine whether certain payment card network rules may violate Section 1075 or Regulation II [the Federal Reserve Board’s rule implementing the Durbin Amendment], including issuing a request for information to one payment card network,” the report says. “FTC staff continues to assess whether any payment card network rules and fees may operate as a penalty inhibiting merchants’ routing or otherwise violate Regulation II. Certain provisions of the law and regulations were not effective until April 1, 2012, and many of the fees potentially at issue are assessed or invoiced on a quarterly basis, so merchants may not yet be fully aware of their effects.”
An FTC spokesperson refused to give any details about the investigation or identify the companies in question. Visa’s recent annual report for fiscal 2012 says the FTC asked for information about a service it offers that routes PIN-debit transactions from merchants or merchant acquirers to electronic funds transfer networks for merchants that don’t have a direct connection to a particular EFT network.
Doug Kantor, the attorney for the Merchants Payments Coalition, an activist group fighting for lower card-acceptance costs, says that given the structure of the U.S. debit market and the dominance of it by Visa and MasterCard Inc., there is little doubt the FTC is probing both networks and any of their fees and programs that could affect transaction routing. Those likely would include Visa’s new Fixed Acquirer Network Fee (FANF) and a similar fee MasterCard instituted late this summer, he says.
“They didn’t name Visa and MasterCard, but they said they were looking at the networks' rules,” Kantor tells Digital Transactions News. “It doesn’t take much of a leap to say they’re looking at Visa and MasterCard.”
In addition to putting price controls on big banks’ debit card interchange, the Durbin Amendment outlawed exclusive partnerships between networks and card-issuing financial institutions, and required debit cards to give merchants access to at least one unaffiliated network with each transaction. The intent was to give merchants more power to get their card transactions onto networks that charged the lowest interchange.
Kantor says the FTC is moving into new territory with its authority over card networks under Dodd-Frank, and the agency likely will focus on whether FANF and the other new post-Durbin network measures by Visa and MasterCard inhibit merchants’ routing choices. “I don't know for certain what they’re investigating, but that’s what it’s looking like to us, reading between the lines,” he says.
Neither Visa nor MasterCard responded to requests for comment. A spokesperson for the Electronic Payments Coalition, a lobbying group of networks and banks, says by e-mail that “the report doesn’t show much new.”
The FTC said it has consulted with the U.S. Department of Justice’s Antitrust Division, which has probed the card networks in the past, and has listened to input from merchants and others regarding debit cards.
Citing research from the Federal Reserve and the Government Accountability Office (GAO), the FTC said it appears small banks and credit unions are collecting more debit card interchange than their regulated big-bank brethren (those with more than $10 billion in assets), as the Durbin Amendment intended. Dodd-Frank has provisions meant to prevent networks and large issuers from getting around the price controls, and the report notes that the Senate Appropriations Committee has asked about possible attempts by networks that would prevent small financial institutions from competing against big banks in debit card issuance. “To date, FTC staff has not uncovered evidence that this type of conduct is occurring, but we will continue to collect and evaluate information related to this concern,” the report says.
The EPC spokesperson notes, however, that unlike the interchange price controls, the transaction-routing provisions affect debit card issuers of all sizes. Many small issuers opposed the Durbin price controls, fearing that merchants would try to find ways to avoid the higher interchange rates on their cards. “Credit unions and community banks remain concerned that they will also feel the Durbin damage, just like their larger counterparts,” the spokesperson says. “Merchants will soon start routing transactions over cheaper networks, meaning lower revenue for all.”
