Amid substantial growth in online purchases in recent years, the Federal Reserve today reopened its rule on the Durbin Amendment. Specifically, the Fed issued a proposal that would amend Regulation II, which implements Durbin, to apply the requirement that debit card transactions be able to be processed on at least two unaffiliated payment card networks—for example, a PIN debit and a signature debit network—to card-not-present transactions, which have grown from 10% of debit purchases in 2009 to 23% in 2019.
When the Fed first issued Reg II, “the market had not developed solutions to broadly support multiple networks over which merchants could choose to route [CNP] transactions,” the Fed said, noting that technology has since evolved to address these issues. “Despite these developments, and in contrast to the routing choice that currently exists for card-present transactions, merchants are often not able to choose from at least two unaffiliated networks when routing card-not-present transactions, according to data collected by the Board and information from industry participants,” the Fed said.
However, the American Bankers Association and several trade associations today warned that revisiting the “flawed from the beginning” Durbin Amendment would make it harder for banks to deliver low transaction prices to acquirers and consumers. “The Fed’s decision to revisit Reg II risks causing even further consumer harm,” said groups said. “The Fed’s own study of debit card transactions, both in person and online, shows that merchants and consumers are increasingly benefitting from significant investments in innovation and fraud detection embedded in the nation’s payment rails today. By reopening the rules surrounding debit card transactions, the Fed could put the convenience, safety, and security that Americans have come to expect when they use their debit card at risk. We will vigorously oppose any attempt to undermine the payments system at the expense of consumers.”
The proposal would also clarify that the debit card issuer is responsible for ensuring at least two unaffiliated networks have been enabled and would standardize and clarify certain terms and phrases in the Fed’s Reg II commentary. Comments are due 60 days after the rule is published in the Federal Register.
The Fed also today published its biennial survey of debit card issuers’ economics, which found that smaller debit card issuers—those covered by the Durbin Amendment’s routing provision but not its interchange fee cap—continue to see a decline in revenue from interchange fees on PIN debit transactions since the provision took effect.
The average interchange fee paid to these smaller, nominally “exempt issuers” (institutions with less than $10 billion in assets) for PIN debit transactions fell from 31 cents in 2011 before the Durbin amendment took effect to 25 cents in 2019. The average interchange fee for exempt signature debit transactions rose modestly from 51 cents in 2011 to 54 cents in 2019.
However, in surveying banks and credit unions to set debit interchange price caps for covered issuers, the Fed does not consider many important costs that issuers incur to facilitate electronic debit transactions. (For example, the Fed does not include costs related to corporate overhead, account relationships, rewards programs, non-sufficient funds handling, non-sufficient funds losses, debit card compliance costs, cardholder inquiries, card production and delivery, fraud-prevention costs not incurred as part of authorization, costs associated with funds loads or costs of account setup and maintenance.
About 79.2 billion debit and prepaid card transactions amounting to $3.1 trillion were processed in the U.S. during 2019. Signature transactions experienced faster volume growth in 2019 than PIN transactions, at 7.6% and 6%, respectively. While card-not-present transactions were the fastest growing transaction type, these types of transactions represented a little over one-fifth of total transactions.