Democratic Sen. Richard Durbin is asking the Federal Reserve to probe allegedly anticompetitive practices that are forcing merchants to pay excessive debit-card fees levied during the coronavirus crisis by large networks like Visa Inc. and Mastercard Inc. MA -0.96%
In a letter to Fed Chairman Jerome Powell, Mr. Durbin said practices by the large card networks and debit-card issuers are diminishing competition in the online payments marketplace and costing merchants potentially billions of dollars. The letter, which Mr. Durbin’s office sent late Friday, asks the Fed to determine whether the major card networks and debit-card issuers have a shared incentive to limit the transactions processed by lesser-known debit-card networks. The Wall Street Journal reviewed a copy of the letter.
The Illinois senator is the namesake of the Durbin amendment, a part of the 2010 Dodd-Frank Act that is best known for capping the swipe fees that merchants pay large banks when customers shop with debit cards. But it also requires that merchants have the ability to choose from at least two unaffiliated debit-card networks to route transactions. Some debit-card issuers appear to be violating that part, Mr. Durbin wrote. He didn’t name any specific banks or other card issuers.
“U.S. retailers and restaurants cannot afford to pay unnecessarily high fees for debit card transactions at a time when they have been hit hard by the pandemic and its economic effects,” said the letter, which was also signed by Rep. Peter Welch (D., Vt.).
The pandemic has also changed consumers’ payment preferences, and that in itself has caused some businesses to pay higher fees. More card purchases are occurring online and with digital wallets. Payments in stores are also shifting to cards that are tapped at stores’ payments terminals rather than inserted, as people try to avoid touching surfaces.
Merchants in recent years have said that these types of purchases limit their ability to route debit-card transactions on networks beyond Visa and Mastercard when those brands are on the front of the card. They have said that they often incur higher network fees as a result, compared with what they would generally pay on lesser-known networks like Shazam or NYCE.
From March through early May, online and other card-not-present debit-card purchases made up an estimated average of 24% of total U.S. debit- and credit-card payments, according to CMSPI, a merchants’ payments consulting firm. That was up from 14% as of Feb. 28.
“What was an issue beforehand is a real big issue now,” said Callum Godwin, chief economist at CMSPI.
The letter called Visa and Mastercard a “card network duopoly.”
Visa declined to comment. A Mastercard spokesman declined to comment, saying he hadn’t seen the letter.
Merchants do have routing choices, said Jeff Tassey, board chairman of the Electronic Payments Coalition, which represents card networks and issuers. “There’s nothing to suggest anyone isn’t fully adhering to the debit marketplace rules,” he said.
During the pandemic, online and contactless payments have helped small businesses to stay open, he said. “Independent PIN debit networks failed to innovate and make the necessary investments in technology,” he said. “Now, at a time of rapid change and disruption, [they] are asking the government to force the transfer of intellectual property…developed through substantial investments by the payment networks and financial institutions.”
“Simply put, the independent PIN debit networks want to access the full benefits of the advanced payment networks, and merchants want to pay the cheaper PIN debit prices for those benefits.”
The Fed has received the letter and plans to respond, a spokesman said Friday.
Merchant trade groups, including the National Retail Federation, the National Association of Convenience Stores and FMI, which represents the food industry, in recent months have been speaking with congressional members’ offices about the issue, according to people familiar with the matter. Merchant lawyers and trade groups say both networks and issuers have played a role in the routing restrictions. Most networks beyond Visa and Mastercard are so-called PIN debit networks. When consumers shop in stores and type in their PIN at checkout, those transactions generally travel over a PIN network.
Online purchases are harder to route this way. Few merchants use technology that lets shoppers input their PIN online. Also, some issuers haven’t enabled PINless functionality on their debit cards.
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That functionality would allow debit transactions to be processed with PIN networks without the need for the cardholder to type in their PIN. When that functionality isn’t turned on, the transaction will usually automatically go through Visa and Mastercard. The absence of fully available PINless functionality costs U.S. merchants at least $2 billion a year in debit fees, according to CMSPI.
The letter said Fed intervention might be necessary “to prevent what appears to be the anticompetitive practice of major debit card issuers refusing to enable PINless debit functionality on their cards.”
Debit-card purchases on mobile wallets are also hard to route over other networks. Those generally involve tokens that are created by major networks that replace a card’s number when a payment gets processed. Those networks can translate the tokens back into the actual account number to allow for the purchase to proceed. Merchants can send those payments to the PIN debit networks, but those networks then have to contact the major network, like Visa, on the front of the card to decode the token. Merchants and some smaller networks say the process isn’t easy to execute.
Network fees that merchants pay for online debit-card transactions average an estimated 0.28 percentage points compared with 0.20 points when a debit card is presented at checkout, according to CMSPI.
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