WASHINGTON—The Merchants Payments Coalition (MPC) welcomed the Federal Reserve’s long-awaited approval of new rules making it clear that merchants’ right to choose which payment networks process trillions of dollars in debit card transactions each year applies the same online as it does in stores and must be honored by banks and card companies. NACS is an executive committee member of MPC.

“This move will bring badly needed competition to our nation’s broken payments market,” said NACS General Counsel and MPC Executive Committee member Doug Kantor. “When Congress said merchants had the right to route debit transactions to the processor of their choice, they meant all transactions, not just those in stores. The Fed has followed through on Congress’ intent and made it clear that big banks’ evasion of competition must stop. Visa, Mastercard and their bank members should not be allowed to shut out other networks that can do the job more efficiently and more securely.”

“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,” Kantor said. “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.”

“The final rule will encourage competition between networks and incentivize them to improve their fraud-prevention capabilities,” the Fed said in yesterday’s announcement.

NACS filed comments in support of the Fed’s proposed clarification, and many NACS members did as well.

The new regulations clarify that routing choice applies the same online as in-store, that banks must enable processing over at least one unaffiliated payment network in addition to Visa or Mastercard’s networks regardless of where a debit transaction takes place, and that neither banks, Visa nor Mastercard can block merchants’ access to a competing network. The rules also apply to contactless cards and digital wallets and address issues such as making sure both in-store and online transactions can be processed over competing networks regardless of the type of authentication used, including signature, PIN, PINless or biometrics like fingerprints or facial recognition.

The regulations were sought by merchants to ensure compliance with a 2010 law requiring that banks enable all debit transactions to be processed over at least one competing network such as NYCE, Star or Shazam in addition to Visa or Mastercard and that merchants be allowed to choose which network to use.

The law has seen success with in-store purchases, where competing networks handle 40% of transactions and studies show competition over processing has saved merchants billions of dollars a year with about 70% of the savings passed on to consumers. But merchants have long complained that banks have not enabled cards to be processed over competing networks when used online, and that Visa and Mastercard have offered banks financial incentives that discourage them from doing so. Banks have also failed to enable routing options for most transactions made with contactless cards or digital wallets on mobile devices.

As a result, all but 6% of online debit card transactions are still processed by Visa and Mastercard, even though other networks offer lower fees and have about one-fifth as many fraudulent transactions, according to the Fed. The Fed said last year that lack of access to competing networks “forecloses the ability of merchants to choose.”

Debit card swipe fees cost merchants and their customers $32.6 billion in 2021, with payments processed over Visa and Mastercard accounting for $28.1 billion of the total, according to the Nilson Report. When all types and brands of cards are included, credit and debit card swipe fees totaled $137.8 billion, up more than double over 10 years. The fees are most merchants’ highest operating cost after labor, driving up consumer prices and amounting to $900 a year for the average family.