The Federal Reserve on Monday voted to finalize a proposal to clarify a rule requiring more than one debit card network be available for routing all transactions, including those online.

In a statement on the 6-1 vote to finalize the rule, the Fed said “that debit card issuers should enable at least two payment card networks to process all debit card transactions, including ‘card-not-present’ transactions, such as online payments.” It noted that “the final rule is substantially similar to the proposal issued last year.” It will take effect July 1 of next year.

The Fed proposed clarifying the rule last year because it said evidence all too often showed competing networks were not available for routing debit card transactions, contrary to a 2011 rule requiring them to be.

“The final rule will encourage competition between networks and incentivize them to improve their fraud-prevention capabilities,” the Oct. 3 Fed statement said.

The Fed’s backing for the updated rule is the latest blow to the big networks that process card payments, namely Visa and Mastercard, and to the banks that issue the cards.

The Fed’s initial May 2021 proposal for clarification touched off controversy in the industry. While retailers and other merchants welcomed the effort to reinforce the prior rule requiring at least two networks be available for debit routing, card industry opponents argued the rule shouldn’t necessarily apply for e-commerce.

In its statement this week, the board acknowledged that when it first issued the rule in 2011 there may have been technological obstacles to making multiple networks broadly available for online debit transactions, but it says that shouldn’t be a problem today. Furthermore, it noted there is an increasing need to do so now because of rising online payments.

“Technology has evolved to address these barriers,” the Fed’s statement Monday said. “However, some debit card issuers have not yet enabled at least two unaffiliated networks for merchants to choose between when routing such transactions. This issue has become increasingly pronounced because of continued growth in online payments.”

Visa, Mastercard views

Mastercard declined to comment and Visa didn’t immediately respond to a request for comment. “We are reviewing their interpretation to understand the future implications,” Mastercard Spokesperson Seth Eisen said by email. “It would be premature for us to comment.”

Still, Visa begged to differ in a letter it submitted last year in response to a Fed request for comments on the proposal. “Technologies for supporting such transactions on historically PIN-based debit networks are, relatively speaking, new and unproven, and therefore have not been widely deployed or supported by issuers, PIN networks, merchants, or other participants in a debit transact,” Visa wrote in the July 2021 letter.

“For this reason, we believe that those aspects of the Proposal that would deem card-not-present transactions to be a ‘specific type of transaction’ for purposes of the two network requirements are premature and would introduce confusion and uncertainty about issuer obligations rather than clarity,” Visa added in its 17-page letter.

The Visa letter was one of 2,700-plus comments submitted to the Fed on the rule proposal.

Bank input

The Fed said public comments on its rule clarification proposal suggested many banks that issue debit cards, including smaller community banks, already comply with the new rule requirements. Nonetheless, Fed Governor Michelle Bowman offered a dissenting view on that point in casting the only vote against the rule clarification.

“During the public comment process, community banks raised substantial concerns with the proposal,” Bowman said in her Monday statement opposing the rule. “I believe that significant questions remain about how the rule will affect banks, and particularly community banks, with respect to both fraud and the cost of compliance. Given this continued uncertainty, I do not support the final rule.”

The Fed’s 2011 rule followed an amendment to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that capped debit card fees and required competing networks, such as NYCE or Shazam, be available for debit routing. The amendment was dubbed the Durbin amendment because Sen. Dick Durbin (D-IL) spearheaded the legislative effort, and he continues to seek to inject more competition into the card industry.

Warring interest groups on either side of the long-running debate over increased curbs on card processing reacted immediately, taking predictable positions, based on their past arguments.

Interest group reaction

“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,” National Association of Convenience Stores General Counsel Doug Kantor said in a statement issued by the Merchants Payments Coalition. “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.”

The Retail Industry Leaders Association had a similarly positive response, suggesting the Fed move was overdue. “The failure of Wall Street banks to enable two unaffiliated networks for all debit transactions — whether they occur online or in-store — has been a flagrant violation of the Durbin Amendment for over a decade,” the association’s statement Monday said.

Card industry companies have increasingly been under attack in the past two years by lawmakers and regulators seeking to increase competition in an industry dominated by Visa and Mastercard. That campaign this year extended to credit card transactions, with Durbin locking arms with Sen. Roger Marshall (R-KS) to introduce legislation that would require multiple networks for routing credit card transactions as well.

Durbin and U.S. Rep. Peter Welch (D-VT), a sponsor of the House companion bill on credit routing curbs, issued a press release today in response the Fed decision. “For years we have worked to bring fairness and competition to debit and credit card swipe fees, and this is a big step forward,” they said in the release. “The Federal Reserve’s rulemaking is a win for competition and good news for Main Street merchants and consumers.”

In the release, they also noted that they had sent a letter to Fed Chair Jerome Powell in July expressing concern about “troubling debit card industry practices.”

And this week they urged further action. The Fed should “investigate reports that card-issuing banks are failing to enable their debit cards to be used by at least two debit card networks for online transactions,” the release said.

The routing requirement efforts are part of a broader campaign to lower the “swipe” fees that the card issuers and networks charge merchants for processing card transactions. The bank card issuers, including JPMorgan Chase and Capital One, and their card network company partners increased the fees earlier this year.