By Natalie DeCoste
The Federal Trade Commission (FTC) has announced that it has submitted a comment to the Board of Governors of the Federal Reserve System addressing debit card fee and routing reforms.
The comment was submitted on Aug. 11 regarding the Board’s proposed clarification of Regulation II, which implements section 920 of the Electronic Fund Transfer Act (EFTA) as part of the Dodd-Frank Wall Street Reform Act of 2010.
Section 920 was an added amendment to the EFTA intended to promote competition between debit card networks for merchant business. The section works by requiring debit card issuers to enable at least two such networks for a merchant to choose between for electronic debit transactions. The Fed has the rulemaking authority to implement these provisions, and the FTC is in charge of enforcing the Fed’s rules concerning card networks.
In the comment, the FTC explains that in the ten years since Regulation II, the debit card industry has seen significant growth in the volume of transactions, the prevalence of e-commerce, and the use of new technologies. The agency noted that Americans use debit cards almost twice as often as credit cards.
The FTC acknowledged the Board’s proposed clarification of the regulation, which addresses some issuers’ failure to fully recognize that card-not-present (CNP) transactions are a “type of transaction” under the existing Regulation II. The Board’s proposed clarification reiterates that Regulation II applies both to transactions in which a physical debit card is used and in CNP situations, such as pay-by-phone or other electronic payments.
The agency submitted its comment to endorse the Board’s clarification and suggest additional revisions to strengthen the rule.
“In particular, the Board should adopt revisions that ensure that debit card networks do not create incentives for issuers to evade Regulation II’s clear mandate that there be two unaffiliated networks available for each type of debit transaction, with each network a commercially reasonable alternative for merchants. We urge the Board to prohibit debit card networks from paying incentives to an issuer based on how electronic debit transactions are routed by merchants using that issuer’s debit cards,” read the FTC’s suggestion.
The FTC suggested that it would be useful for the Board to address debit card network practices that have contributed to issuers’ failure to enable two networks for every type of transaction consistently. To do so, the FTC recommended that the Board revises 12 C.F.R. § 235.7(a)(3) or its associated commentary to expressly prohibit payment card networks from using routing-based incentives.
The goal of the incentive changes is to make it less likely that issuers will search for ways to circumvent Regulation II.
“A prohibition on routing-based incentives would be valuable even assuming that the Board adopts its proposed clarification to issuers’ enablement obligations. Certainly, it is desirable for the Board to identify and prohibit specific mechanisms that are used to circumvent Regulation II. But it is more effective to eliminate or substantially reduce issuers’ incentives to interfere with merchants’ ability to route transactions to alternative networks,” read the comment.
The FTC has experienced issues with Regulation II in the past. In 2016, the agency investigated a potential violation relating to restrictions on new terminals capable of reading debit cards with an EMV chip. The network rules for Visa required merchants to present a screen that asked consumers to select the network to process the transaction. The screen did not explain what the consumer was choosing or how the choice might make the transaction more expensive to process.
These screens effectively prevented merchants from routing transactions to the network of their choice. Following the investigation, Visa changed its rules so that merchants were no longer required to display these selection screens to customers. However, some smaller merchants were unable to reprogram or purchase new terminals. According to the FTC, the incident highlights the importance of clear rules upfront that establish parameters for acceptable and prohibited conduct.
