Fed Banks’ Debit Card Racket Exposed

Federal regulators have launched a probe into the debit card racket run by big banks, accusing them of stifling competition and hiking fees on merchants.

The probe comes after the Federal Reserve Board of Governors proposed a rule to increase competition in the debit card industry. The rule would require banks that issue debit cards to give merchants a choice of debit networks for transactions made online and in circumstances where consumers pay without physically presenting their debit cards.

The proposed rule has the potential to reduce merchants’ transactional costs and ultimately save consumers money. ‘We commend the Board for its efforts to promote competition in this important part of the debit card industry,’ said Acting Assistant Attorney General Richard A. Powers. ‘There is limited competition to process online and other card-not-present debit transactions — which in 2019 accounted for over $1 trillion in transaction value.’

Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires issuers to make available at least two independent debit networks on the cards they issue so that merchants have a choice of debit networks when processing debit transactions. But this requirement has not been effective for online and other card-not-present transactions because many large issuers have not implemented necessary technological changes to permit debit networks other than Visa and Mastercard to process transactions.

The proposed rule would clarify that the Durbin Amendment’s two-debit-network requirement applies with equal force to such transactions. The department supports the Board’s proposed rule because it has the potential to increase competition by lowering one of many barriers to entry and expansion that new or smaller competitors face in this important segment of the debit card industry.

At the same time, the department encourages the Board to consider whether there may be ways to improve upon the proposal. Specifically, the Board should consider whether the proposal is drafted broadly enough to capture all card-not-present transactions. In addition, incumbent industry participants may attempt to circumvent the proposed rule.

The Board is responsible for prescribing regulations pursuant to the Durbin Amendment, a statute designed to promote competition in the debit card market. Click here to view the comment on the proposed rule.

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