FTC Urges Federal Reserve Board to Require Debit Card Gatekeepers to Compete Fairly

The Federal Trade Commission announced that staff have submitted a comment urging the Board of Governors of the Federal Reserve System (the Fed) to clarify and strengthen the implementation of debit card fee and routing reforms to the Electronic Fund Transfer Act (EFTA) made under the Dodd-Frank Wall Street Reform Act of 2010 (Dodd-Frank).

According to a 2019 study, Americans use debit cards almost twice as often as credit cards. Merchants, including millions of small businesses, must pay fees to card issuers, usually banks, and card networks like Visa and Mastercard, in order to accept debit cards. But merchants cannot select low-fee networks unless the issuer enables those networks. Typically, merchants work with payment processing companies to ensure that they get paid. When merchants pay high fees to accept payments, this can lead to price hikes for customers.

In the Dodd-Frank Act, Congress amended EFTA to promote competition among debit card networks by requiring debit card issuers to enable at least two networks so that merchants have a choice for routing electronic debit transactions. The Fed has rulemaking authority to implement these provisions, and the FTC enforces these rules with respect to card networks.

While mobile and electronic payments have been on the rise since 2010, the COVID-19 pandemic has accelerated that growth, with merchants and consumers shifting increasingly to ecommerce and digital marketplaces. As the Fed’s proposed rule recognizes, issuers do not provide sufficient options to merchants for these types of payments. The FTC staff endorsed the proposed rulemaking by the Fed which clarifies that a 2011 regulation applies both to transactions in which a physical debit card is used, and to “card-not-present transactions” that occur without use of a physical card, such as pay-by-phone or other electronic payments.

The FTC staff also called for rules that would prohibit debit card networks from exploiting an issuer’s position by paying incentives to that issuer based on how electronic debit transactions are routed by merchants using that issuer’s debit cards. According to the FTC staff comment, the Fed 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.” This addition would ensure that networks do not overburden merchants or consumers.

The FTC staff submitted its comment in response to the Federal Reserve’s proposal to amend Regulation II and clarify that Regulation II applies to card-not-present transactions as well as card-present transactions, issued on May 13, 2021.

The Commission vote authorizing the staff comment to the Federal Reserve was 3-2. Commissioners Noah Joshua Phillips and Christine S. Wilson voted no