Merchants Call On Fed To Push PINless Routing Rules For Debit Transaction

The deadline has passed — and what looms now is whether or not the way debit transactions are done, particularly online, will change.

As noted in this space in May, the Federal Reserve published a Notice of Proposed Rulemaking that would require merchants to have a choice in how those online transactions are routed. In its proposed rules, the Federal Reserve cited the increase in card-not-present (CNP) transactions.

The comment period has ended, and what comes next might be anybody’s guess. The merchants, of course, want more choice. The payment networks stand to lose interchange fees — and the end result might be at least some headwind to innovation from those networks and from the banks.

Read more: Fed To Examine Debit CNP Routing — Pressure Looms For Interchange Fees 

Changing Regulation II — as has been proposed — would mandate that issuers adopt what is known as a “dual-message debit” option, which is also known as a PINless debit. The merchants would be able to choose between (at least) two unaffiliated networks for electronic transactions; that duality has been in place for face-to-face transactions (as had been mandated by the Durbin Amendment in the wake of the great financial crisis).

This week, the Merchants Payment Coalition said in a statement that the Fed should enable dual network functionality regardless of the methods of authentication (such as signature, PIN or biometrics).

“As merchants have adapted to serve their customers during the pandemic, there has been a dramatic shift to e-commerce as well as mobile apps and wallets that has made the lack of online routing options a more pressing issue than ever,” the MPC said in its statement. “Economists estimate that the lack of routing costs merchants and their customers billions of dollars each year.”

The Fed’s own  survey has found that banks’ average cost of processing debit transactions was just under 4 cents per transaction as of 2019, down from about 8 cents in the previous decade. The interchange cap is at about 21 cents, per the Durbin Amendment.

And yet: By steering business to lower cost networks, the ripple effects may be ones of unintended consequences. Expanding the routing options would come just as the great digital shift and consumers’ urge to spend the cash they have on hand have given tailwind to debit transactions among the payment networks and issuers, boosting interchange revenues. Those trends have been borne out by earnings season.

See also: Visa Payments Volume Up 34 Pct With Debit ‘The Engine Of Cash Digitization’  

For the companies that would see at least some ebbing or headwind of interchange-related revenue (the old adage that you make up for it in volume does not apply if the transactions are routed on a competing network) means that there is at least some reduction in the benefits that accrue to merchants and the payments ecosystem for card acceptance. At least some of the revenue is steered to payments innovation, and critically, improved security.

The period for official comments has passed, but the debate is far from over.