MAG Insights

Over ten years ago, Congress passed legislation aimed at making debit acceptance more competitive. The law, known as Regulation II or the Durbin Amendment, locked in merchants’ right to choose between two unaffiliated networks in the routing of a PIN debit transaction. Congress gave the Federal Reserve the task of writing the rules which would ensure the purpose of the legislation was upheld and enforcement authority over issuers. They also gave the Federal Trade Commission regulatory authority to ensure networks did not inhibit the rights granted in the law.

Much has changed in the market over the last 10 years, including the growth of online transactions. Innovation has thrived. Many debit networks have enabled specifications which allow for online transactions to be routed without entry of a PIN. While many issuers enabled these new specifications for online routing, several did not. By not enabling these new capabilities, issuers inhibited merchants’ choice to route online transactions. This required the transactions to be routed to the network on the front of the card. According to the Department of Justice, this has resulted in one network continuing to have an 80% market share for online debit.

The merchant community believes this is against the intent of both the law and the regulation supporting the law. After multiple conversations with the Federal Reserve Board of Governors (Fed), they proposed a new clarification.  Over 1,000 individuals and organizations filed comments in reply. A consistent request throughout the comments called for online transactions to have the same routing functionality as in-store transactions. After spending over a year reviewing the comments, the Fed issued the final clarification in October 2022 that confirmed that, just like in-store transactions, issuers must enable two unaffiliated networks for online transactions. The Fed gave those issuers which had yet to enable a second network online until July 1, 2023, to do so.

The good news is some issuers that had not enabled the second specification prior to the clarification have done so since October. Through research by CMSPI, we now believe close to 80% of online debit transactions now have a second unaffiliated network which can be used. Enabling the second network is just one step needed for merchants to take advantage of online routing choices though.

In addition to an issuer enabling a second network, the merchant acquirer must enable the PINless specification of the alternative networks. Many acquirers have already completed this, but you should check with your provider to find out if they are ready to process these transactions. Another result from the clarification is both Visa and Mastercard are enabling their traditional single message networks, Interlink and Maestro, to work on card not present transactions.

One of the issues which inhibits merchants' ability to route online is when a network token is delivered to the merchant in replacement of the PAN. This most frequently happens when the transaction is initiated through a digital wallet. For example, when the merchant accepts an Apple Pay transaction they receive a network token that must be sent to the network which created the token to be decoded to the actual account number. Without this decoding, the issuer would not know the actual account being charged and decline it. In these cases, the networks providing tokens varied on whether they would provide the PAN to an alternate network. Recently, the Federal Trade Commission stepped in and through a proposed consent order has made it a requirement of the network issuing the token to decode it.

This is helpful to ensure all transactions can be routed but there is still a concern that the network which issued the token will not share all relevant security information with the transaction. The MAG wrote a letter to the FTC asking that not only the PAN but the information which validates the authenticity of the transaction be passed on to the alternative network. This would be similar to the process which is already in place when a digital wallet is accepted at the physical checkout. While this is a caution flag for merchants, it is not a reason not to pursue their rights to route online transactions.

With this new clarification and some of the needed infrastructure in place to take advantage of routing, what should merchants do? The first step for any merchant is to gain more information on their current business. For instance, seek out information such as how many debit transactions do you currently have in-person, how many are online, and what networks are available for routing them. Next would be to understand the different ways routing could take place. In many cases, your acquirer has built routing engines to help you maximize this opportunity. You could also consider hiring a consultant to assist with strategy or developing decisioning engines as well.

If you are interested in furthering your education on routing, the MAG’s recently released eLearning course, Merchant Payments 205: An Exploration of Debit Routing is available for merchant members. The MAG also has additional resources including our white paper BEST PRACTICES: Debit Routing Optimization, and we have recorded previous conference sessions and webinars which focus on debit routing. All these resources can be found in the MAG Learning Center and by doing a simple search for Debit Routing.

Now that you are armed with the knowledge around how debit routing works and the relevant data, you are ready to help your organization lower its cost of payments acceptance. I have learned through my personal experience this is the one area in which you have negotiating power with the networks by offering them volume which you control. When it comes to routing, results may vary, but in talking with multiple merchants who have done the required work, the benefit is worth the effort.

From the MAG perspective, this is just one of the steps needed to help make the payments landscape more competitive. We continue to engage with the merchant community in identifying other opportunities to ensure they can take advantage of routing debit transactions. We currently have a Community of Practice focused entirely on debit routing, which you can join by clicking here.

The MAG is also working to help ensure the way the clarification is implemented allows the merchants to take advantage of the rights granted under Reg II. In collaboration with other merchant trade associations, we recently sent a letter to the Federal Reserve pointing out additional clarifications which would be helpful. Please note you must be a merchant member to access the letter.

If you have any questions regarding debit routing and how it might help your organization save on payments transaction costs, feel free to reach out to me.