DOJ Endorses Interchange Rule that Credit Unions Hate

A fight is brewing between the Biden Administration and credit union trade groups over a Federal Reserve proposal to require financial institutions to give merchants a choice of debit card networks for online transactions and other purchases when consumers do not physically present their debit cards.

The Justice Department this week threw its support behind the Fed’s proposed rule, saying it would enhance competition and save consumers money. Credit union trade groups, on the other hand, said that the proposal would increase compliance costs, while not passing any savings on to consumers.

The Fed issued a notice of proposed rulemaking in May, saying it was proposing the rule in light of information showing that often only one network is available for such transactions.

“The absence of at least two unaffiliated networks for card-not-present transactions forecloses the ability of merchants to choose between competing networks when routing such transactions, an issue that has become increasingly pronounced because of continued growth in online transactions, particularly in the COVID-19 environment,” the Fed said, in requesting comment on the proposal.

Justice Department officials praised the board for the proposal.

“We commend the Board for its efforts to promote competition in this important part of the debit card industry by ensuring that smaller debit networks will have a greater ability to compete for merchants’ business,” said Acting Assistant Attorney General Richard Powers of the Justice Department’s Antitrust Division. “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.”

Credit union trade groups said that rather than fostering competition, the proposal will result in declining revenue from debit card transactions, and at the same time, will increase the cost of compliance for credit unions.

“Furthermore, adding layers of unnecessary complexity onto the debit card networks can only increase cybersecurity risks,” said Lance Noggle, senior director of advocacy and senior counsel for payments and cybersecurity at the Credit Union National Association said. “These costs and reductions of revenue will likely further accelerate the loss of locally owned and operated cooperative credit unions, which can make the delivery of financial services to those of greatest need even more challenging.”

The trade groups added that the Durbin Amendment which required the Fed to cap debit card interchange fees that financial institutions may charge and required card networks to provide merchants the option to route through at least one additional network has been a failure.

The Durbin amendment’s “promise of benefiting consumers with lower prices has not materialized,” James Akin, regulatory affairs counsel at the National Association of Federally-Insured Credit Unions, wrote in a letter to the Fed. “There is no evidence that merchants have passed along their savings to consumers in the form of price cuts.”

He added, “large multinational retailers that have experienced double-digit profitability increases during the pandemic would be the primary beneficiaries of the proposed rule, not small businesses.”

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