October 11, 2022

Coming soon: More options, better regulation for debit card transaction routing

Final rule by Federal Reserve Board reflects requests long-advocated by Association
Woman slipping a credit card
Last week, the Federal Reserve Board issued a long-awaited final rule on the processing of debit card transactions to the applause of businesses and customers, alike.

Specifically, the final rule requires debit card issuers to enable at least 2 unaffiliated networks to process ALL debit card transactions—including “card not present (CNP)” or online payments. 

Applying the rule to CNP transactions, which historically cost more for businesses to process than their “card present (CP)” counterparts, is a significant advancement, particularly for restaurants that struggled to survive during the pandemic. Online orders and payments generated key revenue for restaurants that were forced to pivot their traditional indoor-dining business models to fulfill contactless, off-premises orders during the pandemic.

The final rule also reflects changes in consumer trends pre-pandemic. In 2019, the number of CNP transactions grew 10 times faster than the rate of transactions in which a card was physically present, according to an August 2020 PULSE study. The trend will not only continue but perhaps skyrocket as an overwhelming majority of consumers plan to maintain their new, digital shopping habits after the pandemic is over.

With more unaffiliated networks and players in the space, it’s possible that the increase in competition could translate to less expensive swipe fees for CNP debit card transactions, as well. More online payments that cost less to process represent a win-win for restaurants.

The Federal Reserve Board believes the final rule will also incentivize card payment networks to improve their fraud-prevention capabilities—another win for businesses and consumers as identity theft and data breaches continue to occur at alarming rates.

Separate from legislation in the House and Senate that seeks to address credit card swipe fees, the final rule, which takes effect July 1, 2023, does not change requirements on debit card swipe fees.

For more than a year, the Association advocated on this issue before the Federal Reserve and Congress, detailing the financial toll of anti-competitive practices in the card payment network on small, family-owned, independent, and chain restaurants across the country. The Association will continue advocacy efforts with other merchant-oriented trade groups to bring about swipe fee reform throughout the broader e-payments ecosystem.