FTC inquiry casts fresh attention on U.S. debit routing issues

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The specific impetus for the Federal Trade Commission's inquiry into Visa and Mastercard's debit transaction routing processes is not entirely clear, but it likely stems from the effect that advanced payments technology has had on Durbin amendment compliance.

For their part, the card brands say they are cooperating with the inquiry, the first time the FTC has raised questions about PIN debit routing since 2016 when Visa addressed how EMV debit network routing was set up on merchant point-of-sale terminals. Merchants and independent debit networks like Star, Pulse, NYCE and Shazam felt Visa's approach was designed to move most transactions to the established networks.

Merchant groups see the latest FTC activity as an indication that issues remain with EMV debit routing and Durbin amendment compliance, which establishes that merchants should have two or more transaction routing options.

Though the FTC declined to comment on the issue, a Bloomberg report last week citing anonymous sources indicated the commission has aligned part of its preliminary inquiry on advanced technology, seeking to determine if problems exist at the POS with routing transactions initiated through mobile wallets, contactless cards or use of new authorization technology.

Visa and Mastercard are waiting to see which direction the FTC probe goes in the coming weeks.

"We received the request to provide information relating to compliance with Durbin amendment routing requirements," Mastercard spokesman Seth Eisen confirmed. "We are cooperating with the FTC's request."

But Eisen also pointed out that "there is no specific claim or complaint being made" through this inquiry. "This is an initial, preliminary investigation by the FTC," he added. "Once they have completed this exercise, we'll understand their next steps and plans."

Visa declined to comment directly about the FTC inquiry or speculate on what type of information the commission might be seeking at this time.

Debit's wild ride

To understand where the FTC may be headed on this, or at least why the routing question has come up again, one has to look back about four or more years when the payments industry realized there was no clear way for a merchant to rout an EMV PIN debit transaction to an independent network. It was a U.S.-specific problem because the country has far more independent networks than other countries that had deployed EMV.

That led to the creation of a common application identifier, or AID, a technology that Visa shared throughout the industry as a globally designed EMVCo standard to assure compliance with Durbin and give merchants the option to move PIN debit transactions to independent networks.

Still, many small businesses in the U.S. were given the choices of Visa AID, and U.S. Common AID or U.S. Debit AID, but did not have the routing capabilities to the unaffiliated networks.

At the same time, consumers were to choose routing, and those who would choose U.S. Debit would find out the transaction did not go to an independent network, but instead would go to the host acquirer — in many cases Visa.

For their part, the card brands have said they worked hard to resolve that situation and get merchants on board with the routing options. However, many U.S. merchants still don't support PIN debit routing. Yet, those merchants have converted to EMV and the choice of U.S. Debit for routing may still fail in those instances.

"But it's a rare instance to see that complaint much anymore," said Dan Sanford, who oversees U.S. debit for Visa in his role as global head of contactless payments. "Merchants have the ability to route to PIN debit networks and they would do so using the Common AID and do the routing as it was before."

Some issues remain

For the most part, the technology used in routing a physical POS transaction is the same as for a contactless or mobile transaction.

The Fed corrected the initial routing problems with U.S. Debit on terminal screens through a consent decree from Visa and Mastercard, stating at that time that merchants no longer had to have consumers choose a routing option. A sticking point, in the eyes of merchants, had been there was also no explanation to consumers as to what U.S. Common or U.S. Debit meant.

This development hasn't diminished merchants' fear that programming problems remain, specifically in that terminal manufacturers still default to the major networks in their routing settings on their products.

This status quo forces merchants to spend money to reprogram terminals with the routing choices they are guaranteed by law, said John Drechny, CEO of the Merchant Advisory Group.

With the PIN routing debate ultimately narrowed down to making one PIN and one signature network acceptable as compliance for the routing options, it became less clear when all of the domestic networks created the ability for PINless transactions to work on their networks.

"As merchants spent time and money to implement these new transaction types, it became clear they were not enabled by all issuers who have those domestic networks on their cards," Drechny said. "Merchants believe this is against the routing provision of Reg II and would be happy to see the FTC and Federal Reserve clarify this point and enforce regulation."

In addition, when a technology like biometrics became an authorization option, the global networks enabled their global application to carry the biometric indicator, but have not updated the common application they share with the domestic networks, Drechny contended.

"When the domestic networks handle transactions authorized with biometrics, it appears that there was no authentication and that increases the chances that the issuing bank will reject the transaction," he added.

Merchants have a similar problem with tokenization in that transactions have to be sent to the global brand that tokenized it in order to obtain the true account number and route the transaction to an alternative network.

"This again inhibits the ability to route a transaction and puts the global networks in the position of seeing their competitors' transactions, and potentially charging a fee or otherwise getting in the way of those transactions being completed as intended," Drechny said.

The route ahead

In the near term, it is likely that far more information will unfold regarding the FTC's interest in debit routing.

The PIN debit networks have opinions on this topic, often stating their position through the Secure Payments Partnership about how Visa and Mastercard use standard setting to restrict competition and thwart payment innovation.

"I think those networks lump all of these things together in saying we have a standards problem here in the U.S. and it is causing problems for the debit networks and violating Durbin," said Sarah Grotta, director of debit card advisory for Mercator Advisory Group.

No matter what the FTC inquiry targets, the larger networks will figure out what needs to be done and how to send their transactions through the networks of least cost in compliance with Durbin, Grotta said. But small merchants may still not benefit, she added.

"The small merchants don't even know what to ask, or to even go back to their acquirer and say they have heard there are less expensive networks, and how do I go about using them?" Grotta added. "That is a real issue as well."

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Compliance Network rules EMV Debit cards FTC Durbin Amendment