Late last July, the FTC notified Visa that it was conducting an investigation “regarding potential violations of certain regulations associated with the Dodd-Frank Act focusing on Visa’s optional PIN Debit Gateway Service.” Visa argued that it provided consumers with choice – and isn’t that always a good thing? Not in this case. Ultimately, the FTC didn’t buy Visa’s argument because it didn’t jibe with the spirit of Durbin. The merchant is supposed to choose, not the consumer.
The Federal Reserve recently clarified debit routing rules that required debit card issuers to offer a choice of at least two unaffiliated networks to route transactions. Merchants are applauding this recent ruling, which states that no card network can inhibit merchant routing choices, regardless of technical specifications used to deploy EMV.
Why the Need for Clarification?
When the specifications were being developed for debit card EMV deployment, leading card issuers baked an extra step into their technical specs that favored them over competitors. Coincidentally, the extra step also threw consumers for a loop. In the case of Visa, debit routing and processing for Visa debit cards at POS were enabled by these two network choices: U.S. Common Debit application identifies (AID), which support more than a dozen domestic networks, or the Visa Debit AID.
When shoppers “dipped their chip,” an additional screen popped up that asked them to choose which network – U.S. AID or Visa AID – to route transactions. In other words, choice for routing transactions was left up to consumers, not merchants – against the intent of the Durbin Amendment, which gives merchants the right to choose where to route their transactions. Furthermore, this second screen popping up with odd language – e.g., U.S. AID vs. Visa AID – confused consumers and added even more time to transactions – not what merchants especially with long lines needed. Seeing the name of Visa (or MasterCard) as a choice vs. U.S. AID, most consumers were indirectly steered toward the familiar brand name – and often away from where the merchant would have chosen to route the transaction.
Merchants Went to War
When EMV had rolled out sufficiently for merchants to catch wind of what was happening, they realized that limiting their ability to dictate a lower-cost alternative than Visa (or MasterCard) was going to result in higher fees. Less competition ultimately breeds higher costs, which are often passed onto consumers. In response, eight prominent merchant associations, including the Retail Industry Leaders Association (RILA) and the National Retail Federation (NRF), banded together to accuse Visa of attempting to circumvent merchants’ legal rights to choose the debit network for routing transactions.
The FTC Responds
Subsequent to the investigation by the FTC and the ruling from the Fed on Nov. 22, Visa is changing its debit routing practices. No longer are merchants required to display the second screen to consumers, which will help move along the checkout process. Also, merchants can now require PIN entry for EMV Visa debit purchases, which consumers are used to, although merchants cannot completely eliminate signature as an option.
Merchants are applauding the ruling because, given more competition among debit rails, they will save money on fees. Less consumer confusion at POS and one less step in their checkout process means shorter transaction times and shorter lines, thereby lowering costs and decreasing cart abandonment. With EMV’s rollout, no one needs added confusion as consumers become habituated to “dipping” instead of swiping.
At FIS, we commend the FTC for addressing this matter and the Federal Reserve for its timely ruling. We also commend Visa for its quick response.
What’s next? My advice to merchants is: Work with your processors to identify least-cost routing options and designate where you want your traffic routed. And, continue to train your frontline on the benefits of using EMV-enabled cards.