6 December 2022

What does the Federal Reserve debit routing ruling mean for merchants?

Last month, the Federal Reserve finalized a rule that will take effect in July 2023, stating that more than one debit card network be available for routing all transactions - including ‘card not present’ transactions, such as those made online. 

The Fed proposed a clarification to the rule in 2021 because it found that competing networks were not made available for routing debit card transactions, despite a 2011 ruling requiring this to be the case. It has suggested that this latest ruling will encourage competition between networks and incentivize them to improve their fraud prevention capabilities. 

So, what does this mean for your business? 

Debit card routing explained

Debit cards continue to be a popular form of payment for the majority of the world, gaining increasing preference amongst US consumers. From an infrastructure perspective, the core difference between debit and credit is that debit cards pull funds from a checking account, whereas credit cards make use of a line of credit. 

Debit cards differ from credit cards in that they have typically been provided by issuers to process “single message” transactions, and the transaction will be settled immediately after authorization. Credit cards, however, have a “dual message” system in place wherein a transaction must be authorized first, which then allows for settlement of the funds. 

Historically, debit cards have been issued for single-message processing because they were used with a personal identity number (PIN) for in-store ‘card present’ environments. This has meant debit card transactions and the local debit card networks such as Star, NYCE, and PULSE, have not been able to keep up with global card schemes. However, the shift to online shopping has led to the rise of ‘PIN-less’ debit transactions, and local debit networks have created the functionality to transact without the need for PIN verification to compete with global card schemes for e-commerce transactions. 

The background to ‘no network exclusivity’

In 2011, the US Government enacted an amendment to the Dodd-Frank Wall Street Reform Act, which offers merchants the possibility to route debit card transactions via at least two unaffiliated networks. The 'Durbin Amendment’ mandates all issuers to issue debit cards with at least two networks, allowing the merchant to choose the network of their preference for routing transactions.

The reason this amendment was put into place was because the global card schemes dominated the debit network market and, as such, were able to charge merchants higher prices than the local debit networks. Preferential pricing and incentives to issuers led the global card schemes to lock in their position in the market, meaning merchants had no choice but to route transactions over the more expensive global networks.

The `No Network Exclusivity` clause in the Durbin Amendment consequently enabled merchants to pay lower costs as it forces issuers to enable lower cost rails to route debit traffic over. Before the Durbin Amendment, merchants had almost no choice but to pay the higher fees to the global networks, and it is calculated that by allowing merchants the choice to route between networks they can save up to 20% to 30% on interchange and scheme fees.

Aside from routing limitations, it would also seem that not all issuers have enabled PIN-less capabilities on all debit card ranges, which is seen as a violation of the Durbin Amendment, as the inability to use PIN-less functionality on ‘card not present’ transactions meant merchants were forced to process transactions via the global card networks.

A decade later, this has led to the new ruling by the Federal Reserve, outlined above.

What does the Federal Reserve ruling mean for merchants?

Due to the complexities involved, many merchants are not reaping the benefits of the regulation yet. Determining whether a card can be sent as a PIN-less debit into a local debit network, or if a card has been issued as dual-branded or not can add an additional admin headache for merchants. 

Payment orchestration platforms (POPs), such as Gr4vy, aim to remove this complexity and offer the functionality needed by merchants to significantly increase conversion rates, while lowering costs : win win for your bottom line.

POPs can help merchants in the following ways:

  • BIN table - A sophisticated bank identification number (BIN) table is able to determine which network a debit card is issued, allowing a merchant to easily display the available card networks to the buyer on the front-end, while at the same time, instructing the payment service provider(s) (PSP) to route the transaction accordingly to the preferred acquirer
  • Vault - Centralized vaults offered by POPs can store the card details to be re-used by the merchant in billing sequences, allowing the same routing capabilities for later use
  • Automatic retry functionality - Automatic retry functionality can enable merchants to automate retry policies for declined transactions over different networks. For example, if a transaction using a local card network is declined, it’s possible to retry it over a global card network. Beyond that, it is also possible to retry a transaction through different acquirers
  • Transaction routing and network tokenization - Sophisticated routing mechanisms using EMVCo’s network token functionality allows POPs, such as Gr4vy, to obtain the highest conversion uplift for merchants with the lowest cost routing. By provisioning network tokens for cards issued with major card schemes via a POP, merchants can benefit from higher authorization rates and lower chargeback rates as tokenized cards have a lower price point for interchange rates by global card schemes. By combining the routing capabilities for debit networks over local rails, and provisioning network tokens for global rails, this allow for maximum cost saving as well as highest conversion rates

Gr4vy takes away the complexity for the merchant by automating the usage of the correct payment instrument (PAN + CVV for local debit network, and Network Token + Cryptogram for global acquiring rails) with the correct network, included in Gr4vy’s automated retry mechanism.

Gr4vy’s POP leverages the power of the cloud to give users the capability to streamline and manage payment methods, services, and transactions all in one place. Its orchestration layer upgrades a company's payment stacks to make infrastructure nimbler. While its intuitive, no-code dashboard centralizes the integration and administration of payment methods, providers, conditions, and transactions. With Gr4vy, you never have to lose a transaction again.

Take a look at Gr4vy’s platform, used by merchants across the world, and get in touch with a member of our team today.