Debit’s on a roll. Are small merchants getting rocked?

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The dramatic shift to credit and debit card spending that occurred last year was a boon for cards and mobile wallets, but it left merchants paying more to handle payments that had previously been made with cash.

It was especially a double-edged sword in Visa’s case; the card brand benefited from this shift, but also lost out on a substantial amount of travel spending once consumers and businesses entered lockdown.

Debit fees were already under pressure from the Durbin amendment to 2010’s Dodd-Frank law, which capped swipe fees and instituted a requirement to allow merchants to use more than one network to route debit payments. Now the issue is whether that law has kept up with the times.

“The big merchants certainly are using so-called smart routing to use PIN-debit networks when it is advantageous to them, but many smaller merchants don’t have the tech staff or the knowledge of payments to even understand their options,” said Sarah Grotta, director of debit and alternative products advisory service at Mercator Advisory Group.

The Justice Department is looking into Visa’s debit card practices. While Visa could technically be in compliance with the Durbin amendment, merchants hope regulatory pressure could motivate Visa — which has the lion’s share of the debit card market — to revise its practices in merchants’ favor.

Visa’s global debit volume increased 21% in the three months ended Dec. 31, 2020, over the same period a year earlier, while credit card spending volume declined 3%, Visa’s CEO Vasant Prabhu told analysts earlier this year.

The timing isn’t great for Visa to defend itself against fresh antitrust allegations, just four months after the DoJ declared Visa a “monopolist” in online debit when it sued the card network, ultimately forcing Visa to abandon its proposed $5.3 billion acquisition of data-aggregator Plaid.

“Visa is back on its heels after the debacle that occurred in their attempt to acquire Plaid, in which Visa implicated itself in documents found by the DoJ showing Visa was at least considering some anticompetitive action,” Grotta said.

With smaller merchants struggling to recover from the pandemic and online debit transaction volume persisting well above pre-pandemic levels, the DoJ could pressure Visa to open a path to help small businesses lower their processing costs, Grotta speculated.

It’s not just smaller merchants complaining about Visa misusing its market power to drive more online debit volume to its network. Larger merchants with deeper technical resources have other complaints about how Visa influences debit card routing for both online signature (PINless) debit versus lower-cost debit transactions requiring a PIN.

“Visa is pressuring larger card issuers to not enable PINless debit through various routing volume agreements and other incentive contracts,” said Robert Yeakel, director of government relations for the National Grocers Association, a Washington, D.C.-based nonprofit representing more than 1,500 independent supermarket operators.

About a dozen independent PIN-debit networks are available to all merchants, compared to the online or signature option which tends to be Visa or Mastercard debit rails. The signature debit transaction fee is roughly 0.26%, or more than double the standard PIN debit pricing at 0.11%, according to a recent report from equity analyst firm KBW, which cited the latest Federal Reserve data.

Visa offered no comment on the situation after confirming in a March 19 SEC filing that the DoJ has opened an investigation into its U.S. debit practices.

Specific remedies for merchants’ complaints about debit routing aren’t clear.

The Fed could mandate more debit-routing choices, but that would likely only create additional complexity and confusion, said Eric Grover, a principal with Intrepid Ventures LLC.

“The Fed earlier considered but rejected mandating that all debit cards be enabled on at least two unaffiliated signature, or PINless debit networks; and two unaffiliated PIN debit networks, but I doubt we’re going to go there,” Grover said.

Any payment network, including Visa, has various levers to convince issuers to prefer their network, which in effect make it harder for independent national PIN debit networks like Shazam, NYCE, Pulse and Star to compete for signature and PINless transactions, Grover noted.

“If the Fed takes a view of these pricing strategies as materially inhibiting merchants from exercising debit-routing choice, it could force Visa to rectify its pricing,” Grover said.

“In some cases, some large regional debit networks offer a PINless debit option, but it’s not necessarily cheaper [than Visa’s existing online debit rail],” KBW’s Sanjay Sakhrani wrote.

Mastercard has stayed out of the fray so far, but that could change if the government sets new debit card pricing rules around network routing and pricing, Mercator’s Grotta said.

“Visa has much, much greater debit market share than Mastercard, but if changes are required in the payments industry around how debit transactions are routed, it’s highly likely Mastercard will need to implement the very same changes,” Grotta said.

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