The Federal Reserve Board’s Regulation II Final Ruling

Author: Alan Vickness

Cheers from merchants could be heard from the rafters in anticipation of the opportunity to reduce debit card processing costs, because on October 3, 2022, the Federal Reserve Board finalized the updates to Regulation II concerning the routing choice for debit card transactions in the card not present environment.

Federal Reserve Board – Federal Reserve Board finalizes updates to the Board’s rule concerning debit card transactions

Regulation II stipulates that debit card issuers must enable at least two unaffiliated payment card networks to process debit card transactions. The rule in question was if it should apply separately in both card-present (Retail) and card-not-present scenarios.

Regulation II was enacted in 2011, when the market had not yet developed solutions to broadly support multiple networks for card-not-present debit card transactions, such as online purchases. Fast forward 11 years when card-not-present transactions have become a significant portion of all debit card purchases, rising from about 10% of all debit card transactions by volume in 2011 to 23% in 2019. Despite this rapid growth in card-not-present volume, the majority of regulated issuers do not have two unaffiliated networks available to process card-not-present transactions. Fortunately, it appears the majority of community banks already do so. In those cases where only one network is enabled for card-not-present transactions, merchants lose routing choice and do not have an alternative network option that might offer lower fees or a better fraud-prevention solution.

The final rule and update to Regulation II enforces debit card issuers to enable at least two unaffiliated payment card networks to process card-not-present debit volume no later than July 1, 2023. This ruling is a big win for the merchants however, it does not translate to immediate cost savings as there are other factors and dependencies that impact merchants’ ability to capitalize on lower debit costs. These factors include tokenization and most importantly, the acquirer’s ability to route CNP transactions to lower cost networks. Many acquirers do not have this ability today. There is a significant amount of technical development needed from the acquirer to route CNP volume to networks other than Visa and Mastercard (the most expensive debit networks). This development is not an easy lift and can take years to complete. Additionally, many card-present transactions are classified as “dual-message” and unable to be routed to lower cost networks, because they require the same development such as; tip-accepting businesses/restaurants and incrementals on hotels.

In summary, the Regulation II final ruling is a massive step in the right direction; however, there are many complexities to manage to obtain those cost savings. But the good news is that more merchant choice gives you options to optimize your payment costs.

If you are interested in optimizing your debit costs and need assistance in mapping out your debit strategy, now is the time to strike and contact Optimized Payments. We are debit industry leaders with a proven track record of success reducing debit transaction costs for many large enterprise merchants.



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