Payments Policy: A look back at 2021 and high expectations for 2022

A look back at the Federal Reserve’s 2021 activity
Arguably the most exciting thing to happen in payments policy in 2021 was the Federal Reserve’s proposed rulemaking to clarify the debit routing provision of Regulation II to apply to all online transactions. Merchants have said for years that ALL debit transactions should have routing choice; however, they have faced many hurdles routing debit transactions in the ten years since the law was enacted.

MAG submitted comments to the Fed in August 2021 outlining our position that the law requires routing choice to apply to all debit transactions, including Card Not Present (CNP) or online transactions, and that we support the clarification as well as enforcement against non-compliance. Despite innovative solutions such as PINless, merchants are frequently blocked from exercising their legal right to choose amongst multiple networks in ecommerce and other CNP transactions. Merchants have closely examined PINless enablement rates, that is, whether a particular percentage of a bank’s BINs are enabled for PINless for cards that are used in ecommerce and other CNP transactions.

Through an examination of data from MAG members, partners, and the Fed, the average PINless enablement rate among card-issuing financial institutions is 45%, with unregulated issuers at a PINless enablement rate of 68% and regulated issuers at a 32% PINless enablement rate for ecommerce debit transactions. This data clearly demonstrates the lack of PINless enablement is not based on feasibility in complying with the law.

Merchants appreciate the Fed’s work to clarify Reg II and are eager to see the Fed’s official clarification this year following their review of the filed comments and information regarding PINless capability among issuers.

The Fed also released the “2019 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions” report in May 2021 after a short delay due to COVID-19. The law required the Fed to set regulations on the “swipe fee” or interchange a covered issuer, an issuing bank with more than $10 Billion in assets, may charge the merchant to process a debit transaction. The law stated the fee must be reasonable and proportional to issuers’ costs and in determining that fee, the Fed should consider authorization, clearance, and settlement as factors. The law also allows for the Fed to consider a fraud adjustment to cover costs incurred by the debit card issuers and requires a study of issuers’ costs every two years. After its first examination of the issuers’ costs, which averaged around eight cents in 2011, the Fed set the rate at 21 cents plus five basis points and a penny for the fraud adjustment.

The recent report showed issuers’ costs to process debit transactions have continued to decline over the last decade; however, the regulated rate has never been reduced. Merchants believe now is the time for the Fed to lower the rate limit. It is imperative they reduce the regulated fee limit considering the issuers’ costs have continually declined and the current rate is considerably higher than their costs.

The Consumer Financial Protection Bureau examines Big Tech and Stablecoins

In October 2021, the Consumer Financial Protection Bureau (CFPB) issued a series of orders to technology companies that operate payments systems seeking information on how the companies use personal payments data and manage data access to users. CFPB Director Chopra was previously a commissioner at the Federal Trade Commission and has long been interested in payments.

The CFPB also commented on the President’s Working Group on Financial Markets’ report on stablecoins. The working group, Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) released the report last fall discussing the potential for increased use of stablecoins as a means of payments. The CFPB’s interest lies in not only their examination of Big Tech and their work with cryptocurrencies but also their preparation for broader consumer adoption of cryptocurrencies and the consideration of nonbank stablecoin-related activities or entities.

During the first year of the Biden Administration, the CFPB has been more active than in previous years under the Trump Administration. It will be an agency to watch in 2022.

More to come in 2022
Even though 2022 is an election year, it may be an active time for payments policy. President Biden will nominate several Governors to the Federal Reserve Board and current Governor Lael Brainard will become Vice-Chair. She oversees payments policy at the Fed which may signal more activity on Reg II as well as FedNow, the Fed’s faster payments service.

In addition, the President will appoint other key nominees that oversee aspects of banking and payments. At the end of 2021, FDIC Chair Jelena McWilliams resigned following a public dispute about control over the agency. There is another vacancy on the five-member board as well, and the current other members are all Democrats.

With the ongoing activity at the Fed, CFPB, FDIC, and what is sure to be an active Congress, as well as Federal Trade Commission, Securities and Exchange Commission, and OCC, we expect to see increased activity around payments policy. If you are interested in learning more about how to get involved with our policy efforts, please contact me. Merchant involvement is critical to educating policymakers and regulators on the issues most important to our community.