Federal Reserve to Clarify Debit Routing Rules, Seeks Comment from Industry

July 23, 2021

By Robert Yeakel, Director of Government Relations

The Federal Reserve has been in the spotlight lately. While most attention has been focused on whether the agency will notch interest rates higher as Americans feel the sudden uptick in inflation, or whether Jerome Powell will keep his role as Chairman, the Fed has also proposed a clarification to its decade-long rules surrounding debit card transactions. 

Regulation II was established in October 2011 as a result of the Dodd-Frank Act. The rule itself has two main purposes. First, the regulation ensures that the amount of debit interchange fee received by large issuers (i.e. banks with at least $10 billion in assets) is “reasonable and proportional to the cost incurred by the issuer”.  

Secondly, Reg II limits the restrictions that issuers and networks can place on the processing of debit card transactions. More specifically, the rule requires that at least two unaffiliated debit networks be enabled to route debit card transactions. Ending routing exclusivity on debit has given merchants the ability to choose which network they route debit transactions over, allowing businesses to weigh both cost and security when processing a debit card swipe.  

With e-commerce growing exponentially over the last decade (even more so since the pandemic), so too has the use of debit cards when shopping online. Grocers and other merchants, however, have seen their routing choice impaired when it comes to online and some mobile transactions – commonly referred to as card-not-present (CNP). Many of the largest debit card issuers, in collaboration with the global card networks, have refused to enable a second network to process transactions when customers are not physically swiping, dipping, or tapping their debit card. The result is that grocers and other retailers are forced to use either Visa or Mastercard only when processing card-not-present debit transactions, leading to higher acceptance costs.  

This lack of enablement flies in the face of Reg II, which is why NGA and other merchant organizations have been raising the issue with the Fed for years. Fortunately, the Fed responded in May and announced that it would be clarifying Reg II to address card-not-present enablement issues. 

The proposed revisions would (1) clarify the Reg II requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to card-not-present transactions, (2) clarify the requirements that the regulation imposes on debit card issuers to ensure that at least two unaffiliated payment card networks have been enabled for debit card transactions, and (3) standardize and clarify the use of certain terminology. 

The Fed is seeking public comment on its proposed Reg II clarifications, and NGA is encouraging its members to file comments in support of the clarifications. NGA has provided sample comments for you to submit via our Grocers Take Action portal.  


The sample comments highlight the following issues: 

  • How lack of debit routing choice has led to higher acceptance costs for grocers. 
  • The growth in card-not-present (CNP) debit transactions from online and in-app grocery shopping. 
  • The lack of card-not-present (CNP) enablement by large debit card issuers while smaller banks’ and credit unions’ debit cards have enablement rates significantly higher. 
  • The need for the Fed to finalize and implement these clarifications as soon as possible.  
  • That in addition to these routing clarifications, the Fed needs to lower the regulated debit interchange rate to better align the fees that grocers have to pay with the actual issuer costs. 

You can also submit your own comments by emailing regs.comments@federalreserve.gov and include Docket No. R-1748, RIN 7100-AG15 in the subject line. 

The deadline to submit comments is Wednesday, August 11, 2021. With over $3 billion in debit routing fees on the table, the Federal Reserve needs to hear from grocers.  

If you have any questions, or for more information, please contact Robert Yeakel at ryeakel@nationalgrocers.org