Now retailers may get to play Visa (NYSE:V), Mastercard (NYSE:MA) and Discover (NYSE:DFS) against each other. The judge's ruling in July that threw out the 21-cent cap on fees for debit-card transactions also changed the rules for how those transactions can be processed, effectively doubling the number of networks available for each card, according to PaymentsSource.
In other words, merchants won't just have the choice of "debit or credit," but could also potentially send a Visa debit card's transaction across MasterCard's or Discover's network. And that competition could drive transaction fees lower.
In the past, transactions for a debit card were routed through the network of whatever card brand was on the face of the card—usually Visa or MasterCard. But U.S. District Judge Richard Leon said the Durbin amendment to the Dood-Frank financial reform law requires banks to offer two routing options for every transaction. The Federal Reserve's rules, which said each card had to offer two network options—one for debit, one for credit—had misread the law, the judge said.
How would a retailer decide which network to use? Probably in the usual way: Whichever one has the lowest transaction price.
But it gets more complicated than that. Debit cards issued by big banks will likely have very little room for interchange-fee reductions, because they'll also be covered by whatever reduced debit-fee cap the Fed eventually sets. However, debit cards from smaller banks and credit unions, which are exempt from the debit-fee cap, could end up in the middle of price wars between competing card-processing networks.
"The fact that the merchant will have the choice of which of those four networks to route the transaction at the point of sale will put the community banks at a severe disadvantage," the head of a community bank association told PaymentsSource. "That's horrendous for the community banks."
But how much card networks will be able to chop transaction fees will also depend on keeping banks happy. If the banks don't get a good price, they won't include the network. That means retailers will have more leverage in cutting interchange costs, but not necessarily as much as they'd like.
There's one other possibility that's legally very iffy: Suppose a new "independent" debit-transaction network decided to offer merchants an extremely unattractive fee for debit transactions. No merchant would ever use it—which would always make the card brand's network the default, just as it is today.
- See this PaymentsSource story
Judge: Merchants May Get Back Billions In Overcharged Debit Fees
Debit-Cap Chop Might Cut The Number Of Debit Cards, Complicate MCX
Retailer Debit Fees Must Come Down, Judge Says