The Route to Success
The idea of not having any choice in your phone carrier seems preposterous today. Those of us old enough all remember the days when Ma Bell dominated the telephone market, ending with the historical breakup of the legendary telephone monopoly.
Today we expect choice and enjoy competition in the telephone provider space, with companies competing for business by offering lower costs, greater reliability and security. This competition extends beyond our mobile phones. At home we can now select among carriers who can bundle services with your cable, home security and even your thermostat! Clearly, competition has provided customers with more choices in the traditional and mobile telephone market.
Similar to the telephone service industry, merchants use providers or networks to transmit or route payment card data when processing transactions. When banks began issuing debit cards to replace checks, there would often be several networks enabled on a single card. In turn, these networks would compete for a merchant's routing businesses. As the debit card industry matured, and the two large credit card brands started branding debit cards, they paid their largest issuing banks to sign network exclusivity contracts, allowing only that brand's network to be enabled on a card. As a result, merchants witnessed a disturbing trend of fewer and fewer debit cards enabled with multiple networks, leaving the merchant with no choice on whom to route a transaction through.
In 2010, Congress recognized that like the old Ma Bell days, the U.S. debit routing market lacked necessary competition. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act included the much-needed debit reforms, or “Durbin Amendment,” that brought transparency and predictability into pricing where previously there was none and required networks to compete for merchant business.
The law prohibited the anti-competitive exclusivity contracts and required that every debit card issued have at least two unaffiliated networks enabled. As with the breakup of Ma Bell, merchants and consumers have benefited by competition in the debit routing market. Since the law went into effect, networks have once again had to compete for merchant business by offering lower costs, greater efficiencies and security. Competition has driven innovation, with providers now offering network encryption and tokenization security services.
While network competition has been a net gain for the U.S. payment system, it continues to face challenges. U.S. merchants continue to struggle to become chip-card compliant since the October 2015 EMV liability shift date. As merchants began to pilot and test EMV in their stores, they discovered a disturbing trend of a pre-installed screen that essentially transferred the merchant's routing selection to the consumer, often leading to confusion and delays at the register. The screens have proven difficult and time-consuming to remove and, often coupled with the growing pressure of expensive chargebacks, some merchants have been left with no option but to roll out EMV with the problematic screens.
This all comes at a time when there are renewed efforts to repeal the 2010 debit reforms on Capitol Hill. Merchant groups are actively opposing repeal efforts, highlighting the need and successes of the reforms. Additionally, they are working with various debit networks to find a workable solution to these problematic EMV screens. Choice and competition in the debit routing space has proven to be a good thing for our economy, and maintaining merchant choice is essential at this critical time.