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May 27th 2021

The 6 Biggest Takeaways from the Federal Reserve Regulation ii Report

In 2009, the Federal Reserve conducted a study on the average costs of authorization, clearing, and settlement (ACS) for issuing banks in order to set the regulated debit interchange cap at a reasonable level to cover those costs. Every other year, the Federal Reserve releases a report on debit card activity in the U.S., which helps ensure that the interchange fee caps implemented by the Durbin Amendment have remained accurate and proportional to issuer costs.


The report also gives insights on volume, costs, and other considerations such as fraud, and provides helpful information as to how the debit card market has changed over time, which can give some valuable insights into debit card spending. This article will touch briefly on six important takeaways from the latest release. Disclaimer: This article is strictly commentary and graphs based on the data from the Reg ii report.

1. All Debit is growing, but Dual-Message is still king.

2019 saw debit volumes increase significantly, reaching over $3 trillion in total spend. Dual message (DM), or global networks, accounted for the majority of debit spending in the U.S. with over 65% of the total share. Regulated transactions, (i.e. spending on cards from issuers with over $10 billion in assets) also maintained a majority of debit purchase volume, summing to just over $2 trillion, or about two-thirds of the total. (See Figure 1)

Figure 1. Overall Debit Volume

2. PINless is still struggling to get off the ground.

The growth of PINless debit, or the ability to route single message (SM) transactions without PIN authorization, has been limited by the supply chain. While card networks have developed the necessary technology, our analysis shows that issuers and processors are still lagging in enabling PINless technology on debit cards and developing the capability to process PINless. The impact of this on merchants has been exacerbated by the shift to online. With ecommerce volumes growing more than 50% in 2020 (CMSPI analysis), a lack of PINless enablement – and therefore merchant routing choice online – has stifled competition in the debit space. In the graph below, you will see that single message CNP transactions (i.e. PINless transactions) are much less common than any other debit type, and struggling to grow. In fact, the market share of PINless in ecommerce dropped from 8% to 6% from 2017-2019, showing how much faster global debit is growing in comparison. (The Federal Reserve, along with this report, released a statement clarifying that all debit transactions, whether in store or online, fall under the Durbin No Network Exclusivity mandate. Read more about the position, and the 60 day comment period, by clicking this link.)

Figure 2. Dual and Single Message CNP Transactions

3. No-Network Exclusivity is [in my view] the shining star of the Durbin Amendment.

The caps on debit interchange implemented by the Durbin amendment were powerful in reducing the cost of debit acceptance for merchants. Along with the caps, however, Durbin introduced competition into the debit market through the No-Network Exclusivity clause, which required that all debit cards be badged with at least two competing networks. Fed data suggests that this has created downward pressure on prices. In the adjacent graph, the costs of PIN debit transactions (single message) for exempt issuers have decreased by 5 cents from 2011 to 2019, showing that competition is continuously driving more savings to merchants outside of caps. Conversely, the Durbin amendment did not mandate routing when a transaction is routed dual message, which is one of the reasons that dual message debit pricing has increased by 3 cents since Durbin was passed.

Figure 3. Exempt Debit Costs

4. Acquirers (and therefore merchants) are paying more in network fees.

Global networks typically provide the infrastructure for dual-message debit transactions. The Fed’s data suggests that the fees paid by acquirers, and therefore merchants, to these networks have been increasing consistently since the Durbin amendment was introduced in 2011. Conversely, network fees paid by issuers, both covered and exempt, have dropped in the same period. Our analysis of Fed data therefore suggests that the overall network fee burden has shifted from a more equal distribution to being heavily weighted towards merchants, as the graph shows below.

Figure 4. Dual Message Network Fees

5. Economies of scale are a proven benefit to banks since the Durbin Amendment cap was set

When the Federal Reserve completed their study on debit interchange caps in 2009, they used average 80th Percentile issuer costs as a basis for the capped rate. Since 2009, these average costs have only decreased, meaning that the Durbin amendment’s original interchange cap is out of date relative to the current state of affairs in the issuing market. This trend is not limited to only certain banks either; every single quartile (by volume) of regulated banks have seen a decrease in overall ACS costs since 2009, the smallest of which (75th Percentile) was used to originally set the caps. The regulated debit cap should be lowered proportionately to represent today’s issuing market more accurately.

Figure 5. Debit Card Fraud – Losses Per Transaction

Figure 6. Average ACS Costs

Glossary of Terms

PIN Debit: When an PIN is input for a debit transaction, allowing it to be routed down a local debit network as a single-message transaction.

Signature Debit: When a PIN is not entered, forcing the transaction to be routed down a global network as a dual-message transaction.