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Federal Register / Vol. 86, No. 91 / Thursday, May 13, 2021 / Proposed Rules
The Board promulgated its final rule implementing the prohibitions on network exclusivity and routing restrictions in July 2011.6 These prohibitions under Regulation II aim to ensure that merchants or their acquirers can choose from at least two unaffiliated networks when routing debit card transactions.
Section 235.7a implements the prohibition on network exclusivity set out in EFTA section 920b1A.
Specifically, the provision prohibits an issuer or payment card network from directly or indirectly restricting the number of payment card networks on which an electronic debit transaction may be processed to fewer than two unaffiliated networks. To comply with the network exclusivity provisions, among other things, an issuer must allow an electronic debit transaction to be processed on at least two unaffiliated payment card networks, each of which i must not, by rule or policy, restrict the networks operation to a limited geographic area, specific merchant, or particular type of merchant or transaction and ii must have taken steps reasonably designed to enable the network to process the electronic debit transactions that the network would reasonably expect will be routed to it.
Section 235.7b implements the prohibition on routing restrictions set out in EFTA section 920b1B.
Specifically, the provision prohibits any issuer or payment card network from directly or indirectly inhibiting the ability of any person that accepts or honors debit cards for payments such as a merchant to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions. Therefore, if an issuer has enabled a payment card network to process transactions for a particular debit card, then the issuer or payment card network may not inhibit a merchants ability to route an electronic debit transaction over that network.

C. Overview of Issue and Proposed Changes At the time the Board promulgated Regulation II, for card-not-present transactions, such as online purchases, the market had not developed solutions to broadly support multiple networks over which merchants could choose to route those transactions.7 In the decade since the adoption of Regulation II, technology has evolved to address these barriers, and more networks have introduced capabilities to process cardnot-present transactions. At the same time, card-not-present transactions have become an increasingly significant portion of all debit card transactions.
Despite these developments, and in contrast to the routing choice that currently exists for card-present transactions, merchants are often not able to choose from at least two unaffiliated networks when routing card-not-present transactions, according to data collected by the Board and information from industry participants.
In light of this issue, the Board is proposing changes to Regulation II to clarify that debit card issuers should enable, and merchants should be able to choose from, at least two unaffiliated networks for card-not-present transactions. Specifically, the Board is proposing revisions to the commentary to Regulation II that clarify the applicability of the prohibition on network exclusivity to card-not-present transactions. These proposed revisions to the commentary clarify that card-notpresent transactions are a particular type of transaction for which two unaffiliated payment card networks must be available. The Board is further proposing revisions to the rule and the commentary that clarify the responsibility of the debit card issuer in ensuring that at least two unaffiliated networks have been enabled to comply with the regulations prohibition on network exclusivity. In addition to these changes, the Board is proposing revisions to standardize and clarify certain terms and phrases in the commentary. The Board requests comment on all proposed changes to the rule and commentary.
The proposed changes do not affect other parts of Regulation II that directly address interchange fees for certain electronic debit transactions. The Board will continue to review the regulation in light of the most recent data collected by
6 Regulation II, Debit Card Interchange Fees and Routing, codified at 12 CFR part 235. Regulation II
also implements a separate provision of EFTA
section 920 regarding debit card interchange fees.
The proposed revisions in this notice do not concern that provision.

7 Card-not-present transactions are those in which a cardholder initiates a card payment without physically presenting the card to a merchant. Cardnot-present transactions typically involve remote commerce, such as internet, telephone, or mailorder purchases.

restrictions, an issuer or payment card network could establish rules or other restrictions that override a merchants routing preferences, thereby preventing the merchant or its acquirer from routing a transaction over a network with, for example, lower fees for merchants.
B. Regulation II Requirements
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the Board pursuant to EFTA section 920
and may propose additional revisions in the future.
II. Background on Network Exclusivity Issues for Card-Not-Present Debit Card Transactions Debit cards are used for a wide variety of payments in the United States today, involving both card-present and cardnot-present transactions.8 Over the last decade, card-not-present transactions have become an increasingly significant type of debit card transaction. Spurred by the growth of online commerce, the number of card-not-present debit card transactions has increased rapidly in recent years, growing approximately 17
percent per year, on average, from 2009
to 2019, in contrast to the 6 percent average annual growth in card-present transactions over the same period.9 As a result of this differential growth, cardnot-present transactions comprised almost 23 percent of all debit card transactions in 2019, up from slightly less than 10 percent in 2009. Recent evidence indicates that growth in cardnot-present transactions has accelerated further in the Coronavirus19 COVID
19 environment, as consumers have shifted from in-person to remote purchases.10
Like any debit card transaction, cardnot-present transactions rely on payment card networks to conduct payments. The network used to process a transaction depends primarily on the set of networks that the issuer has enabled for the transaction and the specific network that the merchant or its acquirer chooses to route the transaction out of those available.11
8 According to the Federal Reserve Payments Study, the number of debit card payments in 2018
nearly equaled the combined number of credit card, check, and automated clearinghouse payments. See https www.federalreserve.gov/paymentsystems/frpayments-study.htm.
9 See 2019 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions, 2019 Data Report available at https
www.federalreserve.gov/paymentsystems/regii-datacollections.htm. The data summarized in the report are collected through mandatory surveys of debit card issuers subject to the interchange fee standard in Regulation II covered issuers and payment card networks. Covered issuers are those with worldwide assets, including affiliates, of $10 billion or more. The Board administers these surveys and releases biennial reports pursuant to data collection requirements in EFTA section 920.
10 For information about aggregate patterns in ecommerce, see Latest Quarterly E-Commerce Report, available at https www.census.gov/retail/
index.htmlecommerce.
11 The network used to process a transaction may also depend on other factors, such as whether the merchant can support the authentication methods used by the available networks. It may also depend on the cardholders choice of authentication method in situations where the merchant has
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