State of the Industry Report September 2024

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CMSPI – IAC State of the Industry Report

and network fees have risen in the last two years. For example, two PIN debit networks levy interchange of $0.45 plus 1.45% of the transaction value on these cards, and have increased network fees from $0.20 to 0.95% on all of the card types. 259 260 While mono-badged cards are less than 2.5% of all volume, the higher-than-average cost of acceptance ensures that their share of costs is greater than their share of volume. CONSUMER VS. MERCHANT ROUTING CHOICE Merchants were presented with new routing challenges when the U.S. migrated to chip card technology. The native EMV ® prompt screen on the chip card point-of-sale (POS) readers prompted the customer to pick the network, in violation of the Durbin Amendment. In response to merchant requests, in 2016 the Fed intervened with a clarifying FAQ, which stated: “A payment card network inhibits a merchant’s ability to route electronic debit card transactions if it…requires the merchant to allow the cardholder to make the choice of EMV ® chip application on a debit card…Such a requirement is not compliant with section 235.7 of Regulation II because it prevents the merchant from directing the routing of electronic debit transactions.” 261 NETWORK TOKENS In general, industry stakeholders view tokenization as a useful and important security tool. However, engagement and oversight by policymakers and antitrust authorities raise concerns that the global networks may use debit network tokenization in violation of the Durbin routing requirements and limit competition in the market. Today, Visa and Mastercard will fully detokenize CP transactions for the competitive debit networks. However, the process requires the competitive network to perform a callout to the global network to perform the detokenization, which likely gives them visibility into their competitors’ debit businesses. While, today, the global networks do this without charging a fee, there are concerns about how the service may evolve. 262 The global networks’ CNP detokenization process is not the same as CP resulting in regulator intervention and monitoring. In December 2022, the Federal Trade Commission (FTC) announced a consent decree with Mastercard to change its CNP network tokenization business practices. 263 Prior to the consent decree, Mastercard’s policies did not allow for detokenizing CNP debit transactions, blocking merchant routing rights. Today, both Mastercard and Visa permit card-on-file, CNP, tokens to be routed to non-affiliated networks. However, unlike CP, they will detokenize the transaction, but do not provide access to security measures like cryptogram validation and token domain control restriction enforcement. As a result, if a merchant opts to route Card-Not-Present (CNP) network tokenized transactions, they may face

a higher risk of false declines. This is due to the fact that the issuer wouldn’t receive the cryptogram validation or domain control during the transaction approval process, which could have an adverse impact on authorization rates. In addition to the FTC’s enforcement actions, it has been reported that the U.S. Department of Justice is probing Visa’s token technology pricing as part of a larger investigation into possible antitrust violations by the card brand. 264 Additionally, Congressional leaders who championed debit routing reforms in 2010 addressed network tokenization concerns in the proposed legislation, the Credit Card Competition Act (CCCA). The CCCA would require banks with over $100 billion in assets to enable at least two unaffiliated networks on the credit cards they issue. The bill would forbid the use of tokenization and other security technologies, as well as authentication methods, to impair merchant routing rights. 265 The legislative text of the CCCA is an indicator that policymakers – including the leader of the U.S. Senate Judiciary Committee – have concerns over tokenization technology potentially being a bottleneck to competitive network access. POTENTIAL CREDIT ROUTING IN THE US: THE CREDIT CARD COMPETITION ACT The Credit Card Competition Act ( CCCA), first introduced by Senators Durbin (D-IL) and Marshall (R-KS) in July 2022, seeks to increase U.S. credit card network competition by requiring credit card issuers with over $100 billion in assets to co-badge credit cards with at least two unaffiliated networks. 266 Exempt from the bill are three-party issuers (card networks that also issue their own cards) such as American Express and Discover. The bill would also prevent credit card issuers above the asset threshold from badging certain foreign networks as a means of compliance. In addition, to prevent greater market concentration, issuers could not gain compliance by badging the two largest credit card networks on the same card.

259 The break-even amount is $21. In 2021 the Fed reported the U.S. average debit card transaction was $46.26, so overall fees will increase with this fee change: Federal Reserve Board Publication 260 PIN Debit Networks Fee Schedule (wellsfargomedia.com) 261 https://www.federalreserve.gov/paymentsystems/regii-faqs.htm 262 https://www.federalreserve.gov/regreform/rr-commpublic/dna-meeting-20201014.pdf 263 https://www.ftc.gov/news-events/news/press-releases/2022/12/ftc-orders-end-illegal-mastercard-business-tac- tics-requires-it-stop-blocking-competing-debit-card

264 Visa discloses further demands from US Justice Dept. over antitrust probe | Reuters ; Visa’s pricing of token tech- nology under DOJ probe - Bloomberg News | Reuters 265 Text - S.1838 - 118th Congress (2023-2024): Credit Card Competition Act of 2023 | Congress.gov | Library of Con- gress at Section 2.B.II and III 266 FRB: Large Commercial Banks-- March 31, 2024 (federalreserve.gov)