FTC Orders Mastercard to Assist Competitors with Transaction Processing

The Federal Trade Commission has ordered Mastercard to start providing its competitors with the customer account information they need to process debit payments. This could potentially cut costs for merchants.

After a years-long investigation, the enforcement action against Mastercard and Visa Inc. was approved in a 4-0 vote. The focus of the investigation was on the policies of these companies that prohibit merchants from routing card transactions over alternative debit networks. The issue at hand is whether or not these payment giants were violating part of the Dodd-Frank Act, which requires banks to enable at least two unaffiliated networks on every debit card.

"This is a victory for consumers and the merchants who rely on debit-card payments to operate their businesses," said Holly Vedova, director of the FTC's Bureau of Competition, in a statement Friday.

FTC Chair Lina Khan has pledged to use the agency’s full authority to crack down on corporate abuses of power. The announcement on Friday is the latest in a series of actions against large corporations, including Microsoft Inc. and Activision Blizzard Inc. The commission is suing Microsoft over its $69 billion acquisition of Activision Blizzard, alleging that the deal violates antitrust laws.

Mastercard and Visa have invested years in developing tokenization technology, which replaces sensitive information like account numbers with a unique, one-time-use set of numbers that validates a customer’s identity. The payment networks say that these services were designed to reduce online card fraud and help the banks that issue credit and debit cards approve more transactions.

"At a time when we are taking steps to resolve this issue, it is important to remember that tokenized transactions offer a higher level of protection for both consumers and merchants," Seth Eisen, a spokesman for Mastercard, said in an emailed statement. "This focus on security is what drives our efforts in a competitive market, and it is what motivates us to continue investing in innovations that provide the peace of mind people expect."

But merchants have long complained about tokenization technology, especially its use in mobile payments. The FTC said Purchase, New York-based Mastercard used its control over the tokenization process to block the use of competing card networks.

The statement didn't say whether the FTC had reached a similar agreement with Visa. A representative for Visa didn't immediately respond to a request for comment.

More than a decade ago, Congress passed a provision in the Dodd-Frank Act called the Durbin Amendment. This amendment ordered banks to put two competing networks on all debit cards, in order to give merchants more choice in how they route such transactions. The goal of this move was to lower card acceptance costs by improving competition among networks. Banks typically issue debit cards with either Visa or Mastercard, but there are also smaller, lesser-known networks such as Pulse, Shazam and Star. These networks often charge a lower fee.

The FTC has said that Mastercard has historically not allowed alternative networks access to its so-called token vault. This means that when a debit card user chooses to pay with Apple Pay or Samsung Pay, merchants would have no choice but to route the transaction over Mastercard's network to ensure the payment would be authorized.

The agency has ordered Mastercard to provide alternative debit-card networks with customers’ personal account numbers. Mastercard is also banned from taking any action to prevent competitors from providing their own payment token service or offering tokens on Mastercard-branded debit cards.

Eisen stated that the company believes its existing routing practices are legal and have always given merchants the option to choose, adding that Mastercard will continue to update its processes to follow the consent order and provide more choice.

Visa and Mastercard have come under fire from regulators and lawmakers over their debit-card practices in recent years. Visa said last year that the US Department of Justice informed the company of plans to open an investigation into its US debit practices after the agency earlier blocked its proposed takeover of Plaid Inc. due to concern that Visa would use the acquisition to dominate online debit-card transactions.

The FTC has proposed an agreement with Mastercard that is subject to public comment. After the comment period closes, the FTC will decide whether to make the agreement final.