Opinion ID: 6330404
Heading Depth: 3
Heading Rank: 1

Heading: The Market Structure

Text: To pay for breakfast at the local coffee shop, you swipe (or tap) your debit card. So begins an invisible process that transfers your money to the shop. The electronic architecture that makes this possible is a “debit network.” This diagram shows roughly how it works: Located at the central hub of the diagram, the debit network links the merchant’s bank (or “acquirer”) with the cardholder’s bank (or “issuer”). Data races back and forth between acquirer and issuer. If the issuer approves the transaction, the price of breakfast zips from your account to the coffee shop’s. There are two kinds of debit networks. A “PIN network” is used when you complete a sale by punching in your personal identification number. A “signature network” is used when you sign your name. Nearly all debit cards enable one signature network and at least one PIN network. 1 Notably, though, the line between the two kinds of networks has blurred: 1 The network logos appear on the back of your card. 2 Case: 18-20669 Document: 00516267971 Page: 3 Date Filed: 04/05/2022 No. 18-20669 companies have developed “PINless” technology that lets PIN networks process sales that would otherwise route through signature networks. Debit networks are not free. Two kinds of fees are collected on every transaction. First, debit network companies collect “network fees,” which are their primary revenue. These are paid by both merchants and issuers. They are typically low—averaging a few cents per transaction—and slightly higher for signature than for PIN networks. Second, issuers collect “interchange fees” from merchants’ banks. These make up the largest portion of the prices merchants pay for debit transactions. 2 Both kinds of fees are big business. In 2019, issuers and merchants paid $2.94 billion and $5.32 billion, respectively, in network fees, and issuers received $24.31 billion in interchange fees. 3 The debit network market is “two-sided,” meaning debit network companies compete for business from both merchants and issuers. Issuers choose which PIN and signature networks to enable on cards; merchants choose which of those networks to route sales over. Thus, debit network companies compete by (1) convincing issuers to include their networks on cards and (2) convincing merchants to route sales over their networks. Success means pleasing both sides, because effects on one side ripple over to the other. If a network’s fees go up, issuers may not choose it, lowering that network’s value to merchants. If in turn merchants opt not to use that network, it has even less value to issuers, triggering “a feedback loop of declining demand.” Ohio v. Am. Express Co., 138 S. Ct. 2274, 2281 (2018). 2 See Notice of Proposed Rulemaking, Debit Card Interchange Fees and Routing, 75 Fed. Reg. 81,722, 81,723–24 (Dec. 28, 2010); Final Rule, Debit Card and Interchange Fees and Routing, 76 Fed. Reg. 43,394, 43,396 (July 20, 2011). 3 See Board of Governors of the Federal Reserve System, 2019 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions (May 2021) at 12. 3 Case: 18-20669 Document: 00516267971 Page: 4 Date Filed: 04/05/2022 No. 18-20669