Debit Networks Prepare As a Fed Clarification on Network Choice Sinks in

Debit card networks are gearing up for an expected flood of new online transactions in the wake of a Federal Reserve rule clarification that took effect more than a month ago to require that issuers enable network choice for online as well as in-person transactions.

The latest example emerged late Wednesday morning with an announcement from the Pulse network that it has extended an agreement with Fair Isaac Corp. to use FICO’s fraud-analytics technology to support e-commerce transactions in addition to those occurring at store counters. FICO’s technology supports Houston-based Pulse’s DebitProtect anti-fraud offerings. Information was not immediately available regarding the length of the extension.

The network’s move comes as electronic-funds transfer networks react to the Fed’s ruling, which the regulator issued in October. The new rule adds no new requirements but makes explicit that issuers must enable network choice for merchants on all debit transactions.

The clarification follows more than a decade after the Durbin Amendment to the Dodd-Frank Act required network choice. Merchants, however, have complained for years that issuers were not observing the rule in the case of card-not-present payments, blunting the amendment’s impact and raising sellers’ transaction costs.

Instead, many of these debit transactions were flowing to either Visa or Mastercard as issuers feared the higher fraud liability associated with transactions in which the card is not physically swiped or tapped. The new FICO agreement at Pulse is expected to help banks meet the choice requirement by managing fraud risk.

“Our enhanced fraud-detection and blocking capabilities have become more important than ever with the [Federal Reserve’s clarification] expected to shift more card-not-present transaction volume to unaffiliated debit networks such as Pulse,” said Jim Lerdal, executive vice president of operations at Pulse, in a statement. “Extending our close partnership with FICO enables us to continue enhancing our ability to prevent and respond to the latest trends in debit fraud.”

Pulse says 76% of debit card issuers that responded to a survey connected to the network’s 2023 Debit Issuer Study had improved fraud models to cut losses and reduce false positives. The study is expected to be issued later this year.