Banking Too Expensive? Blame Reg II and Dual-Network Routing

Matthew Goldman is the Founder of fintech consultancy Totavi and the Publisher of CardsFTW. He is a serial entrepreneur, having started five businesses, raised more than $30MM in capital from leading investors, and successfully participated as a founder or executive in four exits worth more than $1.6 billion.

More than a decade after the United States enacted the Durbin Amendment, the consequences of debit regulation are visible in bank fee schedules, fintech product design, and the steady erosion of what was once called “free checking.”

The popular narrative around Regulation II is familiar and politically durable:

1. Cap debit interchange. 

2. Require multiple networks. 

3. Increase routing choice. 

4. Reduce merchant costs.

Competition will then deliver consumers lower prices. But debit regulation has failed to deliver an open market, more banks, and more consumer choice. 

The dual-network routing requirement in Regulation II has quietly exacerbated that failure by undermining the primary revenue stream that funds low-cost transaction accounts, particularly for smaller banks and fintechs.^1,2 Regulation II interferes with the two-sided debit market in ways that predictably reduce issuer revenue without delivering clear consumer benefits in return. The result is fewer sustainable free accounts, more fees, and higher barriers for new entrants.

Routing Matters

When people talk about Durbin, they usually mean the interchange cap. Banks with over $10 billion in assets are limited to 21 cents plus five basis points per debit transaction, with a possible one-cent adjustment for fraud.³ That cap is explicit, easy to explain, and politically legible. The dual-network routing requirement is subtler, and more consequential.

Regulation II prohibits issuers and networks from restricting debit transactions to fewer than two unaffiliated networks and from inhibiting a merchant’s ability to choose which enabled network processes a transaction. This routing mandate applies broadly to debit transactions, not just to those issued by banks subject to the interchange cap.⁴

In practice, this means merchants and acquirers can route transactions to the lowest-cost enabled network that meets their operational requirements. Large merchants actively optimize routing based on cost, reliability, and fraud performance.

Once the routing choice is mandated, networks compete for volume by lowering fees. Since networks cannot easily lower merchant pricing without affecting issuer payouts, this competition often manifests as reduced interchange or reduced net economics for issuers.⁵ Even when a bank is technically exempt from the interchange cap, routing-based yield compression exposes it to revenue declines.

Congress tried to shield smaller banks from the cap's harm by carving them out of it. The market does not honor carve-outs when routing incentives encourage intelligent routing of payments across cheaper rails.

The Small Bank and Fintech Canary

Smaller banks, credit unions, and sponsor-bank plus fintech stacks do not have the scale, diversified revenue, and the ability to absorb regulatory shocks that large banks do.⁶ For many of these institutions, debit interchange is not a rounding error. It is a core funding mechanism for transaction accounts. It subsidizes onboarding, compliance, fraud management, customer support, card issuance, and core processing. It allows bank and fintech issuers to offer accounts with no monthly fee, no minimum balance, and no overdraft dependence.

Dual-network routing undermines that subsidy in two ways.

First, it shifts volume toward networks that offer lower interchange, particularly in single-message and card-not-present contexts. Second, it weakens issuers’ ability to negotiate economics based on value differentiation, because merchants can route transactions away from the issuer regardless of the issuer's preference.

The Federal Reserve has acknowledged that interchange fees for exempt issuers vary more across networks than they do for covered issuers. That variation makes exempt issuers more sensitive to merchant routing decisions. In other words, the routing mandate affects smaller issuers more, not less.⁷

There is no comprehensive public dataset that isolates the issuer-side revenue impact of dual routing alone. Acknowledging that gap in the literature is essential: what exists instead is a combination of Federal Reserve reporting, network disclosures, and observed program economics.

Across fintech programs with whom I work directly, the effective reduction in debit yield attributable to routing pressure is commonly in the range of 20 to 40 basis points. Where I once advised modeling gross interchange at 130-140 basis points, I now advise modeling it at 100 basis points. That number varies depending on the spend mix, merchant category distribution, and network enablement strategy. It is not universal, but for most programs it is the difference between a sustainable free account and one that requires fees, minimums, or monetization elsewhere.

Card-Not-Present, Problem Very Present

For years, much of the debate over routing has focused on card-present debit. That distinction mattered because card-not-present debit behaved differently in terms of fraud, authorization, and network capabilities.

In 2022, the Federal Reserve amended the rules for Regulation II, ensuring that routing requirements apply to card-not-present debit transactions as well.⁸ This change expanded routing pressure into ecommerce, in-app payments, subscriptions, and digital wallets, precisely where debit usage is growing fastest.

This change in regulation matters for three primary reasons:

1. Card-not-present transactions are a growing share of debit volume, especially for younger consumers and fintech-first users.

2. Fraud costs are higher in card-not-present environments, which increases issuer expenses at the same time, and routing compresses revenue.

3. Digital merchants and payment facilitators are highly sophisticated about routing optimization. When given a choice, they route aggressively.

The combined effect is a squeeze. Issuer costs go up. Issuer revenue per transaction goes down. Consumer expectations remain anchored to the concept of “free.” No amount of branding can solve that math.

Fewer Free Accounts and More Fees

We have already seen this movie.

After the Durbin Amendment took effect, free checking became significantly less common. Banks raised monthly maintenance fees, increased minimum balance requirements, and introduced new account-level charges. This conclusion is well-documented by academic research, Federal Reserve analysis, GAO reports, and industry surveys.⁹

That pattern is repeating itself in fintech.

Fintech products that once competed on being free are introducing monthly fees, paid tiers, interchange-funded rewards that only work for high spenders, and increasingly complex fee waiver structures. The market shift is not because fintechs suddenly became greedy. It is because the revenue that allowed them to subsidize free is no longer sufficient.

If you regulate away a revenue source that funded consumer access, you should expect consumer pricing to change. That is not a failure of execution. It is a failure of policy design.

The Phantom Price Reduction

The strongest political argument for debit regulation has always been that it lowers prices for consumers. The problem is that the evidence for this claim is weak relative to the evidence of increased banking costs.

Merchant surveys conducted after the Durbin implementation found that most merchants did not change their prices at all. A small fraction reported price reductions. Many merchants noted that they absorbed the savings into their margins, used them to offset other costs, or applied them selectively through promotions rather than shelf price changes.¹⁰

Academic work examining the effects of the Durbin Amendment finds clear evidence of changes in bank pricing and product availability, but limited evidence of broad consumer savings at the point of sale.

This asymmetry is not surprising: competition, labor, inventory, and strategy all influence retailer pricing. Payment acceptance costs are real, but they are rarely decisive enough to drive transparent, economy-wide price reductions. Banking fees, by contrast, adjust quickly and visibly when revenue models change.

If the policy goal is to reduce consumer prices, debit interchange is a failed instrument. If the policy goal is to support access to banking, it is actively counterproductive.

In practice, Regulation II functions less like a pro-competition policy and more like a transfer of funds from banks and consumers to merchants.

Value moves away from bank customers and toward merchants with routing power, particularly large merchants and platforms. Consumers see higher banking fees and fewer free accounts. Retail price reductions are often subtle and difficult to detect.

That outcome may be politically acceptable, but we cannot describe the limitations of Regulation II as expanding choice or openness.

A Proposal to Make Things Worse

The Credit Card Competition Act (CCCA) was reintroduced to Congress by Senator Roger Marshall (R-Kansas) and Senator Dick Durbin (D-Illinois).¹¹ The case made by Marshall and Durbin is that Americans “pay nearly $1,200 per year in swipe fees.” The bill requires that large financial institutions using a four-party network (e.g., Visa or Mastercard) must enable two competing payment networks on every credit card they issue.¹² Much like the dual-routing mandate for debit, the theory is that this will reduce the cost of merchant acceptance, and therefore the cost of goods. The two networks cannot be owned or affiliated with each other, both owned or affiliated with the issuing bank nor both the two largest networks by market share.

Practically speaking, this means that cards must carry Visa or Mastercard and a smaller network (e.g., you cannot do Visa and Mastercard). In addition, the networks cannot force merchants to choose a specific network on which to process a card, nor penalize merchants for their selection.

Potential winners in this bill would be American Express and Capital One/Discover Network. In addition, three-party networks, such as American Express, are excluded from the act when processing their own issued cards.

There may be good intentions here, but as noted above, there is no proof that dual-routing mandates cause prices to drop. 

Time for Fintechs to Talk

Fintech companies are often reluctant to engage directly on debit policy. It feels abstract, technical, and politically charged.

But if fintech wants to argue for consumer-friendly banking, it cannot ignore the economics of debit.

Debit interchange is not just a fee. It is the primary mechanism that has funded free transaction accounts in the United States. When regulation compresses it, costs reappear elsewhere, usually in ways that hurt the consumers who are the least able to absorb them.

Dual-network routing did not just increase choice. It shifted bargaining power and systematically reduced issuer yield. The evidence base for consumer price reductions does not match the certainty with which the policy is defended.

If policymakers want lower retail prices, they should address retail market structure directly. If they wish to have more banks and more consumer options, they should stop weakening the revenue models that make low-cost accounts possible.

Regulation II, particularly its routing mandate, does the opposite.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1] Federal Reserve Board, “Regulation II (Debit Card Interchange Fees and Routing)”

^[2] eCFR, “12 CFR Part 235, Debit Card Interchange Fees and Routing (Regulation II)”.
https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-235

^[3] H.R.4173 - Dodd-Frank Wall Street Reform and Consumer Protection Act, https://www.congress.gov/bill/111th-congress/house-bill/4173/text

^[4]  Federal Register, “Debit Card Interchange Fees and Routing” (Final Rule clarifying routing requirement applies to card-not-present debit; published Oct. 11, 2022).
https://www.federalregister.gov/documents/2022/10/11/2022-21838/debit-card-interchange-fees-and-routing

^[5] Mark D. Manuszak and Krzysztof Wozniak, “The Impact of Price Controls in Two-Sided Markets: Evidence from US Debit Card Interchange Fee Regulation,” FEDS Working Paper. https://www.federalreserve.gov/econres/feds/files/2017074pap.pdf

^[6]  Vladimir Mukharlyamov and Natasha Sarin, “The Impact of the Durbin Amendment on Banks, Merchants, and Consumers.”

^[7] Federal Reserve Bank of Kansas City, “Credit and Debit Card Interchange Fees Assessed to Merchants in the United States” (Aug. 2023 update). https://www.kansascityfed.org/documents/9755/CreditDebitCardInterchangeFeesAssessedMerchantsUS_August2023Update.pdf

^[8] Federal Reserve System, 12 CFR Part 235, Regulation II; Docket No. R-1748, RIN 7100-AG15 Debit Card Interchange Fees and Routing https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20221003a1.pdf

^[9] Bankrate, “Free Checking Gets Rarer as ATM Fees and Other Checking Account Fees Continue to Rise” (Sept. 24, 2012). https://www.prnewswire.com/news-releases/free-checking-gets-rarer-as-atm-fees-and-other-checking-account-fees-continue-to-rise-170961531.html

^[10] Zhu Wang, Scarlett Schwartz, and Neil Mitchell, “The Impact of the Durbin Amendment on Merchants: A Survey Study,” Federal Reserve Bank of Richmond Economic Quarterly (2014). https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_quarterly/2014/q3/pdf/wang.pdf

^[11] Marshall, Durbin Reintroduce Credit Card Competition Act Backed by President Trump https://www.marshall.senate.gov/newsroom/press-releases/marshall-durbin-reintroduce-credit-card-competition-act-backed-by-president-trump/

^[12] S.3623 - Credit Card Competition Act of 2026, https://www.congress.gov/bill/119th-congress/senate-bill/3623/text/is

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