December 17, 2010

Proposed Rules on Debit Card Interchange Fees

The Board of Governors of the Federal Reserve System met yesterday with staff to discuss draft rules which would implement Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (often referred to as the "Durbin Amendment") relating to debit card interchange fees.  The live webcast of the meeting attracted nearly 3,000 viewers. 

Among other things, the Durbin Amendment provides that issuers may only receive or charge interchange fees on electronic debit transactions which are "reasonable and proportional to the cost incurred by the issuer with respect to the transaction."  Final regulations establishing standards for determining whether such fees are reasonable and proportional must be put in place by the Board no later than April 2011.

Using data collected from surveys of industry participants, two alternative methods for implementing this "reasonable and proportional" standard are now proposed for public comment.  Each method includes a specific cap on debit interchange fees.  The first alternative would require a covered issuer to (a) calculate its "average variable cost" for authorization, clearance and settlement of electronic debit transactions, subject to a cap of 12 cents per transaction, or (b) rely on a 7 cent per transaction safe harbor.  The second alternative would simply establish a 12 cent per transaction cap applicable to all covered issuers. 

The Durbin Amendment expressly provides that issuers which have assets of less than $10,000,000,000 are to be exempted from the Board's regulations, as well as debit card interchange fees assessed with respect to government-administered payment programs and reloadable prepaid cards. 

In response to concern expressed by Governor Kevin M. Warsh (New York) that these alternatives were establishing prices rather than setting standards, staff noted that these alternatives were drafted so as to "avoid negative economic incentives and to minimize administrative burden."  By setting caps, covered issuers would be incentivized to increase efficiency of the electronic debt systems and reduce costs, and regulators would not be faced with case-by-case analyses of debit card interchange fees.

Staff clarified that the transactional costs which were considered in drafting the proposed Regulation II included only those expressly authorized by the Durbin Amendment (i.e., costs of an issuer related to the authorization, clearing and settlement of the underlying debit transaction).  Costs affiliated with providing cardholder rewards, producing debit cards, overhead and responding to cardholder inquiries would not be recognized as allowable under the proposed rules.  Further, although the Durbin Amendment expressly authorizes adjustments to interchange fees to account for issuer costs related to fraud prevention, proposed rules regarding such adjustment are not yet proposed.

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