by Edmund D. Harllee
July 20, 2011, the Board of Governors of the Federal Reserve System (the
"Board") issued a final rule implementing its new Regulation II (12 CFR Part
235) with respect to debit card pricing and other requirements for debit card
transactions and systems, as required by the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the "Act"). At the same time, the Board issued
an interim final rule, with a request for comment, on standards for receiving a
fraud-prevention adjustment to interchange transaction fees.
Section 1075 of the Act amends the Electronic Fund Transfer Act by adding a new
section regarding interchange transaction fees and rules for payment card
transactions. Under the revised statute, an "interchange fee" or "interchange
transaction fee" is any fee established, charged, or received by a payment card
network for the purpose of compensating a card issuer for its involvement in an
electronic transaction in which a consumer uses a debit card. Typical debit
card transactions are withdrawals, transfers and other transactions using
automated teller machines ("ATMs"), point of sale ("POS") transactions whereby
the purchase price for goods and services is automatically debited to the
purchaser's account using a card, and prepaid cards, whether or not reloadable,
such as gift cards. In order to clear each of these transactions, one or more
intermediate processors will be used to route the transaction from its origin
(at an ATM or POS terminal, for example) to the cardholder's deposit account.
Various fees (commonly referred to as "swipe fees") are associated with this
process. An interchange fee is determined by the operator of a network used in
the clearing process and is paid to the card issuer by the person (called an
"acquirer") performing settlement services for the merchant accepting the card.
Switch fees are charged by the network to acquirers and card issuers to
compensate the network for its role in clearing the transaction. An acquirer
will charge a merchant a "merchant discount," which is the face amount of all
transactions in a particular period, such as a day, minus the amount of such
transactions actually received by the merchant, the difference being the amount
of the above types of fees and other acquirer costs. In addition to setting
fees, card processing networks will establish procedural rules for the use of
their networks, such as technical specifications for cards and rules regarding
the proper acceptance of cards.
New Regulation II contains restrictions on interchange fees, requirements with
respect to the operation of card networks, and reporting requirements for issuers
and networks. Some of these requirements are as follows:
Caps on Interchange Fees. Issuers may only charge "interchange fees"
(generally defined as set forth in Section 1075 of the Act) which are
"reasonable and proportional to the cost incurred by the issuer." If the issuer
charges an interchange fee of no more than the sum of (i) 21 cents, plus (ii) 5
basis points times the transaction amount, such fee will be deemed to be in
In a separate interim final rule and request for public comment, also published
in the Federal Register on July 20, 2011 and effective October 1, 2011, the
Board is allowing, an issuer to charge an additional 1 cent per transaction, so
long as it develops, implements and updates policies and procedures reasonably
designed to identify and prevent fraudulent electronic debit transactions.
Comments on this interim rule must be submitted by September 20, 2011. Comments
must be identified by Docket No. R-1404 and RIN No. 7100 AD 63, and may be sent
Prohibited Practices. The regulation prohibits the following practices
by a card issuer:
Limitations on Certain Restrictions. The regulation limits the following
payment card restrictions by issuers and payment card networks:
Reporting Requirements. Unless exempted (see below), issuers must file a
report with the Board setting forth, among other things, data regarding the
costs associated with debit card transactions, interchange transaction fees,
network fees, fraud-prevention costs, and transaction value, volume and type.
Records of such information must be retained for at least 5 years.
Exemptions. The following are generally exempt from Regulation II:
Except as set forth above, these requirements are effective October 1,
If you have any questions about the information in this Alert, please
contact Ed Harllee at firstname.lastname@example.org.
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