The Federal Reserve Board has published proposed rules implementing Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (July 21, 2010) (Dodd-Frank Act). Section 1075 amends the Electronic Fund Transfer Act to, among other things:

    • Authorize the Board to prescribe regulations on “interchange transaction fees” (i.e., fees established, charged or received by a payment card network for the purpose of compensating an issuer for its involvement in an electronic debit transaction) that issuers with of assets of $10B or more may receive or charge with respect to electronic debit transactions;
    • Provide that such fees must be “reasonable and proportional to the cost incurred by the issuer”; and
    • Require the Board to prescribe regulations in final form not later than April 21, 2011 to establish standards for reasonable and proportional fee amounts. The Board may allow for adjustment to the fee amount for fraud prevention costs.

    In addition, the Board must establish by rule certain limitations on payment card network restrictions, including prohibitions against exclusivity arrangements and routing restrictions before July 21, 2011.

    The Board proposes to address debit interchange fees and routing in a new Regulation II. Highlights of the proposal are summarized below.

    Interchange Fees

    The Board proposes two alternative interchange fee standards, one being a cost-based approach with a safe harbor (initially 7 cents per transaction) and a cap (initially 12 cents per transaction) and the other a stand-alone cap (initially 12 cents per transaction). The Board estimates that either of these standards would result in interchange fees more than 70% percent below the 2009 average, but nonetheless opines that “setting the cap at 12 cents per transaction will be sufficient to allow all but the highest-cost issuers . . . to recover through interchange transaction fees the costs incurred for authorizing, clearing, and settling electronic debit transactions.” The Board also notes that issuers have sources of revenue in addition to interchange fees, such as cardholder fees, to help cover their costs. The Board also is requesting comment on possible frameworks for adjustment to the interchange fees to reflect certain issuer costs associated with fraud prevention.

    Network Exclusivity

    The Board also proposes two approaches to implementation of the prohibition on network exclusivity. Under Alternative A, an issuer or payment card network may not restrict the number of networks over which an electronic debit transaction may be carried to fewer than two unaffiliated networks. Under Alternative B, an issuer or network may not restrict the number of networks over which an electronic debit transaction may be carried to less than two unaffiliated networks for each method of authorization the cardholder may select (e.g., signature or PIN).

    Transaction Routing

    In addition, the Board proposes to prohibit issuers and payment card networks from restricting a merchant’s ability to direct the routing of electronic debit transactions over any of the networks that an issuer has enabled to process the electronic debit transactions. For example, issuers and payment card networks may not set routing priorities that override a merchant’s routing choice.

    Scope of Rule

    In general, the proposed rule covers debit card transactions (not otherwise exempt) that debit an account and also covers both three-party and four-party systems. Throughout the proposal, the Board generally describes the interchange fee standards and the network exclusivity and routing rules in a manner that most readily applies to debit card transactions initiated at the point of sale for the purchase of goods and services and debit card transactions carried over four-party networks. The scope of the proposed rule, however, covers three-party networks and could cover ATM transactions and networks. (According to the Board, in a three-party payment system, the payment card network typically serves both as the card issuer and the merchant acquirer for purposes of accepting payment on the network; in this system, there is no explicit interchange fee.) The Board requests comment on the application of the proposed rule to ATM transactions and ATM networks, as well as to three-party networks.

    Deferred and Decoupled Debit Arrangements

    The Board also proposes to revise the Official Staff Commentary to Regulation E to address card products with both credit and debit attributes that the Board believes fall within the statutory definition of “debit card,” including:

    • “Deferred debit arrangements,” under which transactions are not posted to a cardholder’s account immediately when received by the account-holding institution for settlement, but instead funds in the account are held and made unavailable for other transactions for a specified period of time; and
    • “Decoupled debit arrangements,” in which the issuer is not the institution that holds the underlying account that will be debited and thus the issuer-cardholder relationship is “decoupled” from the cardholder’s relationship with the institution holding the cardholder’s account.

    The Board solicits comment on whether additional guidance is necessary to clarify that deferred and decoupled debit, or any similar products, qualify as debit cards for purposes of the proposed rule. Comments must be received by February 22, 2011.

    • Judy Scheiderer