In an open meeting of the Federal Reserve Board of Governors yesterday, the Board issued a final rule capping debit interchange fees, prohibiting network exclusivity and granting merchants greater leeway in electronic debit transaction routing. This action is last step which the Fed was required to take to implement many of the requirements contained in the Durbin Amendment of the Dodd-Frank Act.
After receiving more than 11,000 comments on the Fed's original proposal that interchange fees charged by issuers with respect to electronic debit transactions be limited to 12 cents, Fed staff reconsidered the language of the Durbin Amendment and modified the previously proposed rules. Although most issuers did not favor a cap and urged the Board to consider setting standards which would result in a more discretionary review of interchange fees, this cap increase is seen by many as a win for issuers and credit unions.
In setting the new 21-cent base component of the cap, the Board determined that costs related to network connectivity, transaction monitoring, hardware and software, network processing fees, and labor required to process the transaction should be included as allowable costs which issuers could reasonably expect to recover in handling particular electronic debit transactions. The Board's Committee on Payments, Clearing, and Settlement specifically noted that the Durbin Amendment "suggests that Congress left the Board discretion" and therefore "all elements of the issuer's costs (other than those expressly prohibited from consideration) incurred in effecting an electronic debit transaction for which the Board has reliable data would be considered…." The initial version of the proposed rules only permitted recovery of an issuer's costs related to the authorization, clearing and settlement of a transaction.
In addition to the base component, the final rule also includes an adjustment of up to 5 basis points of the value of the transaction. This ad valorem component of the cap was set to "provide incentives for both issuers and merchants to take steps to reduce fraud losses." On a $100 transaction, this adjustment would increase the interchange fee cap to 26 cents.
An interim final rule was also approved yesterday which would allow issuers to add another 1 cent to the interchange fee if the issuer implements reasonable policies and procedures aimed at meeting the Board's fraud prevention standards. Comments on this additional element are to be submitted by September 30, 2011, although the Board has provided that it will take effect on an interim basis at the same time as the new interchange fee cap.
The Board also issued final rules on network exclusivity and routing restrictions. Issuers are required to enable two unaffiliated networks for each debit transaction and are also prohibited from hampering merchants' ability to direct transaction routing.
The cap on interchange fees and routing restrictions will take effect October 1, 2011, although a delayed implementation date is set for cards "with particular technological challenges" (such as certain health benefit cards). Compliance with the rules related to network exclusivity is required by April 1, 2012.