On October 1, 2011 a new Federal Reserve Board Final Rule implementing the “Durbin Interchange Amendment” to the Dodd-Frank Act will go into effect. The amendment mandates that any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction (EDT) must be “reasonable” and “proportional” to the cost incurred by the issuer with respect to the transaction. The Board’s final rule sets the interchange fee at 21 cents, an increase over its initial proposal of 12 cents. In addition to the reduction of interchange fees, the amendment also gives merchants more control over costs by requiring debit cards to have at least two partner processors, which permits merchants to opt for the least expensive. While some have expressed concerns that the savings created by the amendment do not automatically benefit merchants (not to mention consumers), the new rule marks a significant policy shift in a direction that retailers have wanted to see for years.

Background

The Durbin Interchange Amendment was designed to curb the excessive costs of processing debit card transactions, which are increasingly replacing traditional check transactions. The amendment regulates the interchange fee, the largest single component of the total transactional fee; however, it does not regulate the fees paid to the network or charged by the merchant’s bank. The Board has the authority to issue rules prescribing a calculation of the interchange fee, but may only regulate other network fees for the limited purpose of ensuring that no other network fee is improperly used to circumvent the Dodd-Frank Act.

The Board issued a proposed rule on December 16, 2010 setting the interchange fee cap at 12 cents per transaction and setting an effective date of July 21, 2011. The Board then invited public comment, resulting in an avalanche of nearly 10,000 responses. Members of the Senate also weighed in, proposing a bill (the Tester Bill) to significantly delay the implementation of the rule. The Tester Bill failed to garner sufficient support, however, and its defeat was promptly termed a “landmark achievement” by the National Retail Federation.

Following its review of public input, the Board issued its final rule on June 29, 2011 setting the transaction interchange fee cap at 21 cents, with allowable adjustments for fraud losses and fraud prevention. This marks a significant reduction in fee revenue to card issuers, who previously collected an average of 44 cents per transaction, but it also represents a significant concession to issuing banks in light of the Board’s initial proposal. In what could be seen as a further effort to pacify an irate banking community, the Board also abandoned its initial effective date of July 21, instead delaying implementation until October 1, 2011.

Summary of the Interchange Fee Cap

• Transactions Covered
  • Debit card transactions
    • Regardless of whether PIN or signature is used (includes online transactions

  • Certain "Prepaid" cards
    • Covered if the card is only one type of access vehicle (funds also accessible by check, ACH)

    • Exempted only if the card is the SOLE means of accessing the funds

• Calculation
  • 21 cents per transaction, PLUS

  • Up to 5 basis points (0.05%) as recovery for fraud losses, PLUS

  • 1 cent for fraud prevention adjustment (must comply with guidelines below)

• Fraud Prevention Guidelines
  • In order to charge additional 1 cent fraud prevention adjustment, issuer must develop and implement policies and procedures reasonably designed to:
    • Identify and prevent fraudulent transactions

    • Monitor incidence of fraudulent transactions

    • Respond appropriately to suspicious transactions

    • Secure cardholder data

Prohibitions on Network Exclusivity and Routing Restrictions

Under the final rule, card issuers and networks are also prohibited from:

• Limiting, directly or indirectly, the number of networks over which a debit transaction may be processed to fewer than two unaffiliated networks, without regard to the method of authorization that is available on each network
  • This prohibition has rolling effective dates:
    • October 1, 2011 – Payment card networks

    • April 1, 2012 – Debit card issuers

    • April 1, 2013 – Health and benefit cards

    • April 1, 2013 – General use prepaid cards

• Inhibiting the right of the merchant to route the transaction over any network enabled to process the transaction

Exemptions

The amendment exempts three types of issuers from its interchange fee cap:

• Small issuers
  • Less than $10 billion in total assets for prior calendar year

• Prepaid cards provided in connection with government programs

• Re-loadable prepaid cards or devices
  • Exemption applies if card is the exclusive access device for the underlying funds

  • If funds are held in an underlying account accessible by other means, the cards must comply with the final rule
    • Such accounts are termed "electronic transaction accounts"

Impact on Merchants

There are some foreseeable boons to merchants as a result of the amendment, besides the capping of interchange fees. One such potential benefit is that merchants have a greater control over network routing, though the routing choices may be limited to those enabled by the issuer. A separate provision of the amendment also prohibits networks from inhibiting a merchant’s effort to set a minimum dollar value requirement for the acceptance of credit cards, so long as the threshold does not discriminate between card issuers and is not greater than $10.

It is true that the Durbin Interchange Amendment only regulates the interchange fee collected by debit card issuers, and as such there is no guarantee that the savings it creates for acquiring banks and payment processors will actually be passed on to merchants. However, greater transparency and lowered costs overall means that merchants will have newfound leverage when negotiating with issuing banks and payment processors, and should seek out agreements correlating processing costs to the true interchange fee.

© 2011 Perkins Coie LLP