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No one's happy about Fed's interchange rule

Wednesday, the Federal Reserve issued its final rule implementing the provisions of the Durbin Amendment capping debit card interchange charges. The final rule establishes standards for debit card interchange fees and prohibits network exclusivity arrangements and routing restrictions.

This rule, Regulation II (Debit Card Interchange Fees and Routing), is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

"Debit card interchange fees are established by payment card networks and ultimately paid by merchants to debit card issuers for each electronic debit transaction. As required by the statute, the final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. This provision regarding debit card interchange fees is effective on October 1, 2011."

The final rule modifies the Fed's original proposal by increasing the fee cap from 12 cents per transaction to 21 cents and allowing an additional five basis-point charge per transaction to help cover fraud losses. The Fed also issued an interim final rule that allows a fraud-prevention adjustment of 1 cent per transaction, conditioned upon an issuer adopting effective fraud prevention policies and procedures.

According to the American Bankers Association, for an average $40 transaction, the new rate would be 24 cents, including the fraud surcharge, enabling issuers to recover twice as much as would have been allowed under the Fed's original 12-cent price cap proposal. The five basis point adjustment for fraud losses will fluctuate with the size of the transaction, and that will allow the interchange level to also fluctuate.

"While price controls remain an anathema to free market principles, the Federal Reserve has taken a significant step in reducing the harm that could have resulted from the proposed rule," said ABA President and CEO Frank Keating.

"We commend the Board for recognizing that there are a whole range of costs for which banks should receive reimbursement, including fraud losses, network fees, certain fixed costs, and fraud prevention costs. We likewise commend the Board for delaying the effective dates for compliance with this complex rule. It is clear that the Board benefited from the input of bankers, policymakers and other commentators.

"The final rule still represents a 45 percent loss in revenue that banks use to provide low-cost accounts to our customers, fight fraud, and maintain our efficient U.S. payments system. This remains a real concern to banks everywhere and the consumers and communities they serve."

In addition, the Fed included a delay in the effective date on the pricing and routing restrictions, to Oct. 1, 2011.
According to the American Banker this morning, neither bankers nor retail merchants are happy about this proposal. Without saying it outright, there were hints that merchants may sue over the Fed's action alleging it ignores the direct provisions and intent of the statute.

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