Federal Reserve Sets Higher Interchange Debit Fee Cap, Incorporates Fraud Costs

June 30, 2011 - A final rule released by the Federal Reserve Board (Fed) sets a 21-cent transaction interchange fee cap for debit cards along with a five basis points per transaction for fraud costs. The final rule is effective Oct. 1, 2011.

The final rule implements Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act directing the Fed to set reasonable and proportional fees and rules for electronic debit transactions. Issuers with less than $10 million in assets are exempt from this regulation. The restrictions also do not apply to electronic debit transactions made using debit cards provided by government administered programs and certain re-loadable, general use pre-paid cards. 

A proposed rule released in December 2010 set a cap of 12-cents for interchange debit card fees. The Fed received more than 11,000 public comments, and made significant changes from its proposed rule. The final rule caps the base component of any interchange fee at 21-cents to include allowable costs such as authorization, clearance and settlement, network fees and other costs for activities directly related to the debit card program such as software and hardware costs.

Fraud losses were considered separately by the Fed in developing the final rule. As such, the final rule provides an allowance for fraud losses as an ad valorem component of 5 basis points of the transaction value. The Fed’s intent with this fraud component is to provide issuers with incentives to take the appropriate steps to identify and prevent fraudulent transactions.

While the Fed doesn’t have the authority to mandate a two-tiered structure to recognize the exempt issuers under $10 billion in assets, the Fed intends to monitor and report to Congress on the effectiveness of the exemption for small issuers. NASCUS expressed its concern to the Fed and to Congress about the small issuer exemption and the importance of ensuring a meaningful exemption for issuers under $10 billion in assets, as intended by Congress. During the Fed Board’s meeting on June 29, there was a commitment to ongoing monitoring of the impact of the final rule on smaller issuers, and the ability to make changes if warranted in the future.

Regarding the network exclusivity and routing restrictions part of this rulemaking, the final rule prohibits an issuer or payment card network from restricting the number of payment card networks on which an electronic debit transaction may be processed to fewer than two unaffiliated networks, regardless of the method of authentication.

To view the final rule, follow this link to the Fed’s website.