Board of Governors of the Federal Reserve System.
Notice of proposed rulemaking.
The Board is requesting public comment on proposed new Regulation II, Debit Card Interchange Fees and Routing, which: establishes standards for determining whether an interchange fee received or charged by an issuer with respect to an electronic debit transaction is reasonable and proportional to the cost incurred by the issuer with respect to the transaction; and prohibits issuers and networks from restricting the number of networks over which an electronic debit transaction may be processed and from inhibiting the ability of a merchant to direct the routing of an electronic debit transaction to any network that may process such transactions. With respect to the interchange fee standards, the Board is requesting comment on two alternatives that would apply to covered issuers: an issuer-specific standard with a safe harbor and a cap; or a cap applicable to all such issuers. The proposed rule would additionally prohibit circumvention or evasion of the interchange fee limitations (under both alternatives) by preventing the issuer from receiving net compensation from the network (excluding interchange fees passed through the network). The Board also is requesting comment on possible frameworks for an adjustment to interchange fees for fraud-prevention costs. With respect to the debit-card routing rules, the Board is requesting comment on two alternative rules prohibiting network exclusivity: one alternative would require at least two unaffiliated networks per debit card, and the other would require at least two unaffiliated networks for each type of transaction authorization method. Under both alternatives, the issuers and networks would be prohibited from inhibiting a merchant's ability to direct the routing of an electronic debit transaction over any network that may process such transactions.
Comments must be submitted by February 22, 2011.
You may submit comments, identified by Docket No. R–1404 and RIN No. 7100 AD63, by any of the following methods:
All public comments are available from the Board's Web site at
Public comments may also be viewed electronically or in paper in Room MP–500 of the Board's Martin Building (20th and C Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
Dena Milligan, Attorney (202/452–3900), Legal Division, David Mills, Manager and Economist (202/530–6265), Division of Reserve Bank Operations & Payment Systems, Mark Manuszak, Senior Economist (202/721–4509), Division of Research & Statistics, or Ky Tran-Trong, Counsel (202/452–3667), Division of Consumer & Community Affairs; for users of Telecommunications Device for the Deaf (TDD) only, contact (202/263–4869); Board of Governors of the Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) (Pub. L. 111–203, 124 Stat. 1376 (2010)) was enacted on July 21, 2010. Section 1075 of the Dodd-Frank Act amends the Electronic Fund Transfer Act (“EFTA”) (15 U.S.C. 1693
EFTA Section 920 provides that, effective July 21, 2011, the amount of any interchange transaction fee that an issuer receives or charges with respect to an electronic debit transaction must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.
Under EFTA Section 920, the Board may allow for an adjustment to an interchange transaction fee to account for an issuer's costs in preventing fraud, provided the issuer complies with the standards to be established by the Board relating to fraud-prevention activities. EFTA Section 920 also authorizes the Board to prescribe regulations in order to prevent circumvention or evasion of the restrictions on interchange transaction fees, and specifically authorizes the Board to prescribe regulations regarding any network fee to ensure that such a fee is not used to directly or indirectly compensate an issuer and is not used to circumvent or evade the restrictions on interchange transaction fees.
EFTA Section 920 exempts certain issuers and cards from the restrictions on interchange transaction fees described above. The restrictions on interchange transaction fees do not apply to issuers that, together with affiliates, have assets of less than $10 billion. The restrictions also do not apply to electronic debit transactions made using two types of debit cards—debit cards provided pursuant to government-administered payment programs and reloadable, general-use prepaid cards not marketed or labeled as a gift card or certificate. EFTA Section 920 provides, however, that beginning July 21, 2012, the exemptions from the interchange transaction fee restrictions will not apply for transactions made using debit cards provided pursuant to a government-administered payment program or made using certain reloadable, general-use prepaid cards if the cardholder may be charged either an overdraft fee or a fee for the first
In addition to rules regarding restrictions on interchange transaction fees, EFTA Section 920 also requires the Board to prescribe certain rules related to the routing of debit card transactions. First, EFTA Section 920 requires the Board to prescribe rules that prohibit issuers and payment card networks (“networks”) from restricting the number of networks on which an electronic debit transaction may be processed to one such network or two or more affiliated networks. Second, that section requires the Board to prescribe rules prohibiting issuers and networks from inhibiting the ability of any person that accepts debit cards from directing the routing of electronic debit transactions over any network that may process such transactions.
EFTA Section 920 requires the Board to establish interchange fee standards and rules prohibiting circumvention or evasion no later than April 21, 2011. These interchange transaction fee rules will become effective on July 21, 2011. EFTA Section 920 requires the Board to issue rules that prohibit network exclusivity arrangements and debit card transaction routing restrictions no later than July 21, 2011, but does not establish an effective date for these rules.
Over the past several decades, there have been significant changes in the way consumers make payments in the United States. The use of checks has been declining since the mid-1990s as checks (and most likely some cash payments) are being replaced by electronic payments (
In general, there are two types of debit card transactions: PIN (personal identification number)-based and signature-based.
Networks that process debit card transactions exhibit two main organizational forms, often referred to as three-party and four-party systems.
In a typical three-party system, the network itself acts as both issuer and acquirer. Thus, the three parties involved in a transaction are the cardholder, the merchant, and the network. Three-party systems are also referred to as “closed,” because the issuer and acquirer are generally the same institution—they have, thus, tended to be closed to outside participants. The three-party model is used for some prepaid card transactions, but not for other debit card transactions.
In a typical four-party system transaction, the cardholder initiates a purchase by providing his or her card or card information to a merchant. In the case of PIN debit, the cardholder also enters a PIN. An electronic authorization request for a specific dollar amount and the cardholder's account information is sent from the merchant to the acquirer to the network, which forwards the request to the card-issuing institution.
The clearing of a debit card transaction is effected through the authorization message (for PIN debit systems) or a subsequent message (for signature debit systems). The issuer posts the debits to the cardholders' accounts based on these clearing messages. The network calculates and communicates to each issuer and acquirer its net debit or credit position to settle the day's transactions. The interbank settlement generally is effected through a settlement account at a commercial bank, or through automated clearinghouse (ACH) transfers. The acquirer credits the merchant for the value of its transactions, less the merchant discount, as discussed below.
There are various fees associated with debit card transactions. The interchange fee is set by the relevant network and paid by the merchant acquirer to the issuer. Switch fees are charged by the network to acquirers and issuers to compensate the network for its role in
When PIN debit networks were first introduced, some of them structured interchange fees in a manner similar to ATM interchange fees.
During the 1990s, most PIN debit networks employed fixed per-transaction interchange fees. Beginning around 2000, many PIN debit networks incorporated an
In general, interchange fees for signature debit networks, like those of credit card networks, combine an
In addition to setting the structure and level of interchange fees and other fees to support network operations, each card network specifies operating rules that govern the relationships between network participants. Although the network rules explicitly govern the issuers and acquirers, merchants and processors also may be required to comply with the network rules or risk losing access to that network. Network operating rules cover a broad range of activities, including merchant card acceptance practices, technological specifications for cards and terminals, risk management, and determination of transaction routing when multiple networks are available for a given transaction.
Since enactment of the Dodd-Frank Act, Board staff has held numerous meetings with debit card issuers, payment card networks, merchant acquirers, merchants, industry trade associations, and consumer groups. In general, those parties provided information regarding electronic debit transactions, including processing flows for electronic debit transactions, structures and levels of current interchange transaction fees and other fees charged by the networks, fraud-prevention activities performed by various parties to an electronic debit transaction, fraud losses related to electronic debit transactions, routing restrictions, card-issuing arrangements, and incentive programs for both merchants and issuers. Interested parties also provided written submissions.
On September 13, 2010, the Board distributed three surveys to industry participants (an issuer survey, a network survey, and a merchant acquirer survey) designed to gather information to assist the Board in developing this proposal. Industry participants, including payment card networks, trade groups and individual firms from both the banking industry and merchant community, commented on preliminary versions of the issuer and network surveys, through both written submissions and a series of drop-in calls. In response to the comments, the two surveys were modified, as appropriate, and an additional survey of merchant acquirers was developed.
The card issuer survey was distributed to 131 financial organizations that, together with affiliates, have assets of $10 billion or more.
In general, the surveys requested information on signature debit, PIN debit and prepaid card operations and, for each card type, the costs associated with those card types, interchange fees and other fees established by networks, fraud losses, fraud-prevention and data-security activities, network exclusivity arrangements and debit-card routing restrictions. The Board compiled the survey responses in a central database, and reviewed the submissions for completeness, consistency, and anomalous responses. As indicated above, the response rates for the three surveys were high; however, some respondents were not able to provide information on all data elements requested in the surveys. For example, most respondents provided cost data at an aggregate level, but some were unable to provide cost data at the level of granularity requested in the surveys. In addition, there were inconsistencies in some data that were reported within individual responses and across responses. Therefore, each of the summary statistics reported below may be based on a subset of the responses received for each of the three surveys. The reporting period for each survey was calendar year 2009, unless otherwise noted.
Networks also reported providing discounts and incentives to issuers and acquirers/merchants. Issuers were provided discounts and incentives totaling $0.7 billion, or an average of 2.0 cents per transaction, while acquirers
Discounts and incentives effectively reduce the per-transaction amount of network fees each party pays. After adjusting for discounts and incentives, the average net network fee per transaction is 4.5 cents for issuers and 4.1 cents for acquirers.
Under Alternative 1, an issuer could comply with the standard for interchange fees by calculating its allowable costs and ensuring that, unless it accepts the safe harbor as described below, it did not receive any interchange fee in excess of its allowable costs through any network. An issuer's allowable costs would be those costs that are attributable to the issuer's role in authorization, clearance, and settlement of the transaction and that vary with the number of transactions sent to an issuer within a calendar year (variable costs). The issuer's allowable costs incurred with respect to each transaction would be the sum of the allowable costs of all electronic debit transactions over a calendar year divided by the number of electronic debit transactions on which the issuer received or charged an interchange transaction fee in that year. The issuer-specific determination in Alternative 1 would be subject to a cap on the amount of any interchange fee an issuer could receive or charge, regardless of the issuer's allowable cost calculation. The Board proposes to set this cap at an initial level of 12 cents per transaction. Alternative 1 also would permit an issuer to comply with the regulatory standard for interchange fees by receiving or charging interchange fees that do not exceed the safe harbor amount, in which case the issuer would not need to determine its maximum interchange fee based on allowable costs. The Board proposes to set the safe harbor amount at an initial level of 7 cents per transaction. Therefore, under Alternative 1, each payment card network would have the option of setting interchange fees either (1) at or below the safe harbor or (2) at an amount for each issuer such that the interchange fee for that issuer does not exceed the issuer's allowable costs, up to the cap.
Under Alternative 2, an issuer would comply with the standard for interchange fees as long as it does not receive or charge a fee above the cap, which would be set at an initial level of 12 cents per transaction. Each payment card network would have to set interchange fees such that issuers do not receive or charge any interchange fee in excess of the cap.
In general, the Board's proposed rule covers debit card transactions (not otherwise exempt) that debit an account. The Board's proposed rule 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. The Board requests comment on the application of the proposed rule to ATM transactions and ATM networks, as well as to three-party networks.
Under EFTA Section 920(c)(8), the term “interchange transaction fee” is defined as a fee charged “for the purpose of compensating an issuer.” Traditionally, however, the interchange fee for ATM transactions is paid by the issuer and flows to the ATM operator. Thus, the proposed interchange transaction fee standards would not apply to ATM interchange fees and would not constrain the current level of such fees.
The network-exclusivity prohibition and routing provisions, however, would directly affect the operations of ATM networks if these provisions were applied to such networks. Issuers would be required to offer ATM cards that can be accepted on at least two unaffiliated networks, and the ATM operator would have the ability to choose the network through which transactions would be routed. As discussed below, in point-of-sale transactions, these provisions improve the ability of a merchant to select the network that
If ATM networks and ATM transactions are included within the scope of the rule, the Board requests comment on how to implement the network exclusivity provision. For example, if the Board requires two unaffiliated networks for each authorization method, should it explicitly require an issuer to ensure that ATM transactions may be routed over at least two unaffiliated networks? Should the Board state that one point-of-sale debit network and one ATM-only network would not satisfy the exclusivity prohibition under either proposed alternative? The Board also specifically requests comment on the effect of treating ATM transactions as “electronic debit transactions” under the rule on small issuers, as well as the cardholder benefit, if any, of such an approach.
Both the statutory and proposed definition of “interchange transaction fee” would cover the part of the merchant discount in a three-party system that is used to compensate the network for its role as issuer. If a three-party network apportioned its entire merchant discount to its roles as network or merchant acquirer, however, the interchange fee would, in effect, be zero. This outcome, coupled with the fact the statute does not restrict fees an acquirer charges a merchant, may present practical difficulties in limiting the amount of a merchant discount charged in a three-party network. The Board requests comment on the appropriate way to treat three-party networks and on any specific clarifications with respect to such fees that should be provided in the regulation.
In addition, the Board requests comment on how the network exclusivity and routing provisions should be applied to three-party systems. If the limitations on payment card network restrictions under § 235.7 were applied to a three-party system, debit cards issued by the network would be required to be capable of being routed through at least one unaffiliated payment card network in addition to the network issuing the card, and the network may not inhibit a merchant's ability to route a transaction to any other unaffiliated network(s) enabled on a debit card. For example, under Alternative A for the network exclusivity provisions, the payment card network would be required to add an unaffiliated network and arrange for the unaffiliated debit network to carry debit transactions, for ultimate routing
The Board recognizes that the nature of a three-party system could be significantly altered by any requirement to add one or more unaffiliated payment card networks capable of carrying electronic debit transactions involving the network's cards. Nonetheless, the statute does not provide any apparent basis for excluding three-party systems from the scope of the provisions of EFTA Section 920(b). The Board requests comment on all aspects of applying the proposed rule to three-party payment systems, including on any available alternatives that could minimize the burden of compliance on such systems.
This section sets forth the authority and purpose for the proposed rule.
The proposed rule provides definitions for many of the terms used in the rule. As noted throughout this section, many of the definitions follow the EFTA's definitions. The proposed rule also provides definitions for terms not defined in EFTA Section 920. Some of these definitions are based on existing statutory or regulatory definitions, while others are based on terminology in the debit card industry. The Board requests comment on all of the terms and definitions set out in this section. In particular, the Board requests comment on any terms used in the proposed rule that a commenter believes are not sufficiently clear or defined.
EFTA Section 920(c) defines the term “debit card” in reference to a card, or other payment code or device, that is used “to debit an asset account (regardless of the purpose for which the account is established) * * *.” That section, however, does not define the terms “asset account” or “account.” EFTA Section 903(2) defines the term “account” to mean “a demand deposit, savings deposit, or other asset account (other than an occasional or incidental credit balance in an open end credit plan as defined in section 103(i) of [the EFTA]), as described in regulations of the Board established primarily for personal, family, or household purposes, but such term does not include an account held by a financial institution pursuant to a
Similar to EFTA Section 903(2), proposed § 235.2(a) defines “account” to include a transaction account (which includes a demand deposit), savings, or other asset account. The proposed definition, however, differs from EFTA Section 903(2) because EFTA Section 920(c) does not restrict the term debit card to those cards, or other payment codes or devices, that debit accounts established for a particular purpose. Accordingly, the proposed definition includes both an account established primarily for personal, family, or household purposes and an account established for business purposes. For the same reason, the proposed definition of “account” includes an account held by a financial institution under a
The proposed definition of “account” is limited to accounts that are located in the United States. The Board does not believe it is appropriate to apply EFTA Section 920's limitations to foreign issuers or accounts, absent a clear indication from Congress to do so.
Proposed § 235.2(b) defines the term “acquirer.” Within the debit card industry, there are numerous models for acquiring transactions from merchants, and the term “acquirer” may not always be used to refer to the entity that holds a merchant's account. In some acquiring relationships, an institution performs all the functions of the acquirer (
The Board is proposing to limit the term “acquirer” to entities that “acquire” (or buy) the electronic debit transactions from the merchant. Proposed § 235.2(b) defines “acquirer” as a person that “contracts directly or indirectly with a merchant to receive and provide settlement for the merchant's electronic debit transactions over a payment card network.” Proposed § 235.2(b) limits the term to those entities serving a financial institution function with respect to the merchant, as distinguished from a processor function, by stipulating that the entity “receive and provide settlement for the merchant's” transactions. Proposed § 235.2(b) also explicitly excludes entities that solely process transactions for the merchant from the term “acquirer.”
Proposed § 235.2(b), however, takes into consideration the fact that the degree of involvement of the entity settling with the merchant varies under different models by defining “acquirer” as a person that “contracts directly or indirectly with a merchant.”
Proposed §§ 235.2(c) and (e) define the terms “affiliate” and “control.” EFTA Section 920(c)(1) defines the term “affiliate” as “any company that controls, is controlled by, or is under common control with another company.” The proposed rule incorporates the EFTA's definition of “affiliate.”
Although the EFTA's definition of affiliate is premised on control, the EFTA does not define that term. The Board is proposing to adopt a definition of “control” that is consistent with definitions of that term in other Board regulations.
Proposed § 235.2(d) defines the term “cardholder” as the person to whom a debit card is issued. Proposed comment 2(d) clarifies that if an issuer issues a debit card for use to debit a transaction, savings, or other similar asset account, the cardholder usually will be the account holder. In some cases, however, such as with a business account, there may be multiple persons who have been issued debit cards and are authorized to use those debit cards to debit the same account. Each employee issued a card would be considered a cardholder. In the case of a prepaid card, the cardholder is the person that purchased the card or a person who received the card from the purchaser.
EFTA Section 920(c)(2) defines the term “debit card” as “any card, or other payment code or device, issued or approved for use through a payment card network to debit an asset account (regardless of the purpose for which the account is established), whether authorization is based on signature, PIN, or other means.” The term includes a general-use prepaid card, as that term was previously defined by the gift card provisions of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (Credit Card Act).
Proposed § 235.2(f) defines the term “debit card” and generally tracks the definition set forth in EFTA Section 920. Thus, proposed § 235.2(f)(1) generally defines the term “debit card” as “any card, or other payment code or device, issued or approved for use through a payment card network to debit an account, regardless of whether authorization is based on signature, personal identification number (PIN), or other means.” In addition, the term applies regardless of whether the issuer holds the underlying account. This is consistent with the statutory definition of “debit card” which does not require that an issuer also hold the account debited by the card, code, or device. Proposed § 235.2(f)(2) further provides that “debit card” includes a “general-use prepaid card.”
Proposed comment 2(f)–1 clarifies that the requirements of this part generally apply to any card, or other payment code or device, even if it is not issued in card form. That is, the rule applies even if a physical card is not issued or if the device is issued with a form factor other than a standard-sized card. For example, an account number or code that could be used to access underlying funds in an account would be considered a debit card under the rule (except when used to initiate an ACH transaction). Similarly, the term “debit card” would include a device with a chip or other embedded mechanism that links the device to funds held in an account, such as a mobile phone or sticker containing a contactless chip that enables the cardholder to debit an account.
Proposed comments 2(f)–2 and –3 address deferred and decoupled debit cards, two types of card products that the Board believes fall within the statutory definition of “debit card” notwithstanding that they may share both credit and debit card-like attributes. Under a deferred debit arrangement, transactions are not immediately posted to a cardholder's account when the card transaction is received by the account-holding institution for settlement, but instead the funds in the account are held and made unavailable for other transactions for a specified period of time.
Proposed comment 2(f)–3 addresses decoupled debit arrangements in which the issuer is not the institution that holds the underlying account that will be debited. That is, the issuer-cardholder relationship is “decoupled” from the cardholder's relationship with the institution holding the cardholder's account. In these “decoupled debit” arrangements, transactions are not posted directly to the cardholder's account when the transaction is presented for settlement with the card issuer. Instead, the issuer must send an ACH debit instruction to the account-holding institution in the amount of the transaction in order to obtain the funds from the cardholder's account. As noted above, the term “debit card” includes a card, or other payment code or device, that debits an account, regardless of whether the issuer holds the account. Accordingly, the Board believes it is appropriate to treat decoupled debit cards as debit cards subject to the requirements of this part.
Moreover, the Board understands that there may be incentives for some issuers to design or offer products with “credit-like” features in an effort to have such products fall outside the scope of the interchange fee restrictions to be implemented by this rulemaking. For example, an issuer may offer a product that would allow the cardholder the option at the time of the transaction to choose when the cardholder's account will be debited for the transaction. Any attempt to classify such a product as a credit card is limited by the prohibition against compulsory use under the EFTA and Regulation E. Specifically, the EFTA and Regulation E provide that no person may condition the extension of credit to a consumer on such consumer's repayment by means of preauthorized electronic fund transfers.
The proposed rule also sets forth certain exclusions from the term “debit card” in § 235.2(f)(3) to clarify the definition. Proposed § 235.2(f)(3)(i) clarifies that retail gift cards that can be used only at a single merchant or affiliated group of merchants are not subject to the requirements of this part. The Board believes that by including an explicit reference to general-use prepaid cards in the statutory definition of “debit card,” Congress did not intend the interchange fee restrictions to apply to other types of prepaid cards that are accepted only at a single merchant or an affiliated group of merchants. These cards are generally used in a closed environment at a limited number of locations and are not issued for general use.
Proposed comment 2(f)–5 clarifies that two or more merchants are affiliated if they are related by either common ownership or common corporate control. For purposes of the definition of “debit card,” the Board views franchisees to be under common corporate control if they are subject to a common set of corporate policies or practices under the terms of their franchise licenses. Accordingly, gift
Proposed § 235.2(f)(3)(ii) expands the statutory exclusion for paper checks to exempt any “check, draft, or similar paper instrument, or electronic representation thereof” from the definition of “debit card.” This adjustment is proposed because in many cases paper checks may be imaged and submitted electronically for presentment to the paying bank. Proposed comment 2(f)–6 further clarifies that a check that is provided as a source of information to initiate an ACH debit transfer in an electronic check conversion transaction is not a debit card.
Finally, proposed § 235.2(f)(iii) would generally exclude ACH transactions from the requirements of this part. Specifically, the proposed exclusion provides that an account number is not a debit card when used to initiate an ACH transaction from a person's account. The Board believes that this exclusion is necessary to clarify that ACH transactions initiated by a person's provision of a checking account number are not “electronic debit transactions” for purposes of the network exclusivity and routing provisions under § 235.7. However, this exclusion is not intended to cover a card, or other payment code or device, that is used to directly or indirectly initiate an ACH debit from a cardholder's account, for example, under a decoupled debit arrangement.
The statutory definition of “debit card” includes a “general-use prepaid card” as that term is defined under EFTA Section 915(a)(2)(A).
The proposed definition of “general-use prepaid card” generally tracks the definition as it appears under EFTA Section 915(a)(2)(A), with modifications to simplify and clarify the definition.
The inclusion of general-use prepaid cards in the definition of “debit card” under EFTA Section 920(c)(2)(B) refers only to the term “general-use prepaid card” as it is defined in EFTA Section 915(a)(d)(A), and does not incorporate the separate exclusions to that term that are set forth in the gift card provisions of the Credit Card Act.
Proposed comment 2(i)–1 clarifies that a card, or other payment code or device, is “redeemable upon presentation at multiple, unaffiliated merchants” if, for example, the merchants agree, pursuant to the rules of the payment network, to honor the card, or other payment code or device, if it bears the mark, logo, or brand of a payment network. (
Proposed comment 2(i)–2 provides that a mall gift card, which is generally intended to be used or redeemed at participating retailers located within the same shopping mall or in some cases, within the same shopping district, would be considered a general-use prepaid card if it is also network-branded, which would permit the card to be used at any retailer that accepts that card brand, including retailers located outside the mall.
In some cases, a group of unaffiliated merchants may jointly offer a prepaid card that is only redeemable at the participating merchants. For example, “selective authorization” cards may be offered to encourage sales within a shopping mall or district or at merchants located in the same resort. Selective authorization cards generally are issued by a financial institution or member of a card network, rather than a program sponsor as in the case of many retail gift card programs. Transactions made using such cards are authorized and settled over the payment card networks just like other general-use prepaid cards. In addition, interchange transaction fees may be charged in connection with these cards because they are processed over a payment card network.
Selective authorization programs enable a merchant to offer gift cards to its customers and ensure that card funds are spent only within the participating merchant(s) without incurring the costs of setting up a separate program. There may be little difference between these programs and closed-loop retail gift card programs operated by a single retailer, but for the fact that these cards are accepted at merchants that are unaffiliated. However, requiring these selective authorization cards to comply with the network exclusivity and routing restrictions could be problematic and costly for the participating merchants with little corresponding benefit. Accordingly, comment is requested on whether a prepaid card that is accepted at a limited number of unaffiliated participating merchants and
EFTA Section 920(a)(7)(C) defines a “designated automated teller machine network” as either (1) all ATMs identified in the name of the issuer or (2) any network of ATMs identified by the issuer that provides reasonable and convenient access to the issuer's customers. Proposed § 235.2(g) implements this definition substantially as set forth in the statute.
The Board is also proposing to clarify the meaning of “reasonable and convenient access,” as that term is used in § 235.2(g)(2). Proposed comment 2(g)–1 provides that an issuer provides reasonable and convenient access, for example, if, for each person to whom a card is issued, the issuer provides access to an ATM within the metropolitan statistical area (MSA) in which the last known address of the person to whom the card is issued is located, or if the address is not known,
Furthermore, because a debit card includes a general-use prepaid card, for which the issuer may not have the address of the person using the card, the proposed comment provides that the issuer may use the location of where the card was first purchased or issued. The issuer of a general-use prepaid card may not have address information because either the person to whom the card is issued is not the ultimate user of the card, such as in the case of a gift card, or the issuer does not collect address information for the product. In these instances, the only location known to the issuer is the place where the card was first purchased or issued, and the issuer may assume that the person using the card is located in that same area. The Board also requests comment on whether additional clarification or guidance is needed for how an issuer may identify a network of automated teller machines that provides reasonable and convenient access to the issuer's cardholders.
EFAT section 920(c)(5) defines the term “electronic debit transaction” as “a transaction in which a person uses a debit card.” The Board's proposed definition in § 235.2(h) adds two clarifying provisions.
First, proposed § 235.2(h) clarifies that the term “electronic debit transaction” is a transaction in which a person uses a debit card as “a form of payment.” The statute defines payment card network, in part, as a network a person uses to accept a debit card as a form of payment. For clarity, the Board proposes to incorporate that requirement into the definition of electronic debit transaction.
Second, the statutory definition is silent as to whether use of the debit card must occur within the United States. Proposed § 235.2(h) limits electronic debit transactions to those transactions where a person uses a debit card for payment in the United States. The Board found no indication in the statute that Congress meant to apply the interchange provisions extraterritorially. Moreover, if a person uses a debit card outside the United States, even if such use is to debit an account located in the United States, the amount of the interchange transaction fees the issuer may receive often is determined by the network rules for cross-border transactions or the laws or regulations of the country in which the merchant is located. Therefore, electronic debit transactions subject to the proposed rule are those that occur at a merchant located within the United States.
Proposed comment 2(h)–1 explains that the term “electronic debit transaction” includes transactions in which a person uses a debit card other than for the initial purchase of goods or services. For example, after purchasing goods or services, a person may decide that such goods and services are unwanted or defective. If permitted by agreement with the merchant, that person may return the goods or cancel the services and receive a credit using the same debit card used to make the original purchase. Proposed § 235.2(h) covers such transactions. The Board understands, however, that issuers typically do not receive interchange fees for these transactions. Proposed comment 2(h)–2 clarifies that transactions in which a person uses a debit card to purchase goods or services and also receives cash back from the merchant are electronic debit transactions.
Proposed § 235.2(j) generally incorporates the EFTA Section 920(c)(8)'s definition of “interchange transaction fee” that defines the term as “any fee established, charged or received by a payment card network for the purpose of compensating an issuer for its involvement in an electronic debit transaction.” A payment card network may determine interchange transaction fees according to a schedule that is widely applicable, but also may permit bilateral negotiation of fees between issuers and acquirers or merchants, as well as specialized interchange transaction fee arrangements.
As discussed above, interchange transaction fees today are used to reimburse issuers for their involvement in electronic debit transactions by transferring value between acquirers and issuers. In general, payment card networks establish the interchange transaction fees, although the issuers are receiving the fees by reducing the amount remitted for a particular transaction by the amount of that transaction's interchange transaction fee. Therefore, the merchants or acquirers are paying the amount of the interchange transaction fee. The proposed definition, however, clarifies that interchange transaction fees are paid by merchants or acquirers.
Proposed comment 2(j)–2 restates the rule that interchange fees are limited to those fees established, charged or received by a payment card network for the purpose of compensating the issuer, and not for other purposes, such as to compensate the network for its services to acquirers or issuers.
Proposed § 235.2(k) incorporates the statute's definition of “issuer” that defines the term as “any person who issues a debit card or the agent of such person with respect to the card.” Proposed § 235.2(k) follows the statutory definition, but removes the phrase “or the agent of such person with respect to the card.” Because agents are, as a matter of law, held to the same restrictions with respect to the agency relationship as their principals, the Board does not believe that removing this clause will have a substantive effect.
Issuing a debit card is the process of providing a debit card to a cardholder. The issuing process generally includes establishing a direct contractual relationship with the cardholder with respect to the card and providing the card directly or indirectly to the cardholder. The debit card provided may or may not have the issuer's name on the card. For example, a prepaid card may be issued by a bank that has partnered with another entity (
Similar to merchant-acquirer relationships, the issuer-cardholder relationship varies. Proposed comments 2(k)–2 through 2(k)–5 clarify which entity is the issuer in the most prevalent issuing arrangements. In the simple four-party system, the financial
In contrast, in a three-party system, the network typically provides the debit card or prepaid card directly to the cardholder or through an agent. Generally, the network also has a direct contractual relationship with the cardholder. Notwithstanding the other roles the network may have with respect to the transaction, the network is considered an issuer under proposed § 235.2(k) because it provides the card to the cardholder, and may also be the account-holding institution.
A variation of the issuer relationship within the four-party and three-party systems involves the licensing or assignment of Bank Identification Numbers (BINs), which are numbers assigned to financial institutions by the payment card networks for purposes of issuing cards. Some members of payment card networks permit other entities that are not members to issue debit cards using the member's BIN. The entity permitting such use is referred to as the “BIN sponsor.” The entity using the BIN sponsor's BIN (“affiliate member”) typically holds the account of the cardholder and directly or indirectly provides the cardholder with the debit card. The cardholder's direct relationship is with the affiliate member. Proposed comment 2(k)–4.i and .ii describes two circumstances involving BIN sponsorship arrangements and provides guidance on the entity that would be considered to be the issuer in those circumstances.
Another variant of the issuer relationship within the four-party and three-party systems is the decoupled debit card arrangement. In a decoupled debit card arrangement, a third-party service provider (which may or may not be a financial institution) issues a debit card to the cardholder and enters into a contractual relationship with the cardholder with respect to the decoupled debit card. Therefore, proposed comment 2(k)–5 clarifies that the entity directly or indirectly providing the cardholder with the card is considered the issuer under proposed § 235.2(k).
Some issuers outsource to a third party some of the functions associated with issuing cards and authorizing, clearing, and settling debit card transactions. A third party that performs certain card-issuance functions on behalf of an issuer would be subject to the same restrictions as the issuer in the performance of those functions. An issuer that outsources certain issuing functions retains the underlying relationship with the cardholder and should retain responsibility for complying with the rule's requirements as they pertain to issuers. Therefore, the Board's proposed definition of “issuer” does not include the phrase “or agent of the issuer with respect to such card.” The Board requests comment on whether there are circumstances in which an agent of an issuer also should be considered to be an issuer within the rule's definition.
Proposed § 235.2(k)'s definition of “issuer” applies throughout this part, except for the provisions exempting small issuers.
The Board requests comment on all aspects of the issuer definition. The Board specifically requests comment on whether the appropriate entity is deemed to be the issuer in relation to the proposed examples.
The statute does not define the term “merchant.” The term is used throughout the proposed rule, and the Board is proposing to define a merchant as a person that accepts a debit card as payment for goods or services.
EFTA Section 920(c)(11) defines the term “payment card network” as (1) an entity that directly, or through licensed members, processors, or agents, provides the proprietary services, infrastructure, and software that route information and data to conduct debit card or credit card transaction authorization, clearance, and settlement, and (2) that a person uses in order to accept as a form of payment a brand of debit card, credit card, or other device that may be used to carry out debit or credit transactions. Proposed § 235.2(m) follows this definition, with revisions for clarity.
Under the proposed rule, a payment card network is generally defined as an “entity that directly or indirectly provides the proprietary services, infrastructure, and software for authorization, clearance, and settlement of electronic debit transactions.” Because the interchange fee restrictions and network exclusivity and merchant routing provisions of the Dodd-Frank Act do not apply to credit card transactions, the Board believes it is appropriate to exclude from the proposed definition the reference to credit cards in the statutory definition to avoid unnecessary confusion. No substantive change is intended. Likewise, the Board does not believe its necessary to state that a payment card network is an entity that a person uses in order to accept debit cards as a form of payment, because proposed § 235.2(h) defines the term “electronic debit transaction,” as use of a debit card “as a form of payment.”
In addition, the term “payment card network,” as defined in EFTA Section 920, could be interpreted broadly to include
In certain cases, such as in a three-party system, the same entity may serve multiple roles, including that of the payment card network, the issuer, and the acquirer. Proposed comment 2(m)–1 clarifies that the term “payment card network” would also cover such entities to the extent that their rules, standards,
The Board requests comment on whether other non-traditional or emerging payment systems would be covered by the statutory definition of “payment card network.” For example, consumers may use their mobile phone to send payments to third parties to purchase goods or services with the payment amount billed to their mobile phone account or debited directly from the consumer's bank account. In addition, consumers may use a third party payment intermediary, such as PayPal, to pay for Internet purchases, using the consumer's funds that may be held by the intermediary or in the consumer's account held at a different financial institution. In both examples, the system or network used to send the payment arguably provide the “proprietary services, infrastructure, and software for authorization, clearance, and settlement of electronic debit transactions.” Transactions involving these methods of payment typically are subject to rules and procedures established by the payment system. If such systems are not covered, the Board requests specific comment how it should appropriately distinguish these payment systems from traditional debit card payment systems that are subject to the rule.
The term “person” is not defined in the EFTA. The proposed definition incorporates the definition of the term in existing Board regulations.
EFTA Section 920 uses the term “processor” but does not define the term. Proposed § 235.2(o) defines the term “processor” as a person that processes or routes electronic debit transactions for issuers, acquirers, or merchants.
Proposed § 235.2(p) defines the term “United States.” The proposed definition is modified from the EFTA's definition of “State.” (15 U.S.C. 1693a(10)).
Proposed § 235.3 sets forth standards for assessing whether the amount of any interchange transaction fee that an issuer receives or charges with respect to an electronic debit transaction is reasonable and proportional to the cost incurred by the issuer with respect to the transaction.
As noted above, EFTA Section 920 requires the Board to establish standards for assessing whether the amount of any interchange transaction fee an issuer receives or charges with respect to an electronic debit transaction is reasonable and proportional to the cost incurred by the issuer with respect to the transaction. EFTA Section 920 does not define “reasonable” or “proportional.” The Board has found only limited examples of other statutory uses of the terms “reasonable” or “proportional” with respect to fees.
Although the Board believes the previously relied upon definitions can inform this rulemaking, the Board notes that reasonableness and proportionality have different connotations in the context of interchange transaction fees than in the context of penalty fees. The TILA provision related to the reasonableness and proportionality of the fees charged when a violation of the account terms occurred. TILA required the Board to consider the costs incurred by issuers as a result of violations and other factors, including the need to deter violations. In considering whether an interchange fee is reasonable, the Board proposes to consider whether the fee is fair or proper in relation to both the individual issuer's costs as well as the costs incurred by other issuers. As discussed further below, the Board believes it may determine that certain fee levels are reasonable based on overall issuer cost experience, even if the individual issuer's costs are above (or below) that fee level.
Similarly, in considering whether an interchange fee is proportional to the issuer's costs, the Board does not believe that proportionality must be interpreted to require identical cost-to-fee ratios for all covered issuers (although a constant cost-to-fee ratio would result from the issuer-specific standard discussed below for issuers with allowable costs below the cap). Rather, if the Board were to adopt a safe harbor or a fee cap (discussed further below) that it determined to be reasonable, the cost-to-fee ratio of any issuer that received fees at or below the safe harbor or cap would be deemed to meet the proportionality standard.
In EFTA Section 920, Congress set forth certain factors that the Board is required to consider when establishing standards for determining whether interchange transaction fees are reasonable and proportional to the cost
There are a number of similarities between the debit card and check payment systems. Both are payment instruments that result in a debit to the payor's asset account. Debit card payments are processed electronically, and while historically check processing has been paper-based, today virtually all checks are processed and collected electronically. Further, depository institutions have begun to offer their depositors remote deposit capture services to enable merchants to deposit their checks electronically. For both debit card and check payments, merchants pay fees to banks, processors, or intermediaries to process the payments. Settlement time frames are roughly similar for both payment types, with payments settling within one or two days of deposit.
However, there are also differences between debit card and check payment systems.
As noted above, the statute provides that, in establishing standards for assessing whether an interchange fee is reasonable and proportional to “the cost incurred by the issuer with respect to the transaction,” the Board shall consider the incremental cost of authorizing, clearing, and settling a particular transaction and shall not consider other costs that are not specific to a particular transaction.
After considering several options for the costs that may be taken into account in setting interchange transaction fees (“allowable costs”), the Board proposes such costs be limited to those associated with authorization, clearing, and settlement of a transaction. This formulation includes only those costs
In the definition of allowable costs, the Board proposes to exclude network processing fees (
The Board considered including other costs associated with a particular transaction that are not incurred by the issuer for its role in authorization, clearing, and settlement of that transaction. Such costs might include, for example, cardholder rewards that are paid by the issuer to the cardholder for each transaction. The Board does not view the costs of cardholder rewards programs as appropriate for consideration within the context of the statute. Other costs associated with a particular debit transaction might also include costs associated with providing customer service to cardholders for particular transactions, such as dealing with cardholder inquiries and complaints about a transaction. Given the statute's mandate to consider the functional similarities between debit transactions and check transactions, the Board proposes that allowable costs be limited to those that the statute specifically allows to be considered, and not be expanded to include additional costs that a payor's bank in a check transaction would not recoup through fees from the payee's bank.
The Board requests comment on whether it should allow recovery through interchange fees of other costs of a particular transaction beyond authorization, clearing, and settlement costs. If so, the Board requests comment on what other costs of a particular transaction, including network fees paid by issuers for the processing of transactions, should be considered allowable costs. The Board also requests comment on any criteria that should be used to determine which other costs of a particular transaction should be allowable.
The Board considered limiting the allowable costs to include only those costs associated with the process of authorizing a debit card transaction, because this option may be viewed as consistent with a comparison of the functional similarity of electronic debit transactions and check transactions. Among the most prominent differences between debit cards and checks is the existence of authorization for a debit card transaction where the deposit account balance is checked at the time of the transaction to ensure that the account has sufficient funds to cover the transaction amount. Clearing and settlement occur for both debit cards and checks, but for checks there is nothing analogous to an interchange fee to reimburse the issuer for the cost of clearing and settling a transaction. However, because the statute instructs the Board to also consider the costs of clearance and settlement, the Board proposes to include those costs. The Board requests comment on whether it should limit allowable costs to include only the costs of authorizing a debit card transaction.
As noted above, the statute specifically requires consideration of the “incremental” cost of authorization, clearance, and settlement of a particular transaction. There is no single, generally-accepted definition of the term “incremental cost.” One commonly-used economic definition of “incremental cost” refers to the difference between the cost incurred by a firm if it produces a particular quantity of a good and the cost incurred by that firm if it does not produce the good at all.
The Board proposes that the interchange fee standard allow for the inclusion of the per-transaction value of costs that vary with the number of transactions (
However, if variable costs of authorizing, clearing, and settling debit card transactions are shared with credit card operations, the Board believes that some portion of such costs should be allocated to debit card transactions. For example, these costs may be recorded jointly in internal cost accounting systems or not separated on third-party processing invoices. These costs should be allocated to debit cards based on the proportion of debit card transactions to total card transactions.
This measure would
The Board recognizes that, by distinguishing variable costs from fixed costs, this standard imposes a burden on issuers by requiring issuers to segregate costs that vary with the number of transactions from those that are largely invariant to the number of transactions, within the reporting period. The Board also acknowledges that differences in cost accounting systems across depository institutions may complicate enforcement by supervisors. Finally, the Board recognizes that excluding fixed costs may prevent issuers from recovering through interchange fees some costs associated with debit card transactions. However, as noted above, the Board also recognizes that issuers have other sources, besides interchange fees, from which they can receive revenue to help cover the costs of debit card operations. Moreover, such costs are not recovered from the payee's bank in the case of check transactions.
The Board also considered a cost measurement in terms of marginal cost or, in other words, the cost of an additional transaction. However, marginal cost can be different for each unit of output, and it is unclear which unit of output's cost should be considered, although often it is assumed to be the last unit. Notably, if marginal cost does not vary materially over the relevant volume range, then average variable cost will provide a close approximation to marginal cost for any particular transaction.
The Board requests comment on whether it should include fixed costs in the cost measurement, or alternatively, whether costs should be limited to the marginal cost of a transaction. If the latter, the Board requests comment on how the marginal cost for that transaction should be measured.
The statute requires that the amount of any interchange transaction fee that an issuer receives or charges with respect to an electronic debit transaction must be “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”
Under Alternative 1, an issuer could comply with the regulatory standard for interchange fees by calculating allowable per-transaction cost, based on the allowable costs described by the Board, and ensuring that it did not receive an interchange fee for any transaction in excess of its allowable per-transaction cost. Proposed § 235.3(c) sets forth an issuer's allowable costs. As discussed above, these are the issuer's costs that are attributable to its role in authorization, clearance, and settlement of electronic debit transactions and that vary, up to existing capacity limits within a reporting period, with the number of electronic debit transactions sent to the issuer. Network fees paid by the issuer are excluded from allowable costs. Proposed § 235.3(b)(2) limits the amount of any interchange fee that an issuer may receive to no more than the allowable costs divided by the number of electronic debit transactions on which the issuer received or charged an interchange transaction fee in the calendar year.
Alternative 1 also provides for a cap of 12 cents per transaction (proposed § 235.3(b)(2)). An issuer could not receive an interchange fee above the cap regardless of its allowable cost calculation. In addition, Alternative 1 would deem any interchange fee at or below a safe harbor level of 7 cents per transaction to be in compliance with the regulatory standard (proposed § 235.3(b)(1)), regardless of the issuer's allowable per-transaction cost.
Under Alternative 1, each payment card network could set interchange fees for each issuer (1) at or below the safe harbor
EFTA Section 920(a)(2) requires that “the amount of any interchange transaction fee that an issuer may receive or charge * * * be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” One reading of that provision is that the use of the definite article “the” in the second half of the standard suggests that the interchange fee limitation should be determined separately for each issuer and each transaction presented to that issuer. As discussed below, however, such an approach would be impractical and difficult to administer and enforce, and would introduce undesirable economic incentives.
Measuring the allowable cost of each transaction would be highly impracticable due to the volume of
From an economic perspective, an issuer-specific determination directly links the compensation through interchange fees for each issuer to that issuer's specific costs. A major drawback of this approach is that it would not provide incentives for issuers to control their costs. In particular, an issuer that is eligible to recoup its costs under an issuer-specific determination with no cap would face no penalty for having high costs. Conversely, because a reduction in costs would lead to a reduction in an issuer's interchange fee, an issuer would receive no reward for reducing its costs (in the absence of a safe harbor). As a result, issuers would have no incentive to minimize their costs and may incur higher costs than they would otherwise. An issuer-specific determination might also encourage over-reporting of costs by an issuer because any inflation of the reported costs would be directly rewarded with a higher interchange fee for the issuer. Such undesirable incentive properties have generally led economists to advocate the abandonment of cost-of-service regulation in regulated industries in favor of approaches that yield better incentives to the regulated entities.
An issuer-specific determination, on its own, would also place a significant implementation and administration burden on industry participants and supervisors. Each issuer would have to account for its costs in a manner that enables it to segregate allowable costs that could be recovered through the interchange fee from its other costs, tabulate those costs on an ongoing basis, and report them to the networks in which it participates. A network that set issuer-specific fees would need to incorporate such fees into its fee schedules, including the operational ability to distinguish among many different issuers in order to apply different rates to each of those issuers' transactions. The issuers' supervisors would need to evaluate each issuer's reported costs and verify that each issuer's interchange fees appropriately reflect those reported costs.
To address, at least in part, the incentive problems discussed above with respect to a purely issuer-specific determination, the Board proposes to place a ceiling on the amount of any issuer-specific determination by specifying a cap of 12 cents per transaction. With an issuer-specific determination and a cap, the Board would deem any interchange fee that was equal to an issuer's allowable costs to be reasonable and proportional to the issuer's costs if it is at or below the cap.
Some issuers that are subject to the interchange fee limitations have debit card programs with substantially higher per-transaction costs than others. These unusually high costs might be due to small programs targeted at high-net-worth customers or newer start-up programs that have not yet achieved economies of scale. In comparing reported per-transaction costs to current interchange transaction fee levels, the Board believes it is unlikely that these issuers currently are recovering their per-transaction costs through interchange transaction fees. The Board does not believe it is reasonable for the interchange fee to compensate an issuer for very high per-transaction costs. The Board believes that setting the cap at 12 cents per transaction will be sufficient to allow all but the highest-cost issuers discussed above to recover through interchange transaction fees the costs incurred for authorizing, clearing, and settling electronic debit transactions. The Board notes that even the highest-cost issuers have sources of revenue in addition to interchange fees, such as cardholder fees, to help cover their costs.
A cap would eliminate some of the negative incentives of a purely issuer-specific determination. An issuer with costs above the cap would not receive interchange fees to cover those higher costs. As a result, a high-cost issuer would have an incentive to reduce its costs in order to avoid this penalty. The Board would re-examine the cap periodically (to coincide with the reporting requirements in proposed § 235.8) to ensure that the cap continues to reflect a reasonable fee.
To determine an appropriate value for a cap, the Board used data from responses to the card issuer survey described earlier. The Board used data on transaction volumes and the variable cost of authorization, clearing, and settlement (the allowable costs under an issuer-specific determination) to compute an issuer's per-transaction cost. These data were used to compute various summary measures of per-transaction variable costs for issuers, generally. For this sample of issuers, the Board estimated that the per-transaction variable costs, averaged across all issuers, were approximately 13 cents per transaction. Average per-transaction variable costs were approximately 4 cents per transaction when each issuer's costs are weighted by the number of its transactions.
The Board proposes a cap of 12 cents per transaction because, while it significantly reduces interchange fees from current levels (approximately 44 cents per transaction, on average, based on the survey of payment card networks), it allows for the recovery of per-transaction variable costs for a large majority of covered issuers (approximately 80 percent). The proposed cap does not differentiate between different types of electronic debit transactions (
The Board notes that issuers reported higher costs for authorizing, clearing, and settling prepaid card transactions
To further address the incentive and administrative burden problems discussed above, the Board proposes to provide a safe harbor for issuers as an alternative to the issuer-specific determination. Alternative 1 provides that, regardless of an issuer's per-transaction allowable cost, an interchange fee that is less than or equal to 7 cents per transaction is deemed to be reasonable and proportional to the issuer's cost of the electronic debit transaction. Thus, issuers would have an incentive to reduce their per-transaction costs below the safe harbor.
In determining the proposed safe harbor amount, the Board considered allowable issuer costs identified in responses to its card issuer survey. Using the issuer cost data described above, the Board proposes that 7 cents per transaction is an appropriate safe harbor value for the interchange fee. This value represents the approximate median in the distribution of estimated per-transaction variable costs. Like the cap discussed above, the Board proposes one safe harbor for all electronic debit transactions
Overall, this approach reduces administrative burden on those issuers that choose to rely on the safe harbor, rather than determine their allowable costs, and allows issuers with costs above the safe harbor to receive an interchange fee directly linked to their costs, up to the level of the cap. At the same time, for an issuer with costs below the safe harbor value, this approach provides a reward for efficient production while also encouraging cost reductions to maximize the spread between the issuer's costs and the safe harbor value.
Under Alternative 2, the Board would use information about issuer costs to determine an appropriate maximum interchange fee, or a cap, that would apply uniformly to all issuers. That is, each issuer could receive interchange fees up to the cap, regardless of that specific issuer's actual allowable costs. Alternative 2 provides that an interchange transaction fee is reasonable and proportional to an issuer's cost only if it is no more than 12 cents per transaction. As in Alternative 1, a network would be permitted to set fees that vary with the value of the transaction (
As in Alternative 1, a stand-alone cap would encourage high-cost issuers to reduce their costs. In addition, an issuer with costs below the cap would receive a markup reflecting the spread between its costs and the cap value. Because the magnitude of the spread increases with the difference between the issuer's costs and the cap, all issuers, including low-cost issuers, would have an incentive to improve the efficiency of their operations. Finally, a cap reduces somewhat the incentive for an issuer to inflate its reported costs because no issuer would receive direct compensation for higher costs. These incentives have motivated authorities in other contexts to set price caps in many regulated industries, including, for example, the Reserve Bank of Australia in its intervention in the Australian credit and debit card markets.
In comparison to Alternative 1, administration and implementation of this approach places less administrative burden on industry participants. Although the issuer would have to report its costs to the Board every two years in accordance with § 235.8, an issuer would not have to calculate or report to the networks its maximum allowable interchange transaction fee. Similarly, a payment card network would not need to incorporate issuer-specific fees into its fee schedule, as the cap would apply uniformly to all covered issuers in that network.
Under both Alternative 1 and Alternative 2, the limitations on interchange fees would apply on a per-transaction basis. Under both alternatives, no electronic debit transaction presented to an issuer could carry an interchange fee that exceeds the interchange fee standard for that issuer.
This approach generally follows the statutory provisions discussed above that refer to “the” issuer and “the” transaction. The Board recognizes, however, that this approach restricts flexibility in setting interchange fees to reflect differences in risk, among other things. If the interchange fee standard must hold strictly for all transactions, then an issuer would be unable to receive a higher interchange fee for relatively high-risk transactions offset by lower interchange fees on relatively low-risk transactions.
The Board has identified two other potential methods for implementing the interchange fee standards and requests comment on each. The first approach would allow flexibility in interchange fees with respect to a particular issuer. Under this approach, the issuer could comply with the rule as long as it meets the interchange fee standard, on average, for all of its electronic debit
Both of these approaches would provide flexibility in setting interchange fees to incorporate considerations such as differences in risk across transactions. However, both of these approaches would introduce the possibility that any particular set of fees, set
The Board requests comment on whether either of these approaches is appropriate. If so, the Board requests comment about whether and how it should adopt standards with respect to a permissible amount of variation from the benchmark for any given interchange transaction fee.
Proposed § 235.3(a) restates the statutory requirement that the amount of any interchange transaction an issuer charges or receives with respect to a transaction must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Proposed § 235.3(a) is the same for both Alternatives 1 and 2.
Proposed § 235.3(c) sets forth an exclusive list of allowable costs for purposes of the issuer-specific approach. Specifically, as discussed above, an issuer may include only those costs that are attributable to the issuer's role in authorization, clearance, and settlement of the transaction. Proposed § 235.3(c)(1) describes activities that comprise the issuer's role in authorization, clearance, and settlement and limits the types of costs that may be included to those that vary with the number of transactions sent to the issuer. Proposed § 235.3(c)(2) specifies that fees charged by a payment card network with respect to an electronic debit transaction are not included in the allowable costs.
Proposed comment 3(c)–2 describes in more detail the issuer's role in authorization, clearance, and settlement of a transaction. Proposed comment 3(c)–2 also specifies the types of costs that an issuer is considered to incur for authorization, clearance, and settlement of a transaction. With respect to authorization, an issuer may include the costs of activities such as data processing, voice authorization inquiries and referral requests.
Proposed § 235.3(c)(1) limits allowable costs to those that vary with the number of electronic debit transactions sent to the issuer during a calendar year. Proposed comment 3(c)–3.i describes, and provides examples of, the distinction between allowable, variable costs (those costs that vary, up to existing capacity limits, with the number of transactions sent to the issuer over the calendar year) and unallowable, fixed costs (those costs that do not vary, up to existing capacity limits, with the number of transactions sent to the issuer over the calendar year).
Proposed § 235.3(c)(2) states that allowable costs do not include the fees an issuer pays to a network for processing transactions. Proposed comment 3(c)–3.ii clarifies that switch fees are an example of fees that are not an allowable cost. Proposed comment 3(c)–3.ii further explains that fees an issuer pays to a network when the network acts as the issuer's third-party processor are allowable costs.
As clarified in proposed comment 3(c)–3–iii, an issuer would not be permitted to include costs that are common to other products offered by the issuer, except insofar as those costs are allowable costs that are shared with other payment card products and vary with the number of debit transactions. Proposed comment 3(c)–3–iv clarifies that proposed § 235.3(c) sets forth an exhaustive list of allowable costs, and provides examples of costs that may not be included, such as the costs of rewards programs. The Board requests comment on whether additional clarification of allowable costs is needed.
In establishing the conditions for reporting, the Board recognizes that not all networks likely will establish individualized interchange transaction fees. If a network does not establish individualized interchange transaction fees above the safe harbor amount, the Board believes it is not necessary to require an issuer to report its maximum allowable interchange transaction fee to networks through which it receives
The Board proposes that an issuer report its maximum allowable interchange fee to each payment card network through which it processes transactions by March 31 of each year (based on the costs of the previous calendar year) to ensure compliance with the standard beginning on October 1 of that same year.
Section 920(a)(5) of the statute provides that the Board may allow for an adjustment to the interchange fee amount received or charged by an issuer if (1) such adjustment is reasonably necessary to make allowance for costs incurred by the issuer in preventing fraud in relation to electronic debit card transactions involving that issuer, and (2) the issuer complies with fraud-prevention standards established by the Board.
In issuing the standards and prescribing regulations for the adjustment, the Board must consider (1) The nature, type, and occurrence of fraud in electronic debit transactions; (2) the extent to which the occurrence of fraud depends on whether the authorization in an electronic debit transaction is based on a signature, PIN, or other means; (3) the available and economical means by which fraud on electronic debit transactions may be reduced; (4) the fraud-prevention and data-security costs expended by each party involved in the electronic debit transactions (including consumers, persons who accept debit cards as a form of payment, financial institutions, retailers, and payment card networks); (5) the costs of fraudulent transactions absorbed by each party involved in such transactions (including consumers, persons who accept debit cards as a form of payment, financial institutions, retailers, and payment card networks); (6) the extent to which interchange transaction fees have in the past reduced or increased incentives for parties involved in electronic debit transactions to reduce fraud on such transactions; and (7) such other factors as the Board considers appropriate.
For the reasons set forth below, the Board has not proposed specific regulatory provisions to implement an adjustment for fraud-prevention costs to the interchange transaction fee. The Board, however, sets forth two approaches—a technology-specific approach and a non-prescriptive approach—to designing the adjustment framework and requests comment on several questions related to these approaches. The Board plans to consider the comments in developing a specific proposal for further public comment.
Although the statute authorizes the Board to allow an adjustment to an interchange fee for fraud-prevention costs, the statute does not define the term “fraud.” In considering whether to allow an adjustment, the Board believes that fraud in the debit card context should be defined as the use of a debit card (or information associated with a debit card) by a person, other than the cardholder, to obtain goods, services, or cash without authority for such use.
Two primary steps are involved in making fraudulent purchases using a debit card. The first is stealing the cardholder account data. The second is using the stolen card or account data to make the fraudulent transaction. A thief may steal the card or the account information in several ways. For example, a card may be lost or stolen, and a thief may simply use the card to make purchases. Alternatively, a thief could obtain card account data by breaching the data-security systems of any entity that maintains records of debit card data. A thief might use the card account data to create a counterfeit card. The stolen card or account data may also be used to make unauthorized card-not-present transactions via the Internet, phone, or mail-order purchases.
As part of its survey of debit card issuers, payment card networks, and merchant acquirers, the Board gathered information about the nature, type, and occurrence of fraud in electronic debit transactions at the point of sale, and the losses due to fraudulent transactions absorbed by parties involved in such transactions.
The surveys also solicited information about respondents' fraud-prevention and data-security activities and the costs of these activities. The surveys did not capture analogous activities and costs for merchants (or cardholders). The data presented below derive from the survey of debit card issuers, which has the most complete information about fraud losses.
Issuers that provided data on total fraud losses relating to their electronic debit card transactions reported $719 million in total debit card fraud losses to all parties, averaging 0.041 percent of transaction volume and 9.4 basis points of transaction value. These fraud losses were generally associated with 10 different types of fraud. The most commonly reported fraud types were counterfeit card fraud, lost and stolen card fraud, and card-not-present fraud.
Issuers reported that total signature and PIN debit card fraud losses to all parties averaged 13.1 and 3.5 basis points, respectively. This represents, on a per-dollar basis, signature debit fraud losses 3.75 times PIN-debit fraud losses. These different fraud rates reflect, in part, differences in the ease of fraud associated with the two authorization methods. A signature debit card transaction requires information that is typically contained on the card itself in order for card and cardholder authentication to take place. Therefore, a thief only needs to steal information on the card in order to commit fraud.
Signature debit card transactions exhibit a higher fraud rate than that of PIN debit card transactions. Debit cards used to make purchases over the Internet and in other card-not-present environments are routed almost exclusively over signature debit card networks.
In terms of losses to the various parties in a transaction, almost all of the reported fraud losses associated with debit card transactions fall on the issuers and merchants. In particular, across all types of transactions, 57 percent of reported fraud losses were borne by issuers and 43 percent were borne by merchants. In contrast, most issuers reported that they offer zero or very limited liability to cardholders, in addition to regulatory protections already afforded to consumers, such that the fraud loss borne by cardholders is negligible.
The distribution of fraud losses between issuers and merchants depends, in part, on the authorization method used in a debit card transaction. Issuers and payment card networks reported that nearly all the fraud losses associated with PIN debit card transactions (96 percent) were borne by issuers. In contrast, reported fraud losses were distributed much more evenly between issuers and merchants for signature debit card transactions. Specifically, issuers and merchants bore 55 percent and 45 percent of signature debit fraud losses, respectively.
In general, merchants are subject to greater liability for fraud in card-not-present transactions than in card-present transactions. As noted above, signature-based authorization is currently the primary means to perform such transactions. According to the survey data, merchants assume approximately 76 percent of signature debit card fraud for card-not-present transactions.
Based on the card issuer survey data, issuers engage in a variety of fraud-prevention activities. Issuers identified approximately 130 fraud-prevention activities and reported the costs associated with these activities as they relate to debit card transactions.
The survey also asked issuers to report their data-security activities and costs. Issuers identified approximately 50 data-security activities and reported the allocated costs to debit card programs.
Merchants also have fraud-prevention and data-security costs, including costs related to compliance with payment card industry data-security standards (PCI–DSS) and other tools to prevent fraud, such as address verification services or internally developed fraud screening models, particularly for card-not-present transactions.
As previously described, issuers, merchant acquirers, and networks listed a variety of fraud-prevention and data-security activities in their survey responses. In designing an adjustment framework for fraud-prevention costs, the Board is considering how an adjustment should be implemented, what fraud-prevention costs such an adjustment should cover, and what standards the Board should prescribe for issuers to meet as a condition of receiving the adjustment.
This approach to implementing the adjustment has the potential to spur implementation of major security enhancements in the debit card market that have not yet gained substantial market adoption. Specifically, the adjustment could serve as an incentive for debit card industry participants to coordinate in the adoption of technologies that the Board determines would be effective in reducing fraud losses. The drawback of adopting technology-specific standards is the risk that it would cause issuers to under-invest in other innovative new technologies, not included in the Board's standards, that may be more effective and less costly than those identified in the standards.
Under this approach, the adjustment would be set to reimburse the issuer for some or all of the costs of its current fraud-prevention and data-security activities and of research and development for new fraud-prevention techniques, perhaps up to a cap. This approach would shift some or all of the issuers' ongoing fraud-prevention costs to merchants, even though many merchants already bear substantial card-related fraud-prevention costs, particularly for signature debit transactions.
The Board requests comment on how to implement an adjustment to interchange fees for fraud-prevention costs. In particular, the Board is interested in commenters' input on the following questions:
1. Should the Board adopt technology-specific standards or non-prescriptive standards that an issuer must meet in order to be eligible to receive an adjustment to its interchange fee? What are the benefits and drawbacks of each approach? Are there other approaches to establishing the adjustment standards that the Board should consider?
2. If the Board adopts technology-specific standards, what technology or technologies should be required? What types of debit-card fraud would each technology be effective at substantially reducing? How should the Board assess the likely effectiveness of each fraud-prevention technology and its cost effectiveness? How could the standards be developed to encourage innovation in future technologies that are not specifically mentioned?
3. If the Board adopts non-prescriptive standards, how should they be set? What type of framework should be used to determine whether a fraud-prevention activity of an issuer is effective at reducing fraud and is cost-effective? Should the fraud-prevention activities that would be subject to reimbursement in the adjustment include activities that are not specific to debit-card transactions (or to card transactions more broadly)? For example, should know-your-customer due diligence performed at account opening be subject to reimbursement under the adjustment? If so, why? Are there industry-standard definitions for the types of fraud-prevention and data-security activities that could be reimbursed through the adjustment? How should the standard differ for signature- and PIN-based debit card programs?
4. Should the Board consider adopting an adjustment for fraud-prevention costs for only PIN-based debit card transactions, but not signature-based debit card transactions, at least for an initial adjustment, particularly given the lower incidence of fraud and lower chargeback rate for PIN-debit transactions? To what extent
5. Should the adjustment include only the costs of fraud-prevention activities that benefit merchants by, for example, reducing fraud losses that would be eligible for chargeback to the merchants? If not, why should merchants bear the cost of activities that do not directly benefit them? If the adjustment were limited in this manner, is there a risk that networks would change their rules to make more types of fraudulent transactions subject to chargeback?
6. To what extent, if at all, would issuers scale back their fraud-prevention and data-security activities if the cost of those activities were not reimbursed through an adjustment to the interchange fee?
7. How should allowable costs that would be recovered through an adjustment be measured? Do covered issuers' cost accounting systems track costs at a sufficiently detailed level to determine the costs associated with individual fraud-prevention or data-security activities? How would the Board determine the allowable costs for prospective investments in major new technologies?
8. Should the Board adopt the same implementation approach for the adjustment that it adopts for the interchange fee standard, that is, either (1) an issuer-specific adjustment, with a safe harbor and cap, or (2) a cap?
9. How frequently should the Board review and update, if necessary, the adjustment standards?
10. EFTA Section 920 requires that, in setting the adjustment for fraud-prevention costs and the standards that an issuer must meet to be eligible to receive the adjustment, the Board should consider the fraud-prevention and data-security costs of each party to the transaction and the cost of fraudulent transactions absorbed by each party to the transaction. How should the Board factor these considerations into its rule? How can the Board effectively measure fraud-prevention and data-security costs of the 8 million merchants that accept debit cards in the United States?
EFTA Section 920(a) sets forth several exemptions to the applicability of the interchange fee restriction provisions. Specifically, the statute contains exemptions for small issuers as well as government-administered payment programs and certain reloadable prepaid cards.
Under the proposed rule, an electronic debit transaction may qualify for more than one exemption. For example, an electronic debit transaction made using a debit card that has been provided to a person pursuant to a Federal, State, or local government-administered payment program may be issued by an issuer that, together with its affiliates, has assets of less than $10 billion as of the end of the previous calendar year. Proposed comment 5–1 clarifies that an issuer only needs to qualify for one of the exemptions in order to exempt an electronic debit transaction from the interchange provisions in §§ 235.3, 235.4, and 235.6 of the proposed rules. The proposed comment further clarifies that a payment card network establishing interchange fees need only satisfy itself that the issuer's transactions qualify for at least one of the exemptions in order to exempt the electronic debit transaction from the interchange fee restrictions.
Section 920(a)(6)(A) of the EFTA provides that EFTA Section 920(a) does not apply to any issuer that, together with its affiliates, has assets of less than $10 billion. For purposes of this provision, the term “issuer” is limited to the person holding the asset account that is debited through an electronic debit transaction.
Proposed § 235.5(a)(1) combines the statutory language in EFTA Sections 920(a)(6)(A) and (B) to implement the exemption with some minor adjustments for clarity and consistency. Therefore, § 235.5(a)(1) provides that §§ 235.3, 235.4, and 235.6 do not apply to an interchange transaction fee received or charged by an issuer with respect to an electronic debit transaction if (i) the issuer holds the account that is debited; and (ii) the issuer, together with its affiliates, has assets of less than $10 billion as of the end of the previous calendar year. Proposed comment 5(a)–1 clarifies that an issuer would qualify for this exemption if its total worldwide banking and nonbanking assets, including assets of affiliates, are less than $10 billion.
For consistency, the proposed rule assesses an issuer's asset size for purposes of the small issuer exemption at a single point in time. Although the asset size of an issuer and its affiliates will fluctuate over time, for purposes of determining an issuer's eligibility for this exemption, the Board believes the relevant time for determining the asset size of the issuer and its affiliates for purposes of this exemption should be the end of the previous calendar year. The Board has used the calendar year-end time frame in other contexts for determining whether entities meet certain dollar thresholds.
To the extent that a payment card network permits issuers meeting the small issuer exemption to receive higher interchange fees than allowed under §§ 235.3 and 235.4, payment card networks, as well as merchant acquirers and processors, may need a process in place to identify such issuers. Thus, the Board requests comment on whether the rule should establish a consistent certification process and reporting period for an issuer to notify a payment card network and other parties that the issuer qualifies for the small issuer exemption. For example, the rule could require an issuer to notify the payment card network within 90 days of the end of the preceding calendar year in order to be eligible for an exemption for the next rate period. The Board also requests comment on whether it should permit payment card networks to develop their own processes for making this determination.
Under EFTA Section 920(a)(7)(A)(i), an interchange transaction fee charged or received with respect to an electronic debit transaction made using a debit or general-use prepaid card that has been provided to a person pursuant to a
Proposed comment 5(b)–1 clarifies the meaning of a government-administered program. The proposed comment states that a program is considered government-administered regardless of whether a Federal, State, or local government agency operates the program or outsources some or all functions to service providers that act on behalf of the government agency. The Board understands that for many government-administered programs, the government agency outsources the administration of the card program to third parties. The proposed comment makes clear that a government-administered program will still be deemed government-administered regardless of the government agency's choice to use a third party for any and all aspects of the program.
Furthermore, proposed comment 5(b)–1 provides that a program may be government-administered even if a Federal, State, or local government agency is not the source of funds for the program it administers. For example, the Board understands that for child support programs, a Federal, State, or local government agency is not the source of funds, but such programs are nevertheless administered by State governments. As such, the Board believes that cards distributed in connection with such programs would fall under the exemption.
The Board notes that Section 1075(b) of the Dodd-Frank Act amends the Food and Nutrition Act of 2008, the Farm Security and Rural Investment Act of 2002, and the Child Nutrition of 1966 to clarify that the electronic benefit transfer or reimbursement systems established under these acts are not subject to EFTA Section 920. These amendments are consistent with the exemption under EFTA Section 920(a)(7)(i). Because proposed § 235.5(b)(1), which implements EFTA Section 920(a)(7)(i), covers these and other government-administered systems, neither the proposed regulation nor commentary specifically references such programs.
Payment card networks that allow issuers to charge higher interchange fees than permitted under §§ 235.3 and 235.4 for transactions made using a debit card that meets the exemption for government-administered payment programs will need a means to identify the card accounts that meet the exemption. As with the small issuer exemption in § 235.5(a), the Board requests comment on whether it should establish a certification process or whether it should permit payment card networks to develop their own processes.
The operational aspects of certifying on an account-by-account basis may be more complex than certifying on an issuer-by-issuer basis. Therefore, if the Board is to establish a certification process, the Board requests comment on how to structure this process, including the time periods for reporting and what information may be needed to identify accounts to which the exemption applies. For example, the Board understands that certain cards issued under a government-administered payment program may be distinguished by the BIN or BIN range.
EFTA Section 920(a)(7)(A)(ii) establishes an exemption for an interchange transaction fee charged or received with respect to an electronic debit transaction for a plastic card, or other payment code or device, that is: (i) Linked to funds, monetary value, or assets purchased or loaded on a prepaid basis; (ii) not issued or approved for use to access or debit any account held by or for the benefit of the cardholder (other than a subaccount or other method of recording or tracking funds purchased or loaded on the card on a prepaid basis); (iii) redeemable at multiple, unaffiliated merchants or service providers, or automated teller machines; (iv) used to transfer or debit funds, monetary value, or other assets; and (v) reloadable and not marketed or labeled as a gift card or gift certificate.
For clarity, the proposed rule refers to “general-use prepaid card,” which incorporates certain of the conditions for obtaining the exemption in EFTA Section 920(a)(7)(A)(ii).
Typically, issuers structure prepaid card programs so that the funds underlying each prepaid card in the program are held in an omnibus account, and the amount attributable to each prepaid card is tracked by establishing subaccounts or by other recordkeeping means. However, certain issuers structure prepaid card programs differently such that the funds underlying each card are attributed to separate accounts established by the issuer.
The condition in EFTA Section 920(a)(7)(A)(ii)(II) makes clear that an exempt card may not be issued or approved for use to access or debit an account held by or for the benefit of the cardholder (other than a subaccount or other method recording or tracking funds purchased or loaded on the card on a prepaid basis). Therefore, issuers that structure prepaid card programs such that the funds underlying each card are attributed to separate accounts do not qualify for the exemption based on the conditions set forth under the statute. These issuers may argue that there is little difference between their prepaid programs and others that are constructed so that the funds are part of an omnibus account. However, an argument can be made that prepaid cards that access separate accounts are not significantly different from debit cards that access demand deposit accounts, which are covered by the interchange fee restrictions in EFTA Section 920(a). The Board's proposal is based on the view that prepaid cards where the underlying funds are held in separate accounts do not qualify for the exemption.
The Board has previously defined and clarified the meaning of “reloadable and not marketed or labeled as a gift card or gift certificate” in the context of a rule restricting the fees and expiration dates for gift cards under 12 CFR 205.20 (“Gift Card Rule”). In order to maintain consistency, the Board proposes to import commentary related to the meaning of reloadable and not marketed or labeled as a gift card or gift certificate from the Gift Card Rule.
Proposed comment 5(c)–1 provides that a general-use prepaid card is “reloadable” if the terms and conditions of the agreement permit funds to be added to the general-use prepaid card after the initial purchase or issuance. The comment further states that a general-use prepaid card is not “reloadable” merely because the issuer or processor is technically able to add functionality that would otherwise
Proposed comment 5(c)–2, which has been adapted from comment 20(b)(2)–2 under the Gift Card Rule, clarifies the meaning of the term “marketed or labeled as a gift card or gift certificate.” The proposed comment provides that the term means directly or indirectly offering, advertising, or otherwise suggesting the potential use of a general-use prepaid card as a gift for another person. The proposed comment also states that whether the exclusion applies does not depend on the type of entity that is making the promotional message. Therefore, under the proposed comment, a general-use prepaid card is deemed to be marketed or labeled as a gift card or gift certificate if anyone (other than the consumer-purchaser of the card), including the issuer, the retailer, the program manager that may distribute the card, or the payment network on which a card is used, promotes the use of the card as a gift card or gift certificate.
The proposed comment also states that a certificate or card could be deemed to be marketed or labeled as a gift card or gift certificate even if it is primarily marketed for another purpose. Thus, for example, a reloadable network-branded card would be considered to be marketed or labeled as a gift card or gift certificate even if the issuer principally advertises the card as a less costly alternative to a bank account but promotes the card in a television, radio, newspaper, or Internet advertisement, or on signage as “the perfect gift” during the holiday season. Proposed comment 5(c)–2 further clarifies that the mere mention that gift cards or gift certificates are available in an advertisement or on a sign that also indicates the availability of exempted general-use prepaid cards does not by itself cause the general-use prepaid card to be marketed as a gift card or a gift certificate.
The Board also proposes examples of what the term “marketed or labeled as a gift card or gift certificate” includes and does not include in proposed comment 5(c)–3; these examples are similar to those in comment 20(b)(2)–3 under the Gift Card Rule. Thus, under the proposed comment, examples of marketing or labeling as a gift card or gift certificate include displaying the word “gift” or “present,” displaying a holiday or congratulatory message, and incorporating gift-giving or celebratory imagery or motifs on the card, certificate or accompanying material, such as documentation, packaging and promotional displays.
The proposed comment further states that a general-use prepaid card is not marketed or labeled as a gift card or gift certificate if the issuer, seller, or other person represents that the card can be used as a substitute for a checking, savings, or deposit account, as a budgetary tool, or to cover emergency expenses. Similarly, the proposed comment provides that a card is not marketed as a gift card or gift certificate if it is promoted as a substitute for travelers checks or cash for personal use, or promoted as a means of paying for a consumer's health-related expenses.
As the Board discussed in connection with the issuance of the Gift Card Rule, there are several different models for how prepaid cards may be distributed from issuers to consumers.
The Board issued comment 20(b)(2)–4 under the Gift Card Rule to address these issues. Specifically, comment 20(b)(2)–4 provides that a product is not marketed or labeled as a gift card or gift certificate if persons subject to the Gift Card Rule, including issuers, program managers, and retailers, maintain policies and procedures reasonably designed to avoid such marketing. Such policies and procedures may include contractual provisions prohibiting a card, or other payment code or device, from being marketed or labeled as a gift card or gift certificate; merchandising guidelines or plans regarding how the product must be displayed in a retail outlet; and controls to regularly monitor or otherwise verify that the card, or other payment code or device, is not being marketed as a gift card or gift certificate. The comment further states that whether a person has marketed a reloadable card, or other payment code or device, as a gift card or gift certificate will depend on the facts and circumstances, including whether a reasonable consumer would be led to believe that the card, or other payment code or device, is a gift card or gift certificate. The comment also included examples. The Board is proposing a similar comment 5(c)–4 to address issues related to maintaining proper policies and procedures to prevent a general-use prepaid card from being marketed as a gift card or gift certificate. Proposed comment 5(c)–4 also contains similar examples as set forth in comment 20(b)(2)–4 under the Gift Card Rule.
Proposed comment 5(c)–5 provides guidance relating to online sales of gift cards that is substantially the same as in comment 20(b)(2)–5 under the Gift Card Rule. As discussed in connection with the issuance of the Gift Card Rule, the Board believes that a Web site's display of a banner advertisement or a graphic on its home page that prominently displays “Gift Cards,” “Gift Giving,” or similar language without mention of other available products, or inclusion of the terms “gift card” or “gift certificate” in its web address, creates the same potential for consumer confusion as a sign stating “Gift Cards” at the top of a prepaid card display. Because a consumer acting reasonably under these circumstances may be led to believe that all prepaid products sold on the Web site are gift cards or gift certificates, the Web site is deemed to have marketed all such products, including any general-purpose reloadable cards that may be sold on the Web site, as gift cards or gift certificates. Proposed comment 5(c)–5 provides that products sold by such Web sites would not be eligible for the exemption.
As with the exemption for government-administered payment programs, payment card networks, as well as merchant acquirers and processors, will need a process to identify accounts accessed by reloadable general-use prepaid cards that are not marketed or labeled as a gift card or gift certificate if such networks permit issuers of such accounts to charge interchange fees in excess of the amount permitted under §§ 235.3 and 235.4. The Board seeks comment on whether it should establish a certification process for the reloadable prepaid cards exemption or whether it should permit payment card networks to develop their own processes. The Board also requests comment on how it should structure the certification process if it were to establish a process, including the time
As the Board discussed in connection with the Gift Card Rule, some general-purpose reloadable cards may be sold initially as a temporary non-reloadable card. These cards are usually marketed as an alternative to a bank account (or account substitute). After the card is purchased, the cardholder may call the issuer to register the card. Once the issuer has obtained the cardholder's personal information, a new personalized, reloadable card is sent to the cardholder to replace the temporary card.
The Board decided to permit temporary non-reloadable cards issued solely in connection with a general-purpose reloadable card to be treated as general-purpose reloadable cards under the Gift Card Rule despite the fact that such cards are not reloadable. As it discussed in connection with the Gift Card Rule, the Board was concerned that covering temporary non-reloadable cards under the Gift Card Rule would create regulatory incentives that would unduly restrict issuers' ability to address potential fraud. Some issuers issue temporary cards in non-reloadable form to encourage consumers to register the card and provide customer identification information for Bank Secrecy Act purposes. A rule that provides that the exemption is only available if the temporary card is reloadable would therefore limit issuers' options without a corresponding benefit.
For similar reasons, the Board is proposing that interchange fees charged or received with respect to transactions using a temporary non-reloadable card issued solely in connection with a general-purpose reloadable card would also qualify for the exemption under EFTA Section 920(a)(7)(A)(ii), provided such cards are not marketed or labeled as a gift card or gift certificate. Therefore, proposed § 235.5(c)(2) provides that the term “reloadable” also includes a temporary non-reloadable card if it is issued solely in connection with a reloadable general-use prepaid card. Proposed comment 5(c)–6, similar to comment 20(b)(2)–6 under the Gift Card Rule, provides additional guidance regarding temporary non-reloadable cards issued solely in connection with a general-purpose reloadable card.
EFTA Section 920(a)(7)(B) provides that after the end of the one-year period beginning on the effective date of the statute, the exemptions available under EFTA Sections 920(a)(7)(A)(i) and (ii) become subject to an exception. The statute provides that the exemptions are not available if any of the following fees may be charged to a person with respect to the card: (i) An overdraft fee, including a shortage of funds or a transaction processed for an amount exceeding the account balance; and (ii) a fee charged by the issuer for the first withdrawal per month from an ATM that is part of the issuer's designated ATM network. The Board proposes to implement this exception to the exemptions in § 235.5(d), substantially as presented in the statute with one minor clarification.
Specifically, the Board proposes to clarify that the fee described in § 235.5(d)(1) does not include a fee or charge charged for transferring funds from another asset account to cover a shortfall in the account accessed by the card. Such a fee is not an “overdraft” fee because the cardholder has a means of covering a shortfall in the account connected to the card with funds transferred from another asset account, and the fee is charged for making such a transfer.
EFTA Section 920 contains two separate grants of authority to the Board to address circumvention or evasion of the restrictions on interchange transaction fees. First, EFTA Section 920(a)(8) authorizes the Board to prescribe rules to ensure that network fees are not used “to directly or indirectly compensate an issuer with respect to an electronic debit transaction” and “to circumvent or evade” the interchange transaction fee restrictions under the statute and this proposed rule.
Payment card networks charge network participants a variety of fees in connection with electronic debit transactions. On the issuer side, fees charged by the network include access fees for connectivity and fees for authorizing, clearing, and settling debit card transactions through the network.
On the acquirer and merchant side, a network similarly charges fees for accessing the network, as well as fees for authorizing, clearing, and settling debit card transactions through the network. Likewise, networks charge network administration fees, membership or merchant acceptance fees, and licensing or member registration fees on acquirers and/or merchants. There are also fees for various optional services offered by the network to acquirers or merchants, including fees for fraud detection and risk mitigation services. For a closed-loop or three-party payment network, network fees are bundled into the merchant discount rate charged by the network in its capacity as the merchant acquirer.
A fee charged by the network can be assessed as a flat fee or on a per transaction basis, and may also vary based on transaction size, transaction type or other network-established criteria. While interchange fee rates generally do not vary across issuers or acquirers for the same types of debit card transactions, fees charged by the network are often set on an issuer-by-issuer or merchant-by-merchant basis. For example, issuers and merchants may be given individualized discounts relative to a published network fee or rate based on their transaction volume increases.
In addition to discounts, issuers and merchants may receive incentive payments or rebates from a network. These incentives may include upfront payments to encourage issuers to shift some or all of their debit card volume to the network, such as signing bonuses
Discounts and incentives enable networks to compete for business among issuers and merchants. Among other things, these pricing tools help networks attract new issuers and retain existing issuers, as well as expand merchant acceptance to increase the attractiveness of the network brand. Discounts and incentives also help the network to encourage specific processing behavior, such as the use of enhanced authorization methods or the deployment of additional merchant terminals.
There are a number of factors that a network may consider in calibrating the appropriate level of network fees, discounts, and incentives in order to achieve network objectives. However, EFTA Section 920(a) authorizes the Board to prescribe rules to ensure that such pricing mechanisms are not used to circumvent or evade the interchange transaction fee restrictions. This authority is both specific with respect to the use of network fees under EFTA Section 920(a)(8), as well as general with respect to the Board's implementation of the interchange transaction fee restrictions under EFTA Section 920(a)(1).
As an initial matter, the Board notes that the statute does not directly regulate the amount of network fees that a network may charge for any of its services. Thus, the proposed rule does not seek to set or establish the level of network fees that a network may permissibly impose on any network participant for its services. Instead, the proposed rule is intended to ensure that network fees, discounts, and incentives do not, in effect, circumvent the interchange transaction fee restrictions. Accordingly, proposed § 235.6 contains a general prohibition against circumventing or evading the interchange transaction fee restrictions in §§ 235.3 and 235.4. In addition, proposed § 235.6 would expressly prohibit an issuer from receiving net compensation from a payment card network with respect to electronic debit transactions. The Board believes that such compensation would effectively serve as a transfer to issuers in excess of the amount of interchange transaction fee revenue allowed under the standards in §§ 235.3 and 235.4.
The Board also considered whether increases in fees charged by the network on merchants or acquirers coupled with corresponding decreases in fees charged by the network on issuers should also be considered circumvention or evasion of the interchange fee standards in §§ 235.3 and 235.4. For example, following the effective date of this rule, a network might increase network switch fees charged to merchants, acquirers, or processors while decreasing switch fees paid by issuers for the same types of electronic debit transactions. Under these circumstances, the increase in network processing fees charged to merchants is arguably “passed through” to issuers through corresponding decreases in processing fees paid by issuers.
The Board recognizes that such decreases in issuer fees could have the effect of offsetting reductions in interchange transaction fee revenue that will occur under the proposed restrictions in §§ 235.3 and 235.4. Nonetheless, the Board believes that such circumstances would not necessarily indicate circumvention or evasion of the interchange transaction fee restrictions because, absent net payments to the issuer from the network, an issuer would not receive net compensation from the network for electronic debit transactions. Moreover, the Board is concerned that prohibiting such shifts in the allocation of network fees would effectively lock in the current distribution of network fees between issuers and merchants, thereby constraining the ability of networks to adjust their own sources of revenue in response to changing market conditions. The Board requests comment on the proposed approach, as well as on any other approaches that may be necessary and appropriate to address concerns about circumvention or evasion of the interchange fee standards.
Proposed comment 6–1 provides that any finding of circumvention or evasion of the interchange transaction fee restrictions will depend on the relevant facts or circumstances. The proposed comment also provides an example of a circumstance indicating circumvention or evasion. In the example, circumvention or evasion occurs if the total amount of payments or incentives received by an issuer from a payment card network during a calendar year in connection with electronic debit transactions, excluding interchange transaction fees that are passed through to the issuer by the network, exceeds the total of all fees paid by the issuer to the network for electronic debit transactions during that year. In this circumstance, an issuer impermissibly receives net compensation from the payment card network in addition to the interchange transaction fees permitted under §§ 235.3 and 234.4.
Proposed comment 6–1.ii clarifies that payments or incentives paid by a payment card network include, but are not limited to, marketing incentives, payments or rebates for meeting or exceeding a specific transaction volume, percentage share or dollar amount of transactions processed, or other fixed payments for debit card related activities. Payments or incentives paid by a payment card network to an issuer do not include any interchange transaction fees that are passed through to the issuer by the network. Incentives paid by a payment card network also do not include funds received by an issuer from a payment card network as a result of chargebacks or violations of network rules or requirements by a third party. The proposed comment further clarifies that fees paid by an issuer to a payment card network include, but are not limited to, network processing, or switch, fees paid for each transaction, as well as fees charged to issuers that are not particular to a transaction, such as membership or licensing fees and network administration fees. Fees paid by an issuer could also include fees for optional services provided by the network.
Proposed comment 6–2 provides examples of circumstances that do not evade or circumvent the interchange transaction fee restrictions. In the first proposed example, an issuer receives an additional incentive payment from the network as a result of increased debit card transaction volume over the network during a particular year. However, because of the additional debit card activity, the aggregate switch fees paid by the issuer to the network also increase. Assuming the total amount of fees paid by the issuer to the network continues to exceed the total amount of incentive payments received by the issuer from the network during that calendar year, no circumvention or evasion of the interchange transaction fee restrictions has occurred.
In the second example, an issuer receives a rate reduction for network processing fees due to an increase in debit card transactions during a calendar year that reduces the total amount of network processing fees paid by the issuer during the year. However, the total amount of all fees paid to the network by the issuer continues to exceed the total amount of incentive payments received by the issuer from the network. Under these circumstances, the issuer does not circumvent or evade the interchange
Proposed comment 6–3 clarifies that the prohibition in § 235.6 against circumventing or evading the interchange transaction fee restrictions does not apply to issuers or products that qualify for an exemption under § 235.5. Thus, for example, § 235.6 does not apply to an issuer with consolidated assets below $10 billion holding the account that is debited in an electronic debit transaction.
Comment is requested regarding how the rule should address signing bonuses that a network may provide to attract new issuers or to retain existing issuers upon the execution of a new agreement between the network and the issuer. Such bonuses arguably do not circumvent or evade the interchange transaction fee restrictions because they do not serve to compensate issuers for electronic debit transactions that have been processed over the network. Moreover, if such payments were considered in assessing whether network-provided incentives during a calendar year impermissibly exceeded the fees paid by an issuer during that year, it could constrain a network's ability to grow the network and achieve greater network efficiencies by potentially removing a significant tool for attracting new issuers. However, if such signing bonuses are not taken into account in determining whether an issuer receives net compensation for electronic debit transactions, a network could provide significant upfront incentive payments during the first year of a contract or space out incentive payments over several years to offset the limitations on interchange transaction fees that could be received by the issuer over the course of the contract.
The Board also requests comment on all aspects of the proposed prohibition against circumvention or evasion, including whether the rule should provide any additional examples to illustrate the prohibition against circumvention or evasion of the interchange transaction fee restrictions.
EFTA Section 920(b) sets forth provisions limiting the ability of issuers and payment card networks to restrict merchants and other persons from establishing the terms and conditions under which they may accept payment cards. For example, EFTA Section 920(b) prohibits an issuer or payment card network from establishing rules that prevent merchants from offering discounts based on the method of payment tendered. In addition, the statute prohibits an issuer or payment card network from establishing rules preventing merchants from setting minimum and maximum transaction amounts for accepting credit cards. These two statutory provisions are self-executing and are not subject to the Board's rulemaking authority.
However, the Board is directed to prescribe implementing regulations with respect to two additional limitations set forth in the statute. First, the Board must issue rules prohibiting an issuer or payment card network from restricting the number of payment card networks on which an electronic debit transaction may be processed (network exclusivity restrictions).
The statutory exemptions for small issuers, government-administered payment cards, and certain reloadable prepaid cards under EFTA Section 920 apply only to the restrictions on interchange transaction fees in EFTA Section 920(a).
EFTA Section 920(b)(1)(A) directs the Board to prescribe rules prohibiting an issuer or a payment card network from directly or indirectly restricting, through any agent, processor, or licensed member of a payment card network, the number of payment card networks on which an electronic debit transaction may be processed to fewer than two unaffiliated payment card networks. Proposed § 235.7(a) implements the new requirement.
In recent years, payment card networks have increasingly offered issuers financial incentives in exchange for committing a substantial portion of their debit card transaction volume to the network. For example, some issuers may agree to shift some or all of their debit card transaction volume to the network in exchange for higher incentive payments (such as volume-based payments or marketing support) or volume-based discounts on network fees charged to the issuer. In many cases, issuers have agreed to make the payment card network, or affiliated networks, the exclusive network(s) associated with the issuer's debit cards. For example, some issuers have agreed to restrict their cards' signature debit functionality to a single signature debit network and PIN debit functionality to the PIN debit network that is affiliated with the signature debit network. Certain signature debit network rules also prohibit issuers of debit cards carrying the signature network brand from offering other signature debit networks or certain competing PIN debit networks on the same card.
Some issuers also negotiate or enroll in “exclusivity arrangements” with payment card networks for other business purposes. For example, an issuer may want to shift a substantial portion or all of its debit card volume to a particular network to reduce core processing costs through economies of scale; to control fraud and enhance data security by limiting the points for potential compromise; or to eliminate or reduce the membership and compliance costs associated with connecting to multiple networks.
From the merchant perspective, the availability of multiple card networks on a debit card is attractive because it gives merchants the flexibility to route transactions over the network that will result in the lowest cost to the merchant. This flexibility may promote direct price competition among the debit card networks that are enabled on the debit card. Thus, debit card network exclusivity arrangements limit merchants' ability to route transactions over lower-cost networks and may reduce price competition.
From the cardholder perspective, however, requiring multiple payment card networks could have adverse effects. In particular, such a requirement could limit the cardholder's ability to obtain certain card benefits. For example, a cardholder may receive zero liability protection or enhanced chargeback rights only if a transaction is carried over a specific card network. Similarly, insurance benefits for certain types of transactions or purchases or the
In the proposed rule, the Board requests comment on two alternative approaches for implementing the restrictions on debit card network exclusivity. The first alternative (Alternative A) would require a debit card to have at least two unaffiliated payment card networks available for processing an electronic debit transaction. Under this alternative, an issuer could comply, for example, by having one payment card network available for signature debit transactions and a second, unaffiliated payment card network available for PIN debit transactions. The second alternative (Alternative B) would require a debit card to have at least two unaffiliated payment card networks available for processing an electronic debit transaction for each method of authorization available to the cardholder. For example, a debit card that can be used for both signature and PIN debit transactions would be required to offer at least two unaffiliated signature debit payment card networks and at least two unaffiliated PIN debit payment card networks.
EFTA Section 920(b)(1)(A) provides that an issuer and payment card network do not violate the prohibition against network exclusivity arrangements as long as the number of payment card networks on which an electronic debit transaction may be processed is not limited to less than two unaffiliated payment card networks. Nothing in EFTA Section 920(b)(1)(A) specifically requires that there must be two unaffiliated payment card networks available to the merchant once the method of debit card authorization has been determined. In other words, the statute does not expressly require issuers to offer multiple unaffiliated signature and multiple unaffiliated PIN debit card network choices on each card.
In addition, requiring multiple unaffiliated payment card networks on a debit card for each method of card authorization could potentially limit the development and innovation of new authorization methods. Although PIN and signature are the primary methods of debit card transaction authorization today, new authentication measures involving biometrics or other technologies may, in the future, be more effective in reducing fraud. However, an issuer may be unable to implement these new methods of card authorization if the rule requires that such transactions be capable of being processed on multiple unaffiliated networks. Moreover, the Board understands that enabling the ability to process a debit card transaction over multiple signature debit networks may not be feasible in the near term. Specifically, enabling multiple signature debit networks on a debit card could require the replacement or reprogramming of millions of merchant terminals as well as substantial changes to software and hardware for networks, issuers, acquirers, and processors in order to build the necessary systems capability to support multiple signature debit networks for a particular debit card transaction.
Finally, the Board recognizes that small debit card issuers could be disproportionately affected by a requirement to have multiple networks for each method of debit card authorization.
For these reasons, Alternative A would provide that the network exclusivity prohibition could be satisfied as long as an electronic debit transaction may be processed on at least two unaffiliated payment card networks.
The Board also recognizes that the effectiveness of the rule promoting network competition could be limited in some circumstances if an issuer can satisfy the requirement simply by having one payment card network for signature debit transactions and a second unaffiliated payment card network for PIN debit transactions. In particular, the Board understands that only about 2 million of the 8 million merchant locations in the United States that accept debit cards have the capability to accept PIN debit transactions. Thus, in those locations that accept only signature debit, potentially under Alternative A only a single payment card network would be available to process electronic debit transactions.
In addition, PIN debit functionality generally is not available in certain merchant categories or for certain types of transactions. For example, the Board understands that PIN debit typically cannot be used for hotel stays or car rentals for which a merchant obtains an authorization for an estimated transaction amount, but the actual transaction amount is not known until later, when the cardholder checks out of the hotel or returns the rental car. Because PIN debit transactions are single-message transactions that combine the authorization and clearing instructions, the Board understands that it is currently not feasible to use PIN debit in circumstances where the final transaction amount differs from the authorized transaction amount. PIN debit is also not currently available for Internet purchase transactions in most cases. Thus, for these transaction types, the unavailability of PIN debit as an alternative method of authorization effectively means that only a single card network would be available to process an electronic debit transaction if Alternative A is adopted in the final rule.
Finally, the Board notes that Alternative A could limit the effectiveness of the separate prohibition on merchant routing restrictions under new EFTA Section 920(b)(1)(B), discussed below, if an issuer elected to enable only one signature debit network and one unaffiliated PIN network on a particular debit card. This is because once the cardholder has authorized the
Under Alternative B, an issuer or payment card network would be prohibited from directly or indirectly restricting the number of payment card networks on which an electronic debit transaction may be processed to less than two unaffiliated networks “for each method of authorization that may be used by the cardholder.” This means that an issuer would not comply with the proposed rule for a signature and PIN-enabled debit card unless there were at least two unaffiliated signature debit networks and at least two unaffiliated PIN debit networks enabled on the card.
Proposed comment 7(a)–3 under Alternative B clarifies that under this alternative, each electronic debit transaction, regardless of the method of authorization, must be able to be processed on at least two unaffiliated payment card networks. For example, if a cardholder authorizes an electronic debit transaction using a signature, that transaction must be capable of being processed on at least two unaffiliated signature-based payment card networks. Similarly, if a cardholder authorizes an electronic debit transaction using a PIN, that transaction must be capable of being processed on at least two unaffiliated PIN-based payment card networks. This comment would also clarify that the use of contactless or radio-frequency identification (RFID) technology would not constitute a separate method of authorization as the Board understands that such transactions are generally processed over either a signature debit network or a PIN debit network.
The Board requests comment on both proposed alternatives for implementing the prohibition on network exclusivity arrangements under EFTA Section 920(b)(1)(A). Comment is requested on the cost and benefits of each alternative, including for issuers, merchants, cardholders, and the payments system overall. In particular, the Board requests comment on the cost of requiring multiple payment card networks for signature-based debit card transactions, and the time frame necessary to implement such a requirement.
Proposed § 235.7(a)(2) describes three circumstances in which an issuer or payment card network would not satisfy the general requirement to have at least two unaffiliated payment networks on which an electronic debit transaction may be processed, regardless of which of the alternatives is adopted.
First, proposed § 235.7(a)(2)(i) addresses payment card networks that operate in a limited geographic acceptance area. Specifically, the proposed rule provides that adding an unaffiliated payment card network that is not accepted throughout the United States would not satisfy the requirement to have at least two unaffiliated payment card networks enabled on a debit card. For example, an issuer could not comply with the network exclusivity provision by having a second unaffiliated payment card network that is accepted in only a limited geographic region of the country. However, an issuer would be in compliance with proposed § 235.7(a)(1) if, for example, the debit card operates on one national network and multiple geographically limited networks that are unaffiliated with the first network and that, taken together, provide nationwide coverage. Proposed comment 7(a)–4.i provides an example to illustrate the provision regarding limited geographic acceptance networks. The proposed comment also clarifies that a payment card network is considered to have sufficient geographic reach even though there may be limited areas in the United States that it does not serve. For example, a national network that has no merchant acceptance in Guam or American Samoa may nonetheless meet the geographic reach requirement.
The Board requests comment on the impact of the proposed approach to networks with limited geographic acceptance on the viability of regional payment card networks, and whether other approaches may be appropriate, including, but not limited to, requiring that a particular debit card be accepted on at least two unaffiliated payment card networks (under either alternative) in States where cardholders generally use the card. If the Board permitted a regional network by itself to satisfy the requirement, what standard should be used for determining whether that network provides sufficient coverage for the issuer's cardholders' transactions? The Board also requests comment on the potential impact, and particularly the cost impact, on small issuers from adding multiple payment card networks in order to ensure that a debit card is accepted on a nationwide basis on at least two unaffiliated payment card networks.
Second, proposed § 235.7(a)(2)(ii) provides that adding an unaffiliated payment card network that is accepted only at a limited number of merchant locations or for limited merchant types or transaction types would not comply with the requirement to have at least two unaffiliated payment card networks on a debit card. For example, an issuer could not solely add as an unaffiliated payment card network, a network that is only accepted at a limited category of merchants (for example, at a particular supermarket chain or at merchants located in a particular shopping mall).
Third, the proposed rule would prohibit a payment card network from restricting or otherwise limiting an issuer's ability to contract with any other payment card network that may process an electronic debit transaction involving the issuer's debit cards.
Proposed § 235.7(a)(2)(iii) would also prohibit network rules or guidelines that allow only that network's (or its affiliated network's) brand, mark, or logo to be displayed on a particular debit card, or that otherwise limit the number or location of network brands, marks, or logos that may appear on the debit card.
Proposed comment 7(a)–6 provides, however, that nothing in the rule requires that a debit card identify the brand, mark, or logo of each payment card network over which an electronic debit transaction may be processed. For example, a debit card that operates on two or more different unaffiliated payment card networks need not bear the brand, mark, or logo for each card network. The Board believes that this flexibility is necessary to facilitate an issuer's ability to add (or remove) payment card networks to a debit card without being required to incur the additional costs associated with the
Proposed § 235.7(a) does not expressly prohibit debit card issuers from committing to a certain volume, percentage share, or dollar amount of transactions to be processed over a particular network. However, these volume, percentage share, or dollar amount commitments could only be given effect through issuer or payment card network priorities that direct how a particular debit card transaction should be routed by a merchant. As discussed below under proposed § 235.7(b), these issuer or payment card network routing priorities would be prohibited by the proposed limitations on merchant routing restrictions. The Board requests comment on whether it is necessary to address volume, percentage share, or dollar amount requirements in the exclusivity provisions, and whether other types of arrangements should be addressed under the rule.
Proposed comment 7(a)–7 clarifies that the requirements of § 235.7(a) apply equally to voluntary arrangements in which a debit card issuer participates exclusively in a single payment card network or affiliated group of payment card networks by choice, rather than due to a specific network rule or contractual commitment. For example, although an issuer may prefer to offer a single payment card network (or the network's affiliates) on its debit cards to reduce its processing costs or for operational simplicity, the statute's exclusivity provisions do not allow that. Thus, the proposed comment clarifies that all issuers must issue cards enabled with at least two unaffiliated payment card networks, even if the issuer is not subject to any rule of, or contract, arrangement, or any other agreement with, a payment card network requiring that all or a specified minimum percentage of electronic debit transactions be processed on the network or its affiliated networks.
Proposed comment 7(a)–8 clarifies that the network exclusivity rule does not prevent an issuer from including an affiliated payment card network among the networks that may process an electronic debit transaction for a particular debit card, as long as at least two of the networks that accept the card are unaffiliated. The proposed comment under Alternative A clarifies that an issuer is permitted to offer debit cards that operate on both a signature debit network as well as an affiliated PIN debit network, as long as at least one other payment card network that is unaffiliated with either the signature or PIN debit networks also accepts the card. The Board is also proposing a corresponding comment that would apply to Alternative B.
Proposed § 235.7(a)(3) addresses circumstances where previously unaffiliated payment card networks subsequently become affiliated as a result of a merger or acquisition. Under these circumstances, an issuer that issues cards with only the two previously unaffiliated networks enabled would no longer comply with § 235.7(a)(1) until the issuer is able to add an additional unaffiliated payment card network to the debit card. The proposed rule requires issuers in these circumstances to add an additional unaffiliated debit card network no later than 90 days after the date on which the prior unaffiliated payment card networks become affiliated. The Board requests comment on whether 90 days provides sufficient time for issuers to negotiate new agreements and add connectivity with the additional networks in order to comply with the rule.
The Board understands that some institutions may wish to issue a card, or other payment code or device, that meets the proposed definition of “debit card,” but that may be capable of being processed using only a single authorization method. For example, a key fob or mobile phone embedded with a contactless chip may be able to be processed only as a signature debit transaction or only on certain networks. Under the proposed rule (under either alternative), the issuer would be required to add at least a second unaffiliated signature debit network to the device to comply with the requirements of § 235.7(a). The Board requests comment on whether this could inhibit the development of these devices in the future and what steps, if any, the Board should take to avoid any such impediments to innovation.
As noted above under proposed comment 7–1, the statutory exemptions for small issuers, government-administered payment cards, and certain reloadable prepaid cards do not apply to the limitations on payment card network restrictions under EFTA Section 920(b). Thus, for example, government-administered payment cards and reloadable prepaid cards, including health care and other employee benefit cards, would be subject to the prohibition on the use of exclusive networks under EFTA Section 920(b)(1). The Board understands that in many cases, issuers do not permit PIN functionality on prepaid cards in order to prevent cash access in response to potential money laundering or other regulatory concerns. In addition, in the case of debit cards issued in connection with health flexible spending accounts and health reimbursement accounts, Internal Revenue Service (IRS) rules require the use of certain sophisticated technology at the point-of-sale to ensure that the eligibility of a medical expense claim can be substantiated at the time of the transaction. However, PIN-debit networks may not currently offer the functionality or capability to support the required technology. Thus, applying the network exclusivity prohibition to these health benefit cards in particular could require an issuer or plan administrator to add a second signature debit network to comply with IRS regulations if PIN networks do not add the necessary functionality to comply with those regulations. The Board requests comment on any alternatives, consistent with EFTA Section 920, that could minimize the impact of the proposed requirements on these prepaid products.
EFTA Section 920(b)(1)(B) requires the Board to prescribe rules prohibiting an issuer or payment card network from directly or indirectly “inhibit[ing] the ability of any person that accepts debit cards for payments to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions.” The Board is proposing to implement this restriction in § 235.7(b). Specifically, proposed § 235.7(b) would prohibit both issuers and payment card networks from inhibiting, directly, or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, a merchant's ability to route electronic debit transactions over any payment card network that may process such transactions.
In practice, this means that merchants, not issuers or networks, must be able to designate preferences for the routing of transactions, and that the merchant's preference must take priority over the issuer's or network's preference. The rules of certain PIN debit payment card networks today require merchants to route PIN debit transactions based on the card issuer's designated preferences. This is the case even where multiple PIN debit networks are available to process a particular debit card transaction. In other cases, the PIN debit network itself may require, by rule or contract, that the particular PIN debit transaction be
The Board does not interpret EFTA Section 920(b)(1)(B) to grant a person that accepts debit cards the ability to process an electronic debit transaction over
Proposed comment 7(b)–2 provides examples of issuer or payment card network practices that would inhibit a merchant's ability to direct the routing of an electronic debit transaction in violation of § 235.7(b). Although routing generally refers to sending the transaction information to the issuer, the Board notes that the statute broadly directs the Board to prescribe the rules that prohibit issuer or payment card network practices that “inhibit” a person's ability to direct the routing of the transaction. Accordingly, the Board believes it is appropriate also to address certain practices that may affect the network choices available to the merchant at the time the transaction is processed.
The first example addresses issuer or card network rules or requirements that prohibit a merchant from “steering,” or encouraging or discouraging, a cardholder's use of a particular method of debit card authorization. For example, merchants may want to encourage cardholders to authorize a debit card transaction by entering their PIN, rather than by providing a signature, if PIN debit carries a lower interchange rate than signature debit. Under proposed § 235.7(b) and comment 7(b)–2.i, merchants may not be inhibited from encouraging the use of PIN debit by, for example, setting PIN debit as a default payment method or blocking the use of signature debit altogether.
The second example of a prohibited routing restriction is network rules or issuer designated priorities that direct the processing of an electronic debit transaction over a specified payment card network or its affiliated networks.
As noted above, if issuer- or network-directed priorities are prohibited, issuers will, as a practical matter, be unable to guarantee or otherwise agree to commit a specified volume, percentage share, or dollar amount of debit card transactions to a particular debit card network. Accordingly, the Board believes it is unnecessary to separately address volume, percentage share, or dollar amount commitments of debit card transactions as prohibited forms of network exclusivity arrangements under proposed § 235.7(a).
Under the third example, a payment card network could not require a particular method of debit card authorization based on the type of access device provided by the cardholder.
Although proposed § 235.7 provides merchants control over how an electronic debit transaction is routed to the issuer, the proposed rule does not impose a requirement that a merchant be able to select the payment card network over which to route or direct a particular electronic debit transaction in real time, that is, at the time of the transaction. The Board believes that requiring real-time merchant routing decision-making could be operationally infeasible and cost-prohibitive in the short term as it would require systematic programming changes and equipment upgrades. Today, for example, transaction routing is relatively straightforward once the cardholder has chosen to authorize a debit card transaction using his or her PIN. Once the PIN is entered, card information for the transaction is transmitted to the merchant's acquirer or processor and the transaction is then generally routed over a pre-determined network based upon issuer or payment network routing priorities for that card. Under proposed § 235.7(b), however, issuer and network routing priorities would no longer be permitted, except under limited circumstances.
Although EFTA Section 920 requires that the restrictions on the amount of interchange transaction fees become effective on July 21, 2011, the statute does not specify an effective date for the separate provisions on network exclusivity and merchant routing restrictions. As discussed above, the new provisions provide that at least two unaffiliated payment card networks must be available for processing any electronic debit transaction, and prohibit issuers and payment card
If Alternative B is adopted in the final rule and multiple signature debit networks are required for each debit card, the Board anticipates that significantly more time will be needed to enable issuers and networks to comply with the rule. The Board requests comment on a potential effective date of October 1, 2011, for the provisions under § 235.7 if the Board were to adopt Alternative A under the network exclusivity provisions, or alternatively, an effective date of January 1, 2013 if Alternative B were adopted in the final rule.
The Board requests comment on all aspects of implementing the proposed limitations on network exclusivity and merchant routing restrictions under § 235.7, including the specific changes that will be required and the entities affected. The Board also requests comment on other, less burdensome alternatives that may be available to carry out the proposed restrictions under § 235.7 to reduce the necessary cost and implementation time period.
Section 920 authorizes the Board to collect from issuers and payment card networks information that is necessary to carry out the provisions of this section and requires the Board to publish, if appropriate, summary information about costs and interchange transaction fees every two years. Summary information from information collections conducted prior to this proposed rulemaking is discussed above. The Board anticipates using forms derived from the Interchange Transaction Fee Surveys (FR 3062; OMB No. 7100), but with a narrower scope, for purposes of these proposed reporting requirements.
Consistent with the statutory information collection authority, the Board proposes to require issuers that are subject to §§ 235.3 and 235.4 and payment card networks to submit reports to the Board. Each entity required to submit a report would submit the form prescribed by the Board. The forms would request information regarding costs incurred with respect to electronic debit transactions, interchange transaction fees, network fees, and fraud-prevention costs. Similar to the surveys conducted in connection with this proposed rulemaking, the Board may publish summary or aggregate information.
The Board proposes that each entity would be required to report biennially, consistent with the Board's statutory publication requirement. The Board anticipates that circumstances may develop that require more frequent reporting. Accordingly, under proposed § 235.8(c), the Board reserves the discretion to require more frequent reporting.
For the years an entity is required to report, the Board proposes that such entity must submit the report to the Board by March 31 of that year. The Board believes that permitting three months following the end of the calendar-year reporting period provides a reasonable time to determine the costs that need to be reported and complete the report. The Board is requesting comment on whether the three-month time frame is appropriate.
Proposed § 235.8(e) would require entities that are required to report under this section to retain records of reports submitted to the Board for five years. Further, such entities would be required to make each report available upon request to the Board or the entity's primary supervisors. The Board believes that the record retention requirement will facilitate administrative enforcement.
The interchange transaction fee requirements and the network exclusivity and routing rules are enforced under EFTA Section 918 (15 U.S.C. 1693o), which sets forth the administrative agencies that enforce the requirements of the EFTA. Unlike other provisions in the EFTA, the requirements of Section 920 are not subject to EFTA Section 916 (civil liability) and Section 917 (criminal liability). Further, the Dodd-Frank Act amends the current administrative enforcement provision of the EFTA. Therefore, proposed § 235.9 sets forth the administrative enforcement agencies under EFTA Section 918 as amended by the Dodd-Frank Act.
Comment letters should refer to Docket No. R–1404 and, when possible, should use a standard typeface with a font size of 10 or 12; this will enable the Board to convert text submitted in paper form to machine-readable form through electronic scanning, and will facilitate automated retrieval of comments for review. Comments may be mailed electronically to
Section 772 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 4809) requires the Board to use “plain language” in all proposed and final rules published after January 1, 2000. The Board invites comment on whether the proposed rule is clearly stated and effectively organized, and how the Board might make the text of the rule easier to understand.
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed this proposed rule under the authority delegated to the Board by the Office of Management and Budget. The Board will conduct an analysis under the Paperwork Reduction Act and seek public comment when it develops surveys to obtain information under § 235.8. Any additional burden associated with the reporting requirement in proposed § 235.3(d) (under Alternative 1) for issuers that wish to receive an interchange fee in excess of the safe harbor is considered negligible. Thus no new collections of information pursuant to the PRA are contained in the proposed rule.
In accordance with Section 3(a) of the Regulatory Flexibility Act, 5 U.S.C. 601
1.
2.
3.
The proposed rule prohibiting network exclusivity arrangements may affect small financial institutions that issue debit cards if such institutions do not currently comply with the Board's proposed standards. Under one alternative, a small issuer, like other issuers, would be required to have at least two unaffiliated payment card networks on each debit card it issues. If the issuer does not do so already, it would be required to add an additional network. This process may require making a decision as to which additional network to put on a card, establishing a connection to the new network, or updating internal processes and procedures. Under the second alternative, a small issuer, like all issuers, would be required to issue debit cards with at least two unaffiliated networks for each method of authorization a cardholder could select. The actions that may be necessary to add additional networks under the second alternative are the same as those under the first alternative. An issuer, however, would incur greater costs as the number of networks it adds increases. In contrast, like all merchants that accept debit cards, smaller merchants will be provided with greater routing choice. Therefore, the smaller merchants will be able to route electronic debit transactions over the lowest-cost path. Accordingly, the Board expects any economic impact on merchants to be positive.
4.
5.
Electronic debit transactions, interchange transaction fees, and debit card routing.
For the reasons set forth in the preamble, the Board is proposing to add new 12 CFR part 235 to read as follows:
15 U.S.C. 1693r.
(a)
(b)
(a)
(b)
(c)
(d)
(e)
(1) Ownership, control, or power to vote 25 percent or more of the outstanding shares of any class of voting security of the company, directly or indirectly, or acting through one or more other persons;
(2) Control in any manner over the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of the company; or
(3) The power to exercise, directly or indirectly, a controlling influence over the management or policies of the company, as the Board determines.
(f)
(2) Includes any general-use prepaid card.
(3) The term “debit card” does not include—
(i) Any card, or other payment code or device, that is redeemable upon presentation at only a single merchant or an affiliated group of merchants for goods or services;
(ii) A check, draft, or similar paper instrument, or an electronic representation thereof; or
(iii) An account number, when used to initiate an ACH transaction to debit a person's account.
(g)
(1) All automated teller machines identified in the name of the issuer; or
(2) Any network of automated teller machines identified by the issuer that provides reasonable and convenient access to the issuer's customers.
(h)
(i)
(1) Issued on a prepaid basis, whether or not that amount may be increased or reloaded, in exchange for payment; and
(2) Redeemable upon presentation at multiple, unaffiliated merchants for goods or services, or usable at automated teller machines.
(j)
(k)
(l)
(m)
(1) Directly or indirectly provides the services, infrastructure, and software for authorization, clearance, and settlement of electronic debit transactions; and
(2) Establishes the standards, rules, or procedures that govern the rights and obligations of issuers and acquirers involved in processing electronic debit transactions through the network.
(n)
(o)
(p)
(a)
Alternative 1 (Issuer-Specific Standard With Safe Harbor and Cap):
(b)
(1) Seven cents per transaction; or
(2) The costs described in paragraph (c) of this section incurred by the issuer with respect to electronic debit transactions during the calendar year preceding the start of the implementation period, divided by the number of electronic debit transactions on which the issuer charged or received an interchange transaction fee during that calendar year, but no higher than twelve cents per transaction.
(c)
(1) Are only those costs that vary with the number of transactions sent to the issuer and that are attributable to—
(i) Receiving and processing requests for authorization of electronic debit transactions;
(ii) Receiving and processing presentments and representments of electronic debit transactions;
(iii) Initiating, receiving, and processing chargebacks, adjustments, and similar transactions with respect to electronic debit transactions; and
(iv) Transmitting or receiving funds for interbank settlement of electronic debit transactions; and posting electronic debit transactions to cardholder accounts; and
(2) Do not include fees charged by a payment card network with respect to an electronic debit transaction.
(d)
(e)
(1) Seven cents per transaction; or
(2) The costs described in subsection (c) of this section incurred by the issuer for electronic debit transactions during the 2009 calendar year, divided by the number of electronic debit transactions on which the issuer received or charged an interchange transaction fee during the 2009 calendar year, but no higher than twelve cents per transaction.
Alternative 2 (Cap):
(b)
(a)
(1) The issuer holds the account that is debited; and
(2) The issuer, together with its affiliates, has assets of less than $10 billion as of the end of the previous calendar year.
(b)
(1) The electronic debit transaction is made using a debit card that has been provided to a person pursuant to a Federal, State, or local government-administered payment program; and
(2) The cardholder may use the debit card only to transfer or debit funds, monetary value, or other assets that have been provided pursuant to such program.
(c)
(i) Not issued or approved for use to access or debit any account held by or for the benefit of the cardholder (other than a subaccount or other method of recording or tracking funds purchased or loaded on the card on a prepaid basis); and
(ii) Reloadable and not marketed or labeled as a gift card or gift certificate.
(2)
(d)
(1) A fee or charge for an overdraft, including a shortage of funds or a transaction processed for an amount exceeding the account balance, unless the fee or charge is charged for transferring funds from another asset account to cover a shortfall in the account accessed by the card; or
(2) A fee charged by the issuer for the first withdrawal per calendar month from an automated teller machine that is part of the issuer's designated automated teller machine network.
(a)
(a)
Alternative A: An issuer or payment card network shall not directly or through any agent, processor, or licensed member of a payment card network, by contract, requirement, condition, penalty, or otherwise, restrict the number of payment card networks on which an electronic debit transaction may be processed to less than two unaffiliated networks.
Alternative B: An issuer or payment card network shall not directly or through any agent, processor, or licensed member of a payment card network, by contract, requirement, condition, penalty, or otherwise, restrict the number of payment card networks on which an electronic debit transaction may be processed to less than two unaffiliated networks for each method of authorization that may be used by the cardholder.
(2)
(i) The unaffiliated network(s) that is added to satisfy the requirements of this paragraph does not operate throughout the United States, unless the debit card is accepted on a nationwide basis on at least two unaffiliated payment card networks when the network(s) with limited geographic acceptance is combined with one or more other unaffiliated payment card networks that also accept the card.
(ii) The unaffiliated network(s) that is added to satisfy the requirements of this paragraph is accepted only at a small number of merchant locations or at limited types of merchants; or
(iii) The payment card network restricts or otherwise limits an issuer's ability to contract with any other payment card network that may process an electronic debit transaction involving the issuer's debit cards.
(3)
(b)
(a)
(b)
(c)
(2) Each entity shall submit the report to the Board by March 31 of the year the entity is required to report.
(3) The first report shall be submitted to the Board by March 31, 2012.
(d)
(a)(1) Compliance with the requirements of this part shall be enforced under—
(i) Section 8 of the Federal Deposit Insurance Act, by the appropriate Federal banking agency, as defined in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)), with respect to—
(A) National banks, federal savings associations, and federal branches and federal agencies of foreign banks;
(B) Member banks of the Federal Reserve System (other than national banks), branches and agencies of foreign banks (other than Federal branches, Federal Agencies, and insured state branches of foreign banks), commercial lending companies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act;
(C) Banks and state savings associations insured by the Federal Deposit Insurance Corporation (other than members of the Federal Reserve System), and insured state branches of foreign banks;
(ii) The Federal Credit Union Act (12 U.S.C. 1751
(iii) The Federal Aviation Act of 1958 (49 U.S.C. 40101
(iv) The Securities Exchange Act of 1934 (15 U.S.C. 78a
(2) The terms used in paragraph (a)(1) of this section that are not defined in this part or otherwise defined in section 3(s) of the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the meaning given to them in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
(b)
(2) In addition to its powers under any provision of law specifically referred to in paragraphs (a)(1)(i) through (iv) of this section, each of the agencies referred to in those paragraphs may exercise, for the purpose of enforcing compliance under this part, any other authority conferred on it by law.
(c)
The following commentary to Regulation II (12 CFR part 235) provides background material to explain the Board's intent in adopting a particular part of the regulation. The commentary also provides examples to aid in understanding how a particular requirement is to work.
1.
2.
1.
1.
2.
1.
1.
2.
3.
4.
5.
6.
7.
1.
1.
2.
3.
1.
2.
1.
2.
1.
2.
3.
4.
i.
ii.
5.
1.
1.
2.
Alternative 1 (Issuer-Specific Standard With Safe Harbor and Cap):
1.
2.
3.
4.
1.
2.
i.
ii.
iii.
iv.
3.
i.
ii.
iii.
iv.
1.
2.
1.
1.
1.
1.
1.
2.
The mere mention of the availability of gift cards or gift certificates in an advertisement or on a sign that also indicates the availability of exempted general-use prepaid cards does not by itself cause the general-use prepaid card to be marketed as a gift card or a gift certificate. For example, the posting of a sign in a store that refers to the availability of gift cards does not by itself constitute the marketing of otherwise exempted general-use prepaid cards that may also be sold in the store along with gift cards or gift certificates, provided that a person acting reasonably under the circumstances would not be led to believe that the sign applies to all cards sold in the store. (
3.
i. The following are examples of marketed or labeled as a gift card or gift certificate:
A. Using the word “gift” or “present” on a card or accompanying material, including documentation, packaging and promotional displays;
B. Representing or suggesting that a card can be given to another person, for example, as a “token of appreciation” or a “stocking stuffer,” or displaying a congratulatory message on the card or accompanying material;
C. Incorporating gift-giving or celebratory imagery or motifs, such as a bow, ribbon, wrapped present, candle, or a holiday or congratulatory message, on a card, accompanying documentation, or promotional material;
ii. The term does not include the following:
A. Representing that a card can be used as a substitute for a checking, savings, or deposit account;
B. Representing that a card can be used to pay for a consumer's health-related expenses—for example, a card tied to a health savings account;
C. Representing that a card can be used as a substitute for travelers checks or cash;
D. Representing that a card can be used as a budgetary tool, for example, by teenagers, or to cover emergency expenses.
4.
i. An issuer or program manager of prepaid cards agrees to sell general-purpose reloadable cards through a retailer. The contract between the issuer or program manager and the retailer establishes the terms and conditions under which the cards may be sold and marketed at the retailer. The terms and conditions prohibit the general-purpose reloadable cards from being marketed as a gift card or gift certificate, and require policies and procedures to regularly monitor or otherwise verify that the cards are not being marketed as such. The issuer or program manager sets up one promotional display at the retailer for gift cards and another physically separated display for exempted products under § 235.5(c), including general-purpose reloadable cards, such that a reasonable person would not believe that the exempted cards are gift cards. The exemption in § 235.5(c) applies because policies and procedures reasonably designed to avoid the marketing of the general-purpose reloadable cards as gift cards or gift certificates are maintained, even if a retail clerk inadvertently stocks or a consumer inadvertently places a general-purpose reloadable card on the gift card display.
ii. Same facts as in same facts as in comment 5(c)–4.i, except that the issuer or program manager sets up a single promotional display at the retailer on which a variety of prepaid cards are sold, including store gift cards and general-purpose reloadable cards. A sign stating “Gift Cards” appears prominently at the top of the display. The exemption in § 235.5(c) does not apply with respect to the general-purpose reloadable cards because policies and procedures reasonably designed to avoid the marketing of exempted cards as gift cards or gift certificates are not maintained.
iii. Same facts as in same facts as in comment 5(c)–4.i, except that the issuer or program manager sets up a single promotional multi-sided display at the retailer on which a variety of prepaid card products, including store gift cards and general-purpose reloadable cards are sold. Gift cards are segregated from exempted cards, with gift cards on one side of the display and exempted cards on a different side of a display. Signs of equal prominence at the top of each side of the display clearly differentiate between gift cards and the other types of prepaid cards that are available for sale. The retailer does not use any more conspicuous signage suggesting the general availability of gift cards, such as a large sign stating “Gift Cards” at the top of the display or located near the display. The exemption in § 235.5(c) applies because policies and
iv. Same facts as in same facts as in comment 5(c)–4.i,, except that the retailer sells a variety of prepaid card products, including store gift cards and general-purpose reloadable cards, arranged side-by-side in the same checkout lane. The retailer does not affirmatively indicate or represent that gift cards are available, such as by displaying any signage or other indicia at the checkout lane suggesting the general availability of gift cards. The exemption in § 235.5(c) applies because policies and procedures reasonably designed to avoid marketing the general-purpose reloadable cards as gift cards or gift certificates are maintained.
5.
6.
1.
i.
ii.
2.
i. Because of an increase in debit card transactions that are processed through a payment card network during a calendar year, an issuer receives an additional volume-based incentive payment from the network for that year. Over the same period, however, the total network processing fees the issuer pays the payment card network with respect to debit card transactions also increase so that the total amount of fees paid by the issuer to the network continue to exceed payments or incentives paid by the network to the issuer. Under these circumstances, the issuer does not receive any net compensation from the network for electronic debit transactions, and thus, no circumvention or evasion of the interchange transaction fee restrictions has occurred.
ii. Because of an increase in debit card transactions that are processed through a payment card network during a calendar year, an issuer receives a rate reduction for network processing fees that reduces the total amount of network processing fees paid by the issuer during the year. However, the total amount of all fees paid to the network by the issuer for debit card transactions continues to exceed the total amount of payments or incentives received by the issuer from the network for such transactions. Under these circumstances, the issuer does not receive any net compensation from the network for electronic debit transactions and thus, no circumvention or evasion of the interchange transaction fee restrictions has occurred.
3.
1.
1.
2.
3.
3.
4.
i. A payment card network that operates in only a limited region of the United States would not meet the geographic test, unless one or more other unaffiliated payment card network(s) are also enabled on the card, such that the combined geographic coverage of networks permits the card to be accepted on at least two unaffiliated payment card networks for any geographic area in the United States. For example, an issuer may not issue a debit card that is enabled solely on one payment card network that is accepted nationwide and another unaffiliated payment card network that operates only in the Midwest United States. In such case, the issuer would also be required to add one or more unaffiliated payment card networks that would generally enable transactions involving the card to be processed on at least two unaffiliated payment card networks in almost all of the rest of the country. A payment card network is considered to have sufficient geographic reach even though there may be limited areas in the United States that it does not serve. For example, a national network that has no merchant acceptance in Guam or American Samoa would nonetheless meet the geographic reach requirement.
ii. A payment card network that is accepted only at a limited category of merchants (for example, at a particular grocery store chain or at merchants located in a particular shopping mall).
5.
i. Network rules or contract provisions limiting or otherwise restricting the other payment card networks that may be enabled on a particular debit card.
ii. Network rules or guidelines that allow only that network's brand, mark, or logo to be displayed on a particular debit card or that otherwise limit the number, or location, of network brands, marks, or logos that may appear on the debit card.
6.
7.
8.
8.
1.
2.
i. Prohibiting a merchant from encouraging or discouraging a cardholder's use of a particular method of debit card authorization, such as rules prohibiting merchants from favoring a cardholder's use of PIN debit over signature debit, or from discouraging the cardholder's use of signature debit.
ii. Establishing network rules or designating issuer priorities directing the processing of an electronic debit transaction on a specified payment card network or its affiliated networks, except as a default rule in the event the merchant, or its acquirer or processor, does not designate a routing preference, or if required by state law.
iii. Requiring a specific method of debit card authorization based on the type of access device provided by to the cardholder by the issuer, such as requiring the use of signature debit if the consumer provides a contactless debit card.
3.