A reasonable and proportional interchange transaction fee is 21 cents, plus a multiplier of 0.05 percentage points on the cost of every transaction to pay for fraud losses, according to a June 29, 2011, unanimous vote of the Federal Reserve Board of Governors. Also, an "interim rule" allows issuers to charge an additional 1-cent fee if they can "certify" they took measures over and above what would be expected to prevent fraud.
Twenty-one cents is a dramatic turn around for financial institutions that fought vigorously against the proposed new transaction fee cap.
The industry recently came within six Senate votes of halting the fee cap, but now it will settle for fees 9 cents higher than the 12-cent cap the Fed initially proposed in December 2010. In this sense, the final rule is a victory for card issuers and financial institutions. The new 21-cent cap is still just half the 44 cents issuers are receiving on average now on debit card transactions. Under the new and final rule, issuers will receive about 24 cents from the average $38 debit card transaction. The new transaction fee will go into effect Oct. 1, 2011, after final public comment is complete.
The new rule was developed at the direction of Congress through the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Durbin Amendment directs the Federal Reserve to develop standards for debit interchange fees that would cap the fees at a rate "reasonable and proportional" to the cost of the card issuer. The amendment also called on the Federal Reserve to prohibit issuers and networks from restricting the number of networks the merchant can use to route a debit card transaction.
The Board of Governors accepted the staff recommendation for a stand-alone cap on the interchange fee, arguing it was the easiest way to implement and monitor the Dodd Amendment. The staff said a higher fee than the one in the original proposed rule was needed to cover legitimate transaction costs of issuers, including network connectivity costs, hardware, software and labor costs of transactions, network processing fees and transaction monitoring costs.
The Fed also accepted a fraud-prevention adjustment of 1 cent per transaction for issuers to pay for effective fraud prevention policies and procedures. Finally, the board will require that issuers allow at least two unaffiliated debit card networks access to POS transactions while, at the same time, allowing merchants to choose to send their transactions to any processing network that can handle the transaction.
The board, though unanimous in its support for the staff recommendation, still has concerns about the impact of the debit fee transaction cap on small banks. The Durbin Amendment only applies to issuers with assets of more than $10 billion. There is a concern that a two-tier system will bias merchants against small issuers that still recover debit transaction costs through higher interchange fees in favor of larger issuers that not only have to, but can afford to offer lower interchange fees. The staff noted that despite industry pressure to institute a two-tier system of fee structures to address the disparity between small and large issuers, the board does not have the authority to force two-tier fee structures on networks.
The board decided instead to shore up the exemption for small issuers by publishing every year a list of issuers that fall above and below the $10 billion exemption. This list, to be published by mid-July 2011, will help payment card networks determine which of their issuers are subject to the new interchange fee rule.
The board also, acting on staff recommendation, will publish an annual list of average network interchange transaction fees for issuers. This will give small issuers the ability to assess the interchange revenue they would receive from each network. The board voted to carefully monitor the exemption to assess its impact on small issuers. Those reports will be issued 6 months and 18 months after the new rule goes into effect.
Federal Reserve Chairman Ben Bernanke said the new rule was one of the most difficult the Fed has ever written, and he reiterated his concern over the effect of the small issuer exemption on community banks and credit unions. "Congress has directed the board to accomplish a very difficult task," Bernanke said in opening remarks. "I believe the final rule gives careful consideration to the statutory language, the cost data available to us, and the complexities of the debit interchange payment system.
"The board plans to monitor developments in the debit card market, that monitoring will include collecting and publishing data related to debit card costs and interchange fees. These data will help the board, as well as issuers (both large and small), merchants, networks, consumers and Congress assess whether the statute and the rule are effectively accomplishing their intended goals."
Reaction from the financial industry was swift with a general sense of relief expressed that the final rule was receptive to industry comments and fears about the 75 percent cut in fees the Fed originally proposed with its 12-cent cap on fees.
"The Durbin Amendment of Dodd-Frank [is] less of a train wreck - but still very destructive - for community banks, credit unions and consumers," Competitive Enterprise Institute's Director of the Center for Investors and Entrepreneurs John Berlau commented. "Though this [21-cent cap on fees] still would be a significant reduction in fees for banks and credit unions, it still may be enough for a 'modest rally' in financial stocks. And it hopefully will be enough to avert a warning by Federal Reserve Chairman Ben Bernanke that as written, the proposed rule may cause some community banks to fail."
Credit Union Times quoted National Credit Union Administration Chairwoman Debbie Matz saying the new interchange fee amounts "are a step in the right direction."
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