On August 14, 2015, the Board of Governors of the Federal Reserve System (the Board) published a clarification (the Clarification) of the Board’s decision to include transactions-monitoring costs in establishing the 21-cent interchange-fee limitation set forth in Regulation II, Debit Card Interchange Fees and Routing (Regulation II). The Clarification was issued in response to an order of the U.S. Court of Appeals for the D.C. Circuit in NACS v. Board of Governors of the Federal Reserve System (NACS v. Board), the long-running challenge by merchants and merchant trade associations to Regulation II’s interchange-fee limitation. The appellate court’s order upheld Regulation II as a whole but mandated that the Board provide further explanation of its decision to allocate such costs to the fixed component of the interchange-fee limitation, rather than to the fraud-prevention adjustment established elsewhere in Regulation II.

The Durbin Amendment’s Interchange-Fee Limitation

The Durbin Amendment requires interchange fees charged or received by certain debit card issuers in conjunction with debit card transactions to be “reasonable and proportional” to the costs the issuer incurs in connection with such transactions. The Durbin Amendment instructs the Board to issue rules to establish standards for assessing whether an interchange fee meets this standard. In so doing, the Durbin Amendment directs the Board to consider the “incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance or settlement of a particular electronic debit transaction” (referred to as “incremental ACS costs”) and prohibits the Board from considering “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.”