Federal Reserve Releases Proposed Regulations Implementing Durbin Amendment

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On December 16, 2010, the Board of Governors of the Federal Reserve released proposed regulations implementing the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The proposed regulations were proposed at a Board meeting, which was simultaneously webcast through the Federal Reserve Web site.

The Durbin Amendment provides that interchange rates for electronic debit transactions must be “reasonable and proportionate” to the actual processing costs incurred by the issuer, taking into account only the incremental costs of authorizing, clearing and settling electronic debit transactions, but not other costs incurred by an issuer that are not specific to a particular debit transaction. In addition, the Durbin Amendment prohibits “network exclusivity” for debit payments, so that merchants can utilize at least two networks to route debit payments.

With regard to the reasonableness and proportionality requirement for debit interchange fees, the staff has proposed two alternative rules. Under the first alternative, interchange fees would be set separately for each issuer according to its own incremental1 clearing, authorization and settlement costs. Interchange fees under such an arrangement would be capped at 12 cents per transaction, with a safe harbor for fees set at 7 cents per transaction (the median cost per transaction for the issuers that the staff surveyed prior to proposing this rule). Under the second alternative, interchange fees would be capped at 12 cents per transaction for all issuers. The Board is soliciting comment from the public relating to both alternatives. Neither alternative would allow an issuer to recoup fixed or overhead costs relating to debit transactions, nor would it allow an issuer to recoup costs associated with reward programs or cardholder transaction inquiries.

The proposed interchange fee limitations do not currently reflect allowances for fraud, but the staff has proposed two alternatives with regard to fraud costs. First, an issuer may recover costs incurred with expenditures relating to industry-wide fraud losses. Second, an issuer may recoup costs for steps it takes toward implementing fraud prevention programs. Neither alternative specifies the types of fraud-prevention processes or technology that would qualify

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