WASHINGTON (MNI) – The following is an excerpt of details from the
proposed final rule on interchange fee standards provided by the Federal
Reserve Wednesday that will be considered at its open board meeting:

A. Final rule for interchange fee standard, and exclusivity and
routing Based on an analysis of the comments, the data regarding
interchange transaction fees and debit card processing costs available
to the Board at this time, and other relevant available information,
staff recommends that the Board adopt a final rule with the following
components:

– A modified version of the proposed Alternative 2 (stand-alone
cap) for the interchange fee standard, with a cap composed of a base
component of 21 cents and an ad valorem component of 5 basis points to
reflect a portion of fraud losses.

* The following issuer costs that are incurred to effect an
electronic debit transaction were included in deriving the base
component of the cap: network connectivity costs; costs of hardware,
software, and labor used to effect electronic debit transactions;
network processing fees; and transaction monitoring costs. As noted
above, a portion of fraud losses incurred by issuers for particular
electronic debit transactions are also included as an ad valorem
component.

* The following issuer costs were not included in deriving the
cap: corporate overhead (such as executive compensation, support
functions such as legal, human resources, and audit, and the issuer’s
branch network); costs of establishing the account; card production and
delivery, marketing, and research and development; network membership
fees; costs of rewards programs; and customer inquiries.

– With respect to network exclusivity, a requirement that an issuer
enable two unaffiliated networks for electronic debit transactions
(Alternative A in the original proposal); the prohibition on routing
restrictions in the proposed rule, which prohibit an issuer or payment
card network from inhibiting the ability of the merchant to direct the
routing of electronic debit transactions for processing over any network
that can process the transaction.

– A definition of “payment card network” that would exclude
threeparty systems (e.g., American Express) because they are not a
“network” that “routes” transactions.

– An effective date of October 1, 2011, for the interchange fee
standards (including, on an interim basis, the fraud-prevention
adjustment) and the routing restrictions; an effective date of April 1,
2012, for the prohibition on network exclusivity as it applies to
issuers and an effective date of October 1, 2011, as it applies to
network enforcement of a rule that restricts the ability of an issuer to
add a network to comply with the prohibition on network exclusivity.

– A delayed effective date of April 1, 2013, for certain cards with
particular technological challenges, including certain health benefit
cards, as well as certain prepaid cards.

With respect to the fraud-prevention adjustment to the interchange
transaction fee, staff recommends that the Board adopt an interim final
rule that allows a fraudprevention adjustment of 1 cent per transaction
conditioned upon the issuer adopting effective fraud prevention policies
and procedures.

—

Exemptions

The exemptions in the statute provide that electronic debit
transactions made using certain cards or cards issued by certain issuers
are not subject to the interchange fee standards in Section 920 or the
Boards rules. The statute does not itself require networks to provide
or merchants to pay a higher interchange transaction fee to exempt small
issuers or issuers of exempt products.

Furthermore, the statute does not authorize the Board to mandate
that payment card networks institute two-tier fee structures. Similarly,
the statute does not exempt small issuers from the network exclusivity
and routing provisions of the rule or provide the Board with exemptive
authority regarding these provisions. Accordingly, the attached draft
final rule does not include provisions that would require a two-tier
interchange structure by networks or that would exempt small issuers
from the other network exclusivity and routing portions of the rule.

Staff recommends, however, that the Board take several steps
permitted by the statute to reinforce the exemption for small issuers.
First, staff recommends that the Board publish annually lists of
institutions that fall above and below the small issuer exemption asset
threshold to assist payment card networks in determining which of the
issuers participating in their networks are subject to the rule’s
interchange fee standards. Second, as suggested by commenters, staff
recommends that the Board survey payment card networks annually and
publish annually a list of the average interchange transaction fee each
network provides to its covered issuers and to its exempt issuers.

This list should enable issuers, including small issuers, to more
readily compare the interchange revenue they would receive from each
network. This reporting will also allow exempt issuers, Congress, and
others to monitor the effect of the statute and final rules to determine
if they are having the desired policy result.

** Market News International Washington Bureau: 202-371-2121 **

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