Fed Paper PDF

Vol.
76 Wednesday,
No. 139 July 20, 2011
Part II
Federal Reserve System

12 CFR Part 235
Debit Card Interchange Fees and Routing; Final Rule
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43394 Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations
FEDERAL RESERVE SYSTEM Federal Reserve System, 20th and C less than $10 billion. The restrictions
Streets, NW., Washington, DC 20551. also do not apply to electronic debit
12 CFR Part 235 SUPPLEMENTARY INFORMATION: transactions made using two types of
[Regulation II; Docket No. R–1404] debit cards—debit cards provided
I. Section 1075 of the Dodd-Frank Act pursuant to certain government-
RIN 7100 AD 63 The Dodd-Frank Wall Street Reform administered payment programs and
and Consumer Protection Act (the certain reloadable, general-use prepaid
Debit Card Interchange Fees and ‘‘Dodd-Frank Act’’) was enacted on July cards not marketed or labeled as a gift
Routing 21, 2010.1 Section 1075 of the Dodd- card or gift certificate. Section 920(a)
AGENCY: Board of Governors of the Frank Act amends the Electronic Fund provides, however, that beginning July
Federal Reserve System. Transfer Act (‘‘EFTA’’) (15 U.S.C. 1693 21, 2012, these two types of debit cards
ACTION: Final rule. et seq.) by adding a new section 920 will not be exempt if the cardholder
regarding interchange transaction fees may be charged either an overdraft fee
SUMMARY: The Board is publishing a and rules for payment card or a fee for the first withdrawal each
final rule, Regulation II, Debit Card transactions.2 month from automated teller machines
Interchange Fees and Routing. This rule EFTA Section 920(a)(2) provides that, (‘‘ATMs’’) in the issuer’s designated
implements the provisions of Section effective July 21, 2011, the amount of ATM network.
920 of the Electronic Fund Transfer Act, any interchange transaction fee that an In addition to rules regarding
including standards for reasonable and issuer receives or charges with respect restrictions on interchange transaction
proportional interchange transaction to an electronic debit transaction must fees, EFTA Section 920(b) requires the
fees for electronic debit transactions, be reasonable and proportional to the Board to prescribe rules related to the
exemptions from the interchange cost incurred by the issuer with respect routing of debit card transactions. First,
transaction fee limitations, prohibitions to the transaction.3 Section 920(a)(3) Section 920(b)(1) requires the Board to
on evasion and circumvention, requires the Board to establish standards prescribe rules that prohibit issuers and
prohibitions on payment card network for assessing whether an interchange payment card networks (‘‘networks’’)
exclusivity arrangements and routing transaction fee is reasonable and from restricting the number of networks
restrictions for debit card transactions, proportional to the cost incurred by the on which an electronic debit transaction
and reporting requirements for debit issuer with respect to the transaction. may be processed to one such network
card issuers and payment card Under EFTA Section 920(a)(5), the or two or more affiliated networks.
networks. An interim final rule, with a Board may allow for an adjustment to an Second, that section requires the Board
request for comment, on standards for interchange transaction fee that is to prescribe rules prohibiting issuers
receiving a fraud-prevention adjustment reasonably necessary to make allowance and networks from inhibiting the ability
to interchange transaction fees is for costs incurred by the issuer in of any person that accepts debit cards
published separately in the Federal preventing fraud in relation to from directing the routing of electronic
Register. electronic debit transactions, provided debit transactions over any network that
the issuer complies with standards may process such transactions.
DATES: Effective date: The final rule is established by the Board relating to Section 920(a) requires the Board to
effective October 1, 2011. fraud prevention. Section 920(a)(8) also establish interchange fee standards no
Compliance dates: For § 235.7(a) the authorizes the Board to prescribe later than April 21, 2011, and that
general compliance date is April 1, regulations in order to prevent section becomes effective on July 21,
2012, except as follows: Payment card circumvention or evasion of the 2011. Section 920(b) requires the Board
networks must comply with restrictions on interchange transaction to issue rules that prohibit network
§§ 235.7(a)(1) and (a)(3) on October 1, fees, and specifically authorizes the exclusivity arrangements and debit card
2011. Issuers must comply with Board to prescribe regulations regarding transaction routing restrictions no later
§ 235.7(a) on April 1, 2013, with respect any network fee to ensure that such a than July 21, 2011, but does not
to debit cards that use transaction fee is not used to directly or indirectly establish an effective date for these
qualification or substantiation systems compensate an issuer with respect to an provisions.
and general-use prepaid cards sold on or electronic debit transaction and is not On December 28, 2010, the Board
after April 1, 2013. Issuers must comply used to circumvent or evade the requested public comment on a
with § 235.7(a) with respect to restrictions on interchange transaction proposed rule for implementing these
reloadable general-use prepaid cards fees. provisions of the Dodd-Frank Act. As
sold and reloaded prior to April 1, 2013 EFTA Sections 920(a)(6) and (a)(7) explained below, the Board received
by May 1, 2013. Issuers must comply exempt certain issuers and cards from comments from more than 11,500
with § 235.7(a) with respect to the restrictions on interchange commenters regarding this proposal,
reloadable general-use prepaid cards transaction fees described above. The including comments from issuers,
sold prior to April 1, 2013 and reloaded restrictions on interchange transaction payment card networks, merchants,
after April 1, 2013 within 30 days of the fees do not apply to issuers that, consumers, consumer advocates, trade
reloading. together with affiliates, have assets of associations, and members of Congress.
FOR FURTHER INFORMATION CONTACT: Prior to publishing its proposed rule,
Dena Milligan, Attorney (202/452– 1 Pub.
L. 111–203, 124 Stat. 1376 (2010). the Board also conducted a survey of
3900), Legal Division, David Mills, 2 EFTASection 920 is codified as 15 U.S.C. issuers covered by EFTA Section 920
Manager and Economist (202/530– 1693o-2. As discussed in more detail below, EFTA and of payment card networks to gather
Section 920(c)(8) defines ‘‘an interchange

6265), Division of Reserve Bank transaction fee’’ (or ‘‘interchange fee’’) as any fee information regarding electronic debit
Operations & Payment Systems, or Mark established, charged, or received by a payment card transactions and related costs. Based on
Manuszak, Senior Economist (202/721– network for the purpose of compensating an issuer its review of the comments, the
4509), Division of Research & Statistics; for its involvement in an electronic debit statutory provisions, the data available
transaction.
for users of Telecommunications Device 3 Electronic debit transaction (or ‘‘debit card to the Board regarding costs, its
for the Deaf (TDD) only, contact (202/ transaction’’) is defined in EFTA Section 920(c)(5) understanding of the debit payment
263–4869); Board of Governors of the as a transaction in which a person uses a debit card. system, and other relevant information,
Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations 43395
and for the reasons explained below, the accepted at about 8 million merchant prepaid cards).11 In the current
Board has adopted this final rule. A locations in the United States. environment, however, certain
companion interim final rule providing A more recent innovation in card- transactions, such as transactions for
for a fraud-prevention adjustment to the based payments is the introduction of hotel stays or car rentals, where the
interchange fee standards was also prepaid cards. Prepaid cards may or exact amount of the transaction is not
adopted, with a request for comment on may not be reloadable and may be known at the time of authorization,
the interim final rule.4 accepted broadly or restricted to cannot readily be accommodated on
purchases at particular merchants or for PIN-based, single-message systems. In
II. The Debit Card Industry
specific types of products. Prepaid card addition, PIN debit transactions
A. Overview of the Debit Card Industry transaction volume is still low in generally are not currently accepted for
comparison to other forms of electronic Internet, telephone, and mail
When introduced in the late 1960s transactions. Overall, information
payments, such as debit cards, but is
and early 1970s, debit cards provided a collected by the Board indicates that
increasing rapidly. In particular,
new way for consumers to access funds roughly one-quarter of the merchant
prepaid cards were used for 6 billion
in their deposit accounts, locations in the United States that
transactions in 2009, valued at $140
supplementing more traditional means accept debit cards have the capability to
billion, with average annual growth
such as checks and in-person accept PIN-based debit transactions.
rates of prepaid transaction volume and
withdrawals at bank branches.5 Further, as discussed below in
value of more than 20 percent between
Although initially debit cards were used connection with § 235.2(m), new types
2006 and 2009.9
to withdraw cash or perform other of debit card transactions are emerging
banking activities at ATMs, the system In general, there are two types of debit
that are not ‘‘PIN-based’’ or ‘‘signature-
evolved to support payments made by card authentication methods on which
based’’ as those terms traditionally have
consumers for the purchase of goods or current systems are based: PIN (personal
been used and use new cardholder
services at merchants. Cardholders are identification number) and signature.10
authentication methods.
also able to use their debit cards to get The infrastructure for PIN debit
Debit card transactions typically are
cash back at certain point-of-sale networks differs from that for signature
processed over one of two types of
locations as part of the purchase debit networks. PIN debit networks,
systems, often referred to as three-party
transaction. Debit cards are generally which evolved from the ATM networks,
and four-party systems.12 The so-called
issued by depository institutions to their are single-message systems in which
four-party system is the model used for
deposit account holders. authorization and clearing information
most debit card transactions; the four
is carried in a single message. Signature
Debit cards now play a prominent role parties are the cardholder, the entity
debit networks, which leverage the
in the U.S. payments system. Debit card that issued the payment card to the
credit card network infrastructure, are
payments have grown more than any cardholder (the issuer), the merchant,
dual-message systems, in which
other form of electronic payment over and the merchant’s bank (the acquirer or
authorization information is carried in
the past decade, increasing to 37.9 merchant acquirer).13 The network
one message and clearing information is
billion transactions in 2009.6 Debit receives transaction information and
carried in a separate message.
cards are used in 35 percent of noncash data from the acquiring side of the
payment transactions, and have eclipsed The authentication methods available market, routes the information to the
checks as the most frequently used for a given transaction generally depend issuer of the card (authorization and
noncash payment method. Almost half on features of the consumer’s card, the clearing), and determines each side’s
of total third-party debits to deposit transaction, and the merchant’s daily net settlement positions for
accounts are made using debit cards, acceptance policy. According to the interbank monetary transfers.14
compared to approximately 30 percent Board’s survey of covered card issuers, In a three-party system, one entity
made by checks.7 8 Debit cards are more than 70 percent of debit cards acts as issuer and system operator, and
outstanding (including prepaid cards) often as acquirer as well. Thus, the three
4 See companion interim final rule published support both PIN- and signature-based parties involved in a transaction are the
separately in the Federal Register. transactions (88 percent, excluding cardholder, the merchant, and the
5 Check use has been declining since the mid-
system operator. The three-party model
1990s as checks (and most likely some cash 9 These prepaid numbers are based on the 2010
is used for some prepaid card
payments) are being replaced by electronic Federal Reserve Payments Study, which gathered
payments (e.g., debit card payments, credit card transactions, but currently is not used
information on both general-use and private-label
payments, and automated clearing house (ACH) prepaid cards. According to that study, of the for other debit card transactions in
payments). reported 6.0 billion prepaid card transactions in which the cardholder is debiting his or
6 The numbers in this discussion are derived from
2009, 1.3 billion were general-use prepaid card her bank account.
the 2010 Federal Reserve Payments Study, available transactions, valued at $40 billion, and 4.7 billion
at http://www.frbservices.org/files/communications/
In a typical four-party system
were private-label prepaid card and electronic
pdf/press/2010_payments_study.pdf. Accordingly, benefit transfer (‘‘EBT’’) card transactions, valued at transaction, the cardholder initiates a
these figures may vary from those discussed in $90 billion. Combined, in 2009, debit and prepaid purchase by providing his or her card or
connection with the Board’s survey of covered cards accounted for 43.9 billion transactions or 40 card information to a merchant. In the
issuers and payment card networks. percent of noncash payment transactions. Debit and
7 Third-party debits are those debits initiated to
case of PIN debit, the cardholder also
prepaid card transaction volume of 37.6 billion
pay parties other than the cardholder. These third- reported by networks in the Board’s interchange
11 ‘‘Covered issuers’’ are those issuers that,
party debit numbers are derived from the 2010 survey differed from the transaction volume of 39.2
Federal Reserve Payments Study. The Study billion (excluding private-label prepaid and EBT together with affiliates, have assets of $10 billion or
reported that a total of 108.9 billion noncash card transactions) reported in the Federal Reserve more.
12 Industry participants sometimes refer to four-
payments were made in 2009, 35 percent of which Payments Study because some networks reported
were debit card payments. For purposes of different volumes in the two surveys. party systems as ‘‘open loop’’ systems and three-
determining the proportion of noncash payments 10 Increasingly, however, cardholders authorize party systems as ‘‘closed loop’’ systems.
that were third-party debits to accounts, ATM cash ‘‘signature’’ debit transactions without a signature 13 Throughout this rule, the term ‘‘bank’’ may be
withdrawals and prepaid card transactions are and, sometimes, may authorize a ‘‘PIN’’ debit used to refer to any depository institution.
excluded from the calculation. transaction without a PIN. PIN-based and signature- 14 The term ‘‘four-party system’’ is something of
8 Board staff projects that debit card transactions based debit also may be referred to as ‘‘PIN debit’’ a misnomer because the network is, in fact, a fifth
will total about 50 billion in 2011. and ‘‘signature debit.’’ party involved in a transaction.
enters a PIN. An electronic large fraction of the merchant discount transaction caps on many interchange
authorization request for a specific for a card transaction.17 fees.
dollar amount, along with the When first introduced, some PIN In general, interchange fees for
cardholder’s account information, is debit networks structured interchange signature debit networks, like those of
sent from the merchant to the acquirer fees in a manner similar to ATM credit card networks, combine an ad
to the network, which sends the request interchange fees.18 For ATM valorem component with a fixed fee
to the appropriate card-issuing transactions, the cardholder’s bank component. Unlike some PIN debit
institution.15 The issuer verifies, among generally pays the ATM operator an networks, interchange fees for signature
other things, that the cardholder’s interchange fee to compensate the ATM debit networks generally do not include
account has sufficient funds to cover the operator for the costs of deploying and a per-transaction cap. Beginning in the
transaction amount and that the card maintaining the ATM and providing the early 1990s, signature debit networks
was not reported as lost or stolen. A service. Similarly, some PIN debit also began creating separate categories
message approving or declining the networks initially structured for merchants in certain market
transaction is returned to the merchant interchange fees to flow from the segments (e.g., supermarkets and card-
via the reverse path, usually within cardholder’s bank to the merchant’s not-present transactions) to gain
seconds of the authorization request. bank to compensate merchants for the increased acceptance in those
The clearing of a debit card costs of installing PIN terminals and markets.20 Until 2003, interchange fee
transaction is effected through the making necessary system changes to levels for signature debit transactions
authorization message (for PIN debit accept PIN debit at the point of sale. In were generally similar to those for credit
systems) or a subsequent message (for the mid-1990s, these PIN debit networks card transactions and significantly
signature debit systems). The issuer began to shift the direction in which higher than those for PIN debit card
posts the debits to the cardholder’s PIN debit interchange fees flowed. By transactions. However, PIN debit fees
account based on these clearing the end of the decade, interchange fees began to increase in the early 2000s, as
messages. Based on all clearing for all PIN debit transactions in the noted above, while signature debit fees
messages received in one day, the United States were paid by acquirers to declined in late 2003 and early 2004.21
network calculates and communicates card issuers.19 More recently, both PIN and signature
to each issuer and acquirer its net debit During the 1990s, most PIN debit debit fees have increased, although PIN
or credit position for settlement. The networks employed fixed per- debit fees have increased at a faster
interbank settlement generally is transaction interchange fees. Beginning pace.
effected through a settlement account at around 2000, many PIN debit networks In addition to setting the structure
a commercial bank, or through ACH incorporated an ad valorem (i.e., and level of interchange fees and other
transfers. The acquirer credits the percentage of the value of a transaction) fees to support network operations, each
merchant’s account for the value of its component to their interchange fees, card network specifies operating rules
transactions, less the merchant with a cap on the total amount of the fee that govern the relationships between
discount, as discussed below. The for each transaction. In addition, PIN network participants. Although network
timing of this crediting is determined by debit networks expanded the number of rules generally apply to issuers and
the merchant-acquirer agreement and/or interchange fee categories in their fee acquirers, merchants and processors
ACH operator rules. In some schedules. For example, many networks also may be required to comply with a
circumstances, an acquirer that is also created categories based on merchant network’s rules or risk losing access to
the issuer with respect to a particular type (e.g., supermarkets) and began to that network. Network operating rules
transaction may authorize and settle segregate merchants into different cover a broad range of activities,
that transaction internally. categories based on transaction volume including merchant card acceptance
(e.g., transaction tiers). Over the course practices, technological specifications
Various fees are associated with debit
of the 2000s, most PIN debit networks for cards and terminals, risk
card transactions. The interchange fee is
raised the levels of the fixed and ad management, and determination of
set by the relevant network and paid by
valorem components of fees, in addition transaction routing when multiple
the acquirer to the issuer; the network
to raising the caps on overall fees. By networks are available for a given
accounts for the interchange fee in
2010, some networks had removed per- transaction.
determining each issuer’s and acquirer’s
net settlement position. Switch fees are 17 Merchant discounts generally follow two
B. Summary Information About
charged by the network to acquirers and forms: interchange-plus pricing and blended. If an Interchange Fees and Transaction Costs
issuers to compensate the network for acquirer is charging an interchange-plus merchant In September 2010, the Board
its role in processing the transaction.16 discount, the acquirer passes through the exact
amount of the interchange fee for each transaction. surveyed issuers that would be subject
The acquirer charges the merchant a If an acquirer is charging a blended merchant to the interchange fee standards and
merchant discount—the difference discount, the acquirer charges the same discount payment card networks to gather
between the face value of a transaction regardless of the interchange fee that applies to each information to assist the Board in
and the amount the acquirer transfers to transaction.
18 In the late 1970s, bank consortiums formed developing its proposed rule.22
the merchant—that includes the
numerous regional electronic funds transfer
interchange fee, network switch fees (‘‘EFT’’) networks to enable their customers to 20 Card-not-present transactions occur when the
charged to the acquirer, other acquirer withdraw funds from ATMs owned by a variety of card is not physically presented to the merchant at
costs, and an acquirer markup. The different banks. The EFT networks were first used the time of authorization. Examples include
to handle PIN debit purchases at retailers in the Internet, phone, and mail-order purchases.
interchange fee typically comprises a
early 1980s. It was not until the mid-1990s, 21 This decline followed the settlement of
however, that PIN debit became a popular method litigation surrounding signature debit cards. See In
15 Specialized payment processors may carry out of payment for consumers to purchase goods and re: Visa Check/MasterMoney Antitrust Litigation,
some functions between the merchant and the services at retail stores. 192 F.R.D. 68 (E.D.N.Y. 2000).
network or between the network and the issuer. 19 Debit Card Directory (1995–1999). See also, 22 The Board also surveyed the nine largest
16 A variety of other network fees, such as Fumiko Hayashi, Richard Sullivan, & Stuart E. merchant acquirers, all of which responded to the
membership fees and licensing fees, may be Weiner, ‘‘A Guide to the ATM and Debit Card survey and provided information on the number
collected by the network from the issuer or Industry’’ (Federal Reserve Bank of Kansas City and volume of debit card transactions that they
acquirer. 2003). processed, the number of merchants that accepted
Preliminary summary information was 1.28 percent of the average transaction basis. Networks paid issuers almost
provided in the Board’s proposal.23 An amount.26 $700 million and acquirers more than
updated and more detailed summary of Issuer processing costs. The Board’s $300 million in discounts and
this information is provided in ‘‘2009 survey requested covered issuers to incentives. Of the total incentives or
Interchange Revenue, Covered Issuer report their total transaction processing discounts paid by networks, 81 percent
Costs, and Covered Issuer and Merchant costs, including fixed and variable costs were paid by signature networks.
Fraud Losses Related to Debit Card and network processing fees associated Fraud losses. The Board estimates that
Transactions.’’ 24 What follows is a brief with authorization, interbank clearing industry-wide fraud losses to all parties
high-level summary of the survey data and settlement, and cardholder account of a debit card transaction were
responses on interchange fees, issuer posting for routine purchase approximately $1.34 billion in 2009.
costs, and merchant and issuer fraud transactions and non-routine About $1.11 billion of these losses arose
losses. The data results represent only transactions, such as chargebacks and from signature debit card transactions,
covered issuers and networks that errors. The median per-transaction total about $181 million arose from PIN debit
responded to the survey.25 processing cost across issuers for all card transactions, and almost $18
Card use. Payment card networks types of debit card transactions was 11 million arose from prepaid card
reported a total of approximately 37.6 cents per transaction. The 80th transactions.28 Across all transaction
billion debit (including prepaid) card percentile of per-transaction total types, the median number of purchase
purchase transactions in 2009, with an processing cost across issuers for all transactions that were fraudulent was
aggregate value of more than $1.4 types of debit card transactions was 19 about 3 of every 10,000 transactions.
trillion. Signature-based transactions cents.27 The medians for signature, PIN, and
accounted for 22.5 billion or 60 percent Issuer fraud-prevention and data- prepaid debit card were 4, less than 1,
of all purchase transactions, and $837 security costs. The median issuer cost and 1 of every 10,000 transactions,
billion or 59 percent of transaction for all debit card-related fraud- respectively. The median loss per
value. PIN-based debit transactions prevention activities (excluding data- purchase transaction incurred by both
totaled 13.9 billion or 37 percent of security costs, which were reported issuers and merchants was about 3
purchase transactions, and $555 billion separately) was approximately 1.7 cents cents.29 The median fraud loss as a
or 39 percent of transaction value. and the 80th percentile was 3.1 cents. percent of purchase transaction value
General-use prepaid card transactions The most commonly reported fraud- was about 9 basis points. For issuers
represented 1.2 billion or 3 percent of prevention activity was transaction alone, the median loss per purchase
purchase transactions and $38 billion or monitoring. The median issuer cost for transaction was about 2 cents, and the
3 percent of purchase transaction value. transaction monitoring was 0.7 cents, median fraud loss as a percent of
The average value of all purchase and the 80th percentile was 1.2 cents. purchase transaction value was
transactions was $38.03, with the The remaining costs related to a variety approximately 5 basis points.30
average values of signature debit, PIN of fraud-prevention activities, including Across all types of transactions, 62
debit, and prepaid card transactions research and development, card percent of reported fraud losses were
being $37.15, $40.03, and $31.47, activation systems, PIN customization, borne by issuers and 38 percent were
respectively. merchant blocking, and card borne by merchants. The distribution of
Interchange fees. Networks reported authentication systems; the per- fraud losses between issuers and
that debit card interchange fees totaled transaction cost of each individual merchants differs significantly based on
$16.2 billion in 2009. Of this activity was small, typically less than
interchange-fee revenue, $12.5 billion one-tenth of a cent. The median total
28 Revisions in the data plus the inclusion of
was for signature debit transactions, prepaid card fraud have led to changes to some of
data-security cost reported by issuers the industry-wide fraud loss estimates that were
$3.2 billion was for PIN debit was approximately 0.1 cents and the included in the proposal. 75 FR 81740–41 (Dec. 28,
transactions, and $0.5 billion was for 80th percentile was 0.4 cents. 2010). The higher losses for signature debit card
prepaid card transactions. The average Network Fees and Incentives. The transactions result from both a higher rate of fraud
interchange fee for all debit card and higher transaction volume for signature debit
payment card networks reported various card transactions. The sum of debit card program
transactions was 44 cents per network fees that they charge to issuers fraud losses will not equal the industry-wide fraud
transaction, or 1.15 percent of the and acquirers. Total network fees losses due to different sample sizes and rounding.
average transaction amount. The average exceeded $4.1 billion. Networks charged
29 Issuers charge back transactions to acquirers
interchange fee for signature debit that, in turn, typically pass on the chargeback value
issuers more than $2.3 billion in fees to the merchant.
transactions was 56 cents, or 1.53 and charged acquirers over $1.8 billion 30 For signature debit, the median loss per
percent of the average transaction in fees. Almost 76 percent of the total purchase transaction to both issuers and merchants
amount. The average interchange fee for fees paid, or $3.1 billion, were charged was 5 cents, and the median fraud loss as a
PIN debit transactions was significantly by signature debit networks. More than
percentage of purchase transaction value was about
lower, at 23 cents per transaction, or 12 basis points. This corresponds to a median fraud
$3.4 billion, or 82 percent of total fees loss per purchase transaction to issuers of 3 cents
0.58 percent of the average transaction paid, were assessed on a per-transaction and a median fraud loss as a percentage of purchase
amount. Prepaid card interchange fees transaction value of 7 basis points. For PIN debit,
averaged 40 cents per transaction, or the median loss per purchase transaction to both
26 Some of these numbers differ from those
issuers and merchants was 1 cent and the median
published in the Federal Register notice of fraud loss as a percentage of purchase transaction
various types of debit cards, fraud losses, fraud proposed Regulation II (75 FR 81725 (Dec. 28, value was about 3 basis points. This corresponds to
prevention activities and costs, and exclusivity 2010)) because several networks subsequently a median fraud loss per purchase transaction to
arrangements and routing procedures. submitted corrections to previously provided data.
issuers of 1 cent and a median fraud loss as a

23 75 FR 81724–26, 81740–42 (Dec. 28, 2010). In one instance, a network corrected the number of percentage of purchase transaction value of 2 basis
24 http://www.federalreserve.gov/ prepaid transactions and PIN debit transactions. points. For prepaid, the median loss per purchase
paymentsystems/files/debitfees_costs.pdf. 27 For signature debit transactions, the median
transaction to both issuers and merchants was 1
25 Most respondents did not provide information issuer per-transaction cost was 13 cents and the cent, and the median fraud loss as a percentage of
for every data element requested in the surveys. As 80th percentile was 21 cents. For PIN debit purchase transaction value was 3 basis points. This
discussed further below under § 235.3, when transactions, the median and 80th percentile issuer corresponds to a median fraud loss per purchase
determining the interchange fee standard, the Board per-transaction costs were 8 cents and 14 cents, transaction to issuers of 1 cent and a median fraud
considered only data from issuers that provided respectively. For prepaid card transactions, they loss as a percentage of purchase transaction value
information for each included cost. were 61 cents and $1.52, respectively. of 2 basis points.
the cardholder authentication method account); processing and collection similar costs from the payee’s bank in a
used in a debit card transaction. Issuers costs incurred by the issuer (analogous check transaction.
reported that nearly all the fraud losses to the payor’s bank) for electronic debit Many issuers and networks suggested
associated with PIN debit transactions transactions but not for check; par that the Board’s interchange fee
(96 percent) were borne by issuers. By clearance in the check system; restricted standards should account for the
contrast, reported fraud losses for routing choice in the debit card benefits merchants receive from
signature debit and prepaid card environment; and the ability to reverse accepting debit cards instead of checks.
transactions were distributed more electronic debit transactions within the The benefits of debit cards to merchants
evenly between issuers and merchants. normal processing system.31
that were cited include the payment
Specifically, issuers and merchants bore The Board considered the functional guarantee; the avoidance of fees and
59 percent and 41 percent of signature similarity between electronic debit other costs of handling checks; 32 faster
debit fraud losses, respectively. Issuers transactions and checks in determining availability of funds; faster check-out at
and merchants bore 67 percent and 33 which allowable costs to include under the point-of-sale; increased sales value
percent of prepaid fraud losses, its proposal. In part based on this
respectively. and volume; the ability to engage in
comparison, the Board proposed to certain types of transactions where
Other debit card program costs. The include only those costs that are
issuer survey collected information on checks are not practical (e.g., Internet);
incurred with respect to a particular and resolution of disputes through
other costs related to debit card transaction that are related to
programs, including costs associated network rules and mediation rather than
authorization, clearance, and settlement
with card production and delivery, through the legal system.33
of the transaction. The Board noted that
cardholder inquiries, rewards and other a payor’s bank in a check transaction Some issuer and network commenters
incentives, research and development, (analogous to the issuer in a debit card suggested that the Board also consider
nonsufficient funds handling, and transaction) would not recoup such the benefits to consumers of using debit
compliance. For each issuer that costs from the payee’s bank (analogous cards instead of checks. Such benefits
reported these costs, the costs were to the merchant acquirer in a debit card cited by the commenters included wide
averaged over the total number of debit transaction), but that these were costs acceptance of debit cards by merchants,
card transactions processed by the that EFTA Section 920(a) specifically ease of use, and speed of transactions.
issuer. The median per transaction cost directed the Board to consider in setting More generally, some commenters noted
of production and delivery of cards was standards governing interchange that the increase in debit card use and
2 cents, cardholder inquiries 3 cents, transaction fees. decline in check use are indicative of
rewards and other incentives 2 cents, The Board received several comments greater value from debit cards to all
research and development 1 cent, from issuers, networks, and merchants parties. One network stated that
nonsufficient funds handling 1 cent, on the functional similarities and interchange fee revenue has given
and compliance less than 0.5 cents. differences between electronic debit issuers an incentive to innovate,
C. Comparison to Checking transactions and check transactions, as allowing them to provide to merchants
Transactions well as comments on how the Board a product that is superior to checks.
should take those similarities and One difference between electronic
1. Summary of Proposal and Comments
differences into consideration. debit transactions and check
EFTA Section 920(a)(4)(A) requires Merchants and their trade groups transactions that commenters
the Board to consider, in prescribing suggested that the starting point for the highlighted is the payment guarantee for
standards governing debit interchange comparison to checks should be the cost electronic debit transactions. Numerous
fees, the functional similarity between savings that issuers receive from issuers and networks stated that, unlike
electronic debit transactions and processing a debit card transaction checks, debit card transactions are
checking transactions that are required rather than a check. guaranteed by issuers against
to clear at par within the Federal By contrast, numerous issuers and insufficient funds in an account. These
Reserve System. As part of its proposal, networks asserted that the Board’s commenters stated that a comparable
the Board described both the similarities interchange fee standards should reflect service for checks costs merchants 1.5
and differences between electronic debit not only the similarities between checks percent of the transaction value.
transactions and checking transactions. and debit cards, but also the differences Accordingly, several commenters
The similarities noted by the Board between checks and debit cards. As a argued that the Board should compare
included the fact that both types of result, these commenters believed that merchants’ debit card acceptance costs
transactions result in a debit to an asset the comparison to checks would expand to the cost of accepting a guaranteed
account; both involve electronic the scope of allowable costs. Several check. Some commenters contended
processing and, increasingly, deposit; issuers and networks argued that, by that failure to compensate issuers for the
both involve processing fees paid by tying the amount of an interchange fee payment guarantee could decrease its
merchants to banks and other to the cost of an electronic debit availability.
intermediaries; and both have similar transaction, Congress recognized that
settlement timeframes. The differences The Board has considered the
the debit card pricing system should be
noted by the Board included the closed comments received and has revised its
different from the check pricing system.
nature of debit card systems compared analysis of the comparison of check and
These commenters argued that the
to the open check clearing and electronic debit transactions, as set out
Board should consider all costs that

collection system; the payment below.
issuers incur for electronic debit
authorization that is an integral part of transactions, regardless of whether the
electronic debit card transactions (but payor’s bank would be able to recoup
32 Cited costs of checks included per-item and
not check transactions), which batch deposit fees, check return fees, re-clearance
fees, and an optional guarantee service.
guarantees that the transaction will not 31 See 75 FR 81734 (Dec. 28, 2010) for a more 33 Some commenters argued that the benefits of
be returned for insufficient funds or detailed comparison between checks and electronic debit cards over checks are also benefits of debit
certain other reasons (e.g., a closed debit transactions in the Board’s proposal. cards over cash.
2. Comparison of Check and Electronic check and debit card payment systems. Expedited Funds Availability Act, and
Debit Transactions Some commenters argued that the debit the Board’s Regulation CC (12 CFR part
Typical check transaction.34 Checks card authorization, clearance, and 229). These laws and rules provide a
can be collected, presented, returned, settlement infrastructure has no direct common legal framework for all check
and settled through an interbank system corollary in the check system, and system participants. The participants,
therefore, the comparison between however, may vary certain parts of those
or through an intrabank system, in the
check and debit card payment systems rules, such as by arranging to accept or
case of checks deposited and drawn on
is inappropriate. The Board notes that send electronic images in place of the
the same bank (i.e., ‘‘on-us’’ checks). A
EFTA Section 920(a)(4)(A) requires the paper checks.
typical check transaction is initiated by The routing of checks for collection is
Board to consider the functional
the payor (such as a consumer) writing not limited in the same way as the
similarities between checking
a check drawn on the bank maintaining routing of electronic debit transactions.
transactions and electronic debit
the payor’s account to the order of a A payee’s bank is free to use its least
transactions. The Board recognizes that
payee (such as a merchant). The payee costly option for collecting a check.
there are also important differences
receives as a payment the signed check Intermediary collecting banks generally
between the two types of transactions,
and deposits the check with its bank for including those discussed below. compete on the basis of price and funds
collection. The payee’s bank has several Closed network versus open system. availability. Typically price and
choices in directing the presentment of Debit card systems are ‘‘closed’’ systems availability vary within an intermediate
the check to the payor’s bank for (relative to check systems) in that both collecting bank’s service menu
payment. The payee’s bank may (i) issuing and acquiring banks must join a depending on the level of processing the
present the check for payment directly network in order to accept and make collecting bank is required to do (e.g.,
to the payor’s bank, (ii) use a check payments. To accept debit cards, a whether the payee’s bank sends checks
clearing house, or (iii) use the services merchant must select an acquirer and in paper form or via electronic image)
of an intermediate collecting bank, such make decisions as to the network(s) in and depending on the time of day the
as a Federal Reserve Bank or another which it will participate. Issuers and checks are received. If participants agree
correspondent bank.35 Upon acquirers that are members of a network to send electronic images instead of the
presentment, the payor’s bank settles must establish a relationship with that paper checks, the sending bank must
with the presenting bank (either the network and agree to abide by that have an agreement with the bank to
payee’s bank or an intermediate network’s rules. These network rules which it is sending the image.
collecting bank) for the amount of the include network-defined chargeback Payment authorization and
check and debits the amount of the and liability allocation rules, network- guarantee. Payment authorization is an
check from the account of the payor. In defined processing and dispute integral part of the processing of a
some cases, the payee’s bank may also handling requirements, and network fee transaction on a debit card network. As
be the payor’s bank, in which case the schedules.36 part of the payment authorization
bank settles the check internally. The merchant’s choice with regard to process, at the start of a transaction, a
Functional similarities. There are a routing a debit card transaction is card issuer determines, among other
number of similarities between check limited to the set of networks whose things, whether the card is valid and
and debit card payments. Both are cards the merchant accepts and that are whether there are sufficient funds to
payment instructions that result in a also enabled to process a transaction on cover the payment. Several commenters
debit to the payor’s account. Debit card the customer’s card. Until the effective (predominantly issuers and their trade
payments are processed electronically, date of Regulation II, merchant associations) emphasized that part of
which is increasingly true for checks as transaction routing may be further the approval includes a ‘‘payment
well. For both check and debit card limited if the card issuer or a network guarantee,’’ which refers to the issuers’
payments, merchants pay fees to banks, has designated network routing agreement to fund a transaction
processors, or intermediaries to process preferences on cards that are enabled on authorized by the issuer regardless of
the payments. Interbank settlement multiple networks. These issuer or whether customer funds are actually
times are roughly similar for both network routing preferences may result available at the time of the settlement of
payment types, with payments typically in a transaction being routed to a the transaction, subject to certain
settling between banks on the same day, network that imposes a higher fee on the predefined chargeback rights. These
or one day after, the transaction is acquirer (and hence the merchant) than commenters argued that the cost of this
cleared. Settlement to the payee’s if the payment were processed on ‘‘guarantee’’ is a settlement or
account typically occurs within one or another available network. authorization cost incurred by issuers
two days after the payee deposits the By contrast, the check system is an when they pay acquirers funds to settle
check or submits the debit card open system in which, as a practical the transaction and the cardholder has
transaction to its bank. matter, a merchant simply needs a insufficient funds in the account to
Dissimilarities. As noted by many banking relationship through which it cover the transaction. Many merchant
commenters, there are also important can collect checks in order to be able to commenters, as well as issuers, stated
functional differences between the accept check payments from its that a debit card payment is provisional
customers. The payee’s bank (i.e., the because the transaction may be charged
34 See the discussion above providing an merchant’s bank) need not join a back in certain circumstances, such as
overview of the debit card industry for a description network in order to collect a check. The when it is later discovered that the
of the typical electronic debit transaction. rules governing checks are established
35 Check clearing houses generally provide a

transaction was not properly authorized
facility or mechanism for banks to exchange checks
by generally uniform state laws (e.g., the by the customer.
for collection and return. The services provided by Uniform Commercial Code), the By contrast, payment authorization is
check clearing houses vary. Some merely provide not an inherent part of the check
the capability to exchange checks. Others provide 36 In addition to the network rules, the EFTA
collection process, and therefore the
the capability to exchange between banks in establishes the basic rights, liabilities, and
electronic form. A check clearing house generally responsibilities of consumers who use electronic
acceptance of a check by a merchant for
also facilitates settlement of the checks exchanged fund transfer services and of financial institutions payment does not include any
through it. that offer these services. automatic ‘‘guarantee’’ that the check
will be honored and the payment will verification service, however, leaves the authorize, clear, and settle debit card
be made. Merchants, however, can risk of an unpaid check with the transactions, as well as other costs
purchase check verification and merchant. related to debit card programs.
guarantee services from various third- Various fees are charged for check Likewise, the acquirer incurs costs to
party service providers. These service verification services, and the fee send authorization and clearing
providers offer varying levels of check structure and levels can vary by service messages, as well as for interbank
guarantee and verification services that provider and merchant. Based on settlement and crediting the merchant’s
are structured in various ways. In a information available to the Board, account.
check ‘‘guarantee’’ service, a check check verification services may charge a Payee deposit and availability. A
guarantee provider may verify whether per transaction fee of about 25 cents debit card transaction is initiated in an
currently outstanding returned checks with a $20 monthly minimum and may electronic format and sent electronically
are associated with that payor or the charge a monthly service fee.41 Unlike to the acquiring bank; the proceeds are
checking account, as well as verify the check guarantee services, the check then deposited in the merchant’s bank
open/closed account status and valid/ verification services do not appear to account electronically and made
invalid routing and account numbers, also charge a fee based on the amount available to the merchant in accordance
although the service generally cannot of the check. with the agreement between the
verify the amount of funds in the Payment of processing and collection merchant and its acquirer.
payor’s account.37 If a check meets all costs. In the check system, payments
With respect to paper checks, the
of the guarantee service’s criteria (such clear at par. When a presenting bank
check must be physically accepted by
as no known outstanding bad checks (either the payee’s bank or an
the merchant, and deposited in its bank
drawn by the customer), the service intermediary collecting bank) presents a
and then sent through the check
authorizes acceptance by the merchant check to the payor’s bank, the payor’s
bank pays, and the presenting bank clearing process to the payor’s bank.
and accepts the risk of loss on the The proceeds of a typical check
check.38 If a check is subsequently receives, the face value of the check (i.e.,
‘‘par clearing’’). The presenting bank generally must be made available to the
returned unpaid, the merchant will be payee within one or two business days
reimbursed by the check guarantee typically does not pay a fee to the
payor’s bank in order to receive of deposit.43 Banks may, and sometimes
provider for the value of the returned do, make check deposits available for
check. settlement for the check. In addition, the
payor’s bank does not pay fees to the withdrawal faster than the law requires.
The merchant pays a fee for the check Some merchants may take advantage
guarantee service. Based on available presenting bank to receive check
presentment unless the payor’s bank has of ‘‘remote deposit capture’’ services
information, the Board understands that from their bank wherein a paper check
a check guarantee provider typically agreed to pay a fee to receive
presentment electronically.42 The is scanned to create an electronic image
charges the merchant a percentage of the that is sent to the merchant’s bank
face value of all checks that are payee’s bank and any subsequent
collecting bank incur costs to collect the electronically for deposit.44 Remote
accepted, in addition to various other deposit capture can decrease processing
service charges. The fee structures vary check. A payor’s bank incurs costs to be
able to accept presentment of the check, costs and improve customers’ access to
by the service provider and also can their deposits.45 One commenter stated,
vary by merchant type and perceived to determine whether or not to pay the
check, and to remit funds for settlement. however, that although some merchants
risk, but one commenter asserted that may use remote deposit capture, many
check guarantee services typically One commenter indicated that these
costs exceeded debit card processing do not for a variety of reasons, including
charge between 1.0 percent and 1.5 inconvenience, lack of eligibility, and
percent of the face amount of the check costs. The payor’s bank recoups some or
all of these costs through fees it charges cost.46 Depository institutions charge a
and a 25 cent per-check fee, as well as variety of fees for remote deposit
a monthly customer service fee.39 to its customers or the interest it earns
on the customer’s balances. capture, which may vary by depository
Another service offered is a check
By contrast, in the debit card system, institution and customer, but typically
‘‘verification’’ product, which does not
the merchant does not receive the full include a monthly service fee, a per-
include a guarantee. A check
face value of the debit transaction. The item fee, equipment lease/purchase fee,
verification service may use database
merchant pays fees to its acquirer in the and various other fees. Some banks
searches similar to a check guarantee
form of a discount on the value of each charge a monthly service fee and a fee
service to approve or decline any given
transaction for the services rendered in for leasing the check scanner, although
check transaction.40 The check
processing the transaction. The acquirer, a customer may purchase a scanner.47 A
37 Based on information available to the Board, a in turn, pays an interchange fee to the
check guarantee service requires extra steps at the issuing bank on each debit transaction, 43 See Regulation CC, 12 CFR part 229.
time of a transaction and is not integrated into which is deducted from the amount of 44 Remote deposit capture was made practicable
check processing the same way that the by the Check Clearing for the 21st Century Act
authorization and guarantee is integrated into the
the debit card transaction in the daily (Check 21 Act), codified at 12 U.S.C. 5001 note.
debit card transaction. Each check is entered into net settlement calculations. The 45 FFIEC, Risk Management of Remote Deposit
the system by inputting the check’s MICR acquirer and issuer both pay fees to the Capture (Jan. 14, 2009). Certain risks, however, may
information on either a manual or automated basis. network to process electronic debit be elevated with respect to remote deposit capture
The merchant also enters customer identification when compared to paper checks. For example,
information, such as the driver’s license number.
transactions. As discussed in more
duplicate deposits, check alteration, and forged or
The guarantor then sends a return message to the detail below, the issuer incurs costs to missing indorsements may be more difficult to
merchant. detect in remote deposit capture. Id. p.5.

38 The service provider may have exceptions to its whether to accept the check on a customer-by- 46 The elevated fraud risk may cause some banks
guarantee and these exceptions may vary across customer basis. See http://www.ncms-inc.com/ to offer remote deposit capture only to creditworthy
service providers. check-verification.aspx. corporate customers with appropriate back office
39 See, e.g., Comment letter from American 41 See http://www.nobouncedchecks.com/SCAN- and control environments.
Bankers Association, p. 7. check.html 47 FDIC Supervisory Insights (Summer 2009),
40 Some check verification services also provide 42 If both the presenting bank and the payor’s available at http://www.fdic.gov/regulations/
the merchant with a reason for a decline, so the bank have voluntarily joined a check clearing examinations/supervisory/insights/sisum09/
merchant can make a more informed decision as to house, they may pay fees to the clearing house. primer.html
bank also may charge a per-item fee and of electronic payments and the decline issuer with respect to the transaction.
a client set-up fee.48 of checks can be attributed to Under Alternative 1, an issuer could
Ability to reverse transactions. In the technological and financial innovations comply with the standard for
check system, there is a limited amount that influence the payment choices of interchange fees by calculating its
of time during which the payor’s bank consumers and businesses. Commenters allowable costs and ensuring that,
may return a check to the payee’s bank. (predominantly issuers, networks, and unless it accepts the safe harbor as
Specifically, the payor’s bank must consumers) provided other reasons for described below, it did not receive
initiate the return by its ‘‘midnight these trends, such as ease and speed of through any network any interchange
deadline,’’ which is midnight of the the debit card transaction and the fact fee in excess of the issuer’s allowable
banking day after the check was that customers do not need to leave a costs. An issuer’s allowable costs would
presented to the payor’s bank for physical copy of their names and be those costs that both are attributable
payment.49 After the midnight deadline addresses with the merchant after a to the issuer’s role in authorization,
passes, the payor’s bank can no longer debit card transaction, as they would clearance, and settlement of the
return the payment through the check with checks. Many issuer and network transaction and vary with the number of
payment system, although it may have commenters asserted that merchants transactions sent to an issuer within a
legal remedies, such as warranty claims, also are increasingly accepting debit calendar year (variable costs). The
outside the check collection system.50 cards because debit cards increase the issuer’s allowable costs incurred with
Such legal remedies may be available, amount of money consumers spend at respect to each transaction would be the
for example, if a payor notifies its bank the point of sale. sum of the allowable costs of all
that the check was altered or that the In addition, debit transactions are electronic debit transactions over a
indorsements on the check were forged used in many situations that do not calendar year divided by the number of
and does so reasonably promptly if the readily lend themselves to the use of electronic debit transactions on which
payor’s bank provides statements to the checks, such as purchases made over the issuer received or charged an
payor.51 the Internet or telephone, online interchange transaction fee in that year.
The debit card system provides a recurring payments, vending machine The issuer-specific determination in
much longer time within which a transactions, self-service checkout Alternative 1 would be subject to a cap
transaction may be reversed through the purchases, and purchases at automated of 12 cents per transaction, regardless of
payment card network, as opposed to gas pumps. Also, foreign checks are not the issuer’s allowable cost calculation.
warranty claims outside the payments nearly as widely accepted by U.S. Alternative 1 also would permit an
system. Typically, the time period for merchants as are debit cards issued by issuer to comply with the regulatory
initiating resolution of a disputed institutions in foreign countries. standard for interchange fees by
transaction through the network is Consumers generally may use their receiving or charging interchange fees
around 60 days, but may be longer.52 debit cards at locations beyond their that do not exceed the safe harbor
Payment card network rules permit local area, regardless of the location of amount of 7 cents per transaction, in
certain disputed transactions to be the card issuer. which case the issuer would not need to
resolved through the payment card As required by EFTA Section determine its allowable costs.
network. Specifically, if a transaction 920(a)(4)(A), the Board has taken the Under Alternative 2, an issuer would
was not authorized or is incorrect, similarities between the functionality of comply with the standard for
payment card network rules generally electronic debit transactions and check interchange fees as long as it does not
provide that, depending on the facts and transactions into account in establishing receive or charge a fee above the cap,
circumstances, (1) the transaction is the standards for interchange fees under which would be set at an initial level of
guaranteed and the amount of the Section 920(a). The functional 12 cents per transaction. Each payment
transaction must be absorbed as a fraud similarities between these two types of card network would have to set
loss by the issuer; or (2) the transaction transactions can be understood only by interchange fees such that issuers do not
can be charged back to the merchant considering the differences between receive or charge any interchange fee in
that accepted the electronic debit them as well. Accordingly, the Board excess of the cap amount.
transaction.53 has also, in fulfilling the mandate in The Board requested comment on two
Acceptance by merchants and Section 920(a)(4)(A) and in the exercise general approaches to the fraud-
consumers. The use of debit cards by of its discretion under Section 920(a), prevention adjustment framework and
consumers is increasing, while the use considered the differences between asked several questions related to the
of checks is decreasing.54 The increase these two types of transactions in two alternatives. One approach focused
establishing standards for assessing on implementation of major innovations
48 See, e.g., http://www.firstbankak.com/home/bs/ whether interchange fees are reasonable that would likely result in substantial
remotedepositcapture/rdc_faq#15. and proportional to cost, as discussed reductions in total, industry-wide fraud
49 UCC 4–104(a)(10) (definition of ‘‘midnight
below in the interchange fee standards losses. The second approach focused on
deadline’’).
50 UCC 4–301 and 4–302. The payor’s bank may
section. reasonably necessary steps for an issuer
have a warranty claim for a forged indorsement or to maintain an effective fraud-
III. Summary of Proposal and prevention program, but would not
a material alteration, but, except in limited
circumstances, would not have a claim based on Comments prescribe specific technologies that
insufficient funds or forged drawer’s signature. A. Summary of Proposal must be employed as part of the
51 UCC 4–406.
52 The Board’s Regulation E (implementing other The Board requested comment on two program. The Board did not propose a
provisions of the EFTA) states that a consumer has alternative standards for determining specific amount as an adjustment to the
60 days to dispute the transaction as unauthorized whether the amount of an interchange amount of an interchange fee for an
or incorrect from the date that the consumer’s
transaction fee is reasonable and issuer’s fraud-prevention costs.
depository institution posts an electronic debit As provided in EFTA Section 920, the
transaction to the consumer’s account and sends a proportional to the cost incurred by the
statement to the consumer. 12 CFR 205.11(b).
Board proposed to exempt from the
53 Morrison & Foerster comment letter, p.10.
card transactions increased by an average of 14.8%
interchange fee restrictions issuers that,
54 Between 2006 and 2009, check transactions annually. See The 2010 Federal Reserve Payments together with affiliates, have assets of
decreased by an average of 7.1% annually and debit Study. less than $10 billion, and electronic
debit transactions made using either B. Summary of Comments Merchants overwhelmingly supported
debit cards issued under certain The Board received comments on the the Board’s proposal to limit allowable
government-administered programs or proposed rule from approximately costs to the variable costs of
certain reloadable prepaid cards. 11,570 commenters. Of these authorization, clearance, and settlement.
Issuers and networks urged the Board
In order to prevent circumvention or commenters, approximately 7,080 were
to adopt a more flexible approach to the
evasion of the limits on the amount of depository institutions or represented
standards by prescribing guidelines
interchange fee that issuers may receive depository institutions (including trade
rather than a cap. Issuers typically
or charge with respect to electronic groups, outside counsel, and
favored the stand-alone cap in
debit transactions, the Board proposed consultants), approximately 3,020 were
Alternative 2 over Alternative 1. Issuers
to prohibit an issuer from receiving net merchants or represented merchants
suggested raising the safe harbor up to
compensation from a network for debit (including trade groups, outside
a level that permits a ‘‘substantial
card transactions, excluding interchange counsel, and consultants), 9 were majority’’ of issuers to avail themselves
transaction fees. For example, the total payment card networks, 23 were of it. Issuers and networks supported
amount of compensation provided by payment processors, approximately raising the cap and safe harbor by
the network to the issuer, such as per- 1,340 were individual consumers or expanding the allowable cost base to
transaction rebates, incentives, or represented consumer groups, 35 were include such costs as the payment
payments, could not exceed the total members of Congress or represented guarantee costs, fraud losses, network
amount of fees paid by the issuer to the government agencies, and 54 were other processing fees, customer service costs,
network. interested parties. Approximately 8,300 the costs of rewards, fixed costs, and a
of the commenters submitted one of 17 return on investment.
The Board requested comment on two
form letters, and one letter was Fraud-prevention adjustment.
alternative approaches to implementing
submitted on behalf of over 1,600 Although there was not agreement on
the statute’s required rules that prohibit
merchant commenters. which approach to pursue, commenters
network exclusivity. Under Alternative
A, an issuer or payment card network 1. Overview of Comments Received generally agreed that the Board should
may not restrict the number of payment not mandate use of specific
Merchants, their trade groups, and technologies. Merchants generally
card networks over which an electronic some consumers supported the Board’s
debit transaction may be processed to favored the paradigm-shifting
proposal and argued that the proposal approach.55 By contrast, issuers of all
fewer than two unaffiliated networks. would lower the current interchange
Under this alternative, it would be sizes and payment card networks
fees (the savings of which could be preferred the non-prescriptive approach
sufficient for an issuer to issue a debit passed on to consumers as lower retail
card that can be processed over one that would allow issuers to have the
prices), increase transparency in the flexibility to tailor their fraud-
signature-based network and one PIN- system, and increase competition by
based network, provided the networks prevention activities to address most
prohibiting exclusivity arrangements effectively the risks they faced and
are not affiliated. Under Alternative B, and enabling merchant-routing choice.
an issuer or payment card network may changing fraud patterns. Among
By contrast, issuers, their trade groups, commenters, there was a general
not restrict the number of payment card payment card networks, and some
networks over which an electronic debit consensus that the fraud-prevention
consumers opposed the proposal for a adjustment should be effective at the
transaction may be processed to fewer range of reasons, including concern that
than two unaffiliated networks for each same time as the interchange fee
it would decrease revenue to issuing standard—either on July 21, 2011, or at
method of authentication the cardholder banks; result in increased cardholder
may select. Under this alternative, an a later date as suggested by some
fees or decreased availability of debit commenters. This issue is addressed in
issuer that used both signature- and card services; reduce benefits to
PIN-based authentication would have to the companion notice adopting an
merchants when compared to other interim final rule providing a fraud-
enable its debit cards with two forms of payment; not provide a
unaffiliated signature networks and two prevention adjustment.56
workable exemption for small issuers; Exemptions. Many issuers were
unaffiliated PIN networks. and stifle innovation in the payment concerned that the exemptions, and in
The Board proposed to prohibit system, among other things. particular the small-issuer exemption,
issuers and payment card networks from Interchange fee standards. As would not be effective because all
restricting the ability of a merchant to between proposed Alternative 1 and networks might not institute a two-tier
direct the routing of electronic debit proposed Alternative 2, merchants fee structure or might not be able to
transactions over any of the networks supported the more issuer-specific implement such a structure by July 21,
that an issuer has enabled to process the Alternative 1, arguing that issuer- 2011. Additionally, issuers argued that,
electronic debit transactions. For specific fees would be a proxy for fees even if networks institute a two-tier fee
example, issuers and payment card in a competitive issuer market place and structure, market forces and merchant
networks may not set routing priorities that many covered issuers had per- routing choice would place downward
that override a merchant’s routing transaction authorization, clearance, pressure on interchange fees over time.
choice. The merchant’s choice, and settlement costs significantly below Some issuers suggested the Board
however, would be limited to those the proposed 12-cent cap. Likewise, require that networks implement a two-
networks enabled on a debit card. In merchants supported lowering the cap, tier fee structure. Other commenters
keeping with EFTA Section 920, no some suggesting 4 cents (i.e., the average
suggested the Board initially monitor

exemption was provided from the per-transaction allowable costs across
network exclusivity and routing all transactions and issuers). Merchants 55 Merchants proposed a framework where an
provisions for small issuers or for debit argued that the proposed cap would issuer receives an adjustment only if both the
cards issued pursuant to certain allow some issuers to receive an merchant and issuer use an eligible low-fraud
technology (i.e., one that reduces fraud losses below
government-administered programs or interchange fee significantly higher than PIN debit levels).
certain reloadable general-use prepaid the proposed allowable costs of 56 See companion interim final rule published
cards. authorization, clearance, and settlement. separately in the Federal Register.
implementation of two-tier fee develop new authentication ATM operator. Although representatives
structures (perhaps by requiring technologies, which they would have to of ATM operators supported applying
networks to report to the Board on ensure could be implemented on at least the network exclusivity and routing
whether and how they have two networks. rules to ATM transactions, issuers and
implemented an interchange fee Merchants preferred Alternative B networks opposed applying the network
differential). because they believed that Alternative B exclusivity and routing rules to ATM
Additionally, some issuers and is consistent with the statute and would transactions because of different
prepaid industry commenters supported provide the most routing choice and the economic incentives for ATM
exempting Health Savings Account most market discipline on interchange transactions.
(HSA), Flexible Spending Account and network fees. They noted that, Issuer, network, and merchant
(FSA), Health Reimbursement Account under Alternative A, once the consumer commenters generally supported
(HRA), and Qualified Transportation has chosen the method of including emerging payments
Benefit (QT) cards from the interchange authentication, the merchant may not technologies under both the interchange
fee standard because they believe have a choice over which network to fee standards and network exclusivity
Congress did not intend to cover such route the transaction. Merchants also and routing rules so as to not create an
cards. By contrast, some merchant believed that Alternative B would unfair benefit for emerging payments
groups argued that HSA, FSA, HRA, or promote competition for signature debit, networks. Some networks and issuers
QT cards do not qualify for the whether from PIN networks or other were concerned that applying the
exemption for reloadable prepaid cards new entrants. interchange fee restrictions and network
because such cards typically are not Several commenters suggested that exclusivity and routing provisions to
reloadable and the funds are held in the Board invoke EFTA Section 904(c) emerging payment systems and means
employer accounts for the benefit of the to exempt small issuers and prepaid of authentication would stifle
employee or held by the cardholder him cards from the network exclusivity and innovation, leading to reduced
or herself. routing rules. Several prepaid issuers competition in the payments market.
Circumvention and evasion. Issuers and a processor commented that, if a Other commenters suggested exempting
generally agreed that circumvention or prepaid card is not enabled for both emerging payment systems either during
evasion should be determined on a case- signature and PIN, such cards should their pilot stage or for a specified period
by-case basis based on the facts and not be required to have two signature after they begin processing transactions.
circumstances. Issuers believed that the networks, which would require Other commenters were concerned that
proposed net compensation approach substantial operational restructuring by some ‘‘emerging payments systems’’
was overly broad because it considered various debit card participants to were not truly emerging, and therefore
compensation for ‘‘debit card-related accomplish. Several issuers and prepaid exempting them would create an
activities,’’ rather than merely debit card industry group commenters stated that uneven playing field.
transactions. Merchants, however, because of restricted functionality of
supported the consideration of HSA, FSA, HRA, and QT cards, such 2. Other General Comments
compensation for non-debit card cards cannot be used on a PIN network The Board received numerous
programs when the compensation is tied without significant cost and operational comments that related to the proposed
to debit card activities and chargebacks. changes, partly because satisfying rule and EFTA Section 920 more
Merchants also urged the Board to certain Internal Revenue Service (IRS) generally. Numerous commenters
prevent forms of circumvention or requirements is currently possible only opposed any government regulation of
evasion other than net compensation, over signature networks. Additionally, interchange fees (and prices generally)
such as increasing merchant network commenters noted that enabling two and stated that the free market should
fees concurrently with decreases in signature networks may not be determine interchange fee levels. Some
issuer network fees and issuers’ operationally practical at this time. of these commenters argued that price
adjusting their products to avoid the Scope. The Board received comments and quality competition in the debit
final rule’s interchange fee limits. on the application of the proposed rule card market currently is strong, as well
Network exclusivity and routing to three-party systems, ATM as transparent. These commenters
provisions. Issuer and network transactions, and emerging payment believed that the government should
commenters preferred the proposal to technologies. The majority of impose price controls only where a
require two unaffiliated networks for commenters recognized that three-party market is monopolized or is otherwise
processing without regard to the method systems do not charge explicit demonstrably not functioning properly.
of authentication (Alternative A) interchange fees (rather, they charge a Many of these commenters stressed the
because the commenters believed that merchant discount), but were concerned potential negative or unintended
Alternative A was most consistent with that exempting three-party systems from consequences of government price
the statutory language. These the interchange fee standards would controls. Many commenters were
commenters also argued that Alternative create an uneven playing field. Even further concerned that government price
B, which would require at least two commenters favoring coverage of three- controls would prevent lower-cost
processing alternatives for each party systems recognized, however, the providers from entering the market.
authentication method, would impose circuitous routing that would result Numerous commenters requested that
significant operational burdens with from subjecting these systems to the the Board either take more time to
little consumer benefit. In particular, network exclusivity and routing consider the issue or not adopt
issuers and networks asserted that interchange fee restrictions. These
provisions. A three-party system urged

Alternative B, when coupled with the Board to exempt such systems from commenters thought that further study
merchant routing choice, would cause the exclusivity and routing provisions. and debate were needed because of the
consumer confusion and/or decrease With respect to ATM transactions, lack of study and debate by Congress
consumer benefits. Moreover, these almost all comments received on the prior to passing EFTA Section 920.
commenters asserted that Alternative B issue agreed that interchange fees on Several commenters stated that the
could stifle innovation, as networks and ATM transactions should not be covered Board should have conducted hearings,
issuers would have less incentive to because they flow from the issuer to the debates, and impact analyses prior to
proposing a rule, and encouraged the For the interchange fee standard (set institutions. In addition, the Board will
Board to further study the issue rather forth in § 235.3), the final rule adopts a annually collect and publish
than adopting a final rule. One modified version of proposed information regarding interchange fees
commenter did not believe the statute Alternative 2 (stand-alone cap) and collected by networks and received by
provided the Board with sufficiently provides that an issuer may not receive exempt and non-exempt issuers and
intelligible standards to promulgate or charge an interchange transaction fee transactions to allow monitoring of the
rules; rather, the commenter argued that in excess of the sum of a 21-cent base effectiveness of the exemption for small
several policy judgments remained for component and 5 basis points of the issuers.
Congress to make. Other commenters transaction’s value (the ad valorem With respect to network exclusivity,
did not believe that government component). The interchange fee the final rule adopts Alternative A (i.e.,
intervention was required at this time. standard is based on certain costs two unaffiliated networks for each
Rather, a few commenters believed that incurred by the issuer to effect an transaction). The final rule also adopts
market competition from alternative electronic debit transaction (‘‘allowable the prohibitions on routing restrictions
payment forms (e.g., mobile) would put costs’’ or ‘‘included costs’’). The in the proposed rule.
downward pressure on interchange fees. standard is based on data collected by The final rule’s definition of
Another commenter did not believe any the Board through its survey of covered ‘‘payment card network’’ excludes
interchange fee regulation would be issuers and reflects comments received three-party systems because they are not
necessary if there were no network- from many parties. Issuer costs that are payment card networks that route
imposed restraints on merchant- incurred to effect a transaction include transactions within the terms of the
customer interactions.57 the following costs related to statute. The final rule’s definition of
authorization, clearance, and settlement ‘‘account’’ excludes accounts
3. Consultation with Other Agencies of a transaction: network connectivity; established pursuant to bona fide trust
EFTA Section 920(a)(4)(C) directs the software, hardware, equipment, and arrangements.
Board to consult, as appropriate, with associated labor; network processing Various modifications throughout the
the Comptroller of the Currency, the fees; and transaction monitoring. rule were made in response to
Board of Directors of the Federal Several other costs that may be incurred comments and additional information
Deposit Insurance Corporation, the in effecting a transaction, such as costs available to the Board. The final rule
Director of the Office of Thrift related to customer inquiries and the and the modifications adopted are
Supervision, the National Credit Union costs related to rewards programs, were explained more fully below.
Administration Board, the not included for various reasons
explained below. As noted above, an Section-By-Section Analysis
Administrator of Small Business
Administration, and the Director of the allowance for fraud losses is also I. Authority and Purpose
Bureau of Consumer Financial included as an issuer cost incurred to
The Board proposed to set forth the
Protection in the development of the effect a transaction. The Board did not
authority and purpose of Regulation II
interchange fee standards. Board staff include other costs not incurred to effect
in § 235.1. The Board received no
consulted with the staff of these a particular transaction. Issuer costs that
comments on proposed § 235.1. The
agencies throughout the rulemaking are not incurred in effecting a
transaction include costs of corporate Board, however, made two revisions to
process on all aspects of the proposed that section. First, the Board has revised
rule including the interchange fee overhead (such as senior executive
compensation); establishing the account the authority citation in proposed
standards, the role of supervisors in § 235.1(a) to reflect the section of the
determining compliance with these relationship; card production and
delivery; marketing; research and United States Code in which EFTA
standards, the small-issuer exemption, Section 920 is codified. Second, the
the potential effects on consumers (both development; and network membership
fees. Board has revised § 235.1(b) to state that
banked and unbanked) and merchants Regulation II also implements standards
(both small and large), the two proposed With respect to the fraud-prevention
adjustment, the interim final rule for receiving a fraud-prevention
approaches to a fraud-prevention adjustment.58
adjustment, possible means of (published separately in the Federal
circumvention and evasion of the Register) adopts the more general, less II. Definitions
prescriptive approach to standards
interchange fee standards (through A. Section 235.2(a)—Account
regarding the eligibility of an issuer to
network fees, compensation, change in
receive the adjustment and sets the The Board proposed to define
account structure, or otherwise), and the
adjustment at 1 cent per transaction. ‘‘account’’ to mean ‘‘a transaction,
possible impact of the prohibitions The final rule prohibits
against network exclusivity savings, or other asset account (other
circumvention and evasion of the than an occasional or incidental credit
arrangements and routing restrictions. interchange fee standard, as well as an
Many of these agencies submitted balance in a credit plan) established for
issuer receiving net compensation from any purpose and that is located in the
formal comment letters, raising many of a payment card network.
the same issues addressed by other United States.’’ The proposed definition
The final rule exempts from the included both consumer and business
commenters and discussed above. interchange fee standard issuers that, accounts, as well as accounts held
IV. Summary of Final Rule together with affiliates, have assets less pursuant to a bona fide trust
than $10 billion, debit cards issued arrangement.
The Board has considered all pursuant to certain government-
comments received and has adopted administered programs, and certain 1. Summary of Comments
Regulation II (Debit Card Interchange reloadable general-use prepaid cards.
Fees and Routing). The Board received comments on its
The final rule provides that the Board proposed definition of ‘‘account’’
57 Other commenters suggested that the
will publish a list annually of related to the proposed inclusion of
government supply payment card network services
institutions above and below the small
or that the Board reform money transmitter laws issuer exemption asset threshold to 58 See the companion interim final rule published
rather than regulating interchange fees. facilitate the identification of exempt separately in the Federal Register.
business-purpose accounts and bona term does not include an account held ‘‘account’’ under EFTA Section 903(2)
fide trust arrangements. A few by a financial institution pursuant to a and rules prescribed thereunder. The
commenters suggested that the Board bona fide trust agreement.’’ 60 Section Board has added comment 2(a)–2 to
exclude business accounts from the 920(c)(2) of the EFTA, however, defines clarify that whether a trust arrangement
definition of ‘‘account’’ because the the term ‘‘debit card’’ to mean a card is bona fide is a matter of state or other
EFTA applies only to consumer that may be used ‘‘to debit an asset applicable law and that accounts held
accounts. These commenters contended account (regardless of the purpose for under custodial agreements that qualify
that the Board should not infer which the account is as trusts under the Internal Revenue
congressional intent to include business established).* * *’’ 61 Some Code are considered to be held in trust
debit cards from the parenthetical in commenters encouraged the Board to arrangements.
EFTA Section 920(c)(2) (definition of disregard the parenthetical in Section With respect to excluding HSAs and
‘‘debit card’’), which states that the 920(c)(2) as inconsistent with Section similar accounts, many commenters
purpose of the account being debited is 903(2)’s definition that applies pointed to statements by members of
irrelevant. In support of this argument, throughout the EFTA. Doing so, Congress regarding their intent that
one commenter noted that business however, would render the cards used in connection with flexible
accounts and consumer accounts differ parenthetical mere surplusage, contrary spending accounts (FSAs), HSAs, and
both in the nature of purchases and the to principles of statutory construction. health reimbursement accounts (HRAs)
account structure (e.g., business The Board notes that Regulation E and not be subject to either the interchange
accounts may have multiple employees this rule have different scopes because fee standards or the network exclusivity
on a single account). Other commenters Section 920 has differing definitions and routing provisions.64 Other
stated that the Board has not previously and scope of coverage than the rest of commenters stated that HSAs and other
expanded the definition of ‘‘account’’ in the EFTA. similar accounts are not ‘‘asset
its Regulation E; these commenters saw The Board interprets the parenthetical accounts,’’ but are employer-sponsored
no reason to expand the term’s scope at as removing the limitation in EFTA and administered arrangements under
this time.59 Section 903(2) that applies the which employees have an unsecured
A few commenters urged the Board to ‘‘account’’ definition only to accounts right to reimbursement for certain
exclude bona fide trust arrangements used for consumer purposes. Thus, the health-care-related purchases. The
from the definition of ‘‘account’’ Board has adopted its proposal to commenters explained that the
because EFTA Section 903(2) excludes include accounts used for business employer in such arrangements is not
bona fide trusts from the definition of purposes as ‘‘accounts’’ under Section required to keep funds for the
‘‘account.’’ These commenters asserted 920. Accordingly, § 235.2(a) will reimbursements or to fund any specified
that a bona fide trust arrangement is not continue to include transaction, savings, account. Some commenters stated that
a ‘‘purpose’’ of the account; therefore, and other asset accounts, regardless of HSAs and other similar accounts often
the parenthetical in Section 920(c)(2) the purpose for which the account was are structured as bona fide trusts.
does not affect the EFTA’s general established.This definition of ‘‘account’’ The language in EFTA Section 920
exclusion of bona fide trust is limited to this part and does not does not provide for any exceptions to
arrangements. Additionally, a few extend to other rules that implement the section’s provisions based on the
commenters expressed concern that other provisions of the EFTA. purpose for which an account was
including bona fide trust arrangements The Board agrees with the established; moreover, Section 920(c)(2)
in the definition of ‘‘account’’ could commenters that a trust is a type of defines ‘‘debit card’’ as including cards
result in different treatment of health account structure rather than a purpose that may be used to debit an account
savings accounts (HSAs) and other (such as a business purpose or personal ‘‘regardless of the purposes for which
similar accounts that are structured as purpose) for which the account is held. the account was established.’’ Therefore,
bona fide trusts (proposed to be subject Therefore, the Board has revised its the Board does not believe that the
to the fee standards) and those that are proposed definition of ‘‘account’’ to statute exempts debit cards that access
structured as reloadable, general-use exclude bona fide trusts, consistent with HSAs and other similar accounts solely
prepaid cards (which would be exempt), EFTA Section 903(2). For purposes of because such accounts are established
which could, a commenter contended, Regulation E, the Board has stated that for health care-related purposes. Such
create confusion for cards that access whether an agreement is a bona fide cards and accounts, however, may be
both types of HSAs and similar trust agreement is a question of state or otherwise exempt from the Board’s
accounts. Finally, one commenter other applicable law.62 The Board interchange fee standards if they qualify
suggested that payroll cards be excluded believes a similar approach is warranted for another exemption. For example, as
from the definition of ‘‘account.’’ under this rule. In general, bona fide commenters noted, some HSAs and
2. Analysis and Final Rule agreements or arrangements are those other similar accounts are structured as
done in good faith and not merely a bona fide trust arrangements. Cards that
EFTA Section 903(2) defines the term device to evade a law.63 Accordingly, access these HSAs would be exempt
‘‘account’’ to mean ‘‘a demand deposit, the Board has revised the definition of from the requirements of this part
savings, deposit, or other asset account ‘‘account’’ to exclude accounts held because they do not access ‘‘accounts,’’
(other than an occasional or incidental under bona fide trust agreements that as the term is defined in § 235.2(a). In
credit balance in an open credit plan as are excluded from the definition of addition, some cards that access HSAs
defined in section 103(i) of [the EFTA]),
and other similar accounts are
as described in regulations of the Board,
60 15
U.S.C. 1693a(2). structured like prepaid cards where
established primarily for personal, 61 15
U.S.C. 1693o–2(c)(2) (emphasis added). funds are held in an omnibus account
family, or household purposes, but such 62 12 CFR part 205, Supplement I, par. 2(b)(2). An
account held under a custodial agreement that

(which is considered an ‘‘account’’
59 These commenters stated that the purpose of qualifies as a trust under the Internal Revenue Code under § 235.2(a)) and the employee may
both the EFTA and the Dodd-Frank Act was is considered to be a trust agreement for purposes
consumer protection and that including business of Regulation E. 64 See 156 Cong. Rec. S5927 (statements of Sen.
accounts under the scope of rule was contrary to the 63 See, e.g., 44B Am. Jur. 2d. Interest and Usury Dodd) (2010); 156 Cong. Rec. H5225–26 (statements
purpose behind EFTA Section 920. § 14. of Rep. Larson and Rep. Frank) (2010).
access the funds using a prepaid card. in EFTA Section 920(c)(1). The term not be considered ‘‘general-use’’ and
Provided these cards are structured in ‘‘affiliate’’ is relevant for two purposes would be excluded from Section 920’s
such a way that qualifies them for the in this part: determining which issuers definition of ‘‘debit card.’’
reloadable, general-use prepaid card are considered ‘‘small’’ for purposes of Both the EFTA’s definition and the
exemption in the statute, these cards the small-issuer exemption, and proposed definition of ‘‘affiliate’’ were
used to access HSAs and similar determining which prepaid cards are silent as to whether affiliated companies
accounts will be exempt from the rule’s considered ‘‘general-use.’’ 66 In included companies located outside the
interchange fee standards. See proposed comment 2(f)–5, the Board United States. One commenter
discussion of § 235.5(c). These cards, explained that ‘‘two or more merchants suggested that the term be limited to
however, will be subject to the rule’s are affiliated if they are related by either U.S. affiliates. The statutory language is
network exclusivity and routing common ownership or by common silent on this point, and the Board
provisions. See discussion of delayed corporate control,’’ and that, for believes it is appropriate to consider the
effective date related to § 235.7. purposes of this rule, the Board total resources available to an issuer
Finally, the Board has adopted a considered franchises to be under when determining whether it is
definition of ‘‘account’’ that restricts the common corporate control ‘‘if they are ‘‘small.’’ 67 Accordingly, the Board has
term to those accounts located in the subject to a common set of corporate adopted the definition of ‘‘affiliate’’ in
United States. The Board received no policies or practices under the terms of proposed § 235.2(c). The Board has
comment on this part of the proposal. their franchise licenses.’’ added language to comment 2(c)–1 to
The Board, however, has made The Board received one comment clarify that the term ‘‘affiliate’’ includes
clarifying revisions to proposed suggesting that the Board use a any U.S. and foreign affiliate.
comment 2(a)–2, now designated as consistent definition of ‘‘affiliate’’ for D. Section 235.2(d)—Cardholder
2(a)–3. both the small issuer exemption and for
general-use prepaid cards, expressing a The Board proposed to define
B. Section 235.2(b)—Acquirer ‘‘cardholder’’ to mean ‘‘the person to
preference for the control test set forth
The Board proposed to define in the proposed definition of ‘‘control.’’ whom a debit card is issued.’’ The
‘‘acquirer’’ to mean ‘‘a person that This commenter expressed concern that Board did not receive any comments on
contracts directly or indirectly with a requiring only common ownership, and the proposed definition of ‘‘cardholder’’
merchant to provide settlement for the not common control, could result in the and has adopted § 235.2(d) as proposed.
merchant’s electronic debit transactions exclusion of closed-loop cards accepted E. Section 235.2(e)—Control
over a payment card network.’’ The at merchants that are not truly affiliated.
Board proposed to exclude processors The Board proposed to define
The Board has considered the ‘‘control’’ as it is defined in existing
from the definition of ‘‘acquirer.’’ The comment and does not believe that
Board received one comment on the Board regulations.68 The Board did not
‘‘affiliate’’ is defined inconsistently in receive any comments specifically on
proposed definition. This commenter the small-issuer and general-use prepaid the proposed definition of ‘‘control,’’
supported a definition that limited card contexts. First, proposed comment although the Board received comments
acquirers to those entities that move 2(f)–5 is consistent with the measure for on the definition of ‘‘affiliate,’’
money, and excluded processors, ‘‘control’’ in proposed § 235.2(e)(3): discussed above. The Board has adopted
gateways, and independent sales ‘‘[t]he power to exercise, directly or § 235.2(e) as proposed.
organizations (‘‘ISOs’’).65 indirectly, a controlling influence over
The Board has determined to adopt the management or policies of the F. Section 235.2(f)—Debit card
§ 235.2(b) as proposed, but has made company, as the Board determines.’’ 1. Summary of Proposal and Comments
minor revisions to proposed comment Second, the acceptance of a ‘‘closed-
2(b)–1 to clarify that an acquirer settles loop’’ card is not sufficient to cause EFTA Section 920(c)(2) defines the
for the transaction with the issuer, merchants to be affiliated as the term is term ‘‘debit card’’ as ‘‘any card, or other
rather than with the network itself. defined in this rule. For example, payment code or device, issued or
Although the network calculates net closed-loop cards may be accepted at a approved for use through a payment
settlement amounts for issuers and group of merchants that are not subject card network to debit an asset account
acquirers, settlement occurs between the to a common controlling influence over (regardless of the purpose for which the
issuer and acquirer. The Board also their management and policies. Such account is established), whether
revised comment 2(b)–1 to clarify that cards are considered ‘‘general-use authorization is based on signature, PIN,
in some circumstances, processors may prepaid cards’’ (see discussion of 67 The Board considered the assets of both U.S.
be considered payment card networks. § 235.2(i)) and would not be subject to and non-U.S. affiliates when determining which
See discussion of §§ 235.2(m) and the interchange fee standards if they issuers to survey. The Board computed assets using
235.2(o). satisfied the criteria for exemption in the Consolidated Financial Statements for Bank
§ 235.5(c). These closed-loop cards, Holding Companies (FR Y–9C; OMB No. 7100–
C. Section 235.2(c)—Affiliate 0128), the Consolidated Reports of Condition and
however, would not be excluded from Income (Call Reports) for independent commercial
The Board proposed to define the the network exclusivity and routing banks (FFIEC 031 & 041; OMB No. 7100–0036) and
term ‘‘affiliate’’ to mean ‘‘any company provisions as would cards accepted only for U.S. branches and agencies of foreign banks
that controls, is controlled by, or is at affiliated merchants. If the merchants (FFIEC 002; OMB No. 7100–0032), the Thrift
under common control with another Financial Reports (OTS 1313; OMB No. 1550–0023)
were affiliated, the prepaid card would for thrift holding companies and thrift institutions,
company.’’ The proposed definition and the Credit Union Reports of Condition and
incorporated the definition of ‘‘affiliate’’ 66 Under EFTA Section 920(a)(6), an issuer is Income (NCUA 5300/5300S; OMB No. 3133–0004)
considered ‘‘small’’ if it, together with its affiliates, for credit unions. The ownership structure of
65 A gateway is an entity that connects multiple has assets of less than $10 billion. 15 U.S.C. 1693o– banking organizations was established using the
networks. Merchants may sign-up with a gateway 2(a)(6). EFTA Section 920 incorporates the FFIEC’s National Information Center structure
to enable them to accept debit cards and the definition of ‘‘general-use prepaid cards’’ from the database.
gateway acts as a switch for the merchants to access Credit CARD Act of 2009, which defines ‘‘general- 68 See Regulation Y (Bank Holding Companies
multiple networks. ISOs provide merchant- and use prepaid cards’’ as those cards that, among other and Change in Bank Control), 12 CFR 225.2(e) and
cardholder-acquisition services, including things, are redeemable at multiple, unaffiliated Regulation P (Privacy of Consumer Financial
deploying point-of-sale (‘‘POS’’) terminals. merchants. 15 U.S.C. 1693l–1(a)(2)(A). Information), 12 CFR 216.3(g).
or other means’’ and as including other number used for purposes of to the cardholder’s account is deferred
general-use prepaid cards (as defined in authentication and in addition to the 14 days or more after the transaction
EFTA Section 915(a)(2)(A)) but card, or other payment code or device, because a 2003 network/merchant
excluding paper checks. The proposed is itself a ‘‘payment code or device.’’ In settlement treats such cards as charge or
definition incorporated the statutory that case, the passwords/numbers credit cards.70 The Board has
definition with some clarifying changes. function like PINs or signatures. considered these comments and
The proposed definition of ‘‘debit Therefore, the Board has revised determined not to revise proposed
card’’ had three parts. First, the proposed comment 2(f)–1 to clarify that comment 2(f)–2 to limit deferred debit
proposed definition included ‘‘any card, cards, or other payment codes or cards to those cards where the issuer
or other payment code or device, issued devices, are not debit cards if used for settles the transaction with the
or approved for use through a payment purposes of authenticating the cardholder within 14 days of the
card network to debit an account, cardholder and used in addition to a transaction.
regardless of whether authorization is card, or other payment code or device. The fact that the cardholder initiates
based on signature, personal One commenter requested that the transactions that debit an account, as
identification number (PIN), or other Board exclude account numbers from the term is defined in § 235.2(a), is the
means, and regardless of whether the the definition of debit card if the characteristic of deferred debit cards
issuer holds the account.’’ Second, the account numbers are used to access that distinguishes such cards from
proposed definition included ‘‘any underlying funds held in a pooled charge cards and credit cards for
general-use prepaid card.’’ 69 Finally, account, but where the underlying purposes of EFTA Section 920. In the
the proposed definition excluded (1) funds do not move (i.e., the transaction case of charge cards and credit cards,
any cards, or other payment codes or is a general ledger entry). By contrast, the transactions post to lines of credit
devices, that are redeemable only at a another commenter suggested that such rather than accounts. Excluding cards
single merchant or an affiliated group of use of account numbers be included in that debit an account based on the time
merchants; (2) checks, drafts, or similar the definition of debit card because the period within which the account is
paper instruments, or electronic account numbers are used to debit debited creates significant potential for
representations thereof; and (3) account ‘‘asset accounts.’’ As discussed in evasion and circumvention of Section
numbers when used to initiate an ACH greater detail below in relation to 920’s provisions, as implemented by
transaction to debit a person’s account. § 235.2(m), account numbers, or other this rule. The Board notes that the EFTA
Additionally, the proposed commentary payment codes or devices, that are used and Regulation E limit the ability of an
explained that the term ‘‘debit card’’ only to initiate general ledger issuer to structure deferred debit cards
included deferred debit cards (where transactions are not issued or approved to be more like charge cards or credit
the transaction is posted to the for use through a payment card network cards. The EFTA and Regulation E
cardholder’s account but not debited for because the entity receiving the prohibit any person from conditioning
a specified period of time) and transaction information and data is not the extension of credit to a consumer on
decoupled debit cards (where the issuer routing the information to an such consumer’s repayment by means of
does not hold the account being unaffiliated entity. Accordingly, even if preauthorized electronic fund
debited). The Board received several the account number is used to debit an transfers.71
‘‘account,’’ the account number is not a Two commenters requested
comments about which cards, or other
debit card because it was not issued or clarification as to the types of products
payment codes or devices, should or
approved for use through a payment that qualify as ‘‘deferred debit cards,’’
should not be considered debit cards
card network. particularly as to the deferral period.
under this part. Many of these
Deferred debit cards may have different
comments related to the proposed 3. Deferred Debit Cards deferral periods specified in the
commentary and are summarized and Proposed comment 2(f)–2 explained cardholder agreement; however, the
analyzed below. that deferred debit cards are included deferral period and when the hold is
2. Card, or Other Payment Code or within the proposed definition of ‘‘debit applied are not necessary to
Device card.’’ Like other debit cards, deferred determining whether a card is a ‘‘debit
debit cards can be used to initiate direct card’’ as defined in § 235.2(f). The Board
Proposed comment 2(f)–1 explained debits to the cardholder’s account, but has revised proposed comment 2(f)–2 to
that the phrase ‘‘card, or other payment the issuer may not debit the funds until clarify that, in the case of deferred debit
code or device’’ includes cards, codes, after a pre-arranged period of time (e.g., cards, the issuer-cardholder agreement
and devices in physical and non- two weeks) after posting the transaction governs the period of time for which the
physical (i.e., electronic) form. The to the cardholder’s account. During this issuer will hold the funds in the
Board received three comments time period, the funds typically are cardholder’s account after the debit card
regarding which ‘‘payment codes’’ unavailable to the cardholder for other transaction and before debiting the
should be included or excluded from purposes, although the cardholder may cardholder’s account.
the definition of debit card. One issuer accrue interest on the funds until the The Board is not at this time
requested that the Board clarify that issuer debits the account. providing more examples of debit cards
‘‘payment code’’ does not include one- The Board did not receive any that are considered ‘‘deferred debit
time passwords (or other numbers) comments opposed to including cards.’’ The deferred debit cards of
generated for purposes of authenticating deferred debit cards within its which the Board is aware use the
the cardholder, provided such definition of ‘‘debit card,’’ but did
framework described in comment 2(f)–

passwords/numbers are not used in lieu receive a few comments on the 2. The Board is removing the proposed
of an account number. The Board does proposed deferral time period, as well examples regarding the timing of
not believe that a one-time password or as comments seeking clarification as to merchants sending electronic debit
69 See discussion of § 235.2(i) for a discussion of
which cards qualified as deferred debit transactions to acquirers as unnecessary
the term ‘‘general-use prepaid card.’’ Comment 2(i)–
cards. Two commenters suggested that
7 explains that store cards are not included in the the Board exclude from the definition of 70 See MasterCard comment letter, Appendix C.
term ‘‘debit card’’ under this rule. ‘‘debit card’’ any cards where settlement 71 15 U.S.C. 1693k(1); 12 CFR 205.10(e)(1).
to describe whether a debit card is a card transaction is processed solely 5. Hybrid Cards and Virtual Wallets
deferred debit card. through an ACH operator and not The Board requested comment on
4. Decoupled Debit Cards through a payment card network. whether additional guidance was
Decoupled debit cards that are used to necessary to clarify whether products
Proposed comment 2(f)–3 explained initiate ACH transactions at the point of
that the term ‘‘debit card’’ included with ‘‘credit-like’’ features are
sale that are not processed over a considered debit cards for purposes of
decoupled debit cards. As explained in payment card network for any part of
the proposed comment, decoupled debit this rule. The Board noted that if an
the transaction (i.e., the second type) are issuer offers a product that allows the
cards are issued by an entity other than not debit cards under this part.
the entity holding the cardholder’s cardholder to choose at the time of the
account, and the issuer settles for the By contrast, if the card holder initiates transaction when the cardholder’s
transaction with the acquirer and with a decoupled debit card transaction, part account will be debited for the
the cardholder through an ACH of which is processed over a payment transaction, any attempt to classify such
transaction that debits the cardholder’s card network, the decoupled debit card a product as a credit card would be
account. is a debit card for purposes of this part. limited by the prohibition against
The Board received a few comments Unlike decoupled debit cards that compulsory use under the EFTA and
opposed to including decoupled debit directly initiate ACH transactions, Regulation E.
cards under the rule’s definition of merchants cannot distinguish these A few issuers, networks, and
‘‘debit card,’’ and no comments decoupled debit cards from other debit processors suggested that the Board
explicitly supporting their inclusion. card transactions that would be subject exclude cards used to access or obtain
One commenter contended that to interchange fees and network rules. payment from a credit account (i.e.,
including decoupled debit cards within Accordingly, the Board does not believe cards subject to the Truth in Lending
the definition of ‘‘debit cards’’ is it is inconsistent to include in the Act and Regulation Z), regardless of
inconsistent with the exclusion of ACH definition of ‘‘debit card’’ decoupled whether the consumer chooses to repay
transactions, because decoupled debit the credit account using an asset
debit cards that initiate transactions
cards are used to initiate ACH debits to account. These commenters indicated
processed over payment card networks,
the account. Other commenters that such cards could include cards that
while simultaneously excluding ACH
suggested the Board exclude decoupled enable the customer to pre-designate the
transactions initiated at the point of
debit cards issued by merchants because types of transactions to be paid from a
sale.
including them would be inconsistent preauthorized debit to the asset account
with statutory intent to reduce merchant Inclusion of decoupled debit cards more frequently than the monthly
debit card expense. One commenter that initiate transactions processed over billing cycle. Additionally, these
requested clarification as to the types of payment card networks is consistent commenters urged the Board to
products that qualified as ‘‘decoupled with the provisions in EFTA Section distinguish between credit cards that
debit cards.’’ Another commenter stated 920, which are intended to reduce require repayment using preauthorized
that treating the location of the asset merchant costs of accepting debit cards, transfers and cards that permit
account as irrelevant for defining ‘‘debit even if merchants are the issuers of such repayment using preauthorized
card,’’ but relevant for purposes of the cards (although the Board believes that transfers, stating that the latter would
small issuer exemption, is inconsistent. transactions initiated with merchant- not run afoul of the prohibition against
The Board has considered the issued decoupled debit cards generally compulsory use.
comments received and has determined would be processed through the ACH). The Board is aware of two general
to include decoupled debit cards that Section 920 is designed to achieve cost- categories of cards with both credit- and
process transactions over payment card reduction through limitations on debit-like features (so-called ‘‘hybrid
networks within the definition of ‘‘debit interchange transaction fees and cards’’). The first category includes
card’’ as proposed with minor clarifying prohibitions on network exclusivity and those cards, or other payment codes or
revisions to the commentary. merchant routing restrictions, rather devices, used to initiate transactions
Cardholders use decoupled debit cards than by excluding certain cards that that access and post to credit accounts,
to initiate debits to their accounts. The may be lower-cost to merchant issuers. but that the cardholder repays through
Board is aware of two types of a preauthorized debit to an asset
In addition, any inconsistency
decoupled debit card transactions. The account. The second category of hybrid
between the requirement that an issuer
first type, described in proposed cards includes those cards, or other
hold the account in order to be eligible
comment 2(f)–3, is where the payment codes or devices, that may be
for the small issuer exemption and the
transaction is processed over a payment used to access multiple accounts
lack of relevance for purposes of
card network, and the issuer settles the (including both credit and other
defining ‘‘debit card’’ is statutory.
transaction with the acquirer using the accounts) (often referred to as ‘‘virtual
Section 920(c)(9) defines the term
normal network procedures, but settles wallets’’ or ‘‘mobile wallets’’). Cards
with the cardholder via an ACH ‘‘issuer’’ for general purposes of the
used to initiate transactions that access
transaction. In this type of transaction, section as the person who issues the
and post to credit accounts are not
the cardholder preauthorizes the ACH debit card, or agent of such person. For
considered debit cards for purposes of
transaction, and the issuer initiates the purposes of the small issuer exemption, this rule because such cards are not
ACH transaction shortly after Section 920(a)(6) limits the term used to debit an account, as the term is
authorizing the transaction and settling ‘‘issuer’’ to the entity holding the
defined in § 235.2(a). Further, cards that

for the transaction with the acquirer cardholder’s account. access credit accounts are not
through the payment card network. The A few commenters requested that the considered debit cards regardless of
second type is a transaction initiated Board provide more specific examples whether the cardholder pays the credit
with a card issued by the merchant, and of decoupled debit cards. The balance through preauthorized transfers
the merchant’s processor initiates an decoupled debit cards of which the from an account.
ACH debit to the cardholder’s account. Board is aware use the framework For example, a card may be used to
This second type of decoupled debit described in comment 2(f)–3. initiate transactions that access and post
to credit accounts, but the issuer enables this part. The entire virtual wallet is not distinguishing decoupled debit cards
the cardholder to preselect transactions considered to be the card, or other (discussed above) from cardholder-
for immediate repayment (or repayment payment code or device. initiated ACH transactions. The Board
prior to the monthly billing cycle) from has made minor revisions to the
6. Checks and Similar Instruments
the cardholder’s asset account. The proposed comment to clarify that an
issuer, then, may initiate a One commenter supported the account number used to initiate an ACH
preauthorized ACH debit to the Board’s exclusion of electronic images transaction is not a debit card where the
cardholder’s account in the amount of and representations of checks and person initiating the ACH transaction is
the preselected transactions. Such similar instruments. The Board has the same person whose account is being
products, due to their classification as retained the exclusion in § 235.2(f), as debited and to clarify the distinction
credit cards, may not condition the well as the exclusions for checks, drafts, between decoupled debit cards and
extension of credit on a consumer’s and similar instruments. cardholder-initiated ACH transactions.
repayment by means of preauthorized 7. ACH Transactions G. Section 235.2(g)—Designated
electronic fund transfers.72 An issuer
The Board received a few comments Automated Teller Machine (ATM)
may permit a cardholder to opt in to
on its proposed exclusion of account Network
preauthorization of some or all
transactions made using the credit or numbers when used to initiate an Section 235.2(g) of the proposed rule
charge card. The Board, however, automated clearinghouse (ACH) incorporated the statutory definition
recognizes the potential for issuers to transaction to debit an account. One (EFTA Section 920(a)(7)(C)) of
restructure existing debit cards like commenter thought the Board should ‘‘designated automated teller machine
these hybrid cards in order to consider account numbers used to network.’’ The proposed definition
circumvent and evade this rule. initiate ACH transactions to be included (1) all ATMs identified in the
Therefore, such cards will be considered ‘‘payment codes’’ in order to create a name of the issuer; or (2) any network
debit cards for purposes of this part if level playing field between debit cards of ATMs identified by the issuer that
the issuer conditions a cardholder’s and ACH transactions. One issuer provides reasonable and convenient
ability to preselect transactions for early suggested that the Board broaden the access to the issuer’s customers. The
repayment on the cardholder ACH exclusion to include intrabank Board did not receive any comments on
maintaining an asset account at the transfers initiated using an account the proposed definition, and § 235.2(g)
issuer. See comment 2(f)–4.ii. number. is adopted as proposed, with the
The Board has added comment 2(f)– The Board has considered these exception of minor technical changes.
4.i to clarify that hybrid cards that comments and has determined that The Board also proposed comment
permit some transactions to be posted account numbers used to initiate ACH 2(g)–1 to clarify the meaning of
directly to an account as defined in transactions should be excluded from ‘‘reasonable and convenient access,’’ as
§ 235.2(a), rather than posting first to a the definition of ‘‘debit card.’’ An ACH that term is used in § 235.2(g)(2). Under
credit account, are considered debit transaction is processed through an proposed comment 2(g)–1, an issuer
cards for purposes of this part. Only ACH operator, such as EPN or would provide reasonable and
those transactions that post directly to FedACH®. As explained below in convenient access, for example, if, for
the account, however, will be relation to § 235.2(m), ACH operators each person to whom a card is issued,
considered electronic debit transactions. are not ‘‘payment card networks’’ under the issuer provided access to one ATM
The second category of hybrid cards EFTA Section 920. Therefore, an within the metropolitan statistical area
consists of virtual or mobile wallets, account number used to initiate an ACH (MSA) in which the last known address
which store several different virtual transaction is not ‘‘issued or approved’’ of the person to whom the card is issued
cards that each accesses a different for use through a payment card network is located or, if the address is not
account. The Board has added comment and, therefore, is not a ‘‘debit card’’ for known, where the card was first
2(f)–5 to clarify the treatment of virtual purposes of this rule. Payment purchased or issued.
wallets under this rule. As explained in information used to initiate intrabank Several consumer group commenters
the commentary, the payment codes or transactions using an account number recommended that the Board delete
devices (‘‘virtual cards’’) stored in a are not processed through either ACH proposed comment 2(g)–1. These
virtual wallet may each access a operators or payment card networks commenters noted that certain MSAs
different account, which may be credit and, therefore, are not debit cards under are very large and that requiring only
accounts or accounts as defined in EFTA Section 920. one ATM within the same MSA as a
§ 235.2(a). For example, a mobile phone Even if ACH transactions were subject cardholder’s last known address (or, if
may store credentials (the payment to this part, they already would comply unknown, the card’s place of purchase
codes) for accessing four different with the provisions of this part. or issuance) could potentially be
accounts or lines of credit, which the Currently, ACH operators do not burdensome for certain cardholders
cardholder can view on the phone’s establish, and receiving and originating when an MSA covers a sizeable area.
screen. At the point of sale, the banks do not charge, fees that are Another industry commenter suggested
cardholder selects which virtual card to comparable to interchange fees. If a that for a payroll card, an ATM available
use (e.g., by selecting the icon for the merchant were to use the ACH to clear at a cardholder’s workplace should be
issuer whose card the cardholder wishes its customers’ purchase transactions, its considered to provide reasonable and
to use). If at least one virtual card within bank chooses the ACH operator through convenient access.
As discussed in the proposal, the
the virtual wallet may be used to debit which it will originate transactions.
an account under § 235.2(a), then that The Board believes retaining an proposed comment was intended to
virtual card is a debit card for purposes explicit exclusion from the definition of ensure that cardholders do not have to
of this part, notwithstanding the fact ‘‘debit card’’ in § 235.2(f) is unnecessary travel a substantial distance for ATM
that other cards in the virtual wallet but has retained commentary to explain access. The Board agrees that certain
may not be debit cards for purposes of the exclusion (proposed comment 2(f)– MSAs are very large and, for those
7 is now designated comment 2(f)–9). MSAs, providing access to one ATM
72 15 U.S.C. 1693k(1); 12 CFR 205.10(e)(1). This comment is useful in may not be reasonable or convenient for
many cardholders. Moreover, a network ‘‘form of payment’’ because many POS redeemable upon presentation at
that provides ATM access that is networks also function as ATM multiple, unaffiliated merchants or
reasonable and convenient to a networks. This commenter suggested service providers for goods or services,
cardholder’s home or work address also the Board expand the definition of or usable at ATMs. The proposed
should be considered to provide ‘‘electronic debit transaction’’ to include definition included cards that a group of
reasonable and convenient for purposes ATM transactions. For the reasons unaffiliated merchants agrees to accept
of § 235.2(g)(2). Accordingly, the Board discussed below in relation to via the rules of a payment card network
has adopted a revised comment 2(g)–1 § 235.2(m), the Board is not revising its and cards that a select group of
to provide that whether a network proposed definition of ‘‘electronic debit unaffiliated merchants agrees to accept,
provides reasonable and convenient transaction’’ to include ATM whether issued by a program manager,
access depends on the facts and transactions, but is adding comment financial institution, or network
circumstances, including the distance 2(h)–2 to clarify that payment may be (referred to as ‘‘selective authorization
between ATMs in the designated made in exchange for goods or services, cards’’). The Board requested comment
network and each cardholder’s last as a charitable contribution, to satisfy an on whether selective authorization cards
known home or work address or, if a obligation, or for other purposes. that do not carry a network brand
home or work address is not known, As explained in the proposed should be included within the
where the card was first issued. commentary, the term would include definition of ‘‘general-use prepaid
use of a debit card for subsequent card.’’ The Board received several
H. Section 235.2(h)—Electronic Debit transactions connected with the initial
Transaction comments on its proposed definition,
transaction and would include cash primarily concerning the exclusions
EFTA Section 920(c)(5) defines withdrawal at the point of sale from the definition of ‘‘general-use
‘‘electronic debit transaction’’ as ‘‘a (provided the cardholder has also made prepaid card’’ and selective
transaction in which a person uses a a purchase). The Board has revised authorization cards.
debit card.’’ The Board proposed to proposed comment 2(h)–1 (now For the reasons discussed in relation
define ‘‘electronic debit transaction’’ to designated as comment 2(h)–3) to clarify to §§ 235.2(h), (l), and (m), ATM
mean ‘‘the use of a debit card by a that a transaction, such as a return transactions are not electronic debit
person as a form of payment in the transaction, is an electronic debit transactions for purposes of this rule
United States’’ in order to incorporate transaction if the transaction results in because cash withdrawals are not
the concept of ‘‘payment’’ already a debit to the merchant’s account and a ‘‘payments.’’ Accordingly, the Board has
included in the statutory definition of credit to the cardholder’s account. revised the proposed definition to
‘‘payment card network’’ and to limit The Board has also adopted its eliminate the unnecessary reference to
application of the rule to domestic proposed comments clarifying that prepaid cards’ usability at ATMs.
transactions.73 As discussed above in ‘‘electronic debit transaction’’ includes
relation to § 235.2(f), some debit cards cash withdrawals at the point of sale 1. Credit CARD Act Exclusions
may be used to access both accounts as (comment 2(h)–4) and that transactions Several commenters urged the Board
defined in § 235.2(a) and lines of credit. using a debit card at a merchant located to incorporate the exclusions to the
The Board has revised the definition of outside of the United States are not definition of ‘‘general-use prepaid card’’
‘‘electronic debit transaction’’ to specify subject to this rule (comment 2(h)–5), in the Credit CARD Act of 2009 (CARD
that a transaction is an electronic debit with minor conforming and clarifying Act) into the definition of ‘‘general-use
transaction only if the debit card is used changes. prepaid card.’’ These exclusions include
to debit an account. The Board has I. Section 235.2(i)—General-Use Prepaid telephone cards; cards not marketed or
added comment 2(h)–1 to clarify that Card labeled as gift cards; loyalty, award, or
the account debited could be, for promotional gift cards; cards not
example, the cardholder’s asset account EFTA Section 920(c)(2) defines the
marketed to the general public; cards
or the omnibus account that holds the term ‘‘debit card’’ as including ‘‘a
issued only in paper form; and cards
funds used to settle prepaid card general-use prepaid card, as that term is
redeemable solely for admission to
transactions. defined in section 915(a)(2)(A).’’ EFTA
events or venues (or purchases of goods
A few commenters requested Section 915(a)(2)(A), in turn, defines
and services at the events or venues) at
clarification on whether the rule would ‘‘general-use prepaid card’’ as those
a particular location or affiliated
apply to Internet transactions. Section cards, or other payment codes or
locations.75
235.2(h) does not limit the term devices, that (1) are redeemable at
The proposed definition generally
‘‘electronic debit transaction’’ to multiple, unaffiliated merchants or
tracked the definition of ‘‘general-use
transactions initiated at brick-and- service providers, or ATMs; (2) issued
prepaid card,’’ set forth above, in EFTA
mortar store locations; the term also in a requested amount, whether or not
Section 915(a)(2)(A). EFTA Section
includes purchases made online or by such amount may be increased or
915(a)(2)(D) enumerates exclusions from
telephone or mail. Accordingly, reloaded; (3) purchased on a prepaid
the term ‘‘general-use prepaid card’’ as
electronic debit card transactions basis; and (4) honored upon
defined in Section 915(a)(2)(A). In light
initiated over the Internet are within the presentation for goods and services.74
of the explicit reference to Section
scope of this part. The Board proposed to adopt the
915(a)(2)(A) and the absence of a
One commenter suggested that the statutory definition with some revisions.
reference to Section 915(a)(2)(D), the
definition of ‘‘electronic debit The Board proposed to define ‘‘general-
Board has determined not to exclude the
transaction’’ not be limited to use as a use prepaid card’’ to mean a card, or

CARD Act’s exclusions from the
other payment code or device that is (1)
definition of ‘‘general-use prepaid
73 EFTA Section 920(c)(11) defines ‘‘payment issued on a prepaid basis in a specified
card.’’ 76 Moreover, one of the
card network,’’ in part, as an entity ‘‘that a person amount, whether or not that amount
uses in order to accept as a form of payment a brand may be increased or reloaded, in 75 15U.S.C. 1693l–1(a)(2)(D).
of debit card.’’ See discussion related to § 235.2(q)
(definition of ‘‘United States’’) regarding the exchange for payment; and (2) 76 The Board also notes that EFTA Section
application of the rule to only domestic 920(c)(2) does not refer to Section 915(a)(2) more
transactions. 74 15 U.S.C. 1693l–1. broadly.
enumerated exclusions in Section merchants. This is true regardless of of compensating an issuer for its
920(a)(7)(A)(ii) is for cards ‘‘reloadable whether or not the card carries the involvement in an electronic debit
and not marketed or labeled as a gift mark, logo, or brand of a network. In transaction.’’ The Board proposed to
card or gift certificate.’’ If such cards fact, the Board understands that define ‘‘interchange transaction fee’’ to
were already excluded from Section transactions using some selective mean ‘‘any fee established, charged, or
920’s definition of ‘‘debit card’’ by authorization cards that do not display received by a payment card network and
virtue of their exclusion from the term a network brand logo on the card itself paid by a merchant or acquirer for the
‘‘general-use prepaid card’’ in the CARD are processed over ‘‘brands’’ of payment purpose of compensating an issuer for
Act, Section 920(a)(7)(A)(ii)’s express card networks, including the major its involvement in an electronic debit
exemption of such cards would be networks or smaller networks. transaction.’’
superfluous. Therefore, the Board is Accordingly, there is not a basis for 2. Paid by a Merchant or an Acquirer
adopting the definition of ‘‘general-use distinguishing network-branded
prepaid card’’ as proposed (with the selective authorization cards from non- The Board proposed to add the phrase
exception of removing the unnecessary network branded selective authorization ‘‘and paid by a merchant or acquirer’’ as
ATM reference). The cards excluded cards.78 Selective authorization cards, a clarification of current market
from the CARD Act’s definition of however, like other general-use prepaid practice.79 One commenter expressed
general-use prepaid card may otherwise cards, may not be subject to certain concern that, by adding ‘‘and paid by a
be excluded from the definition of provisions of this part. For example, if merchant or acquirer’’ to the statutory
‘‘debit card’’ (i.e., if they are not the selective authorization card satisfies definition, the Board was opening up
redeemable at multiple, unaffiliated the requirements in § 235.5(c) (e.g., the the possibility that an acquirer would
merchants) or exempt from the card is reloadable and not marketed as contract with a middleman to pay the
interchange fee standards (e.g., if they a gift card), the card would not be fee on the acquirer’s behalf, which
are reloadable). subject to the interchange fee standards. would result in circumvention or
Proposed comment 2(i)–2 explained evasion of the rule. The Board does not
2. Selective Authorization Cards believe that the phrase would enable
that ‘‘mall cards’’ are considered
Several commenters requested that general-use prepaid cards because the such a practice. Under principles of
the Board exclude ‘‘selective cards are accepted at multiple, agency (governed by state law), if an
authorization cards’’ from the definition unaffiliated merchants. The Board is acquirer contracts with a third party to
of ‘‘general-use prepaid cards.’’ These aware, however, that selective pay an interchange transaction fee on
commenters asserted that selective authorization cards are used outside the behalf of an acquirer, the fee is
authorization cards more closely shopping mall environment. Selected considered to be paid by the acquirer
resemble cards that are accepted at only groups of merchants within the same and would be subject to the same
one merchant or affiliated merchants. business district or located near a restrictions as if the fee were in fact paid
Many of these commenters argued that university also may accept selective by the acquirer. Although the Board
selective authorization cards provide authorization cards. Accordingly, the understands that, today, acquirers pay
consumers with more shopping options Board has expanded the scope of the interchange transaction fees to issuers
than cards accepted at only one proposed comment to include selective through settlement effected by a
merchant, thus providing the consumer payment card network (and then pass
authorization cards used in all contexts.
with more protection in the event of a the fee on to merchants), the Board has
merchant’s bankruptcy. Some 3. Other Comments retained the proposed addition, noting
commenters suggested excluding only The Board received one comment that the interchange transaction fee can
those cards that do not carry a network requesting clarification as to whether be paid either by a merchant or acquirer.
brand. ‘‘gift cards’’ are included under the The Board also has made minor
The Board has considered the definition of ‘‘general-use prepaid revisions to comment 2(j)–2 to clarify
comments and has determined to cards.’’ Prepaid gift cards that are that the fees payment card networks
include selective authorization cards redeemable at a single merchant or a charge to acquirers for network services
within the definition of ‘‘general-use group of affiliated merchants are not are not considered ‘‘interchange
prepaid card.’’ Selective authorization included within the definition of transaction fees.’’
cards provide benefits to the merchants ‘‘general-use prepaid cards.’’ By 3. Established, Charged, or Received
or business districts wishing to promote contrast, if the gift card is redeemable at
their business, as well as to consumers Merchant commenters voiced
multiple, unaffiliated merchants, then
wishing to mitigate their exposure in the concerns that issuers may attempt to
the gift card is a ‘‘general-use prepaid
event of a merchant’s bankruptcy. circumvent the interchange fee
card.’’ Gift cards that are general-use
Nonetheless, one characteristic of standards (applicable to those fees
prepaid cards are not exempt from the
general-use prepaid cards is that they ‘‘established, charged, or received’’ by a
interchange fee standards.
are redeemable at multiple, unaffiliated network) by collectively setting fees and
merchants. Two or more merchants are J. Section 235.2(j)—Interchange imposing those collectively set fees on
affiliated if they are related either by Transaction Fee acquirers, and ultimately merchants,
common ownership or by common through the networks’ honor-all-cards
1. Summary of Proposal and Comments
corporate control.77 Two or more rules. For example, the largest issuers
merchants are not ‘‘affiliated’’ within EFTA Section 920(c)(8) defines may collectively determine to charge
‘‘interchange transaction fee’’ as ‘‘any
the rule’s meaning of the term merely interchange transaction fees above the
because they agree to accept the same fee established, charged, or received by cap and effect this decision by dictating
selective authorization card. Therefore, a payment card network for the purpose to each network the agreed upon
selective authorization cards are amount. The network, then, would
78 For the same reason, the Board is revising its
redeemable at multiple, unaffiliated permit each issuer to charge that
proposed comment 2(i)–2 to clarify that a general-
use prepaid card is not required to display the amount, and because merchants would
77 See the discussion on the definition of network brand, mark, or logo in order to come
‘‘affiliate’’ (§ 235.2(c)), above, in this notice. within the definition of ‘‘general-use prepaid card.’’ 79 75 FR 81722, 81731, and 81755 (Dec. 28, 2010).
be required to accept all the network’s may receive. By contrast, Section 920(a) only be considered the issuer when the
cards, merchants would pay the amount does not prohibit networks from agent has a level of control such that the
determined by the issuers. charging other fees to merchants or role of the issuer is subordinated to that
Section 920(c)(8) of the EFTA defines acquirers that are not passed to the of its agent. A few other commenters
the term ‘‘interchange transaction fee’’ issuer and does not require that the requested that the Board clarify the
to mean ‘‘any fee established, charged, network pass through to the issuer the effect on the interchange fee restrictions
or received by a payment card network same amount charged to the acquirer. of eliminating ‘‘or agent of the issuer’’
* * * for the purpose of compensating The Board plans to monitor whether and further study the issue.
an issuer for its involvement in an networks are charging other fees that are The Board also received a few
electronic debit transaction.’’ being passed to the issuer and comments requesting clarification on
Accordingly, interchange transaction determine whether it is necessary to whether an issuer that outsources
fees are not limited to those fees set by address network fees through the processing functions is responsible for
payment card networks. The term also Board’s anti-circumvention and evasion complying with the requirements, or
includes any fee set by an issuer, but authority. whether the third-party processor must
charged to acquirers (and effectively comply with the requirements. One
merchants) by virtue of the network K. Section 235.2(k)—Issuer commenter specifically expressed
determining each participant’s 1. Summary of Proposal and Comments concern about a covered issuer being
settlement position. In determining each EFTA Section 920(c)(9) defines the able to contract with a small issuer for
participant’s settlement position, the term ‘‘issuer’’ to mean ‘‘any person who issuance of the card and having the
network ‘‘charges’’ the fee, although the issues a debit card, or credit card, or the small issuer receive and pass back the
fee ultimately is received by the issuer. agent of such person with respect to higher interchange fees. The Board also
An issuer, however, would be permitted such card.’’ The Board proposed to received a comment requesting
to enter into arrangements with define ‘‘issuer’’ to mean ‘‘any person clarification on which party is
individual merchants or groups of that issues a debit card.’’ Proposed considered the issuer under a variety of
merchants to charge fees, provided that comments 2(k)–2 through 2(k)–5 mobile payments arrangements.
any such fee is not established, charged, provided examples of which entity was 2. Analysis and Final Rule
or received by a payment card network. considered the issuer in a variety of
The Board has added paragraph 2(j)–3 to The Board has considered the
debit card arrangements. As described comments and has determined to revise
the commentary to explain that fees set in the proposed commentary, the issuer
by an issuer, but charged by a payment its definition of ‘‘issuer’’ to clarify the
in four-party systems is the bank meaning of ‘‘issue.’’ In general, the
card network are considered holding the cardholder’s account, and
interchange transaction fees for proposed commentary explained which
the issuer in three-party systems is the entity is the issuer in terms of which
purposes of this part. The Board plans entity acting as issuer and system
to monitor whether collective fee setting entity has the underlying contractual
operator (and typically acquirer as well). agreement with the cardholder.
is occurring and whether it is necessary The issuer in debit card BIN-sponsor
to address collective fee setting or Although the underlying contractual
arrangements is the bank holding the agreement with the cardholder is one of
similar practices through the Board’s cardholder’s account, and the issuer in
anti-circumvention and evasion the defining characteristic of issuing
prepaid card BIN-sponsorship debit cards, the Board believes that it is
authority. arrangements is the BIN sponsor
One commenter urged the Board to clearer and more precise to explain the
holding the omnibus account.80 Finally, underlying agreement in terms of
adopt a definition of ‘‘interchange
the issuer of a decoupled debit card is authorizing the use of the card to
transaction fee’’ that covers both the fee
the entity providing the card to the perform electronic debit transactions.
flowing from merchant to network and
cardholder, not the bank holding the The entity that authorizes use of the
the fee flowing from network to issuer
cardholder’s account. card may also be the entity that arranges
so as to require that the two amounts be The Board received several comments
equal. This commenter was concerned for the cardholder to obtain the card.
on its proposed definition of ‘‘issuer,’’
that, otherwise, networks with The revisions to the commentary
one of which generally supported the
widespread acceptance would be able to describe this component of issuing in
proposed definition. Many of the
engage in price discrimination. terms of ‘‘authorizing’’ the cardholder to
comments received addressed the
Networks may charge lower fees to use the card to perform electronic debit
proposed removal of the phrase ‘‘or
acquirers than they pass through to the transactions, rather than the more
agent of such person’’ from the statutory
issuers in order to compete for general term ‘‘provide’’ as proposed.
definition. Two commenters suggested
transaction volume in certain market Therefore, the identity of the issuer is
that Board exclude third-party agents as
segments, while charging higher fees to proposed, because unlike credit cards, not determined by which entity
acquirers than they are passing through debit card issuers typically do not use performs issuer processing, but rather
to the issuers in other market segments, third-party agents. One commenter by which entity authorized the
although today these amounts are the argued that the agent of an issuer should cardholder to use the card to perform
same. The Board, however, has electronic debit transactions.
determined not to revise its proposed 80 As explained in the proposed commentary,
The Board has revised comment 2(k)–
definition of ‘‘interchange transaction payment card networks assign Bank Identification 1 to provide more guidance on which
fee’’ to cover both the fee flowing from Numbers (‘‘BINs’’) to member institutions for entity is the issuer for purposes of this
purposes of issuing cards, authorization, clearance, part. Comment 2(k)–1 explains that a
merchant to network and the fee flowing

settlement, and other processes. In exchange for a
from network to issuer so as to require fee or other financial considerations, some member
person issues a debit card by
that two amounts be equal. By statute, institutions permit other entities to issue debit authorizing a cardholder to use the debit
an interchange transaction fee is a fee cards using the member-institution’s BIN. The card to perform electronic debit
established, charged, or received by a entity permitting the use of its BIN is referred to as transactions. That person may provide
the ‘‘BIN sponsor’’ and the entity that uses the BIN
payment card network for the purpose to issue cards is often referred to as the ‘‘affiliate
the card directly or indirectly to the
of compensating an issuer and Section member.’’ BIN-sponsor arrangements are done for cardholder. For example, a person may
920(a) limits the amount that the issuer debit cards (including prepaid cards). use a third-party processor to distribute
a plastic card to the cardholder, or may the program manager may track the arrangement, this entity may be either
use a phone network or manufacturer to amount of underlying funds on each the phone network, phone
distribute a chip or other device as part card. The revised comment explains manufacturer, or other entity.
of a phone. The entity that distributes that the BIN sponsor is the issuer As explained in the proposal, as a
the card, or other payment code or because it is the entity authorizing the matter of law, agents are held to the
device, is not the issuer with respect to cardholder to use the card to perform same restrictions with respect to the
the card unless that entity also is the electronic debit transactions to access agency relationships as their principals.
one authorizing the cardholder to use the funds held by the BIN sponsor and In other words, a third-party processor
the card, or other payment code or also has the contractual relationship cannot act on behalf of an issuer and
device, to perform electronic debit with the cardholder. See comment 2(k)– receive higher interchange fees than are
transactions. 3.ii. The Board also has revised this permissible for the issuer to receive
Proposed comments 2(k)–2 and 2(k)– comment, as well as other comments, to under this rule. For example, if an
3 discussed the identity of the issuer in refer to ‘‘member institutions’’ rather issuer uses a third-party processor to
four-party and three-party systems, than ‘‘member-financial institutions’’ for authorize, clear, or settle transactions on
respectively. In light of the changes consistency throughout the its behalf, the third-party processor may
discussed below in relation to commentary. not receive interchange fees in excess of
§ 235.2(m), which clarify that three- Proposed comment 2(k)–5 explained the issuer’s permissible amount.
party systems are not payment card that the issuer with respect to Therefore, the Board does not believe
networks for purposes of this rule, the decoupled debit card arrangements is that removing the clause ‘‘or agent of
Board has deleted the proposed the entity that provides the debit card to such person’’ will have a substantive
commentary language that discusses the cardholder and initiates a effect on either the interchange fee
three-party systems and is making other preauthorized ACH debit to the restrictions or the network exclusivity
clarifying changes for consistency in cardholder’s account at a separate and routing provisions. In assessing
other commentary provisions. See institution. The Board has revised compliance, any interchange transaction
comment 2(k)–2. proposed comment 2(k)–5 (now fee received by the agent of the issuer
Proposed comment 2(k)–4 described designated as 2(k)–4) to clarify that the will be deemed to be an interchange
which entity was the issuer under two bank or other entity holding the transaction fee received by the issuer.
different types of BIN-sponsor cardholder’s funds is not the entity
arrangements: the sponsored debit card L. Section 235.2(l)—Merchant
authorizing the cardholder to use the
model and the prepaid card model. decoupled debit card to perform EFTA Section 920 does not define the
Proposed comment 2(k)–4.i stated that electronic debit transactions. Rather, the term ‘‘merchant.’’ 81 The Board
the issuer in a sponsored debit card bank or other entity holding the proposed to define ‘‘merchant’’ to mean
arrangement was the community bank cardholder’s funds has authorized ‘‘any person that accepts debit cards as
or credit union providing debit cards to access to the funds through ACH debits payment for goods or services.’’ The
its account holders using a BIN of in general, but not specifically through Board did not receive comments
another institution (the ‘‘BIN sponsor’’). the decoupled debit card. The Board has specifically on the proposed definition;
The Board has revised the proposed deleted the statement in proposed however, a few commenters suggested
comment to explain that the community comment 2(k)–5 that the account- that ATM operators be included in the
bank or credit union is an issuer if it holding institution does not have a definition of ‘‘merchant.’’ As discussed
authorizes its account holders to use the relationship with the cardholder with below in relation to § 235.2(m), ATM
debit cards to access funds through respect to the card because the operators do not accept payment in
electronic debit transactions. The statement is unnecessary to explain the exchange for goods or services. Rather,
community bank or credit union may identity of the issuer of the card. ATM operators facilitate cardholders’
provide debit cards directly or The Board has not provided examples access to their own funds. The Board
indirectly (e.g., through its BIN sponsor) in the commentary that are specific to has revised § 235.2(l) so as to not limit
to cardholders. The BIN sponsor is not mobile devices and mobile payments. A the purposes for which a person accepts
considered the issuer for purposes of mobile device, such as a chip in or on payment to being in exchange for goods
this part because the BIN sponsor does a telephone or a software application on or services. See § 235.2(h) and comment
not enter into an agreement with the the telephone, is one type of payment 2(h)–2. This expansion does not include
cardholder authorizing the cardholder code or device that may be used to ATM operators within the definition of
to use the card to perform electronic access underlying funds. If the ‘‘merchant.’’
debit transactions to access funds. The cardholder’s bank authorizes the M. Section 235.2(m)—Payment Card
Board also has revised the comment to cardholder to use a device connected Network
refer consistently to the ‘‘bank or credit with the phone and arranges for the
union’’ throughout the comment. See cardholder to obtain the device through EFTA Section 920(c)(11) defines
comment 2(k)–3.i. the phone network or manufacturer, or ‘‘payment card network’’ as ‘‘an entity
Proposed comment 2(k)–4.ii stated other party, the cardholder’s bank is the that directly, or through licensed
that the issuer in the second type of issuer with respect to the mobile device. members, processors or agents, provides
BIN-sponsor model—the prepaid card By contrast, if the mobile device is more the proprietary services, infrastructure,
model—is the BIN sponsor holding the like a decoupled debit card where the and software that route information and
funds underlying the prepaid cards. The mobile device is used to initiate debits data to conduct debit card or credit card
Board has revised the proposed transaction authorization, clearance,
to an account, but those debits settle

comment to clarify that, under these through a preauthorized ACH and settlement, and that a person uses
arrangements, the BIN sponsor typically transaction, the cardholder’s bank is not in order to accept as a form of payment
uses a program manager to distribute the issuer. Rather, the entity that a brand of debit card, credit card or
cards to cardholders, and the BIN provided the mobile device to the
81 Section 920(c)(11)’s definition of ‘‘payment
sponsor typically holds the funds in an cardholder to ultimately access the card network’’ refers to ‘‘an entity * * * that a
omnibus or pooled account. Under these underlying funds is the issuer. person uses in order to accept as a form of payment
arrangements, either the BIN sponsor or Depending on the debit card a brand of debit card.’’
other device that may be used to carry role (discussed below in connection If a payment card network contracts
out debit or credit transactions.’’ The with this defined term). To be with another entity to perform network-
Board proposed a modified version of considered a payment card network for like functions on behalf of the payment
the statutory definition as defining the purposes of this rule an entity must do card network, the other entity is
term ‘‘payment card network’’ to mean more in relation to a transaction than considered the agent of the payment
an entity that (1) directly or indirectly provide proprietary services, card network.
provides the services, infrastructure, infrastructure, and software to route the
and software for the authorization, transaction information to conduct 2. Proprietary Services and Brands of
clearance, and settlement of electronic authorization, clearance, and settlement. Payment Cards
debit transactions and (2) establishes the The Board continues to believe that an
standards, rules, or procedures that entity that acts solely as an issuer, The proposal did not include the
govern the rights and obligations of acquirer, or processor with respect to an statutory text that a payment card
issuers and acquirers involved in electronic debit transaction is not network provides ‘‘proprietary’’
processing electronic debit transactions covered by the definition of ‘‘payment services, infrastructure, and software
through the network. Proposed card network,’’ because such entities do provided for authorization, clearance,
commentary 2(m)–1 further explained not route information and data between and settlement and that those services
the proposed criteria that only those an acquirer and an issuer with respect enable a person to accept ‘‘a brand of
entities that establish rules governing to the transaction. In order to make this debit card.’’ The Board received one
issuers and acquirers be considered clear, the final rule provides that an comment suggesting the Board retain
payment card networks. The Board entity is considered a payment card the statutory concept that a payment
received several comments on its network only if the entity routes card network provides ‘‘proprietary’’
proposed definition of ‘‘payment card electronic debit transaction information services that a person uses to accept ‘‘a
network.’’ A few commenters generally and data between an acquirer and brand of debit card.’’ In light of the
supported the Board’s proposed issuer.82 other transaction types that resemble
definition. Processors and gateways may take on electronic debit transactions (e.g., ACH
A few commenters supported the different roles depending on the transactions), specifically incorporating
Board’s proposed exclusion of issuers, transaction. For example, for a given the concept of payment card networks
acquirers, and processors from the transaction, an entity may act as providing proprietary services that a
definition of ‘‘payment card network.’’ processor to both the acquirer and the person uses to accept ‘‘a brand of
These commenters argued that issuer. The acquirer and issuer may payment card’’ (although not necessarily
including these entities in the definition wish to bypass the network for such a the brand of the entity providing the
was beyond the intent of EFTA Section transaction and may themselves
services, infrastructure, and software) is
920 and would have unintended establish standards, rules, or procedures
a meaningful way of distinguishing
consequences. By contrast, other for so doing, while relying on the
commenters argued that the statutory processor or gateway to process the between the networks traditionally
definition of ‘‘payment card network’’ electronic debit transaction and charge thought of as ‘‘payment card networks’’
was broad enough to include processors and pay fees between the acquirer and and other entities that provide services,
and gateways, among other entities. One issuer. In that case, the Board believes infrastructure, and software that provide
commenter suggested that the Board the processor is acting as a payment debits and credits to accounts on their
consider third-party intermediaries to be card network and should be considered own books. Accordingly, the final rule
‘‘payment card networks’’ if a network a ‘‘payment card network’’ with respect adopts the more complete statutory
contracts with them to perform to the transaction for purposes of the language rather than the truncated
functions traditionally performed by a rule. Accordingly, the Board has revised proposed language.
network. the commentary to the definition of The proposed definition of ‘‘debit
‘‘payment card network’’ to explain that card’’ excluded account numbers used
1. Standards, Rules, or Procedures
an entity that acts as processor between to initiate an ACH transaction. As noted
Governing Issuers and Acquirers
issuers and merchants without routing above in the discussion of § 235.2(f),
One commenter expressed concern the transaction through an intervening retaining an explicit exclusion within
that adding the ‘‘standards, rules, or payment card network would be the definition of ‘‘debit card’’ is no
procedures’’ criteria would reduce the considered a payment card network longer necessary because an account
Board’s flexibility to cover emerging with respect to those transactions. See
payment systems under the rule. A few number used to initiate ACH
comment 2(m)–3. transactions is not a ‘‘brand’’ of debit
commenters also suggested that the Some emerging payment systems may
Board impose substantive requirements resemble payment card networks, while card or other device, as the account
on the rules that entities establish in others may resemble acquirers or number is not associated with a ‘‘brand’’
order to be considered ‘‘payment card acquirer processors. Like existing of ACH network. An ACH transaction is
networks’’ for purposes of this rule. In entities, if the emerging payment system processed through an ACH operator,
particular, these commenters suggested routes transaction information and data either EPN or FedACH®. Merchants use
the Board require the ‘‘standards, rules, between acquirers and issuers, and not account numbers or other information to
or procedures’’ to include consumer to an intervening payment card initiate a particular type of transaction
chargeback rights. network, the system will be considered (i.e., ACH), but these account numbers
The Board has considered the are not ‘‘brands’’ of cards, or other
a payment card network for purposes of

comments received and has determined those transactions, provided the entity payment codes or devices. Therefore,
to revise the final rule to eliminate the satisfies the other criteria in § 235.2(m). ACH operators should not be considered
‘‘standards, rules, or procedures’’ ‘‘payment card networks’’ for purposes
criteria. This recognizes that processors 82 The Board is not adopting the guidelines, rules,
of the rule. The Board has added
and gateways may be ‘‘payment card or procedures requirement and, therefore, it is not comment 2(m)–4 that explains that ACH
necessary to address the comments regarding
networks’’ with respect to electronic substantive requirements of such standards, rules, operators are not considered ‘‘payment
debit transactions depending on their or procedures. card networks’’ under this part.
3. Credit Cards could apportion its entire merchant interchange fee standards to three-party
The Board proposed to remove the discount to its role as network or systems also suggested that the Board
reference to ‘‘credit cards’’ from the acquirer, rendering the interchange fee prohibit a three-party system from
definition of ‘‘payment card network’’ as zero, in effect, and EFTA Section 920 allocating fees away from the issuer side
unnecessary in light of the fact that the does not restrict fees an acquirer charges and to the acquirer side. Other
a merchant. Therefore, the Board commenters suggested that the Board
Board’s rule would apply only to debit
requested comment on the appropriate deem three-party systems to be in
card-related interchange fees and
application of the interchange fee compliance if the merchant discount
routing restrictions. One commenter
standards to electronic debit charged by three-party systems was
suggested the Board retain the
transactions processed over three-party similar to merchant discounts charged
references to ‘‘credit card’’ because
systems. in four-party systems.
removing the reference would have an In addition, the Board requested Other issuers and three-party systems
impact on the application of EFTA comment on how the network supported excluding three-party
Sections 920(b)(2) and (b)(3), as well as exclusivity and routing provisions systems from the interchange fee
for the application to hybrid credit-debit should be applied to three-party standards, noting that such systems
cards. Removing the reference to ‘‘credit systems, including alternatives that currently do not establish or charge a fee
card’’ in the definition of payment card could minimize the compliance burden similar in concept to an ‘‘interchange
network will not affect the application on such systems. If those provisions fee.’’ These commenters also stated that
of Section 920(b)(2) (discounts at the were applied to a three-party system, the Board had no authority under EFTA
point of sale) or Section 920(b)(3) debit cards issued by the network must Section 920 to regulate merchant
(transaction minimums and be capable of routing transactions discounts. Moreover, some of these
maximums). Section 920(b)(2) is not through at least one unaffiliated commenters claimed that developing a
dependent on any Board rulemaking, payment card network, in addition to framework and method for calculating
and Section 920(b)(3) authorizes the the network issuing the card, and the an implicit merchant discount would be
Board to increase the level of the network may not inhibit a merchant’s unworkable and arbitrary. Commenters
minimum transaction value merchants ability to route a transaction to any (including some representing
may impose. The Board, however, did other unaffiliated network(s) enabled on merchants) contended that three-party
not request comment on an increase and a debit card. The Board recognized that systems do not raise the same
is not at this time adopting provisions the nature of a three-party system could centralized price-setting concerns as
in this part pursuant to Section be significantly altered by any four-party systems because merchants
920(b)(3). If the Board determines to requirement to add one or more negotiate directly with the three-party
increase the minimum dollar value in unaffiliated payment card networks system setting the merchant discount.
Section 920(b)(3), the Board at that time capable of carrying electronic debit With respect to the network
will consider whether revisions to the transactions involving the network’s exclusivity and routing provisions, the
definition of payment card network are cards. Board received comments from issuers
necessary for that purpose. Therefore, and networks, some of which supported
the Board has not retained the statutory b. Summary of Comments applying the provisions to three-party
reference to ‘‘credit card’’ in the The Board received comments systems, whereas others did not. Almost
definition of payment card network. regarding the application of both the all of these commenters recognized the
interchange fee standards and the circuitous routing that would result if
4. Routing Transaction Information and
network exclusivity and routing three-party systems were subject to the
Three-Party Systems provisions to three-party systems. In network exclusivity and routing
The proposed definition of payment general, almost all of these comments provisions (because all transactions on
card network did not incorporate the recognized that three-party systems do cards issued for three-party systems
statutory concept of providing services, not charge explicit interchange fees, but ultimately would need to be routed back
infrastructure, and software ‘‘to route many of the commenters (particularly to the system operator/issuer for
information and data to conduct’’ debit issuers and four-party systems) were authorization, clearance, and
card transactions. Rather, the Board concerned that exempting three-party settlement), but, similar to the
proposed to shorten the definition to systems from the interchange fee application of the interchange fee
include the provision of services, standards would create an uneven standards, commenters believed that
infrastructure, and software ‘‘for’’ playing field. Some of these commenters exempting three-party systems would
authorization, clearance, and settlement. were concerned that excluding three- create an uneven playing field.83 By
The Board did not receive comments party systems would prompt current contrast, several commenters supported
specifically on this proposed change four-party systems to vertically integrate excluding three-party systems from the
from the definition in EFTA Section and become three-party systems, which network exclusivity and routing
920(c)(11). The Board did, however, they believed could be considered provisions’ coverage because, by
receive comments on the inclusion of circumvention or evasion of the rule. definition, three-party systems operate
three-party systems within the scope of Other commenters recommended that, if on a single ‘‘network.’’ Therefore, the
the rule. covering three-party systems was not commenters contended, application of
feasible, the Board should at least the rules to three-party systems would
a. Summary of Proposal
examine whether excluding three-party have a detrimental effect on the three-
The Board proposed that its rule cover
systems places four-party systems at a party business model. One three-party

three-party systems as well as four-party competitive disadvantage.
systems. The Board noted, however, the One commenter suggested the Board 83 If a three-party system were to enable its cards
practical difficulties in applying the require three-party systems to provide for transaction processing over a second network,
interchange fee standards to three-party the Board with an allocation of the the authorization, clearance, and settlement would
be done by the three-party system. Therefore, the
systems, which charge only a merchant merchant discount that explicitly transaction would go outside the system only to be
discount and no explicit interchange identifies an ‘‘interchange fee.’’ Other sent back to the system for authorization, clearance,
fee. Specifically, a three-party system commenters that favored applying the and settlement.
system stated that the Board should separate acquirers, the issuer/system merely receiving and using information
invoke EFTA Section 904(c) to exempt operator will remit funds to the acquirer and data; specifically, routing suggests
three-party systems.84 This commenter through whatever settlement method the sending the information and data to
asserted that three-party systems do not parties agreed to. another point or destination.89
‘‘restrict’’ the networks over which an A merchant must send the transaction Connecting numerous different points,
electronic debit transaction may be information and data to the issuer (or in this case numerous merchants and
processed ‘‘by contract, requirement, issuer’s processor) for authorization, as issuers, is a fundamental element of any
condition, penalty,’’ or other similar well as clearance and settlement. In a network. The final rule modifies the
method.85 Rather, according to the four-party system, the information and proposal to incorporate this statutory
commenter, the closed-loop data are sent to a network that, in turn, reference to routing in the definition of
characteristic is intrinsic to three-party sends the information and data to an payment card network.
systems. The commenter concluded that issuer (or the issuer’s processor).
Network entities in four-party systems Accordingly, three-party systems are
the network exclusivity and routing
provisions were ambiguous as applied provide services, infrastructure, and not ‘‘payment card networks’’ for
to three-party systems. software that receive transaction purposes of the rule because they do not
The Board also received a few information and data from the merchant ‘‘provide[] the proprietary services,
comments on its characterization of side of the transaction and send the infrastructure, and software that route
three-party systems in its proposed rule. information and data to the designated information and data to an issuer from
One commenter asserted that the issuer. By contrast, in a three-party an acquirer to conduct the
Board’s characterization ignores the fact system, a single entity operates the authorization, clearance, and settlement
that some ‘‘three-party systems’’ provide system and holds the cardholder’s of electronic debit transactions.’’ 90
network and issuing functions but not account. Typically that entity holds the Because three-party systems are not
acquiring functions. This commenter merchant’s account as well, but may payment card networks, they are not
suggested that the Board should permit other entities to acquire subject to the interchange fee standards
characterize three-party systems as transactions. Once the system operator (as there is no payment card network
those where the network is also the receives the transaction information and establishing, charging, or receiving a
issuer, regardless of whether the entity data, the operator does not send the fee) or to the network exclusivity or
acquires transactions, because the rules information and data on to another routing provisions (as there is no
are primarily focused on network-issuer point. Rather, all authorization and payment card network to which an
relationship. Similarly, another settlement decisions and actions occur issuer could restrict the processing of
commenter stated that ‘‘three-party within that entity. Therefore, three-party transactions).91
systems’’ may have the ability to route systems provide services for merchants The Board has made conforming
transactions outside the system, and to send and receive transaction changes to its proposed commentary.
that, in such cases, the network information and data, but not to ‘‘route’’ First, the third sentence in proposed
exclusivity and routing provisions transaction information and data. comment 2(m)–1 that stated that three-
should apply to the ‘‘three-party Merchants are able to protect party systems are considered payment
system.’’ A few commenters requested themselves from excessive fees in three- card networks has been removed.
that the Board provide more examples party systems by negotiating directly Second, commentary to explain the
of three-party systems. with the issuer-system operator, unlike routing component of the definition and
c. Analysis and Final Rule in the case of four-party systems, where the definition’s application to three-
a network intervenes between the issuer party systems has been added. Comment
In a three-party payment system, the
and merchant. 2(m)–1 has been revised to state that an
same entity serves as the issuer and EFTA Section 920(c)(11) defines
system operator, and typically the entity that authorizes and settles an
‘‘payment card network’’ as ‘‘an entity electronic debit transaction without
acquirer.86 For debit card transactions that directly, or through licensed
in three-party systems, the merchant routing information to another entity
members, processors, or agents, generally is not considered a payment
sends the authorization request, as well provides the proprietary services,
as any other information necessary to card network. New comment 2(m)–2 has
infrastructure, and software, that route been added to explain that three-party
settle a transaction, typically to one
information and data to conduct debit systems are not ‘‘payment card
entity. By contrast to four-party systems,
card or credit card transaction networks’’ for purposes of the rule.
the system operator that receives the
authorization, clearance, and settlement Comment 2(m)–2 clarifies that ‘‘routing’’
transaction information and data does
* * *’’ 87 The Board’s proposal did not transaction information and data
not direct the information and data to
include the statutory text that a payment involves sending such information and
another party. Rather, that entity uses
card network provide the services, data to an entity other than the entity
the transaction information and data to
infrastructure, and software that ‘‘route that initially receives the information
approve or decline the transaction, as
information and data to conduct’’ and data, and does not include merely
well as to settle the transaction with
both the merchant and the cardholder. electronic debit transaction receiving information and data. See
If the three-party system involves authorization, clearance, and settlement. comment 2(p).
The statute does not define the term
84 See discussion in connection with § 235.5 ‘‘route.’’ The term ‘‘route’’ is commonly 89 See discussion below in connection with
regarding the Board’s authority under EFTA Section defined as ‘‘to send by a certain [or § 235.2(p).
904(c) as applied to this rulemaking. selected] route’’ or ‘‘to divert in a 90 Transactions through three-party systems are
85 This commenter argued that the Board should
specified direction.’’ 88 In other words, similar to other ‘‘on-us’’ transactions that can be
interpret ‘‘or otherwise’’ to mean by devices or authorized, cleared, and settled using a book-entry
mechanisms similar to those specifically listed.
routing suggests involvement other than rather than sending information to another point.
86 In addition, under a three-party system, outside 91 Because three-party systems are not payment
87 EFTA
Section 920(c)(11).
processors may provide some processing services to card networks for purposes of this rule, it is not
the merchant, but are not authorized to acquire 88 See,
e.g., Webster’s New World Dictionary and necessary to address the comments regarding
transactions. The other parties to a three-party Thesaurus at 558 (2d ed. 2002); Merriam Webster’s calculating an implicit interchange fee for three-
system are the cardholder and the merchant. Collegiate Dictionary at 1021 (10th ed. 1993). party systems.
5. ATM Transactions and Networks industry in order to compete among b. Analysis and Final Rule
a. Summary of Proposal and Comments issuers, who are paying interchange The Board has considered the
fees. Commenters also contended that comments and has determined that
The Board requested comment on applying the interchange fee standards
whether ATM transactions and ATM transactions are not subject to
to ATM interchange fees could render either the interchange fee standards or
networks should be included within the ATM terminals cost-prohibitive,
scope of the rule. The Board also the network exclusivity and routing
emphasizing the extent to which ATM
requested comment on how to provisions. The statute does not
operators rely on interchange to cover
implement the network exclusivity expressly include ATM transactions
operational costs. Moreover, one
provision if ATM transactions and within its scope, but ATM cards, similar
commenter asserted that the Board did
networks are included within the scope to debit cards, are used to debit
not have sufficient information about
of the rule. The Board noted that the accounts, as the term is defined in
ATM interchange fees and costs to set
interchange fee standards would not § 235.2(a). The terms ‘‘debit cards’’ and
standards for such interchange fees.
apply to ATM interchange fees, which The commenters supporting ‘‘electronic debit transaction’’ are both
currently flow from the issuer to the application of the network exclusivity connected to EFTA Section 920(c)(11)’s
ATM operator, and therefore do not and routing provisions to ATM definition of ‘‘payment card network,’’
meet the statutory definition of transactions generally were ATM which is limited to those networks a
‘‘interchange transaction fee.’’ operators or acquirers. These person uses to accept a debit card ‘‘as
The network-exclusivity prohibition commenters argued that including ATM a form of payment.’’ ‘‘Payment’’
and routing provisions, however, would transactions within the scope of the generally is thought of as exchanging
directly affect the operations of ATM network exclusivity and routing money for goods or services or other
networks if these provisions were provisions would increase competition purposes (e.g., satisfying an obligation
applied to such networks. Issuers would in the ATM industry and enable ATM or a making a charitable contribution),
be required to offer ATM cards that can operators to route transactions to the rather than changing the form of a
be accepted on at least two unaffiliated network with the lowest network fees. person’s money (e.g., from a balance in
networks, and the ATM operator would More generally, these commenters an account to cash).93 In an ATM
have the ability to choose the network claimed that eliminating network transaction, a person is using the card
through which transactions would be exclusivity and routing practices in the to access his or her money. Similarly, a
routed. The proposal explained that ATM industry would benefit consumers cardholder may use an ATM to transfer
covering ATM networks under the rule through reduced ATM convenience fees, money from one account to another.
may result in very different economic help small issuers relying on nonbank Withdrawing money from one’s own
incentives than coverage of point-of-sale ATMs, and ensure that cash remains a account is not a payment to an ATM
debit card networks because the party viable alternative to debit cards. One operator in exchange for goods or
receiving the interchange fee would be commenter suggested that issuers be services, to satisfy an obligation, or for
able to control the transaction routing. able to satisfy any requirement for other purposes.94 Therefore, a network
The Board received comments in multiple networks by enabling debit providing only ATM services is not a
support of excluding ATM transactions networks that also function as ATM payment card network. Consequently, a
from the scope of the rule and in networks. card is not a ‘‘debit card’’ by virtue of
support of including ATM transactions By contrast, the commenters that its being issued or approved for use
within the scope of the rule. Those opposed applying the network through an ATM network, which, in
commenters that opposed including exclusivity and routing provisions to turn, means that the ATM transaction is
ATM transactions within the scope of ATM transactions were generally issuers not an ‘‘electronic debit transaction’’ as
the rule argued that ATM withdrawals and payment card networks. These those terms are defined in EFTA Section
are not a payment for goods or services. commenters argued that including ATM 920. Therefore, ATM networks and
Rather, these commenters argued that transactions under the rule would transactions are not within the scope of
the customer is accessing his or her own enable the party receiving the either the interchange fee standards or
funds. By contrast, commenters in interchange fee to direct the routing of the network exclusivity and routing
support of including ATM transactions the transaction, a practice prohibited by provisions. The Board has added
within the scope of the rule asserted the network routing provisions in the comment 2(m)–5, which clarifies that
that ATM operators are ‘‘merchants’’ point-of-sale environment. Commenters ATM networks are not payment card
selling convenient access to cash and also expressed concern that, if the networks for purposes of this part.
that ATM transactions debit accounts. network exclusivity provision applied One commenter suggested the Board
Both the commenters in support of to ATM cards and networks, the address the treatment of ATM
and opposed to including ATM establishment of settlement transactions within the rule text. As
transactions supported the Board’s arrangements with multiple networks discussed above in connection with
interpretation that interchange fees for would create a large burden on issuers, § 235.2(h), the Board has not explicitly
ATM transactions would be excluded which could result in higher consumer excluded ‘‘transactions initiated at an
from the rule’s coverage (even if ATM fees. One issuer that was opposed to automated teller machine (ATM),
transactions were otherwise included) applying the network exclusivity including cash withdrawals and balance
because issuers do not receive or charge provisions to ATM cards argued that transfers initiated at an ATM’’ in the
interchange fees for ATM transactions. doing so was unnecessary because many definition of ‘‘electronic debit
A few commenters believed ATM
issuers currently have at least two transaction.’’

transactions to be outside the scope of unaffiliated network options on their
EFTA Section 920 because merchants cards.92 93 See Black’s Law Dictionary at 950 (abridged 8th
are not charged for ATM transactions. Ed.); Merriam Webster’s Collegiate Dictionary at 963
Furthermore, commenters stated that, 92 The Board also received comments requesting (10th ed. 1993).
94 To the extent the cardholder is paying for the
unlike for debit card transactions, ATM that the Board permit ATM operators to impose
differential surcharges based on the network the service of being able to access his or her money, the
networks currently have incentives to transaction is routed over. This suggestion is amount paid for that service is the convenience fee
lower interchange fees in the ATM outside the scope of the rule. charged by the ATM operator.
Even if ATM transactions were systems.96 In addition, some b. Non-traditional Payment Systems
included within the scope of the rule, commenters believed that emerging Non-traditional and emerging
interchange fees received on ATM payment systems should be built for payment technologies generally fall into
transactions are not ‘‘interchange multiple routing options and that the three categories: those that facilitate
transaction fees’’ as defined in EFTA Board should encourage the payments but do not come within the
Section 920(c)(8) because ATM interoperability of systems and scope of the definition of ‘‘payment card
interchange fees do not compensate an technologies. network,’’ emerging devices or
issuer. Additionally, applying the The Board also received comments authentication methods used to access
network exclusivity and routing from networks, issuers, and emerging existing payment card networks, and
provisions to ATM transactions would payments technology providers that new payment card networks. In general,
provide incentives to the party directing supported excluding emerging payment non-traditional payment systems should
the routing to select the network that systems from the definition of ‘‘payment not be excluded from coverage merely
maximizes interchange fees, although card network.’’ These commenters because the payment systems are ‘‘non-
also one that minimizes network fees. argued that including emerging traditional.’’ Excluding these systems
6. Non-traditional and Emerging payments technologies would hinder solely because they are ‘‘non-
Payments Systems development and innovation of new traditional’’ would not result in a rule
technologies because networks, issuers, that is flexible to accommodate future
a. Summary of Proposal and Comments
and other processors would be less developments in the industry. Rather,
The Board requested comment on likely to innovate if they must share the application of the rule to non-
whether non-traditional or emerging new technology with at least one other traditional payment systems is
payment systems should be covered by network under the network exclusivity determined by whether the
the definition of ‘‘payment card provisions. Commenters asserted that characteristics of the entity with respect
network.’’ In its request for comment, inclusion often would not be practical to transactions make the entity a
the Board provided examples of non- because alternative form factors initially payment card network, issuer, or
traditional or emerging payment may not be capable of being processed acquirer as those terms are defined in
systems, which included systems in on more than one unaffiliated network. the rule.
which a consumer uses a mobile phone Moreover, one commenter asserted that Some non-traditional payment
to purchase goods or services with the innovation could be hindered if a systems perform functions similar to
payment amount billed to the mobile competing payment card network traditional payment card networks, but
phone account or debited directly from blocked adoption of technology by are structured such that these entities
the consumer’s bank account, or refusing to use it, and thereby prevented are not ‘‘payment card networks’’ as the
systems such as PayPal, in which a the technology from being processed term is defined in the rule. For example,
consumer may use a third-party over more than one network. One an entity may provide services that
payment intermediary and use funds commenter further contended that such enable merchants to accept payments
that may be held either by the a barrier would exacerbate the already from customers by permitting customers
intermediary or in the consumer’s significant barriers to entry in the to prefund accounts with the entity.
account held at a different financial payments industry. A few of these Similar to prepaid cards, such accounts
institution.95 The Board stated that commenters asserted that non- could be prefunded with ACH transfers
these non-traditional and emerging traditional payment systems offer a or by a debit or credit card transaction
payment systems arguably satisfied the competitive alternative to the traditional that debits the customer’s account at an
proposed criteria for payment card payment card networks. One commenter issuer. Later, a customer may use his or
networks, and requested comment on argued that the emerging payments her account information to initiate a
how it would distinguish these payment technologies should be excluded debit to her account with the entity in
systems from traditional debit card because merchant adoption of order to pay the merchant for goods or
payment systems in the event technology is voluntary. Another services. If the customer and merchant
commenters believed such non- commenter suggested that the Board both hold accounts with the entity,
traditional and emerging payment initially exclude emerging payment similar to three-party systems, the entity
systems should not be covered. systems, but continue to monitor does not route the transaction
The Board received numerous whether such systems continue to be information and data. Rather, the entity
comments on whether emerging ‘‘emerging.’’ uses the information to make a debit
payment networks should be considered entry to the customer’s account and a
‘‘payment card networks’’ under the A few commenters (typically
merchants and emerging payment card credit entry to the merchant’s account.
rule, and as groups, both issuers and Therefore, an entity is not a ‘‘payment
networks were divided as to their views. networks) suggested that emerging
payment systems be subject to the rule, card network’’ for purposes of this rule
The Board received comments from when the entity does not send the
issuers, networks, and merchants that but not while the emerging payment
system is deployed on a limited, pilot transaction information and data to
supported including emerging payment another point and instead merely makes
systems and more generally, any entity basis. Similarly, one commenter
suggested that emerging payment book-keeping entries.
that satisfied the criteria of a ‘‘payment Like other three-party systems, a non-
card network’’ under the proposed technologies be included, but that an
issuer be able to rebut the presumption traditional payments system that is not
definition. These commenters argued a ‘‘payment card network’’ with respect
that excluding emerging payments of inclusion by demonstrating that

processing over two networks is not to some transactions may be a payment
technologies would create an unfair card network, issuer, or acquirer with
benefit to the emerging payment technologically possible or cannot be
deployed in a cost-effective manner. respect to other transactions. For
95 A few commenters stated that PayPal should no
example, in addition to permitting its
longer be considered an ‘‘emerging’’ payment 96 One of these commenters stated that customers to debit accounts to pay
system due to its broad adoption and that PayPal asymmetric regulation would distort innovation merchants that also have accounts with
operates like a three-party system. and market evolution. the entity, the entity may issue debit
cards to account-holding customers or operators to be merchants for purposes determine the network(s) over which it
merchants that may be used outside the of this rule. Additionally, ATM may send the transaction. For example,
entity/system and the transactions of networks and transactions are not for signature-based transactions, the
which are processed over four-party ‘‘payment card networks’’ or ‘‘electronic acquirer or processor looks to the first
systems. Under these circumstances, the debit transactions,’’ respectively, for number in the BIN and directs the
entity is an issuer with respect to purposes of this rule. Therefore, the transaction to the appropriate network.
electronic debit transactions that are Board has not expanded the definition The network then directs the transaction
initiated using the debit card. If the of ‘‘processor’’ to include those to the appropriate issuer. For PIN-based
entity, together with its affiliates, has processors that process on behalf of transactions, the acquirer or processor
assets of $10 billion or more, then the ATM operators. The Board has adopted usually compares the information
interchange fee restrictions apply to the the definition of ‘‘processor’’ as received from the merchant to ‘‘BIN
entity. The network exclusivity and proposed and its associated commentary tables,’’ which the acquirer or processor
routing provisions will apply regardless with minor clarifying revisions. uses to determine the networks over
of the entity’s asset size. which transactions initiated by cards
P. Section 235.2(p)—Route
c. Emerging Technologies That Access with various BINs may be routed. The
The Board did not propose to define acquirer or processor then sends the
Existing Networks
the term ‘‘route.’’ One commenter transaction over the appropriate
Another category of emerging suggested the Board define the term network, which, in turn, sends the
payments technology is new access ‘‘network routing’’ to mean ‘‘the act of information to the appropriate issuer.
devices used to initiate debit card routing a transaction from the point of Each party that receives the information
transactions processed over existing sale to point of authorization,’’ but to must select the path the information
payment card networks. For example, exclude from the meaning of ‘‘network will take to reach the entity to which it
many networks have approved the use routing’’ any settlement or dispute is sending the information and data.
of contactless devices to initiate handling functions unless the network
transactions processed over their and the gateway is the same entity. The Therefore, the Board has defined the
networks. These contactless devices Board is unaware of whether payment term ‘‘route’’ in § 235.2(p) to mean ‘‘to
may be issued as a separate card or card networks currently permit entities direct and send information and data to
included on or accessible through a to handle settlement and disputes an unaffiliated entity or to an affiliated
mobile phone. The Board received through different entities than those entity acting on behalf of the
comments both supporting and through which the transaction was unaffiliated entity.’’ Comment 2(p)–1
opposing application of the Board’s rule initially routed. Under § 235.7 of the explains that the point to which a party
to such new devices. The Board has final rule, such a rule would not be directs or sends the information may be
considered the comments and has prohibited. a payment card network or processor (if
determined that new or emerging access The Board is adding a definition of the entity directing or sending the
devices are included within the scope of the term ‘‘route’’ in § 235.2(p). EFTA information is an acquirer), or an issuer
the proposed rule if they are issued or Section 920 uses the term ‘‘route’’ in the or processor acting on behalf of the
approved for use through a payment definition of ‘‘payment card network’’ issuer (if the entity directing and
card network and otherwise meet the and requires the Board to prescribe sending the information is a payment
criteria for being a debit card as the term regulations that prohibit issuers and card network). As a result, an entity
is defined in this rule (e.g., the card, networks from inhibiting the ability of does not route information and data if
code, or device debits the cardholder’s merchants to ‘‘direct the routing’’ of the entity merely sends the information
account or a general-use prepaid card). electronic debit transactions. EFTA and data to affiliated book-keeping
New and emerging access devices are Section 920 does not define ‘‘route’’ or entities within itself.
discussed more fully in the context of ‘‘routing.’’ The Board also is not aware As stated in the discussion on the
§ 235.2(f)’s definition of ‘‘debit card’’ of other statutes that use those terms in scope of this part, three-party systems
and the network exclusivity and routing similar contexts. are not payment card networks because
provisions in § 235.7. As discussed above in connection they do not ‘‘route’’ information to
N. Section 235.2(n)—Person with § 235.2(m), the term ‘‘route’’ is another point. Rather, a three-party
commonly defined as ‘‘to send by a system receives the transaction
The Board proposed to define certain [or selected] route’’ or ‘‘to divert information and processes the
‘‘person’’ to mean ‘‘a natural person or in a specified direction.’’ 97 In other information internally in order to
an organization, including a words, routing suggests involvement authorize and settle the transaction.
corporation, government agency, estate, other than merely receiving and using
trust, partnership, proprietorship, information and data; specifically, it Q. Section 235.2(q)—United States
cooperative, or association.’’ The Board involves sending the information and
received no comments on its proposed The Board proposed to define ‘‘United
data to another point or destination. States’’ to mean ‘‘the States, territories,
definition of ‘‘person’’ and has adopted These definitions apply to the term
the definition as proposed. and possessions of the United States,
‘‘route’’ in the context of electronic the District of Columbia, the
O. Section 235.2(o)—Processor debit transactions. Commonwealth of Puerto Rico, or any
In a four-party system, when a political subdivision of any of the
The Board proposed to define the
merchant accepts a debit card as a form foregoing.’’ One network-commenter
term ‘‘processor’’ to mean ‘‘a person that
of payment, the merchant sends the suggested that the Board limit its
processes or routes electronic debit
transaction information to its acquirer or definition of ‘‘United States’’ to the 50
transactions for issuers, acquirers, or
processor. The acquirer or processor states plus the District of Columbia in
merchants.’’ One commenter suggested
uses the transaction information to order to minimize the costs associated
that the definition of processor be
expanded to include processors that 97 See, e.g., Webster’s New World Dictionary and
with reprogramming. This commenter
process on behalf of ATM operators. Thesaurus at 558 (2d ed. 2002); Merriam Webster’s
also noted that if the Board includes
The Board does not consider ATM Collegiate Dictionary at 1021 (10th ed. 1993). U.S. territories, the Board should survey
issuers in those territories regarding A. Summary of Proposal and Comments as lower retail prices).101 A few
their costs.98 individual commenters supported the
The Board proposed a definition of The Board requested comment on two position of merchants and their trade
the term ‘‘United States’’ that is alternative standards for determining groups. Issuers, many consumers, and
consistent with the EFTA’s definition of whether the amount of an interchange payment card networks, on the other
‘‘State.’’ 99 The definition of ‘‘account’’ transaction fee is reasonable and hand, opposed both proposed
in § 235.2(a) is limited to accounts that proportional to the cost incurred by the interchange fee standards for a variety of
are held in the United States and the issuer with respect to the transaction. reasons, arguing that the limits in the
definition of ‘‘electronic debit Under proposed Alternative 1, an issuer proposals were not compelled by statute
transaction’’ to those transactions could comply with the standard for and expressing concerns that either of
accepted as a form of payment in the interchange fees by calculating its the proposed alternatives would
United States because the EFTA allowable costs and receiving an decrease revenue to issuing banks,
provides no indication (such as a interchange fee that does not exceed its result in increased cardholder fees or
conflicts of law provision) that Congress per-transaction allowable costs, up to a decreased availability of debit card
intended for Section 920 to apply to cap of 12 cents per transaction. An services, reduce benefits to merchants
international transactions (i.e., those issuer’s allowable costs with respect to when compared to other forms of
where the merchant or account debited each transaction would be the sum of payment, and stifle innovation in the
is located in a foreign country).100 those costs that are attributable to the payment system, among other things.
Accordingly, limiting the scope of this issuer’s role in authorization, clearance, The Board received numerous
part to transactions initiated at United and settlement of an electronic debit comments, primarily from issuers and
States merchants to debit accounts in transaction and that vary with the networks, on its proposed interpretation
the United States avoids both number of transactions sent to the issuer of the meaning of ‘‘reasonable’’ and
extraterritorial application of this part as within a calendar year (variable costs) ‘‘proportional’’ to cost in Section
well as conflicts of laws. By contrast, divided by the number of electronic 920(a)(2).102 Issuers and networks
including the Commonwealth of Puerto asserted that the Board was bound by,
debit transactions on which the issuer
Rico and other territories or possessions or at least should look to, the
received or charged an interchange
of the United States does not implicate jurisprudence surrounding the phrase,
transaction fee during that year (average
the same extraterritorial application ‘‘just and reasonable,’’ used in
concerns because the EFTA already variable cost). The proposal defined the
issuer’s role in authorization, clearance, connection with ratemaking for public
applies to these jurisdictions. Therefore, utilities or other regulated entities.
the Board has not revised its definition and settlement as receiving and
processing authorization requests These commenters argued that, by
of ‘‘United States,’’ now designated as referring to fees that are ‘‘reasonable’’
§ 235.2(q). (including voice authorization and
referral inquiries); receiving and and ‘‘proportional’’ to cost, Congress
III. Section 235.3 Reasonable and processing presentments and intended the Board to follow ratemaking
Proportional Interchange Transaction representments; initiating, receiving, jurisprudence that requires full recovery
Fees and processing chargebacks, of costs (including depreciation) and a
adjustments, and similar transactions; reasonable return on the rate base
Section 235.3 sets forth a standard for
(asserted by the commenters to be the
assessing whether the amount of any transmitting and receiving funds for
entire debit card program cost). These
interchange transaction fee that an interbank settlement; and posting
commenters argued that an interchange
issuer receives or charges with respect electronic debit transactions to
fee standard must be adopted in
to an electronic debit transaction is cardholders’ accounts. Alternative 1
accordance with the ratemaking
reasonable and proportional to the cost also would permit an issuer to receive jurisprudence in order to avoid a
incurred by the issuer with respect to or charge an interchange fee that does violation of the takings prohibition in
the transaction for purposes of EFTA not exceed a safe harbor amount of 7 the Fifth Amendment to the U.S.
Section 920(a)(2). Under § 235.3(b), an cents per transaction without Constitution. Issuers and networks
issuer may not charge or receive any demonstrating costs. Under Alternative believed that the failure to consider the
interchange transaction fee that exceeds 2, an issuer would comply with the recovery of all types of costs plus a
the sum of 21 cents plus 5 basis points standard for interchange fees as long as reasonable profit for all issuers
of the transaction’s value. it does not receive or charge an (including those with allowable costs
interchange fee in excess of 12 cents per above the level of the proposed cap), as
98 Based on information available to the Board,
transaction. All of the proposed well as the Board’s proposed
the Board distributed surveys to an institution that,
together with its affiliates, had assets of more than amounts were based on cost data for consideration of an issuer’s ability to
$10 billion and that filed one of the following issuers responding to a Board survey in recover costs from consumers, were
reports: The Consolidated Financial Statements for which those issuers reported inconsistent with the ratemaking
Bank Holding Companies (FR Y–9C; OMB No.
7100–0128), the Consolidated Reports of Condition
information related to their transaction jurisprudence. More generally, these
and Income (Call Reports) for independent costs. issuers and networks objected to any
commercial banks (FFIEC 031 & 041; OMB No. The Board received numerous cap that would not permit each covered
7100–0036), the Reports of Assets and Liabilities of issuer to recover the entire amount of its
and for U.S. branches and agencies of foreign banks comments on all aspects of its proposed
(FFIEC 002; OMB No. 7100–0032), the Thrift interchange fee standards. Merchants allowable costs.
Financial Reports (OTS 1313; OMB No. 1550–0023) and their trade groups overwhelmingly
for thrift holding companies and thrift institutions, 101 Several merchant-commenters stated that they
and the Credit Union Reports of Condition and
supported adoption of the framework in
saw no need for any interchange fees and that debit
Income (NCUA 5300/5300S; OMB No. 3133–0004) Alternative 1 because that proposed card transactions should clear at par like check
for credit unions. standard would result in the greatest transactions.
99 15 U.S.C. 1693a(10).
reduction from the current interchange 102 In general, unlike issuers and networks,
100 Interchange fees for electronic debit merchants and their representatives did not
transactions initiated in a foreign country also may
fees (the savings of which could comment in detail about the meaning of the phrase
be subject to restrictions imposed by that country. potentially be passed on to consumers ‘‘reasonable’’ and ‘‘proportional’’ to the cost.
By contrast, merchants and their trade and the cap because both involved routing provisions would result in
groups argued that debit cards are only numerical limits rather than subjective significant downward pressure on
one part of a checking account product, or flexible standards for assessing interchange fee levels under proposed
that issuers do not need to obtain full whether a fee was reasonable and Alternative A.
cost recovery from merchants through proportional to cost. Few of these Many of the commenters opposed to
interchange fees, and that robust debit commenters provided specific a cap and/or safe harbor, however,
card markets exist in other countries suggestions about structuring the more recognized the appeal of a cap or a safe
that have low or no interchange fees. flexible standards (other than harbor from the perspective of
Therefore, merchants and their eliminating the proposed cap). One transparency and administrative
representatives supported the proposal issuer suggested that the Board specify simplicity and stated that a pure issuer-
to limit allowable costs to a narrow the allowable costs and then specify specific standard would be difficult to
group of costs associated mainly with how interchange fees may be structured implement operationally and difficult to
authorization, clearance, and settlement to account for the variation in risk enforce. Merchants and one acquirer/
of a transaction and to establish a cap associated with different types of processor acknowledged that having
at a level that does not permit 100 transactions. This commenter suggested either a cap or a safe harbor would make
percent of covered issuers to recover that the Board specify how to determine the interchange fee structure simpler for
allowable costs through interchange a reasonable rate of return and that each merchants to understand, which could
fees. network could gather cost information increase transparency and reduce
Other issuers and networks suggested from each covered issuer in order to operational risks. One network asserted
that the Board should not follow the determine permissible interchange fees. that an issuer-specific approach would
ratemaking jurisprudence because, A few commenters suggested the Board result in unpredictable interchange fees
unlike public utilities, no natural follow the approach used in its for merchants because merchants would
monopoly exists for issuers, which Regulation Z to interpret similar not know in advance the issuers of their
eliminates the risks of excessive profits language in section 149 of the Truth in customers’ debit cards.
and charges (as issuers do not have Lending Act (TILA), which did not set As between proposed Alternative 1
captive customers). Some of these specific numerical limits, but did and 2, most issuers viewed Alternative
commenters suggested how the Board include safe harbor fee levels.103 2 as the better alternative due to its ease
should interpret the phrase ‘‘reasonable Merchants supported a cap as of compliance, but preferred a higher
and proportional to the cost incurred by necessary to prevent interchange fees cap. Other issuers supported a variant of
the issuer’’ independent from from becoming excessively high, but Alternative 1—issuer-specific standards
ratemaking jurisprudence. Many of objected to a safe harbor as inconsistent with a higher safe harbor and no cap.
these commenters read EFTA Section with the statutory language, which they Issuers supported raising the cap and/or
920(a)(2) as requiring interchange fees viewed as requiring a connection to safe harbor to ensure recovery of costs
that are in ‘‘reasonable proportion’’ to each issuer’s specific costs. Some such as the payment ‘‘guarantee,’’
the issuer’s cost of the transaction. commenters argued that a cap involves network processing fees, customer
Several issuers and networks contended an arbitrary limit on interchange fees service costs, rewards programs, fixed
that an interchange fee was not costs, and a return on investment.104 A
and would be an unauthorized
‘‘reasonable’’ unless the fee included few issuers suggested that any inclusion
assessment of the reasonableness of the
profit or a mark-up on cost. A few of the payment guarantee and fraud
level of costs rather than of interchange
commenters argued that Congress losses be done on an ad valorem basis
fees. Other commenters contended that
demonstrated its intent that issuers be and vary by merchant type.
a single cap creates a variable Merchants and their representatives
permitted to receive or charge relationship between interchange fees
interchange transaction fees that generally supported the more issuer-
and costs across issuers, rather than a specific Alternative 1 as most consistent
exceeded their costs by using the phrase uniform proportional relationship.
‘‘proportional to’’ rather than ‘‘equal with the statute and reflective of the
A few commenters contended that the actual costs of most covered issuers,
to.’’ One commenter contended that the Board had no statutory basis for
‘‘reasonableness’’ of a fee should vary which they asserted are significantly
considering incentives to reduce costs. below both the proposed 12-cent cap
based on the scope of allowable costs. These commenters argued that issuers
For example, reasonableness may be a and 7-cent safe harbor.105 Some
always have such incentives, and acquirers and merchant processors
different standard when compared to
therefore a cap was not necessary to acknowledged that Alternative 2 would
total cost than when compared to
create such incentives. A few be the easier alternative to implement,
average variable cost. Other commenters
commenters also argued that any cap on but objected to a safe harbor as
viewed reasonableness independently
cost recovery would ultimately reduce inconsistent with the statute. Many of
from proportionality and suggested that
efficiency gains by discouraging firms these commenters encouraged the Board
the ‘‘reasonableness’’ of a fee take into
from investing capital needed to achieve
consideration the benefits (or value) of
efficiency gains if those investments 104 Allowable costs are discussed in more detail
debit cards to consumers and merchants
were not recovered under the cap. later in this section. Many issuers, both covered by
(particularly through the analogy to
One commenter argued that a cap was and exempt from the interchange fee standards,
checks). provided information in their comment letters
Numerous issuers, networks, unnecessary in light of the network
about their estimated costs of debit card
depository institution trade exclusivity and routing restrictions and transactions, derived from internal accounting or
believed that a cap would distort the industry studies. These costs generally ranged from
organizations, and individuals objected

to fee limits as inconsistent with the market outcome of those provisions. By 14 cents per transaction to 63 cents per transaction.
contrast, some merchants did not A few commenters provided information about the
directive that the Board establish cost components of these estimates.
‘‘standards for assessing’’ whether the believe that the network exclusivity and 105 Several merchant commenters referenced a
amount of an interchange fee is 2004 industry study (STAR CHEK Direct Product
103 See 12 CFR 226.52(b)(1) (an issuer may impose Overview study; First Annapolis Consulting) that
reasonable and proportional to cost. a fee that ‘‘represents a reasonable proportion of the found the per-transaction costs to be 0.33 cents for
These commenters objected to the total costs incurred by the card issuer for that type PIN debit and 1.36 cents for signature debit, but the
establishment of both the safe harbor of violation’’). study was not provided with the comments.
to revise any safe harbor to base it on appear to believe the language did not for which the issuer is receiving the
the mean cost across transactions rather require computing the actual allowable interchange fee. This reading, however,
than the median issuer cost in order to cost of each specific transaction; none would result in a statutory requirement
provide a greater link between costs and argued for such a calculation. Instead, that is virtually impossible to
fees for most transactions, as well as commenters generally interpreted implement. First, interchange fees are
greater incentives to lower costs. One Section 920(a)(2) as referring to the cost computed at the time of the transaction,
commenter asserted that the average- of an average electronic debit and an issuer’s costs for a specific
cost measurement is more transaction or type of electronic debit transaction cannot be ascertained at the
‘‘economically meaningful’’ than the transaction (e.g., PIN vs. signature) or time the issuer receives the interchange
median. Most merchants objected to an some other categorization of the fee. The cost of each transaction varies
ad valorem component. transaction (e.g., card-present vs. card- based on a variety of factors, including
non-present). factors that may not be known to the
B. Final Interchange Fee Standard The two proposals offered for issuer at the time it charges or receives
1. Description of Final Rule comment by the Board covered both the interchange fee. For example, the
interpretations. Alternative 1 included cost of network fees for a transaction
The Board has considered all of the an issuer-specific measurement of costs
comments it has received and has may vary based on the volume of
and fees. Alternative 2 was based on the transactions that the issuer processes
determined to adopt in the final rule a average costs incurred by an issuer at
modified version of the approach in through a given network. The issuer
the 80th percentile of allowable costs, cannot precisely control or know the
proposed Alternative 2. Under the final based on certain survey data. As noted
rule, each issuer could receive volume of transactions at any given
above, after consideration of the moment when a particular transaction
interchange fees that do not exceed the language and purpose of the statute and
sum of the permissible base component occurs, because that volume depends
the practical results of various largely on customer usage of their debit
and the permissible ad valorem interpretations of the statute, the Board
component. The standard’s base amount cards and merchant routing decisions;
is adopting in the final rule a variant of for example, lower transaction volume
per transaction is 21 cents, which the approach proposed as Alternative 2.
corresponds to the per-transaction may result in higher network fees for
Under this approach, an issuer may not each transaction.
allowable cost, excluding fraud losses, receive an interchange fee that exceeds
of the issuer at the 80th percentile, the sum of a base component, Second, even assuming an issuer
based on data collected by the Board in corresponding to the per-transaction could calculate the cost of each
a survey of covered issuers. The ad allowable costs of the issuer at the 80th transaction, transaction-specific
valorem amount is 5 basis points of the percentile as reported on the Board’s interchange fees would result in an
transaction’s value, which corresponds survey, and an ad valorem component, exceedingly complex matrix of
to the average per-transaction fraud corresponding to the per-transaction interchange fees. Each issuer would be
losses of the median issuer, based on the fraud loss of the median issuer as required to provide each network with
same survey data. Each issuer’s reported on the Board’s survey. data reflecting that issuer’s actual cost
supervisor is responsible for verifying As an initial matter, the Board per transaction, and each network
that an issuer does not receive believes this approach is consistent with would then be required to ensure that
interchange fee revenue in excess of that the language in Section 920(a)(2). no more than the allowable portion of
permitted. See § 235.9. The Board Section 920(a)(2) refers to ‘‘an issuer’’ these actual costs would be covered by
recognizes that issuers’ costs may and ‘‘an electronic debit transaction;’’ in an interchange fee. These calculations
change over time, and the Board other words, to a representative issuer would be required for tens of billions of
anticipates that it will periodically and transaction. Section 920(a)(2)’s electronic debit transactions and a large
conduct surveys of covered issuers in subsequent use of ‘‘the issuer’’ and ‘‘the and growing number of covered
order to reexamine and potentially reset transaction’’ is reasonably read as a issuers.106 This would introduce
the fee standard. reference back to the original tremendous complexity and
representative use of each term (i.e., an administrative costs for issuers,
2. Reasonable and Proportional to Cost
issuer receiving an interchange fee and networks, acquirers, and merchants, as
EFTA Section 920(a)(2) does not a transaction for which a fee is well as difficulty in monitoring and
clearly require either transaction- received). This reading fulfills the enforcing compliance. Thus,
specific or issuer-specific standards. purposes of the provision by allowing a interpreting Section 920(a)(2) as
Section 920(a)(2) provides that ‘‘the standard to be set that ensures that requiring interchange fees to be
amount of any interchange transaction interchange transaction fees are calculated based on the cost of each
fee that an issuer may receive or charge reasonable and are proportional to transaction for which an interchange fee
with respect to an electronic debit allowable costs without imposing undue is charged or received would be an
transaction shall be reasonable and compliance burdens on issuers or absurd result the Board does not believe
proportional to the cost incurred by the networks. This approach also provides Congress intended.107
issuer with respect to the transaction.’’ transparency to issuers, networks,
Some commenters interpreted this acquirers, merchants, and supervisors 106 According to the Board’s survey, there were
language as limiting the permissible that will result in the most effective 37.6 billion electronic debit transactions in 2009.
interchange fee amount for a particular monitoring and enforcement of The Board sent the survey to 131 covered financial
issuer to a proportion of the allowable organizations (some of which represented multiple
compliance. affiliated issuers). The issuers responding to the

costs incurred by that issuer. Other The Board considered an alternative survey, which does not cover the universe of
commenters interpreted this language as interpretation of Section 920(a)(2) under covered issuers, accounted for about 60 percent of
permitting the permissible interchange which the section would require that these transactions—roughly 22.6 billion
fee amount to be set in accordance with each interchange fee that a particular transactions.
107 In general, statutes should be interpreted to
the allowable costs of the average issuer covered issuer receives be reasonable avoid an absurd result. See Harrison v. Benchmark
or an issuer at a reasonable ranking and proportional to the cost incurred by Elecs. Huntsville, Inc., 593 F.3d 1206, 1212 (11th
among issuers. Nearly all commenters that issuer for the particular transaction Cir. 2010).
This impractical result is not or charged by a given issuer were in interpretation of the word
compelled by the words of Section compliance with the statutory standard. ‘‘proportional’’ that would require a
920(a)(2). As explained above, Section In addition, this approach would not constant proportion between costs and
920(a)(2) may be reasonably read to create the incentive to reduce costs that fees. As explained above, that reading is
limit interchange fees based on the is created by an approach like not required to give meaning to the term
allowable costs for a representative Alternative 2. ‘‘proportional’’ in the statute. As
issuer in a representative electronic Section 920(a)(2) raises a second interpreted by the Board, the term
debit transaction. definitional matter. Section 920(a)(2) eliminates quantities that do not have
Some commenters urged adoption of requires that the amount of any the required relationship—in this case,
an interpretation of Section 920(a)(2) interchange fee be ‘‘reasonable’’ and excluding costs that are not related to
that focuses on the costs incurred by a ‘‘proportional to the cost incurred by the electronic debit transactions. Moreover,
specific issuer in connection with a issuer,’’ without defining either the term ‘‘proportional’’ is a meaningful
representative electronic debit ‘‘reasonable’’ or ‘‘proportional.’’ Instead, and descriptive alternative to ‘‘equal
transaction. This view, however, does Section 920(a)(3) requires the Board to to.’’ In this way, Congress indicated that
not represent a consistent reading of the give meaning to those terms through its interchange fees must have a
words of Section 920(a)(2). As noted standards. For purposes of establishing relationship to related costs, but need
above, Section 920(a)(2) refers to ‘‘an standards for assessing whether the not be equal to those costs. Had
issuer’’ and ‘‘an electronic debit amount of any interchange fee is Congress intended a fixed proportion
transaction’’ when identifying the ‘‘reasonable’’ and ‘‘proportional’’ to between an issuer’s transaction cost and
amount of a fee that shall be restricted. cost, the Board has established a the amount of an interchange fee,
Later, Section 920(a)(2) refers to both reasonable limit on the highest amount Congress could have required an
the cost incurred by ‘‘the issuer’’ and of an interchange fee that an issuer may interchange fee to have a ‘‘given
the cost of ‘‘the transaction.’’ If ‘‘the receive and has based that limit on the proportion to,’’ ‘‘be equal to,’’ or have a
issuer’’ in this second location is average per-transaction allowable costs ‘‘fixed proportion to’’ cost.
interpreted not as a reference to the incurred by issuers with respect to Several commenters suggested the
original representative issuer, but electronic debit transactions. Board follow an approach similar to the
instead as a reference to a specific This approach gives meaning and rules prescribed under Section 149 of
issuer, then the same interpretation effect to both terms. The statute’s use of the Truth in Lending Act, which uses
would seem to be required by the the term ‘‘reasonable’’ implies that, language similar to EFTA Section
identical and parallel references to ‘‘a above some amount, an interchange fee 920(a)(2) and requires that penalty fees
transaction’’ and ‘‘the transaction’’ in is not reasonable. The term assessed by credit card issuers be
that same sentence. As explained above, ‘‘reasonable’’ commonly is defined as reasonable and proportional to the
this leads to an extraordinarily complex meaning ‘‘fair, proper, or moderate’’ or omission with respect to, or violation of,
and burdensome result. Commenters ‘‘not excessive,’’ and what is the cardholder agreement.110 Section
recognized this in supporting an ‘‘reasonable’’ generally depends on the 149 of TILA required the Board to
interpretation of ‘‘a transaction’’ and facts and circumstances.108 Section consider the costs incurred by issuers as
‘‘the transaction’’ as both referring to a 920(a) does not specify whether a result of credit card violations in
representative electronic debit reasonableness is assessed from the addition to other factors, which
transaction, distinguishing electronic merchant’s or issuer’s perspective or included the need to deter violations.
debit transactions and the costs related from another perspective. The use of the Under the Board’s TILA rule, a penalty
to those transactions from the costs term ‘‘proportional’’ requires a fee is reasonable and proportional to the
related to other types of transactions, relationship between the interchange fee omission or violation if the penalty fee
such as credit card transactions. In the and costs incurred; however, it does not is a reasonable proportion of the
same way, the parallel use of the same require equality of fees and costs or creditor’s total cost of addressing that
construction in referencing ‘‘an issuer’’ demand that the relationship be type of omission or violation for all
and ‘‘the issuer’’ in the same sentence constant across all quantities. The term consumers, which ensures that no
supports the interpretation of those ‘‘proportional’’ has a variety of individual consumer bears an
references as references to a meanings, including ‘‘forming a unreasonable or disproportionate share
representative issuer of debit cards. relationship with other parts or of the creditor’s costs of the type of
Moreover, establishing issuer-specific quantities’’ or ‘‘corresponding in degree, violation. That rule establishes a safe
interchange fee standards would size, or intensity.’’109 The final rule harbor for compliance with the Board’s
significantly increase the burden on adopts a standard for both terms: a cap standards, but does not establish a cap
supervisors to assess compliance and that delineates a separation between a on the amount of penalty fees.111
make it impossible for networks, ‘‘reasonable’’ fee and a fee that is not The Board believes the context and
acquirers, and merchants to know reasonable; and a requirement that the usage of the terms ‘‘reasonable’’ and
whether issuers were in compliance relationship between the amount of an ‘‘proportional’’ in Section 149 of TILA
with the standards under Section 920. interchange fee that may be received by and Section 920 of the EFTA allow for
Under any issuer-specific framework, an issuer and the cost of the transaction different approaches to effectuate the
each supervisor would need to be set by reference to the allowable costs specific purposes of each section. The
determine for each transaction whether of electronic debit transactions. reference in TILA incorporates a
an issuer is receiving an interchange fee In establishing this standard, the subjective determination, relating to the
that does not exceed its allowable costs. Board rejected a more mathematical proportionality of a fee to the violations
Further, in contrast to the adopted of a contract, while the reference in
approach that includes a publicly 108 Black’s Law Dictionary at 1272 (7th ed. 1999)
Section 920 relates to the
known maximum permissible fee, an (defining ‘‘reasonable’’); Webster’s New World proportionality of a fee to a numerical
issuer-specific approach would Dictionary & Thesaurus at 529 (2nd Ed. 2002)
(defining ‘‘reasonable’’). cost. In the Board’s TILA standards, ‘‘a
introduce uncertainty for networks and 109 American Heritage Dictionary at 1049 (1976);
merchants, neither of which would Merriam Webster’s Collegiate Dictionary at 936 110 15 U.S.C. 1665d.
know whether interchange fees received (10th ed. 1995) (defining ‘‘proportional’’). 111 12 CFR 226.52; 75 FR 37527 (June 29, 2010).
reasonable proportion’’ is based on a transactions and checking transactions that were shared with credit card or
creditor’s total cost of all violations of that are required within the Federal other programs.
that type, and is readily set based on the Reserve System to clear at par. Section The Board based both of its fee
costs to the creditor and monitored by 920(a)(4)(B) requires the Board to standard alternatives on an issuer’s per-
supervisors, with variation across distinguish between ‘‘the incremental transaction variable costs of
creditors reinforcing competition to the cost incurred by an issuer for the role of authorization, clearance, and settlement.
benefit of consumers. In the case of the issuer in the authorization, The regulatory text for Alternative 1,
penalty fees regulated by TILA, the clearance, or settlement of a particular which incorporated an issuer-specific
consumer paying the fee may stop its electronic debit transaction,’’ and ‘‘other cost component, included a detailed
relationship with the creditor charging costs incurred by an issuer which are description of allowable costs. Proposed
the fee. not specific to a particular electronic § 235.3(c)(1) described the exclusive list
Although that approach may be debit transaction.’’ The statute directs of allowable costs as including the costs
permissible under Section 920, the the Board to consider the former costs that are attributable to receiving and
Board believes for the reasons discussed in establishing an interchange fee processing authorization requests;
above that a single cap is a more standard, and prohibits it from receiving and processing presentments
appropriate approach in the context of considering the latter costs. The Board and representments; initiating,
interchange fees. In particular, practical interprets the prohibition in Section receiving, and processing chargebacks,
implementation concerns, constraints 920(a)(4)(B)(ii) on considering certain adjustments, and similar transactions;
on the data currently available to the costs as prohibiting inclusion of these transmitting and receiving funds for
Board, lack of competition in costs in the standards set under Section interbank settlement; and posting
interchange fees, more effective and 920(a)(3), and not as a prohibition on electronic debit transactions to
consistent monitoring, and other factors the Board collecting information about cardholders’ accounts. Proposed
justify a different approach than the and determining the scope of these § 235.3(c)(2) stated that fees paid to a
interpretation under TILA. Accordingly, costs. network were not an allowable cost.
the Board does not believe interpreting Proposed comment 3(c)–2.i clarified
Beyond these instructions, as
‘‘proportional to’’ the same way in both that, with respect to authorization, an
explained below, Section 920 does not
the interchange fee context and the issuer’s allowable costs included costs
restrict the factors the Board may
credit card penalty fee contexts is for activities such as data processing,
consider in establishing standards for
appropriate. voice authorization and referral
Based on the interpretations assessing whether interchange
inquiries, and did not include the costs
discussed above, the standard set in the transaction fees are reasonable and
of pre-authorization activities with the
final rule assesses whether an proportional to cost, such as costs that
primary purpose of fraud prevention
interchange fee is reasonable and are specific to a particular electronic
(e.g., transactions monitoring). Proposed
proportional to costs by reference to debit transaction but are not comment 3(c)–2.ii explained that an
certain average per-transaction costs incremental or are not related to the issuer’s clearance costs included costs
directly related to particular electronic issuer’s role in authorization, clearance, for activities such as data processing
debit transactions of covered issuers. As and settlement. As explained below, the and reconciling the clearing message.
explained below, in setting the cap, the Board carefully evaluated the costs that With respect to non-routine
Board relied on data that were available could be considered under Section transactions, proposed comment 3(c)–
to it through its survey, and the Board 920(a)(4) as well as the data available 2.iii explained that an issuer’s costs
included only certain issuer costs regarding these costs in establishing a included data processing to prepare and
directly related to effecting particular standard for determining whether an send the chargeback, or other similar
electronic debit transactions. The Board interchange fee is reasonable and message and reconciliation expenses
did not consider any costs of processing proportional to cost, and did not specific to non-routine transactions, but
credit card transactions, ACH include costs prohibited by Section allowable costs did not include the costs
transactions, or other transactions that 920(a)(4)(B)(ii) in establishing the of receiving cardholder inquiries about
access a cardholder’s account (but did interchange fee standard. particular transactions. Finally,
consider a pro rata portion of certain a. Summary of proposal proposed comment 3(c)–2.iv explained
costs that are joint between debit cards that an issuer’s settlement costs, for
and credit cards, or between debit card The Board proposed standards for purposes of determining allowable
and other transactions that access a interchange fees that are based on the costs, included fees for settling through
cardholder’s account). Similarly, the per-transaction costs an issuer incurs a net settlement service, ACH, or
Board did not consider corporate only for authorization, clearance, and Fedwire®, as well as data processing
overhead or other costs, whether or not settlement and that vary with the costs incurred for account posting.
related to debit cards, that are not number of transactions within the
reporting period (i.e., average variable b. Summary of comments
related to particular electronic debit
transactions (such as advertising and cost). The proposal excluded network Merchants overwhelmingly supported
marketing costs for debit card processing fees, as well as other costs the proposal to interpret the first
programs). By so limiting the not related to authorization, clearance, consideration in Section 920(a)(4)(B) as
considerations, the Board ensures that and settlement that varied with the limiting allowable costs to only the
the amount of an interchange fee is number of transactions. The proposal incremental costs of authorization,
also excluded all costs that did not vary clearance, and settlement. One
related to issuers’ costs of effecting the

electronic debit transaction and not to with changes in transaction volumes up merchant trade group expressed a
other factors. to capacity limits within a calendar preference for including only
year. See proposed comment 3(c)-3.i. authorization costs (noting that the
3. Cost Considerations Under the proposal, an issuer could statutory requirement to ‘‘consider’’
EFTA Section 920(a)(4)(A) requires allocate a pro rata share of debit card other costs did not require ‘‘inclusion’’
the Board to consider the ‘‘functional costs included among variable costs of of those costs in allowable costs), but
similarity’’ between electronic debit authorization, clearance, and settlement concluded that including clearance and
settlement costs would also be pay for authorizing, clearing, and encourage issuers to shift transaction
permissible in light of the statutory settling each transaction. Another issuer processing to third-party processors that
mandate to consider those costs. suggested including, as an authorization would convert all costs into incremental
By contrast, issuers and networks cost, the cost of PIN management, but costs that vary with the number of
advocated expanding the proposed set did not elaborate as to what that activity transactions over the short term.
of allowable costs, asserting that Section entailed. Numerous issuers suggested Commenters argued that this result
920(a)(4)(B) does not require that that the final rule include the cost or would be less efficient in the long run
allowable costs be limited to the value of the payment guarantee as a cost and could lead to higher interchange
incremental costs of authorization, of authorization. This feature is fees and customer costs. A few
clearance, and settlement of a particular discussed separately below. commenters argued that a broader
transaction. Issuers and networks The Board received numerous reading of incremental costs was
suggested a variety of ways by which comments on its proposed necessary to ensure that a cap would
the Board could expand the set of interpretation of the incremental cost of further general policy goals of efficiency
allowable costs, such as by including an a particular transaction. Merchants, as and innovation, and contended that
expanded definition of activities well as a few other commenters, many efficiency gains and innovations
considered to be part of authorization, supported the use of average variable cannot be achieved absent specific
clearance, and settlement; including costs (i.e., the average value of those upfront investment. A few commenters
more, or all, costs that are specific to a costs that vary with the number of argued that considering a broader range
particular transaction, but not incurred transactions sent to an issuer within a of costs would minimize barriers to
for authorization, clearance, or calendar year). Issuers and networks entry and promote competition.
settlement; including all costs generally opposed this interpretation of The Board also received numerous
associated with a debit card program; the incremental cost of a particular comments on the proposed distinction
and including all costs associated with transaction, and several commenters between costs that are specific to a
deposit accounts or general operations offered alternative definitions of particular transaction and costs that are
of the bank.112 As further discussed ‘‘incremental cost.’’ Several commenters not specific to a particular transaction
below, many issuers suggested that stated that ‘‘incremental cost’’ had a for purposes of the considerations in
other allowable costs could include well-established meaning—the cost Section 920(a)(4)(B). Commenters
costs of computer equipment and other saved by a service provider if it did not disagreed as to which costs were
capital assets, card production and provide the service, or the cost incurred specific to a particular transaction and
delivery, customer service, statements, to provide the service. Many issuers which costs were not. A few
and resolution of billing errors, as well argued that the relevant service was commenters suggested that issuers be
as an allowance for profit. debit card programs and, based on this permitted to recover certain transaction
With respect to authorization, proposed definition, suggested that all costs even if the cost is not paid for,
clearance, or settlement costs, many of the program’s costs should be charged, or incurred on a per-
commenters believed that the proposal considered, including customer service transaction basis. Costs that commenters
improperly limited the costs of costs, the cost of statements, costs from suggested as being specific to a
authorization, clearance, and settlement resolution of billing errors, card particular transaction included costs
to the costs of sending the message and production and delivery, capital costs, incurred for chargebacks, transaction-
funds between parties to a and an allowance for profit, as well as specific customer service inquiries,
transaction.113 In general, commenters account set-up costs.114 providing statements, providing rewards
suggested expanding the interpretation Other commenters argued that the (and associated rewards-program
of authorization activities to include the proposal arbitrarily limited the period of administration), and depreciation. One
costs of building, updating, and time used for determining whether a commenter argued that any cost can be
maintaining databases of cardholder given cost was ‘‘incremental.’’ One allocated to a specific transaction, and
information and behavior patterns that commenter suggested that incremental therefore the statute does not resolve
are necessary for determining whether costs include costs that varied over a which costs are specific to a transaction.
the card and account are valid. In multi-year period (e.g., 3–5 years). Still Several commenters recognized that
addition, numerous issuers suggested others asserted that the costs of debit although any cost could be allocated to
including the cost of monitoring card transactions can vary based on any transaction, the relationship of a
transactions to determine whether a measures other than time, such as cost to a particular electronic debit
particular transaction is fraudulent, transaction volume (e.g., peak-load transaction varies.
which one network noted could involve volumes); therefore, many in-house In addition to the proposed
establishing and maintaining complex costs are variable with changes in interpretation of individual provisions,
algorithms. (Transactions monitoring is transaction volume larger than one the Board received numerous comments
discussed separately below.) Many transaction. Among the costs about how Section 920(a)(2) and the
issuers suggested including the network commenters argued should be included considerations in Section 920(a)(4)(B)
processing fees (e.g., switch fees) they because they vary over time or over should be interpreted together. Some
other measures are customer service merchant commenters argued that the
112 Several commenters encouraged the Board to costs; equipment and other capital costs, Board should interpret Section
view settlement as not complete until after the labor costs, and overhead costs; network 920(a)(4)(B)(ii) as prohibiting inclusion
period during which network rules permit an issuer of all costs that were not an incremental
to charge back a transaction has ended. As
membership and gateway fees; debit
discussed in this section, adopting a specific program administration costs, including cost of authorization, clearance, and
definition of ‘‘authorization,’’ ‘‘clearance’’ or marketing; insurance costs; and research settlement. Several other commenters
‘‘settlement’’ is unnecessary. and development costs. These asserted that Section 920(a)(4)(B) is
113 A few commenters suggested that the Board
commenters contended that excluding silent with respect to non-incremental
expand allowable costs to include data processing costs associated with authorization,
costs of authorization, clearance, and settlement. consideration of these costs would
The proposal included these costs to the extent the
clearance, and settlement. Specifically,
costs varied with the number of transactions sent 114 These and similar costs are discussed in more these commenters argued that Section
to the issuer. detail later in this section. 920(a)(4)(B)(i) addressed the
incremental costs of authorization, particular, they argued that identifying which the statute is silent, are those that
clearance, and settlement of a particular whether a particular cost would not be are specific to a particular electronic
transaction, Section 920(a)(4)(B)(ii) incurred but for one particular debit transaction but that are not
addressed costs that are not specific to transaction is an impractical approach incremental costs related to the issuer’s
a particular transaction, but neither to determining which costs not to role in authorization, clearance, and
paragraph addressed costs that were consider because of the very large settlement. Although Section 920(a)
specific to a particular transaction but number of transactions many covered does not specifically instruct the Board
were not an incremental cost of issuers process in a day or other time on how these costs should be
authorization, clearance, and settlement. period. This volume makes it virtually considered in establishing the debit
Other commenters argued that Section impossible to attribute the actual cost of interchange fee standard, the section
920(a)(4)(B)(ii) excludes only costs that the activity (e.g., receiving messages) to does not prohibit their consideration.
are not specific to electronic debit one specific transaction. Indeed, the requirement that one set of
transactions in general, rather than costs Based on a consideration of these and costs be considered and another set of
that are not specific to a particular other comments on the scope of the costs be excluded suggests that Congress
electronic debit transaction. Several prohibition in Section 920(a)(4)(B)(ii), left to the implementing agency
issuers and networks asserted that the Board has revisited its proposed discretion to consider costs that fall into
Section 920(a)(4)(B) requires the Board interpretation of Section 920(a)(4)(B). neither category to the extent necessary
only to ‘‘consider’’ some costs and that The Board notes that this section is and appropriate to fulfill the purposes
the cost considerations are not binding ambiguous and may be read in several of the statute. Had Congress intended
in the development of fee standards ways. An interpretation that Section otherwise, it would have prohibited
under Section 920(a)(2), which requires 920(a)(4)(B) prohibits consideration of consideration of all costs other than
that the amount of an interchange fee be all costs that are not able to be those required to be considered, rather
reasonable and proportional to ‘‘the cost specifically identified to a given than simply prohibiting consideration of
incurred by the issuer with respect to transaction would appear to exclude a particular set of costs. Moreover, the
the transaction.’’ One depository almost all costs related to electronic statutory phrasing of the costs that must
institution trade group contended that debit transactions because very few be considered and of the costs that may
there is no indication of Congressional costs could be specifically assigned to a not be considered leaves no doubt that
intent that issuers not be able to recover given transaction.115 Moreover, as many costs that are not within the category of
all of the substantial costs incurred to commenters noted, operational prohibited costs and that are not
provide debit card services. constraints make the determination of incremental costs of authorization,
c. Overview of Costs Considered Under which in-house costs an issuer incurs in clearance, and settlement may still be
the Final Rule executing any particular transaction considered in establishing standards
virtually impossible in practice. under Section 920(a).116
EFTA Section 920(a)(4)(B) requires Section 920(a)(4)(B) has another In discussing the costs that the Board
the Board to distinguish between two straightforward interpretation that is is required to consider under Section
types of costs when establishing workable and gives important meaning 920(a)(B)(4)(i), the proposal noted that
standards for determining whether the to this section. This reading would there is no single generally-accepted
amount of any interchange fee is interpret costs that ‘‘are not specific to definition of the ‘‘incremental cost’’ of
reasonable and proportional to the cost a particular electronic debit
incurred with respect to the transaction. a particular unit of a service. As a result,
transaction,’’ and therefore cannot be the Board proposed to apply a definition
In particular, Section 920(a)(4)(B) considered by the Board, to mean those
requires the Board to distinguish to this term. The Board proposed to
costs that are not incurred in the course consider a cost to be an ‘‘incremental
between ‘‘the incremental cost incurred of effecting any electronic debit
by an issuer for the issuer’s role in cost * * * of a particular transaction’’
transaction. The statute allows the for purposes of Section 920(a)(4)(B)(i) if
authorization, clearance, or settlement Board to consider any cost that is not
of a particular electronic debit the cost varied with the number of
prohibited—i.e., any cost that is transactions sent to an issuer within a
transaction,’’ which costs the statute incurred in the course of effecting an
requires the Board to consider, and year.
electronic debit transaction. This Several commenters urged defining
‘‘other costs incurred by an issuer which interpretation would not require
are not specific to a particular electronic ‘‘incremental cost’’ as the difference
identification of the cost of a given between the cost incurred by a firm if
debit transaction,’’ which the statute electronic debit transaction. In this way,
prohibits the Board from considering. it produces a particular quantity of a
the interpretation gives life and meaning good and the cost incurred by the firm
Section 920(a)(4)(B) does not define to the prohibition in Section
which types of costs are ‘‘not specific to if it does not produce the good at all.117
920(a)(4)(B)(ii) without creating the This definition would include any fixed
a particular electronic debit tremendous burdens and practical
transaction.’’ Therefore, the Board must or variable costs that are specific to the
absurdities discussed by commenters
define these costs. The Board had and noted above. Examples of the costs 116 The reference in Section 920(a)(4)(B)(i)
proposed to exclude from allowable the Board is prohibited from requiring consideration of the incremental costs
costs those costs that cannot be considering are discussed below. incurred in the ‘‘authorization, clearance, or
attributed to any identified transaction As noted above, there exist costs that settlement of a particular transaction’’ and the
(referred to as ‘‘fixed costs’’ in the reference in Section 920(a)(4)(B)(ii) prohibiting
are not encompassed in either the set of consideration of costs that are ‘‘not specific to a
proposal), even if those costs were costs the Board must consider under particular electronic debit transaction,’’ read
specific to effecting debit card Section 920(a)(4)(B)(i), or the set of costs together, recognize that there may be costs that are
transactions as a whole. the Board may not consider under specific to a particular electronic debit transaction
Many commenters argued that this Section 920(a)(4)(B)(ii). These costs, on
that are not incurred in the authorization, clearance,
reading was not compelled by the or settlement of that transaction.
117 Baumol, William J., John C. Panzar, and Robert
statute, excluded costs that could be 115 Network switch fees and issuer-processor per- D. Willig (1982), Contestable Markets and the
considered under the statute, and was transaction fees are among the few costs that could Theory of Industry Structure. New York: Harcourt
an unworkable approach in practice. In be assigned to individual transactions. Brace Jovanovich.
entire production run of the good and Moreover, nearly any cost that could mandate not to consider costs identified
would be avoided if the good were not be defined as fixed if incurred by an in Section 920(a)(4)(B)(ii), has fulfilled
produced at all. Another definition of issuer that performs its transactions the statutory mandate requiring
‘‘incremental cost’’ suggested by processing in-house could be consideration of the costs identified in
commenters was the cost of producing considered as variable if the issuer were Section 920(a)(4)(B)(i), and has chosen
some increment of output greater than a to outsource its debit card operations to to consider other costs specific to
single unit but less than the entire a third-party processor that charged particular electronic debit transactions
production run.118 The Board noted in issuers a per-transaction fee based on its to the extent consistent with the
the proposal these definitions do not entire cost, including both fixed and purpose of the statute, in establishing its
correspond to a per-transaction measure variable costs. This makes enforcement standard required under Section
of incremental cost that could be of a distinction between fixed and 920(a)(3)(A).
applied to any particular transaction. variable costs very difficult and
potentially uneven. d. Examples of Costs Not Included in
Other commenters urged the Board to Setting the Standard
interpret ‘‘incremental cost’’ as Commenters argued that an issuer
differentiating between ‘‘fixed’’ and incurs costs to effect an electronic debit On the basis described above, in
‘‘variable’’ costs. Although relying on transaction other than the variable establishing the standards for
the variable cost incurred by the issuer authorization, clearance, and settlement implementation of Section 920(a)(2), the
to authorize, clear, and settle an costs the Board originally proposed to Board did not include in the
electronic debit transaction is a way to include as allowable costs. Specifically, establishment of the interchange fee
interpret the incremental cost of issuers incur costs to connect to the standard those costs that are not specific
authorization, clearance, and settlement network and to purchase and operate to a particular electronic debit
of a particular transaction, the meanings the hardware and software used for transactions.119 In addition, the Board
of fixed costs and variable costs depend processing transactions, including did not include certain costs that are
associated labor cost. As stated above, specific to a particular electronic debit
on a variety of factors, and these
these costs are not readily placed in the transaction but are not incremental costs
concepts are difficult to apply in
‘‘variable’’ or ‘‘fixed’’ categories because incurred by the issuer for its role in the
practice. As asserted by many
their categorization depends on the authorization, clearance, and settlement
commenters, whether a cost incurred by
relevant range of transactions and the of a particular transaction. The costs the
an issuer for authorization, clearance,
time horizon. However, no electronic Board did not consider in setting the
and settlement of transactions is thought
debit transaction can occur without standards include costs associated with
of as ‘‘fixed’’ or ‘‘variable’’ depends on
incurring these costs, making them costs corporate overhead or establishing and
the relevant time horizon and volume
specific to each and every electronic maintaining an account relationship;
range. As applied to the proposed
debit transaction. general debit card program costs, such
interchange fee standards, the same type Many complexities also exist in
of cost may appear variable in one year, as card production and delivery costs,
attempting to define costs that are or are marketing expenditures, and research
but fixed in a different year. For not ‘‘incurred by an issuer for the role
example, if an increase in the number of and development costs; and costs for
of the issuer in the authorization, non-sufficient funds handling. Although
transactions processed from one year to clearance, or settlement’’ of an
the next requires the acquisition of the Board recognizes that all of these
electronic debit transaction under costs may in some way be related to
additional equipment in the second Section 920(a)(4)(B)(i). As noted above,
year, hardware costs that would be debit card programs and transactions,
many commenters disputed the the Board believes that many of these
considered fixed in the first year would proposed definition of authorization,
be variable in the second year. costs are not specific to a particular
clearance, and settlement as arbitrarily
Inconsistent treatment of the same electronic debit transaction within the
excluding costs related to dispute
type of cost would make tracking costs meaning of the prohibition in Section
settlement and account set-up because
for purposes of reporting exceedingly 920(a)(4)(B)(ii) and therefore may not be
these costs are incurred before or after
difficult for issuers. This difficulty is considered by the Board. The Board has
the transaction has occurred. The Board
compounded by the fact that, even if a also determined not to include the costs
considered these comments and
clear line could be drawn between an resulting from non-sufficient funds, the
included additional costs to the extent
issuer’s costs that are variable and those costs of rewards programs, or costs of
described below. The Board does not
that are fixed, issuers’ cost-accounting handling cardholder inquiries for
find it necessary to determine whether
systems are not generally set up to costs are ‘‘incremental,’’ fixed or various reasons discussed below.
differentiate between fixed and variable variable, or incurred in connection with Corporate overhead and account
costs. Rather, cost-accounting systems authorization, clearance, and settlement. relationship costs. Corporate overhead
typically are used for internal Under the framework established by the costs incurred by an issuer for its
management purposes, and determining statute, all costs related to a particular general business operations are shared
which part of total costs is variable and transaction may be considered, and across all product lines of the issuer and
which is fixed often requires a some—the incremental costs incurred are not specific to a particular electronic
subjective judgment by the issuer. This by the issuer for its role in debit transaction. In fact, although a
fact could result in significant variation authorization, clearance, and portion of these costs could relate to
across issuers as to which costs are settlement—must be considered. In debit card programs, these costs are not
specific to any electronic debit
allowable and which are not. determining the interchange fee

standard, the Board considered the transaction because they are not
118 Another interpretation of ‘‘incremental cost’’ authorization, clearance, and settlement incurred in the course of effecting
would be marginal cost, often assumed to be, but costs described in the proposal for electronic debit transactions. Corporate
not required to be, the additional cost of the last which data were available. By
unit produced. The proposal highlighted the 119 The Board also did not include a level of profit
practical difficulties of measuring the marginal cost

considering all costs for which it had or a rate of return as an allowable cost in setting
of a transaction. The Board did not receive data other than prohibited costs, the its standard. To the extent profit is a ‘‘cost,’’ it is
comments regarding the use of marginal cost. Board has complied with the statutory not one that is specific to a particular transaction.
overhead costs include, but are not debit card for an electronic debit network switch fees in establishing
limited to, the costs of compensation for transaction or may use the card only for standards under Section 920(a).
executive management; the costs of ATM transactions (which are not However, the Board did not include the
support functions such as legal, human covered by this rule). A customer may cost of network membership. Although
resources, and internal audit; and the also use only the debit card number (as, network membership is necessary in
costs to operate the issuer’s branch for example, in Internet or order to process transactions over a
network. preauthorized recurring electronic debit particular network, membership fees are
Some commenters recommended the transactions) and not the card or not incurred each time a cardholder
final rule include the costs of account alternate device provided by the issuer. uses a debit card and, in fact, are
set-up, including the costs of performing Excluding the cost of debit card incurred for activities other than those
customer due diligence, enrolling the production and delivery from the related to particular electronic debit
customer in on-line banking, and interchange fee charged to the acquirer transactions, such as marketing and
acquiring customers (e.g., through is consistent with another requirement research and development.
marketing). Costs that are incurred with of Section 920(a). Section 920(a)(4)(A) Payment guarantee and non-sufficient
respect to the cardholder account requires the Board to consider the funds handling. If an issuer authorizes
relationship are not specific to any functional similarity between electronic an electronic debit transaction, network
electronic debit transaction. Once an debit transactions and check rules typically require the issuer to pay
account is established, an issuer may transactions. In the case of checks, the the transaction, subject to specific
incur ongoing costs of maintaining the check-writer or his bank typically bears chargeback rights provided by network
account and customer relationship, the cost of producing and obtaining rules. One aspect of the issuer’s
including costs of receiving and blank checks. obligation is the so-called ‘‘payment
resolving certain account-related An issuer’s marketing costs and costs guarantee,’’ which refers to network
customer inquiries, account-related of research and development to improve rules that specify that an issuer that
regulatory compliance cost (e.g., BSA/ its debit card products and programs are authorizes a transaction may not return
AML compliance, Regulation E not costs that are specific to particular that transaction for insufficient funds or
compliance, and FDIC insurance),120 electronic debit transactions within the an invalid account. Several issuers and
and ATM-related costs. These costs are meaning of the statute. Marketing costs networks suggested including the cost of
also not incurred in the course of could include, for example, the cost of providing the payment guarantee as an
effecting an electronic debit transaction, informing cardholders of the availability authorization or settlement cost. Many
and, as with cardholder account costs, of optional debit card products and of these commenters asserted that the
would be incurred even if the customer services, and the cost of advertising payment guarantee that issuers provide
engaged in no electronic debit campaigns for the issuer’s debit card merchants for electronic debit
transactions. program. Research and development transactions is one of the primary
Debit card program costs. Many costs could include, for example, costs differences between electronic debit
issuers and networks suggested that the related to debit card enhancements, transactions and checking transactions.
final rule include all costs related to process improvements, and debit card Commenters both in favor of and
debit card programs. As noted above, product development. In addition to not opposed to including the cost of the
those commenters urged the Board to being costs specific to effecting payment guarantee as an allowable cost
read Section 920(a)(4)(B)(ii) to exclude particular electronic debit transactions, stated that for check transactions
only those costs that are not related to analogous costs incurred by a payor’s merchants are able to purchase check
electronic debit transactions or the debit bank for its check service are not verification and guarantee services.
card program. reimbursed by the payee’s bank. Commenters that supported including
The Board’s interpretation of the Debit card issuers also incur costs in the cost of the payment guarantee as an
statute distinguishes between costs order to comply with Federal, state, or allowable cost suggested that the Board
incurred in effecting electronic debit local regulations, including costs of measure the costs in terms of risk
transactions and broader program costs. providing account statements. Although exposure, overdraft losses, or the value
Card production and delivery costs were the costs of providing statements relate to the merchant (by considering the
excluded because they are not incurred to conducting electronic debit price merchants pay for comparable
in the course of effecting electronic transactions generally, the statement check verification and guarantee
debit transactions. Although each debit relates to the entire account relationship services). A few issuers asserted that if
card transaction uses a debit card or and the total number of all types of they were not compensated for the
information from the debit card, an transactions in the cardholder’s account payment guarantee, then they should be
issuer’s card production and delivery and is triggered by the account permitted to return a transaction for
costs (e.g., creating plastic cards and relationship as opposed to any specific insufficient funds.122 More generally,
alternate devices such as key fobs, and transaction.121 Moreover, analogous some commenters noted that networks
mailing them to cardholders) are costs incurred by a payor’s bank for its could change existing chargeback rights
incurred without regard to whether, check service are not reimbursed by the if issuers were not reimbursed for their
how often, or in what way an electronic payee’s bank. costs incurred as part of the payment
debit transaction will occur. For As explained below, the Board guarantee.
example, a customer may never use the considered and determined to include By contrast, other commenters
(predominantly merchants) opposed
120 Federal, State, or local regulations that are not 121 Some issuers argued that enabling a second, including the cost of the payment
tied directly to the debit card program include Bank unaffiliated network on a debit card was a
Secrecy Act/anti-money laundering (BSA/AML) ‘‘compliance cost’’ (created by this rule). To the 122 A few issuers suggested that, if the payment
regulations. Among other things, BSA/AML extent an issuer incurs costs related to enabling an guarantee were not included in the base interchange
requires banks to report suspicious activity that unaffiliated network that are otherwise considered fee, an issuer should be able to charge separately
might signify money laundering, tax evasion, or to be incurred in effecting an electronic debit for the guarantee. However, if an issuer were to
other criminal activities. 12 U.S.C. 1829b and 1951– transaction (e.g., network connectivity costs to charge or receive a fee for a payment guarantee
1959; 31 U.S.C. 5311–5314, 5316–5332; 31 CFR part comply with § 235.7), such costs would be included through a network, then such a fee would be an
1010. as a basis for the interchange fee standard. interchange transaction fee for purposes of this rule.
guarantee as an allowable cost because, the fees for these services reflect this However, some customer service
for check transactions, purchasing the incremental risk. inquiries relate to particular
verification or guarantee is optional and Cardholder rewards. Issuers offer transactions. Fielding these inquiries is
not required in order to accept checks. rewards to customers in order to partly a cost of a service required by
Merchants also stated that network rules promote use of the issuer’s debit cards, regulatory and network rule
permitted issuers to charge back and debit card networks develop these requirements and partly a cost of
transactions alleged to be fraudulent rewards programs to be offered by managing the customer relationship.
and therefore, the commenters argued, issuers in order to promote the use of Payor’s banks bear the costs
the payment guarantee was not really a the network’s cards. The costs of the associated with customer inquiries for
guarantee. Some merchants also noted rewards and associated program check transactions and do not receive
that they are constrained from taking administration depend upon the level of reimbursement for these costs from the
certain steps to minimize fraud because rewards the issuer deems desirable to payee’s bank. Moreover, the cost data
payment card networks discourage effectively compete for account holders. obtained by the Board in response to its
merchants from checking the Although an issuer may give issuer survey does not allow for the
identification of the cardholders in cardholders rewards for each separation of the costs of cardholder
order to reduce inconvenience transaction (or value of transactions), inquiries related to specific transactions
associated with use of the card. this cost is a customer-relationship from the costs of inquiries that do not
program cost that the issuer chooses to related to particular transactions. Thus,
The Board has considered the incur. Thus, rewards costs are more akin it is not currently possible to accurately
comments received on payment to marketing costs designed to attract separate out and assess cost data for
guarantees. The final rule does not customers to the issuer and the network customer inquiries related solely to
include the payment-guarantee cost than to transaction costs incurred in the particular debit transactions.
(including non-sufficient funds course of effecting an electronic debit Accordingly, the Board has not included
handling) within the allowable costs. transaction. the costs of cardholder inquiries in
Losses that result from the payment Moreover, rewards programs often establishing the fee standard.
guarantee are incurred when an issuer benefit a specific group of merchants e. Costs Included in Setting the
authorizes a transaction that overdraws determined by the debit card network or Standard
the cardholder’s account. However, issuer. Including these costs in The Board has included in its
losses associated with a debit card interchange fees that are charged to all establishment of the interchange fee
payment guarantee are largely within merchants would amount to a standard the following types of costs
the issuer’s control. An issuer is usually subsidization of selected merchants by from its issuer survey: total transactions
able to decline transactions for which all other merchants that do not benefit processing costs (including costs
there are insufficient funds, whereupon from the rewards program (including reported as fixed and variable
the merchant will not complete the competitor merchants). Although authorization, clearance, and settlement
transaction using the particular debit payor’s banks typically do not offer costs, network processing fees (e.g.,
card. When an issuer approves an rewards programs for the use of checks, switch fees), and the costs of processing
authorization request, it generally places an institution that chose to do so would chargebacks and other non-routine
a hold on the cardholder’s funds bear the associated costs and would not transactions), transactions monitoring,
pending settlement. If an issuer receive reimbursement for these costs and fraud losses. An issuer may use the
approves the transaction knowing there from the payee’s bank. The Board has same processing platform for its debit
are insufficient funds in the account, or not included the costs of rewards in card and credit card operations (or debit
does not place a hold on funds establishing the fee standard. card and ATM card operations) to take
underlying an approved transaction, the Cardholder inquiries. Issuers incur advantage of economies of scope and
issuer is choosing to incur any costs costs for activities necessary to receive scale. The costs of these activities and
incurred in obtaining funds from the and resolve cardholder inquiries before equipment are referred to as ‘‘joint
cardholder. The issuer incurs this cost and after transactions. Issuers and costs’’ because they are shared. Joint
as a service to its cardholders, and networks argued that the costs of costs between debit card and credit card
handling customer inquiries and programs may include network
generally imposes fees to recover the
disputes should be included because connectivity used for multiple card
associated risk that a cardholder may
such costs relate to a particular program activities; common hardware,
fail to provide subsequent funding for
transaction. Moreover, issuers stated software, and associated labor that are
the transaction.123 Although some
that not including these costs would shared across card programs; and
issuers argued that the payment eliminate incentives for issuers to customer settlement applications used
guarantee is analogous to check- provide anything but the minimum, for all transaction account processing. In
guarantee services for which the legally mandated customer service. these cases, in the Board’s survey, costs
merchant pays, check guarantee services Many costs related to cardholder (excluding fraud losses) were allocated
are generally provided by firms that do inquiries do not relate to specific to electronic debit transactions on a pro
not hold the customers’ accounts. transactions. Rather, they relate to rata basis. The costs the Board included
Therefore, these guarantees are made balance inquiries, reports of lost or in establishing the fee standard are
based on less complete information and stolen cards, requests for other discussed further below.
replacement or additional cards, Transactions processing. In addition
123 There are some instances in which a
inquiries about ancillary products and to the proposed allowable costs
transaction is not cleared until after the

authorization hold expires (generally after three
services, and other non-transaction described in relation to proposed
days), which may result in an overdraft that was not specific inquiries. In addition, issuers Alternative 1, an issuer must maintain
within the control of the issuer. Although this often take the opportunity of a and use network connectivity to effect
represents a cost to the issuer of the payment cardholder inquiry to engage in each transaction because the issuer must
guarantee that is not caused by the issuer
knowingly authorizing a nonsufficient funds
marketing activities unrelated to any be able to receive the particular
transaction, the data are not available to separate particular electronic debit transaction authorization request, send the
these ‘‘NSF’’ costs from all other ‘‘NSF’’ costs. (or to debit programs generally). particular approval or denial message,
and receive the related clearing and transactions. Several issuers suggested excluded, issuers should be permitted to
settlement message. Likewise, an issuer including costs of processing receive net compensation from the
must maintain and use computer chargebacks, other than the costs networks so that issuers could realize
equipment that can process each proposed (e.g., data processing and the value to the networks of their
authorization request by checking for sending the message), such as the costs cardholder base. This is discussed
the validity of the card and account, as of resolving cardholder inquiries to further in the section related to
well as checking and updating the determine whether the issuer has a circumvention and evasion.
amount of funds in an account. The chargeback right. One consumer group The Board believes that network
issuer must also employ staff to operate encouraged including the cost of processing fees are both specific to a
and maintain the computer equipment processing chargebacks in allowable particular transaction and incurred for
involved in transaction processing. Each costs in order to encourage issuers to the issuer’s role in authorization,
transaction uses the equipment, use networks that provide chargeback clearance, and settlement. Network
hardware, software and associated labor, rights to consumers.126 A few merchants processing fees are incurred by issuers
and no particular transaction can occur opposed including the costs of fraud- in the course of effecting electronic
without incurring these costs. Thus, related chargebacks, arguing such costs debit transactions, and the total amount
these costs are ‘‘specific to a particular should be included as part of the fraud- of fees charged to an issuer is
transaction.’’ The most reasonable way prevention adjustment, if at all. determined by the amount of electronic
to measure and allocate these costs on Chargebacks and other non-routine debit transactions processed for that
a per-transactions basis is by averaging transactions are separate transactions issuer. The Board has included network
these costs across the total number of that essentially unwind the initial processing fees in determining the
electronic debit transactions that use the transaction (see discussion of the standard for interchange fees. Merchant-
resource.124 definition of ‘‘electronic debit routing choice may place downward
Costs of chargebacks and other non- transaction,’’ § 235.2(h)). The associated pressure over time on the level of
routine transactions. Transactions are costs of processing these transactions network fees assessed to acquirers. To
not limited to the initial purchase. An are ‘‘specific to a particular the extent that acquirers and merchants
issuer may initiate a chargeback transaction.’’ The final rule considers may be in the position of directly paying
transaction to reverse settlement with the costs of processing chargebacks and all of their network fees as well as
both the acquirer and the cardholder, other non-routine transactions as a basis paying the network fees of covered
and an acquirer may present the for establishing the standard for issuers through interchange fees, such
transaction again to the issuer if the interchange fees. As implied by the an arrangement would be similar to
acquirer believes the issuer is not discussion in a companion interim final traditional paper-check processing
entitled to charge back the rule, published separately in the where the payee’s bank (the corollary to
transaction.125 The proposal included as Federal Register, the costs of processing the acquirer for the merchant) typically
allowable costs the costs of ‘‘initiating, chargebacks are not considered for pays all of the processing costs, while
receiving, and processing chargebacks, purposes of the fraud-prevention the payor’s bank (the corollary of the
adjustments, and similar transactions’’ adjustment; therefore, including the issuer in an electronic debit transaction)
and the costs of ‘‘receiving and issuer’s cost of processing fraud-related typically pays no processing fees. The
processing representments of electronic chargebacks in the interchange fee Board recognizes, however, that in
debit transactions’’ (but not the actual standard will not result in double- electronic check collection systems,
amount of the chargeback, adjustment, recovery. both the payee’s bank and the payor’s
or representment. Proposed comment Network processing fees. The Board bank generally pay processing fees.
3(c)–2.iii stated that an issuer’s received numerous comments on the Transactions monitoring. The
activities associated with non-routine proposed exclusion of network proposal excluded authorization-related
transactions included activities such as processing fees (e.g., switch fees) as a fraud-prevention costs from allowable
data processing to prepare and send the type of allowable cost. Many issuers and costs in proposed § 235.3. Numerous
chargeback message and reconciling the networks requested that the Board commenters (predominantly issuers)
chargeback with the cardholder’s include network processing fees because recommended including costs of such
account, but excluded costs of receiving such fees are directly related to the fraud-prevention activities in the
cardholder inquiries about particular authorization, clearance, and settlement interchange fee standard because the
of a transaction. One network asserted pre-authorization fraud-prevention
124 The Board’s survey data included the costs of
that excluding network processing fees activities are integral to transaction
loading funds to prepaid cards as part of reported
created an inconsistency if per- authorization. These commenters
processing costs. The Board does not believe these suggested that such costs could include
costs should be considered in establishing the transaction fees paid to third parties
interchange fee standard because they are not could be included as allowable costs. the cost of enrolling in or maintaining
specific to a particular electronic debit transaction Merchants, by contrast, overwhelmingly programs that monitor transactions prior
and are more akin to deposit account costs, which
supported the exclusion of network to making the decision to authorize the
have not been included in setting the debit transaction. Merchants and a few other
interchange fee standard. However, these costs processing fees because, if such fees
could not be separated from other processing costs were included, merchants would be in commenters opposed including fraud-
that should be included. Because reloadable the position of paying all network fees prevention costs in the interchange fee
prepaid cards transactions are a very small
for a transaction. One issuer contended standard because such costs are
proportion of total electronic debit transactions, the intended to be included through the
Board believes this inclusion is immaterial and that if network processing fees were
does not affect the calculation of the overall cap

fraud-prevention adjustment.
amount. Future surveys will ask that this cost not 126 That commenter suggested that, under Transactions monitoring systems
be included in reporting processing costs for proposed Alternative 1, the Board should allow assist in the authorization process by
reloadable prepaid costs. issuers to recover costs where the merchant has providing information to the issuer
125 The circumstances under which an issuer may gone out of business, and under proposed before the issuer decides to approve or
reverse a transaction vary based on network rules Alternative 2, the Board should reduce the cap to
and include an error in the transaction information, 11 cents and allow issuers to recover 1 cent for
decline the transaction. Issuers may
duplicate processing, an unauthorized transaction, maintaining an effective debit card chargeback monitor transactions through the use of
and non-receipt of merchandise. program. neural networks and fraud-risk scoring
systems. Transactions monitoring is as allowable costs would encourage electronic debit transaction and that the
integral to the authorization decision as merchants to ignore possible fraudulent exact source of fraud often is unknown.
confirming that a card is valid and electronic debit transactions. A few Payment card network rules allocate
authenticating the cardholder. For issuers also indicated that they incur responsibility for fraudulent
example, an issuer may flag a insurance costs against fraud losses, transactions, but this allocation does not
transaction as suspicious and decline including paying a per-account necessarily result in the loss ending up
the authorization request or require the deductible. with the party that was in the best
merchant to verify the transaction with Two issuers provided general position to prevent the fraud. For
the issuer before deciding whether to suggestions for measuring the amount of example, the loss may have occurred
approve or deny the transaction. fraud losses that should be included in from a data breach at a merchant or
In comparison, the types of fraud- allowable costs. One issuer suggested acquirer not involved in the fraudulent
prevention activities considered in that fraud losses be reflected as a transactions. Additionally, network
connection with the fraud-prevention variable component in the interchange rules that are vague with respect to
adjustment (discussed in an interim fee standards because fraud losses merchant requirements for
final rule published separately in the increase with transaction size. Another authenticating a signature may lead to
Federal Register) are those activities issuer suggested that interchange fees fraud losses being borne by the issuer
that prevent fraud with respect to reimburse an issuer for fraud losses when the merchant was in a position to
transactions at times other than when based on the issuer’s fraud levels vis-à- compare the cardholder’s signature with
the issuer is effecting the transaction. vis industry fraud levels, but did not the signature on the back of a card and
The issuer’s cost of this type of action elaborate further as to the precise prevent the fraud.
is not considered a cost of authorization. formula to be used. Allowing a portion of fraud losses to
For example, an issuer may send The Board has considered the be recovered through interchange fees
cardholders alerts after authorizing a comments received on fraud losses. The will not eliminate the incentive for
transaction or series of transactions to final rule includes an allowance for issuers to monitor and prevent fraud.
inquire about suspicious activity. These fraud losses in determining the Issuers will continue to bear the cost of
subsequent alerts are intended to interchange fee standard. For purposes some fraud losses and cardholders will
prevent future fraudulent transactions of the final rule, fraud losses are those continue to demand protection against
and are not a cost of authorizing a losses incurred by the issuer, other than fraud.
particular transaction. Any costs of losses related to nonsufficient funds,
those subsequent alerts are considered The cost of a fraud loss varies with
that are not recovered through the amount of the transaction. For
in the fraud-prevention adjustment, but chargebacks to merchants or debits to or
not as a basis for the interchange fee example, an issuer takes on a greater
collections from customers.127 risk when approving a $100 transaction
standard. Similarly, the cost of research Fraud losses are costs that are specific
and development of new authentication than a $5 transaction because the
to a particular transaction. The issuer’s
methods would be considered in the amount of the potential loss is greater.
fraud losses are generally the result of
fraud-prevention adjustment but would Therefore, fraud losses are best assessed
the authorization, clearance, and
not be a cost that is specific to a through an ad valorem component in
settlement of an apparently valid
particular electronic debit transaction the interchange fee standards.
transaction that the cardholder later
and therefore cannot be considered in identifies as fraudulent. An issuer may C. Section 235.3 Interchange Fee
determining the fee standard. experience losses for fraud that it cannot Standards
Fraud losses. The proposal did not prevent and cannot charge back to the
include fraud losses incurred with EFTA Section 920(a)(3) requires the
acquirer or recoup from the
respect to electronic debit transactions Board to establish ‘‘standards for
cardholder.128 The most common types
as an allowable cost. Numerous assessing’’ whether the amount of any
of fraud reported in the Board’s survey
merchants argued for this exclusion interchange transaction fee that an
were counterfeit card fraud, lost and
because they believed that allowing issuer receives or charges with respect
stolen card fraud, and card-not-present
issuers to pass fraud losses on to to an electronic debit transaction is
fraud.129 Certain fraud and the related
acquirers or merchants through the reasonable and proportional to the cost
losses can be reduced through actions
interchange fee would largely eliminate incurred by the issuer with respect to
by the merchants. Even if the merchant
the incentive for issuers to take steps to the transaction. The Board proposed
takes all reasonable steps to verify the
minimize fraud losses, contrary to that an issuer must comply with its
card user, however, the transaction may
policy goals of reducing the occurrence interchange fee standards, under both
nonetheless be fraudulent.
of, and losses from, fraudulent proposed alternatives, on a per-
Permitting issuers to recover at least
electronic debit transactions. On the transaction basis; that is, an issuer could
some fraud losses through interchange
other hand, numerous issuers and some not receive any interchange fee that
fees is reasonable given that the source
networks supported including fraud exceeds its maximum permissible fee.
of fraud could be any participant in an
losses as costs that are specific to a The Board requested comment on two
particular transaction. These 127 The amount of the fraud-prevention other applications of the interchange fee
commenters argued that it would be adjustment permitted under the accompanying standards: one that would permit an
unreasonable for issuers to bear fraud interim final rule published separately in the issuer to comply with the fee standard,
losses without any compensation from Federal Register does not include consideration of on average, for all of its electronic debit
fraud losses. The adjustment amount is based on
transactions, and another that would
merchants because merchants receive fraud-prevention costs, rather than fraud losses.
benefits from authorized debit card sales 128 Rules regarding chargeback rights and evaluate compliance at a network level
(including the payment guarantee) and obligations vary across payment card networks. and permit an issuer to comply with the
are in a unique position to prevent fraud Some networks have rules that prevent an issuer for fee standard if, for a particular network,
losses by checking for cardholder imposing any liability on the cardholder for all covered issuers on that network
unauthorized transactions.
identification or signature, among other 129 Counterfeit-card fraud is when a fraudster received the amount of the fee standard,
things. Moreover, these commenters obtains information about the card and creates a on average, for all electronic debit
argued that excluding fraud losses from replica of the card. transactions over the network.
1. Standards for Assessing and dynamic system that handles large A few commenters supported an
A number of issuers argued that a cap and growing volumes of transactions. As issuer-averaging approach, including
on interchange fees was a limit and not many commenters recognized, more one issuer that suggested that the safe
a ‘‘standard for assessing’’ whether general cost-based standards (including harbor be an average of all of an issuer’s
interchange fees were reasonable and proposed Alternative 1) would place a interchange fees across all networks.
proportional to costs. These commenters significant burden on industry One network contended that permitting
argued that Section 920(a) requires more participants and supervisors. network averaging was necessary to
flexible guidelines. In addition to meeting the words and provide meaningful flexibility in setting
The term ‘‘standards’’ generally purpose of the statute, the final rule’s interchange fees, would provide
means ‘‘something established by standard provides the proper economic incentives for fraud prevention, and
authority as a rule for the measure of incentives for issuers to improve their would account for cost and risk
quantity, quality, etc.’’ or the ‘‘rule or efficiency. The final rule provides each variation across transactions. One
principle that is used as a basis for issuer an incentive to reduce its per- network suggested that network
judgment.’’ 130 The final rule sets the transaction costs below the level of the averaging could be combined with a
standard for the maximum permissible cap. The Board will use the data transaction-level upper boundary. The
interchange transaction fee that may be collection authority provided in Section commenters in favor of a network-
received by a covered issuer (i.e., a 920(a) to regularly collect data on the averaging approach suggested that
transaction-level standard). If an costs incurred by issuers in connection networks would demonstrate
interchange fee that an issuer receives with electronic debit transactions and, compliance through regular reporting,
does not exceed the cap, the amount of over time, will adjust the standards and any issuers participating in those
the interchange fee is reasonable and based on reported costs, if appropriate. networks would be deemed to be in
proportional to transaction cost. In this Lower costs should result in a lower compliance. If a network exceeds the
way, the cap represents a standard; it is interchange fee cap as issuers become standard amount, the commenter
a ‘‘rule for the measure of quantity’’ and more efficient. suggested that the Board could either
‘‘a basis for judgment.’’ 2. Transaction-Level Standard permit variation or require corrective
The Board recognizes that providing a actions.
standard in the form of general In general, merchants, a few payment The Board has determined to adopt
guidelines would provide networks card networks, and acquirers (as well as neither an issuer-averaging nor a
with more flexibility in setting other types of commenters) opposed network-averaging standard. An issuer-
interchange fees. The Board believes, both an issuer- and network-averaging averaging approach, where the only
however, that this approach would be approach in favor of a transaction-level requirement is that an issuer, on
extremely difficult to implement and is approach. Merchants contended that average, receive an interchange fee that
not required by the statute. Section averaging would enable the does not exceed the cap, would be
920(a) uniquely positions the Board to continuation of price discrimination significantly less burdensome from an
obtain information regarding each against merchants, and Internet enforcement perspective, but would be
covered issuer’s costs and, thus, to merchants in particular. A few of these less likely to produce actual
consider the transaction costs across all commenters stated that averaging was compliance. Issuers and networks
covered issuers in order to determine inconsistent with the language of the would be unlikely to accurately predict
the point at which interchange fees statute because it permits consideration an issuer’s transaction mix ex ante
would no longer be reasonable in light of non-cost factors in the interchange fee because of fluctuation in cardholders’
of allowable transaction costs. By determination. Commenters opposed to shopping patterns and merchant routing
contrast, a payment card network does averaging also argued that it would choice, and therefore may not be able to
not process transactions for each impose a substantial administrative exactly meet an issuer average.
covered issuer and would receive burden on issuers, payment card Moreover, such an approach would be
information from only a subset of networks, acquirers, and regulators. less transparent than a transaction-level
covered issuers. Without a uniform Additionally, a few commenters were standard because each party would be
numerical standard applicable to all concerned that averaging likely would unable to determine whether a given
issuers, networks, and transactions (i.e., result in statutory violations because interchange fee complied with the
predicting the transaction mix ex ante is standard. Similarly, although a network-
as adopted in this rule), the definition
exceedingly difficult, and issuers would averaging approach to the standard
of the highest reasonable fee could vary
be unable to control whether they met would provide networks with more
across issuers, networks, and
the target average because merchants flexibility to vary the amounts of
transactions. This would make
would control routing. Another interchange transaction fees by
enforcement of the statute extremely
commenter was concerned that, under a merchant type and transaction type, an
difficult and burdensome for all parties
network-averaging approach, the largest individual issuer’s compliance would
and would encourage issuers to choose
issuers on a network would receive depend on the amounts of interchange
a network based on the network’s
higher interchange fees than smaller transaction fees received by other
application of the fee standards, rather
issuers. One issuer suggested that the issuers on the network.
than based on the services provided by
safe harbor be an average effective rate
the network. 3. Determining the Interchange Fee
that approximates current fee levels in
Setting a uniform standard of the Standard
order to avoid injecting significant risk
maximum permissible interchange
into the payment system. This issuer The Board surveyed institutions
transaction fee that may be received by

suggested that the Board consider expected to be covered by the
a covered issuer is also the most
adjusting the safe harbor no sooner than interchange fee standards to determine
practical and least burdensome
one year after the exclusivity and their costs relating to debit card
approach in the context of a complex
routing rules go into effect, which programs, among other things. As
130 Webster’s New World Dictionary and should provide the Board time to discussed above, there is no industry
Thesaurus 17 (2nd ed. 2002); Random House evaluate whether routing rules are standard for cost-accounting systems
Webster’s Unabridged Dictionary (2nd ed. 2001). increasing competition. because institutions use cost-accounting
systems predominantly for internal double-counting of costs. For the per transaction.137 The Board used this
management purposes. In recognition of reasons stated above, costs for these range as a starting point for setting
this, the survey contained instructions activities were not considered as the standards for the base component.
regarding the types of costs a basis for the interchange fee standard. Within this range, the Board ranked the
responding issuer should report and the As discussed in more detail above, the average per-transaction allowable cost
types of costs a responding issuer types of costs that form the basis for the from the lowest- to highest-cost issuer.
should exclude entirely from its survey The distribution of issuer costs in the
interchange fee standard are costs
responses. Issuers also were asked to survey is quite skewed, with the
incurred for processing electronic debit
provide information on the number of distribution concentrated in the range of
transactions,134 chargebacks, and
purchase and other electronic debit costs below the 80th percentile, and a
similar transactions, including network scattered set of institutions with
transactions (such as returns and
processing fees and transactions significantly higher costs above this
chargebacks).131 132
Responding issuers were instructed to monitoring costs; and fraud losses. Each point. Below the 80th percentile, the
exclude corporate overhead costs or any of these categories was reported difference between the per-transaction
other overhead costs for activities that separately. With respect to transaction allowable costs of adjacently-ranked
are not directly related to the issuer’s processing, issuers were instructed to issuers is small. For example, among
debit card program. If the responding include the total costs associated with issuers whose costs are between the
issuer incurred overhead costs directly providing authorization for transactions 20th and the 80th percentiles, the
related to activity in a card program, the (including data processing, connectivity largest cost difference over a 5-
issuer could allocate those costs to card expenses, voice authorization inquiries, percentile range of the distribution (e.g.,
program activity. Similarly, if an issuer and referral inquiries); clearing and from the 60th to 65th percentile) is
incurred costs for an activity that was settlement (including receiving, about 3 cents. Above the 80th
jointly attributable to electronic debit verifying, reconciling, settling percentile, however, the distribution
transactions and another program (such transactions with other financial shows a marked discontinuity, with per-
as credit cards), the issuer was institutions, and posting transactions to transaction allowable costs varying
instructed to allocate the costs of that cardholder’s accounts); and processing more significantly across issuers of
activity across the programs on a pro chargebacks and other erroneous similar rank. Between the 80th and 85th
rata basis. Issuers were instructed to transactions. Issuers were instructed to percentiles, the difference in costs is
include the depreciation or amortization separately report network processing about 20 cents. The average per-
of capital expenditures. Throughout the fees and their cost for transactions transaction cost of the issuers above the
survey instructions, issuers were monitoring prior to authorization.135 80th percentile is 49 cents, more than
directed not to include costs that were Issuers were asked to report costs double the level of the cap, and greater
not tied to debit card programs. directly attributable to PIN debit, than the average interchange fee level
With respect to costs incurred for signature debit, and prepaid card recorded in the survey. It appears that
debit card program activity, the survey programs. some of these higher-cost issuers may
requested cost information for the total These data were used to compute an face unique circumstances regarding
costs of several activities that were not average per-transaction cost for each their overall business orientation; for
included as part of authorization, issuer that reported costs for example, some of the issuers with high
clearance, or settlement: Card authorization, clearance and settlement, reported costs appear to be
production and delivery; cardholder network fees, and transactions organizations whose commercial
inquiries; rewards, incentives, and monitoring based on the number of banking operations (and associated
affinity-partnerships; network routine purchase transactions.136 For debit card programs) are small relative
membership; research and development; each such issuer, the total of these costs to their overall operations. The Board
and compliance.133 Survey respondents was computed and divided by the total therefore does not believe that setting
were instructed not to include the costs number of purchase transactions sent to interchange fee standards to
for these activities in any other cost the issuer for authorization during 2009. accommodate these higher-cost issuers
category, which allowed isolation of The data from the Board’s survey would be reasonable or proportional to
these cost categories and prevented showed that these average per- the overall cost experience of the
transaction costs reported by covered substantial majority of covered issuers.
131 In a purchase transaction, value is transferred
issuers ranged from 3 cents to 66 cents Moreover, the Board does not believe
from the cardholder to the merchant in exchange for that it is consistent with the statutory
goods and services. In a return transaction, the purpose to permit networks to set
merchant reverses a purchase transaction (due, for 134 These transactions included purchase and
example, to the return of goods by the cardholder), return transactions, authorizations without value interchange fees in order to
and value is transferred from the merchant to the transfer, denials, and funds loads to prepaid cards. accommodate 100 percent of the average
cardholder. 135 Issuers were instructed to report these costs, per-transaction cost of the highest-cost
132 Although the response rates for the surveys except for transactions monitoring, in Section III of issuers.
were high, some respondents were not able to the Card Issuer Survey. Issuers were instructed to
provide information on all data elements requested report all of their fraud-prevention activities and
Based on a review of the survey data
in the surveys. For example, most respondents the total costs incurred for each activity in Section and public comments, and for the
provided cost data at an aggregate level, but some V of the Card Issuer Survey. The most commonly
were unable to provide cost data at the level of reported activity was transactions monitoring. 137 One merchant group stated that the cost
detail requested in the surveys. In addition, 136 The number of respondents varies across the estimates in the Board’s survey contained an
inconsistencies existed in some reported data cost-categories because not all issuers were able to upward bias due to the inclusion of higher-cost
within individual responses and across responses. break out certain cost information. For example, a prepaid cards (many of which would be excluded).
Where possible, minor problems (e.g., adding number of prepaid card issuers reported that they Unlike other debit cards, issuers may not have
components to determine the total or removing did not know the specific costs associated with information on which prepaid cards are exempt
minus signs) were resolved, but responses with their prepaid card program. In some cases those because an exemption may be determined by factors
major problems (e.g., failing to provide critical issuers provided more complete data for their in the program manager’s or merchant’s control
transaction volume information) were not used. signature and PIN programs. In those cases, the (such as whether the card is marketed or labeled as
133 Issuers were instructed to put information issuer’s signature and PIN purchase transactions a gift card). Accordingly, the survey did not instruct
regarding these costs in Section IV of the Card and costs are included, but their prepaid purchase issuers to differentiate between exempt and non-
Issuer Survey. transactions and costs are excluded. exempt prepaid cards when reporting data.
reasons explained above, the final rule ratemaking jurisprudence. In addition, further increase operational complexity
establishes a standard that caps the base public utility rate-setting involves of standards that differentiate by
component of any interchange fee at 21 unique circumstances, none of which is authentication method. Moreover,
cents per transaction, which present in the case of setting standards interchange fee standards that
corresponds to the 80th percentile for interchange transaction fees. Issuers differentiate by authentication method
issuer’s average per-transaction are unlike public utilities and similarly may impede the introduction of new
included costs. regulated entities, which typically are and innovative authentication methods.
Fraud losses vary by the value of the required to provide the regulated service Some merchant commenters believed
transaction and, thus, were considered to the public or are otherwise restricted one uniform interchange fee standard
separately. Issuers were asked to report from discontinuing provision of the would drive the marketplace to PIN-
fraud losses—the total value of regulated service. In addition, unlike in based transactions, which the merchants
fraudulent transactions less any the case of public utilities and similar asserted was ‘‘the lowest cost, most
amounts recovered from acquirers, entities where the entity’s only source of secure, and best functioning’’ method.
cardholders, or other parties. For issuers revenue for the service or commodity is One merchant commenter contended
that reported net fraud losses, total net the regulated rate, Section 920 regulates that having one cap would eliminate
fraud losses were divided by the total only the fees issuers receive from the circumvention and evasion concerns.
value of purchase transactions.138 The merchant side of the transaction, not Other commenters supported having
Board’s survey indicated that the from all sources.140 different standards for PIN-based and
average per-transaction fraud loss, signature-based transactions because of
measured in basis points (bps), varied 4. Uniform Interchange Fee Standard
different risks and costs associated with
among responding issuers and ranged Section 235.3(a) applies to all
each type of transaction. These
from 0.86 bps to 19.64 bps. electronic debit transactions not
commenters contended that having one
The Board has determined that it is otherwise exempt from the rule, and the
cap would decrease incentives for
appropriate to include an allowance for maximum permissible interchange fee is
merchants to use, or become enabled to
fraud losses in the interchange fee the same irrespective of the network
use, PIN-based transactions (especially
standard, capped at approximately the over which the transaction is processed,
in light of the expense of PIN pads).
median of reported issuer fraud losses (5 the type of debit card, and the method
Additionally, some commenters
bps). Using the median figure recognizes of cardholder authentication. To
believed a single cap would unfairly
that, as explained above, fraud losses determine amounts that would be
proportional to cost, the Board affect issuers that process
can result from the actions or inaction
considered the average per-transaction predominantly signature transactions
of merchants as well as issuers, and will
allowable costs of issuers for signature- and would result in an issuer recovering
provide incentives for both issuers and
based debit, PIN-based debit, and a different portion of its costs from year
merchants to take appropriate steps to
prepaid card transactions. to year depending on its transaction
reduce fraud losses, since each group
mix.
will incur some costs for these losses. a. Summary of Proposal and Comments
Issuers that incur the included costs Several commenters that are active
at a level below the interchange fee Under both proposed alternatives, the participants in the prepaid industry
standard cap (the sum of 21 cents and maximum permissible interchange fee encouraged the Board to adopt a
5 bps multiplied by the value of the would be the same irrespective of card separate fee standard for prepaid cards
transaction) may retain the difference type, network, or cardholder in light of the higher costs. Other
between their costs and the cap. The authentication method. The Board noted commenters suggested the Board allow
cap, however, will result in some that issuers reported higher allowable for variation in interchange fees among
issuers not fully recovering their average costs for prepaid cards and requested different types of prepaid cards, because
per-transaction cost through interchange comment on whether it should have the costs of authorization, clearance,
fees. Some commenters argued that this separate standards for prepaid card and settlement vary depending upon the
result is inconsistent with ratemaking in transactions. type of prepaid card (e.g., a non-
other contexts in which rates enable Several issuers, networks, merchants, reloadable general-use prepaid card and
regulated entities to recover costs plus and their trade groups opposed setting a health savings account prepaid card).
a reasonable profit. The Board has different standards (particularly the cap) b. Analysis of Comments and Final Rule
considered the comments and, for the for PIN-based and signature-based debit
reasons explained above, believes that card transactions for a variety of Electronic debit transactions are
the similarities between the statutes reasons, including to avoid any possible processed over numerous different
governing rates for public utilities and discrimination between PIN-based and networks with numerous different
other regulated entities and Section 920 signature-based networks and to reduce pricing structures and participation
are limited. In summary, EFTA Section operational complexity. Some of these rules and requirements, and each
920(a) does not use the term ‘‘just and commenters stated that authentication network’s pricing, rules, and
reasonable’’ that is typically used in methods will likely expand beyond PIN requirements vary by type of
public utility rate-setting statutes.139 and signature and that accounting for all transaction. Signature networks may
Congress is well aware of this term of art types of authentication methods would have higher switch fees than PIN
and would have used that phrase had it networks, and within those groups,
intended the Board to consider other
140 Several commenters pointed to Brooks- switch fees vary by network. Similarly,
Scanlon Co. v. R.R. Comm’n of La., 251 U.S. 396 each network may have different rules
(1920), in support of the proposition that the Board

138 Issuers were instructed to report information
should not consider an issuer’s ability to receive
related to charging back fraudulent
related to fraud losses in Section VI of the Card revenue by charging cardholders fees. The Board transactions, and the rules vary by type
Issuer Survey. Issuers that reported net fraud losses believes that there is a material difference between of transaction (e.g., card-present and
were not limited to those issuers that reported cost looking to revenue from a separate but commonly- PIN-based). Moreover, new card types
information necessary to calculate the base owned business (as was the case in Brooks-Scanlon)
interchange fee component. and looking to revenue from the same service. See
and transaction types are developing
139 See, e.g., Natural Gas Act, 15 U.S.C. 717 et seq. Baltimore & Ohio Railroad v. U.S., 345 U.S. 146, due to innovation in the payment card
Duquense Light Co. v. Barash, 488 U.S. 299 (1989). 150 (1953). industry.
Accordingly, if the standard were to card-present and card-not-present those permitted under §§ 235.3 and
differentiate between signature-based transactions. 235.4 pursuant to one of the exemptions
networks and PIN-based networks and For the reasons stated above, the final in § 235.5 must develop their own
were to recognize differentiation across rule permits an ad valorem component processes for identifying issuers and
all networks (i.e., a network-specific such that the total amount of an products eligible for such exemptions.
standard) and transaction types (e.g., interchange transaction fee does not As discussed in more detail below with
card-present and card-not present), the exceed the sum of the 21-cent base respect to each of the exemptions in
resulting interchange fee standard component and 5 basis points of the § 235.5, the Board believes payment
would require issuers to track their costs transaction value (plus the fraud- card networks are in the best position to
(including fraud losses and switch fees) prevention adjustment, if applicable). develop processes for identifying issuers
by network and transaction type in Networks are not prohibited from and products eligible for the various
order to submit information to the varying the amount of either exemptions. However, to assist payment
Board. This level of detail would interchange fee component by card networks in determining which of
impose larger reporting burden on transaction type, transaction value, or the issuers participating in their
issuers, as well as a burden on merchant type, provided the networks are subject to the rule’s
supervisors, to ensure that an issuer was interchange fee for any transaction not interchange fee standards, the Board
receiving the appropriate interchange exceed the maximum permissible will publish lists annually of
fee revenue from each network for each amounts in § 235.3(b) (plus the fraud- institutions above and below the small
transaction type. prevention adjustment, if the issuer is issuer exemption asset threshold.
As discussed above, the final rule eligible to receive the adjustment). See
accounts for variation in the cost A. Section 235.5(a) Exemption for Small
comment 3(b)–2. The flexibility to vary Issuers
incurred by an issuer in effecting an the amounts of interchange fee
electronic debit transaction by components below the cap enables EFTA Section 920(a)(6)(A) provides
considering the costs of all types of networks to establish interchange fees an exemption from EFTA Section 920(a)
electronic debit transactions across all that reflect variation in transaction risk for any issuer that, together with its
issuers responding to the Board’s and to account for other factors that affiliates, has assets of less than $10
survey. By treating allowable costs that affect a network’s ability to increase its billion. EFTA Section 920(a)(6)(B) limits
are likely to vary based on network and/ transaction volume. the term ‘‘issuer’’ for purposes of this
or transaction type (e.g., network fees exemption to the person holding the
and fraud losses) the same—on an IV. Section 235.5 Exemptions 142 asset account that is debited through an
average basis for any given transaction The proposed exemptions to the electronic debit transaction.144
regardless of the network, card type, or applicability of the interchange fee Proposed § 235.5(a) implemented
transaction type—the final rule avoids standard in § 235.5 implement the EFTA Sections 920(a)(6)(A) and (B) by
providing incentives for issuers to steer exemptions set forth in EFTA Section providing that §§ 235.3, 235.4, and
consumers to use higher-cost networks, 920(a) for small issuers, government- 235.6 do not apply to an interchange
cards, and transaction types. administered payment programs, and transaction fee received or charged by
Several merchants suggested that the certain reloadable prepaid cards.143 an issuer with respect to an electronic
same interchange fee standard should Because an electronic debit debit transaction if (i) the issuer holds
apply across merchant types, transaction may qualify for more than the account that is debited; and (ii) the
transaction types, and transaction size, one exemption, the Board proposed issuer, together with its affiliates, has
arguing that current variation in comment 5–1 to clarify that an issuer assets of less than $10 billion as of the
interchange fees is due to market power need qualify for only one of the end of the previous calendar year.
rather than true variation in costs or exemptions in order to exempt an Proposed comment 5(a)-1 clarified that
transaction risks (which, they asserted is electronic debit transaction from the an issuer would qualify for this
accounted for through chargeback exemption if its total worldwide
interchange provisions in §§ 235.3,
rules).141 By contrast, several issuers banking and nonbanking assets,
235.4, and 235.6 of the proposed rules.
suggested that the final rule should including assets of affiliates, are less
The proposed comment further clarified
allow networks to set interchange fees than $10 billion. Furthermore,
that a payment card network
based on transaction risk. These consistent with other Board rules, the
establishing interchange fees need only
commenters asserted that fraud losses Board proposed to designate the end of
satisfy itself that the issuer’s transaction
vary with transaction size, transaction the calendar year to measure the assets
qualifies for at least one of the
type, and merchant location. of an issuer and its affiliates.145
exemptions in order to exempt the The Board received numerous
Merchants suggested that the Board
electronic debit transaction from the comments from a variety of
establish different standards for small-
interchange fee restrictions. The Board commenters, including large and small
ticket sales (under $5) because the
did not receive any comment on the issuers, merchants, consumer groups,
proposed cap likely would result in
clarification, and the substance of members of Congress, and other
higher interchange fees than merchants
comment 5–1 has been adopted as financial institution regulatory agencies
currently are paying on those
proposed with modifications to conform expressing concern that the small issuer
transactions. Other merchants thought
the language of the comment to other
that variation in transaction risk should
revisions. 144 EFTA Section 920(a)(6)(B). The Board noted in
be addressed in the fraud-prevention
The Board has adopted new comment its supplementary information to its proposed rule
adjustment, if addressed anywhere, and

5–2 to provide that payment card that an issuer of decoupled debit cards, which is
noted that fraud risk exists for both not the institution holding the consumer’s asset
networks that plan to allow issuers to
account from which funds are debited when the
141 For example, some merchants stated that card-
receive interchange fees higher than card is used, would not qualify for the exemption
not-present merchants are experiencing under EFTA Section 920(a)(6)(A) given the
142 The companion interim final rule published definition of ‘‘issuer’’ under EFTA Section
increasingly low rates of fraud (primarily due to the
merchants’ own investments in fraud prevention), separately in the Federal Register adds § 235.4 920(a)(6)(B), regardless of the issuer’s asset size.
but are subject to higher interchange rates and (Fraud-prevention adjustment). 145 See, e.g., 12 CFR 203.2(e)(1)(i) and 12 CFR
chargeback rates. 143 EFTA Section 920(a)(6) and (7). 228.20(u).
exemption would not be effective in The Board is taking several steps, extend the exemption for small issuers
practice.146 Many issuer commenters including using the data collection to the network exclusivity and routing
stated that they did not believe that authority provided in EFTA Section provisions of § 235.7. Although EFTA
payment card networks would 920(a)(3)(B), to allow the Board to Section 920(a)(6) provides that small
implement two-tier fee structures (i.e., monitor and report to Congress on the issuers are exempt from the provisions
different fee structures for covered effectiveness of the exemption for small of EFTA Section 920(a) concerning the
issuers and exempt issuers). Other issuers. First, the Board plans to publish interchange fee standards, the statute
issuer commenters stated that although annually lists of institutions above and does not extend the exemption to the
networks may attempt to implement below the small issuer exemption asset network exclusivity and routing
two-tier fee structures, market forces threshold to assist payment card provisions of EFTA Section 920(b).
and merchant routing choice will erode networks in determining which of the Some commenters urged the Board to
the differences between the two fee issuers participating in their networks use the exception authority under EFTA
structures until there is only one are subject to the rule’s interchange fee Section 904(c) to extend the exemption.
interchange fee that all issuers may standards.147 Second, the Board plans to The Dodd Frank Act removes this
charge or very little variation between survey payment card networks annually authority from the Board as of July 21,
the two fees. Some of these commenters and publish annually a list of the 2011, however.
expressed concern that if small issuers average interchange fees each network A payment card network suggested
were required to accept the same provides to its covered issuers and to its that in assessing whether an issuer
interchange fees as covered issuers, exempt issuers. This list should enable qualifies for the exemption in § 235.5(a),
small issuers’ debit card programs might issuers, including small issuers, and only U.S. assets should be considered.
not be sustainable and that these issuers Congress to more readily understand EFTA Section 920(a)(6) does not specify
could be forced to severely limit or whether the provisions of EFTA Section that the exemption should be based on
abolish these programs. 920 and the implementing rule, U.S. assets only and nothing in the
Many issuer commenters also including the small issuer exemption, purpose or structure of EFTA Section
requested that the Board mandate that are having a meaningful effect. 920 or in practical operation indicates
payment card networks implement two- With respect to comments on that the provision should not apply to
tier fee structures. Several issuer discrimination by merchants, Section issuers with large foreign operations
commenters stated that even if payment 920(b)(2) prohibits payment card that also operate in the U.S. Indeed,
card networks were to institute two-tier networks from inhibiting the ability of applying the statute to apply to
fee structures, they believe merchants any person to provide a discount or in- worldwide assets would be consistent
would pressure customers or steer kind incentive for payment by the use with the principle of national treatment
customers through discounts to use of debit cards to the extent that the of foreign firms operating in the U.S.
another form of payment or refuse discount or in-kind incentive does not Therefore, the Board believes that this
exempt cards or cards issued by exempt differentiate on the basis of the issuer or measurement should be based on
the payment card network. Section worldwide assets.
issuers.
920(b)(4)(A) further provides that no The final rule also clarifies whether
By contrast, merchant commenters trust assets should be considered in
provision of Section 920(b) shall be
also noted that they believe networks determining whether an issuer’s assets
construed to authorize any person to
have an incentive to institute two-tier fall below the $10 billion exemption
discriminate between debit cards within
fee structures to attract and retain the threshold. Trust assets under
a payment card network on the basis of
business of exempt issuers and issuers management are not considered assets
the issuer of the debit card.
of exempt products. In addition, of the issuer or its affiliates, and are not
Moreover, the Board understands that
merchant commenters, some consumer reflected on the issuer’s or affiliate’s
many payment card networks have rules
group commenters, and a member of balance sheet. Therefore, comment 5(a)–
that require merchants to accept all
Congress stated that they do not believe 1 states that an issuer qualifies for the
cards of that payment product type
merchants would risk alienating small issuer exemption if its total
within that network, regardless of
customers by refusing to accept certain worldwide banking and nonbanking
issuer. Merchants also would likely face
cards or discriminating against the use assets, including assets of affiliates,
negative consequences by refusing to
of certain cards through, for example, other than trust assets under
accept a particular issuer’s debit card.
the use of differential pricing. management, are less than $10 billion.
Unlike credit cards, where customers
The Board’s final rule provides may have cards from more than one In the supplementary information to
exemptions from the interchange fee issuer, customers are more likely to its proposed rule, the Board noted that
standards in accordance with EFTA have only one debit card. A merchant to the extent payment card networks
Sections 920(a)(6) and (7). The EFTA refusing a customer’s particular debit plan to permit issuers meeting the small
does not provide the Board with specific card could cause the customer to use a issuer exemption to receive higher
authority to require networks to credit card, a potentially more interchange fees than allowed under
implement these exemptions in any expensive form of payment for the §§ 235.3 and 235.4, such networks
particular way. The Board notes, merchant. Alternatively, the merchant should establish a process to identify
however, that payment card networks may lose the sale if the customer does small issuers and to provide information
that collectively process more than 80 not have enough cash or another to acquirers and merchant processors to
percent of debit card volume have payment method that would be enable them to determine what
indicated that they plan to implement interchange fee applies to each issuer.
acceptable to the merchant.

two-tier fee structures. The Board also received several other The Board requested comment on
comments on this exemption. Some whether the rule should establish a
146 Although these comments focused on the
issuer commenters and a financial certification process and reporting
effectiveness of the small issuer exemption, the period for an issuer to notify a payment
other exemptions (i.e., debit cards issued pursuant regulatory agency urged the Board to
to certain government payment programs and
card network and other parties that the
certain general-use prepaid cards) raise similar 147 The lists will be posted on the Board’s public issuer qualifies for the small issuer
concerns. Web site. exemption.
Payment card network commenters but is not included on the Board’s list § 235.7. Although the statute exempts
suggested that a Board-developed of exempt institutions, payment card government-administered payment
process would ensure that there is networks may institute their own programs from the interchange fee
consistent treatment across the industry processes for such issuers to certify their standards, it does not provide an
and requested that the Board annually eligibility for the exemption to the exemption from the network exclusivity
publish a list of exempt and non-exempt networks. See comment 5–2. provisions for these programs, or
issuers based on asset size. A merchant From year to year, issuers that are specific authority for the Board to grant
trade group and several processors exempt may become covered issuers an exemption from these provisions.
suggested that the Board develop a based on changes in assets and affiliates. Thus, the Board has not exempted
certification process for small issuers to The Board has added § 235.5(a)(3) (and government-administered payment
notify the Board and the payment card comment 5(a)–2) to provide that, if an programs from the provisions of § 235.7.
networks within 90 days of the end of issuer no longer qualifies for the small Commenters requested that the Board
the preceding calendar year that they issuer exemption as of the end of a provide further clarification on
qualify for the exemption. A merchant calendar year because at that time it, application of the exemption for
trade group commenter also expressed together with its affiliates, has assets of government-administered payment
concerns with networks solely $10 billion or more, the newly covered programs. One depository institution
managing the exemption process. issuer must begin complying with the trade group suggested that the
Another processor commenter suggested interchange fee standards (§ 235.3), the exemption for government-administered
that the payment card networks should fraud-prevention standards (§ 235.4) (to payment programs be extended to
manage the certification process but that the extent the issuer wishes to receive ‘‘multi-purse’’ cards where a debit or
the Board should establish the reporting a fraud-prevention adjustment), and the general-use prepaid card may access
period for consistency. provisions prohibiting circumvention, funds other than funds provided by a
The Board plans to publish annually evasion, and net compensation (§ 235.6) government-administered payment
lists of institutions above and below the no later than July 1 of the following program. The Board believes the statute
small issuer exemption asset threshold year. This date provides time for issuers is clear in stating that the exemption is
and those for which the Board is unable and networks to determine the available for debit or general-use
to make a determination, due to applicability of the exemption and prepaid cards in which a person may
incomplete or unreliable affiliate implement any necessary system use such card only to transfer or debit
data.148 There may exist a small number updates to enable compliance. funds, monetary, value or other assets
of debit-card issuers that do not appear that have been provided pursuant to a
B. Section 235.5(b) Exemption for
on any of these lists.149 The Board will government-administered payment
Government-Administered Programs
compile these lists based on data in the program. Therefore, the Board has not
Board’s possession.150 These lists, based EFTA Section 920(a)(7)(A)(i) provides made the suggested change.
on assets as of December 31, 2010, will an exemption for an interchange Another commenter requested that
be posted on the Board’s Web site. The transaction fee charged or received with the Board clarify that the government-
Board has redesignated proposed respect to an electronic debit transaction administered payment programs include
§ 235.5(a) as § 235.5(a)(1) and adopting made using a debit or general-use programs in which funds are paid to a
§ 235.5(a)(2) to provide that a person prepaid card that has been provided to consumer by government agencies, such
may rely on these Board-published lists a person pursuant to a Federal, State, or as jury-duty fees that are funded to a
to determine whether an issuer, together local government-administered payment prepaid card, and programs
with its affiliates, has assets of less than program, in which the person may use administered by tribal systems. Jury-
$10 billion as of the end of a calendar the debit or general-use prepaid card duty programs administered by Federal,
year. To the extent that an issuer only to transfer or debit funds, monetary State or local governments, including
qualifies for the small issuer exemption value, or other assets that have been the courts, appear clearly covered by the
provided pursuant to such program. The exemption in EFTA Section 920(a)(7) to
148 The Board has insufficient data to determine Board proposed to implement this the extent they meet the other
whether every issuer, together with its affiliates, has provision in § 235.5(b) with minor non- requirements of that section. The Board
assets above or below $10 billion; e.g., the Board substantive changes to the statutory has not attempted to list every type of
may not have data on affiliates of industrial loan language.151 A merchant trade group
companies with assets below $10 billion. government program that qualifies for
commenter suggested that the
149 The lists, for example, would not include this exemption and has instead retained
depository institutions without regulatory financial exemption for government-administered
the general language in the statute.
data reported as of the report date, depository payment programs should be temporary. With respect to programs
institutions without federal insurance, and issuers The statute does not place an expiration
that are not depository institutions. administered by tribal governments, the
150 The Board’s sources of data to compile these
date for the exemption unless certain Board notes that the statute refers to
lists include: the Consolidated Financial Statements
limited conditions are met. The final ‘‘Federal, State, or local government-
for Bank Holding Companies (FR Y–9C; OMB No. rule follows the statute. administered programs.’’ Tribal
7100–0128), the Consolidated Reports of Condition Issuer commenters asked the Board to
governments do not appear to be either
and Income (Call Reports) for independent expand the exemption for government-
commercial banks (FFIEC 031 & 041; OMB No. ‘‘Federal’’ or ‘‘State’’ governments.
administered payment programs to the
7100–0036), the Consolidated Reports on Condition However, unlike other statutes that the
and Income (Call Reports) for Edge and agreement network exclusivity provisions in
Board has implemented by rule,152
corporations (FR 2886b; OMB No. 7100–0086), the
Reports of Assets and Liabilities of and for U.S. 151 As the Board discussed in its proposed rule, EFTA Section 920 does not limit ‘‘local’’
branches and agencies of foreign banks (FFIEC 002; Section 1075(b) of the Dodd-Frank Act amends the governments to political subdivisions of
OMB No. 7100–0032), the Thrift Financial Reports Food and Nutrition Act of 2008, the Farm Security Federal or State governments. Therefore,
(OTS 1313; OMB No. 1550–0023) for thrift holding and Rural Investment Act of 2002, and the Child the Board believes that the term ‘‘local’’
companies and thrift institutions, the Credit Union Nutrition of 1966 to clarify that the electronic
Reports of Condition and Income (NCUA 5300/ benefit transfer or reimbursement systems government would include a tribal
5300S; OMB No. 3133–0004) for credit unions, and established under these acts are not subject to EFTA
the Corporate Credit Union Monthly Call Report Section 920. These amendments are consistent 152 See, e.g., the Expedited Funds Availability Act
(NCUA 5310; OMB No. 3133–0067) for corporate with, and covered by, the exemption under EFTA (12 U.S.C. 4001(24)) and provisions regarding NOW
credit unions. Section 920(a)(7)(i). accounts in 12 U.S.C. 1832(a).
government and that government- process for identifying cards that qualify reloadable and not marketed or labeled
administered payment programs would for the government-administered as a gift card or gift certificate.
include programs administered by tribal payment programs exemption. While a The Board received several comments
governments. The Board has added a Board-established system could provide regarding this exemption. Commenters
sentence to comment 5(b)–1 to clarify consistency in the process, the Board expressed concern that issuers may try
this interpretation. acknowledges that identifying and to restructure accounts in order to
A merchant trade group commented certifying card programs is complex and qualify for the exemption under EFTA
that it does not believe that HSAs, FSAs, that the Board may not be in the best Section 920(a)(7)(A)(ii). One merchant
or HRAs are government-administered position to specify this process. trade group suggested that the Board
payment programs. Certain cards that Furthermore, as one payment card limit the exemption to cards that are
access HSAs, FSAs, and HRAs may network noted, hundreds of new card reloadable by means other than ACH
qualify for exemptions under § 235.5 programs are introduced each year, and transfer or a check drawn upon an asset
depending on how the account is Board involvement in the process could account. A processor commented that
structured. To the extent such accounts delay the timely introduction of these the exemption promotes form-over-
are offered in connection with a programs. The Board understands that substance manipulation of debit card
person’s employment and administered payment card networks generally have a programs because certain reloadable
by or on behalf of a government process currently in place to review and prepaid cards are virtually identical in
employer, the Board believes such approve new card programs, and that function to debit cards. For example, a
accounts may be considered determining whether such products reloadable card would function nearly
government-administered payment would meet the exemption requirements in the same manner as a debit card if the
programs. However, a plain reading of could be built into existing procedures. funds underlying the card may be
the statute indicates that HSAs, FSAs, For these reasons, the Board believes accessed by check, ACH, or wire
and HRAs administered for non- that payment card networks should transfer, in addition to by use of the
governmental entities or individuals by prepaid card.
have the flexibility to design their own
or on behalf of a non-government The Board believes that reloadable
systems for identifying cards that are
employer are not ‘‘government- cards that provide access to the funds
issued pursuant to a Federal, State, or underlying the card through check,
administered payment programs,’’
local government-administered payment ACH, wire transfer or other method
which is the language used by the
program. Therefore, the final rule does (unless these other means of access were
statute.
The Board proposed comment 5(b)–1 not specify the process for identifying used solely for a one-time cash-out of
to clarify the meaning of a ‘‘government- these cards, and as provided in the remaining balance on the card)
administered program.’’ The proposed comment 5–2, discussed above, the would not meet the requirement in
comment provided that a program is Board expects that payment card Section 920(a)(7)(A)(ii)(II) that the card
considered government-administered networks will have a process for not be issued or approved for use to
regardless of whether a Federal, State, or ensuring that only qualifying card access or debit any account held by or
local government agency operates the programs take advantage of this for the benefit of the cardholder (other
program itself or outsources some or all exemption. than certain sub-accounts). If funds
functions to service providers that act C. Section 235.5(c) Exemption for underlying the card may be accessed by
on behalf of the government agency. The Certain Reloadable Prepaid Cards the customer using alternate payment
proposed comment 5(b)–1 also stated methods, the customer would have
that a program may be government EFTA Section 920(a)(7)(A)(ii) contains access to an account held by the
administered even if a Federal, State, or an exemption from the debit customer or for the customer’s benefit.
local government agency is not the interchange fee standards for certain The Board has added new
source of funds for the program it qualifying reloadable, non-gift prepaid § 235.5(c)(1)(iii) to clarify that the
administers. The Board did not receive cards. The Board proposed to exemption for a general-use prepaid
comment on proposed comment 5(b)–1, implement the exemption set forth in card applies only if the card is the only
which is adopted as proposed, with EFTA Section 920(a)(7)(A)(ii) in means to access the funds underlying
minor non-substantive wording changes § 235.5(c)(1) and in the proposed the card, except when all remaining
for clarity. definition of the term ‘‘general-use funds are provided to the cardholder in
The Board also requested comment on prepaid card’’ in § 235.2(i). Specifically, a single transaction. Thus, transactions
whether it should establish a process by EFTA Section 920(a)(7)(A)(ii) provides using prepaid cards that provide regular
which cards that qualify for the an exemption for an interchange access to funds underlying the card
government-administered payment transaction fee charged or received with through check or ACH would be subject
program exemption could be identified respect to an electronic debit transaction to the interchange fee restrictions.
and information related to such cards for a plastic card, payment code, or Comment 6(a)–2 provides examples of
relayed to payment card networks. Such device that is (i) linked to funds, activities that may warrant additional
a process could assist networks in monetary value, or assets purchased or supervisory scrutiny to determine
establishing a two-tier interchange fee loaded on a prepaid basis; (ii) not issued whether there has been circumvention
structure that allows issuers to receive or approved for use to access or debit or evasion of the interchange fee
higher interchange fees than permitted any account held by or for the benefit standard. For example, additional
under §§ 235.3 and 235.4 for of the cardholder (other than a supervisory scrutiny may be warranted
transactions made using debit cards and subaccount or other method of
if an issuer replaces its debit cards with

general-use prepaid cards issued recording or tracking funds purchased prepaid cards that are linked to its
pursuant to government-administered or loaded on the card on a prepaid customers’ transaction accounts and
payment programs. Unlike the process basis); (iii) redeemable at multiple, funds swept from the transaction
for identifying small issuers that qualify unaffiliated merchants or service accounts to the prepaid accounts as
for the exemption in § 235.5(a), providers, or automated teller machines; needed to cover transactions made.
commenters were split on whether they (iv) used to transfer or debit funds, The Board also received many
thought the Board should develop the monetary value, or other assets; and (v) comments on the interpretation of the
condition that the exemption in clarification is consistent with the way § 235.5(c)(1) because they believe that
proposed § 235.5(c)(1) is available only the Board understands subaccounts are cards accessing HSAs, FSAs, and HRAs
if a card is not issued or approved for structured for most prepaid card are not freely reloadable and may only
use to access or debit any account held programs. be reloaded during designated times.
by or for the benefit of the cardholder The statute does not require that, to
1. Reloadable and Not Marketed or
(other than a subaccount or other qualify for the exemption, a card be
Labeled as a Gift Card or Gift Certificate
method of recording or tracking funds reloadable on a continuous basis, only
purchased or loaded on the card on a The Board proposed to import that the card be reloadable and not
prepaid basis). An issuer and a commentary related to the meaning of marketed as a gift card. Accordingly, the
merchant group noted that FDIC pass- reloadable and not marketed or labeled final rule has not been changed to
through insurance is only available for as a gift card or gift certificate from 12 require that a card be continuously
omnibus accounts for which the CFR 205.20 (‘‘Gift Card Rule’’), in which reloadable to qualify for the exemption
individual participants can be identified the Board had previously defined and for reloadable cards. Therefore, the
by the accountholder. Based on this clarified the meaning of ‘‘reloadable and Board is adopting proposed comment
observation, a merchant group stated not marketed or labeled as a gift card or 5(c)–1 as comment 5(c)–2 with minor
that if funds are accorded FDIC gift certificate.’’ Specifically, proposed changes to clarify this point. The Board
coverage, then the account is considered comment 5(c)–1, providing guidance on is adopting proposed comments 5(c)–2
to be held ‘‘for the benefit of the when a general-use prepaid card is through 5(c)–5 without change as
cardholder,’’ and an electronic debit ‘‘reloadable,’’ was adapted from comments 5(c)–3 through 5(c)–6.
transaction made using a card that comment 20(b)(2)–1 under the Gift Card
Rule. Proposed comment 5(c)–2, which 2. Certification
accesses such funds should not be
eligible for the exemption under was adapted from comment 20(b)(2)–2 The Board requested comment on
§ 235.5(c)(1). under the Gift Card Rule, clarified the whether it should establish a process to
EFTA Section 920(a)(7)(A)(ii) exempts meaning of the term ‘‘marketed or identify accounts accessed by cards
a general-use prepaid card only if it is labeled as a gift card or gift certificate.’’ eligible for the reloadable prepaid cards
not issued or approved for use to access Proposed comment 5(c)–3 provided exemption or whether it should permit
or debit any account held by or for the examples of what the term ‘‘marketed or payment card networks to develop their
benefit of the cardholder (other than a labeled as a gift card or gift certificate’’ own processes. Comments received on
subaccount or other method of includes and does not include that are the process for identifying accounts for
recording or tracking funds purchased identical to the examples in comment the reloadable prepaid card exemption
or loaded on the card on a prepaid 20(b)(2)–3 under the Gift Card Rule. were similar to the comments received
basis). The parenthetical indicates that Proposed comment 5(c)–4, which on the process for identifying accounts
if the ‘‘account held * * * for the addressed issues related to maintaining for the government-administered
benefit of the cardholder’’ is actually a proper policies and procedures to payment programs exemption. For the
subaccount or other method of prevent a general-use prepaid card from reasons discussed above with respect to
recording or tracking funds purchased being marketed as a gift card or gift the government-administered payment
or loaded on the card on a prepaid basis, certificate, was adapted from 20(b)(2)–4 program exemption, the Board believes
the general-use prepaid card is not under the Gift Card Rule. Finally, that the process should be developed
considered to access an account held by proposed comment 5(c)–5, which and administered by the payment card
or for the benefit of the cardholder for provided guidance relating to online networks. See comment 5–2. Identifying
purposes of determining whether the sales of gift cards, was substantially the accounts is a complex process that the
general-use prepaid card is exempt. same as comment 20(b)(2)–5 under the payment card networks may be better
General-use prepaid cards that access Gift Card Rule. situated to administer. Furthermore, the
funds in an omnibus account that are The Board received few comments on Board is concerned that a Board-
identifiable to the cardholder by virtue proposed comments 5(c)–1 through administered process could
of a subaccount (and thus are eligible for 5(c)–5. One issuer expressed concerns unnecessarily delay the introduction of
FDIC pass-through insurance) are not that the commentary, taken together, is new card programs.
considered general-use prepaid cards too prescriptive. The Board believes that
the detail is necessary to provide issuers 3. Temporary Cards Issued in
that are issued or approved for use to Connection With a General-Purpose
access or debit an account held by or for with sufficient guidance to determine
whether a prepaid card is considered to Reloadable Card
the benefit of the cardholder and thus
may still qualify for the exemption in be reloadable and not marketed or Proposed § 235.5(c)(2) provided that
§ 235.5(c)(1). labeled as a gift card or gift certificate. the term ‘‘reloadable’’ includes a
Commenters also requested that the Furthermore, the Board believes it is temporary non-reloadable card if it is
Board make a clearer distinction important to maintain consistency with issued solely in connection with a
between account and subaccount. In the Gift Card Rule in interpretation of reloadable general-use prepaid card. As
response, the Board is adopting new what is meant by ‘‘reloadable and not the Board discussed in its proposal, this
comment 5(c)–1 to draw a distinction marketed or labeled as a gift card or gift treatment of temporary cards issued in
between an ‘‘account’’ and a certificate.’’ Issuers and other parties connection with a general-purpose
‘‘subaccount.’’ Comment 5(c)–1 states that are involved in the distribution and reloadable card is consistent with its
that a subaccount is an account within sale of prepaid cards are required to treatment under the Gift Card Rule.
Proposed comment 5(c)–6, similar to
an account, opened in the name of an make these determinations with respect

agent, nominee, or custodian for the to the Gift Card Rule, and consistent comment 20(b)(2)–6 under the Gift Card
benefit of two or more cardholders, interpretation across the two rules Rule, provides additional guidance
where the transactions and balances of should reduce confusion and regarding temporary non-reloadable
individual cardholders are tracked in compliance burden. cards issued solely in connection with
such subaccounts. An account that is One merchant group commented that a general-purpose reloadable card. The
opened solely in the name of a single they did not believe HSAs, FSAs, or Board did not receive comment on the
cardholder is not a subaccount. This HRAs qualified for the exemption in proposed § 235.5(c)(2), which is adopted
as proposed. There were also no substantiation systems for verifying the first ATM withdrawal in a calendar
comments on proposed comment 5(c)– eligibility of purchased goods or month, does not lose the exemption
6, which is adopted as comment 5(c)– services to provide issuers of such cards because the cards it issues also have
7 without change. additional time to identify and access to a nonproprietary ATM
implement approaches to comply with network that charges fees. Proposed
4. Cards Accessing HSAs, FSAs, and
the rule’s network exclusivity § 235.5(d)(2) provides that the
HRAs and Qualified Transportation
provisions. exemptions are not available if a fee is
Benefits
imposed by the issuer for the first
Many issuer commenters urged the D. Section 235.5(d) Exception
withdrawal per calendar month from an
Board to exempt cards accessing HSAs, EFTA Section 920(a)(7)(B) provides ATM that is part of the issuer’s
FSAs, or HRAs from the interchange fee that the exemptions available under designated ATM network. Therefore, a
restrictions as well as the network EFTA Sections 920(a)(7)(A)(i) and (ii) fee may be charged for a withdrawal
exclusivity and routing provisions. terminate after the end of the one-year from an ATM outside of the issuer’s
These commenters also suggested that period beginning on the effective date of designated ATM network without the
cards accessing qualified transportation the statute if either of the following fees issuer losing the exemption. The Board
benefits should be exempt. In support of may be charged: a fee for an overdraft, has adopted comment 5(d)–1 to clarify
their views, these commenters cited including a shortage of funds or a this point by providing that an
statements from certain members of transaction processed for an amount electronic debit card transaction may
Congress indicating their belief that exceeding the balance; or a fee imposed still qualify for the exemption under
cards accessing these types of accounts by the issuer for the first withdrawal per §§ 235.5(b) or (c) with a respect to a card
should be exempt from these provisions. month from an ATM that is part of the for which a fee may be imposed for a
The statute does not provide an issuer’s designated ATM network. withdrawal from an ATM that is outside
exemption for cards accessing HSAs, Proposed § 235.5(d) implemented this of the issuer’s designated ATM network
FSAs, or HRAs or qualified section by providing that the as long as the card complies with the
transportation benefits. Some of these exemptions in §§ 235.5(b) and (c) are condition set forth in § 235.5(d)(2) for
cards may nonetheless fall outside the not available for any interchange withdrawals within the issuer’s
definitions that establish the scope of transaction fee received or charged by designated ATM network.
coverage of EFTA Section 920. For an issuer on or after July 21, 2012, with An issuer requested that the Board
example, § 235.2(a)(2), which defines respect to an electronic debit clarify that the condition in § 235.5(d)(2)
‘‘account,’’ does not cover accounts held transaction, if any of the following fees regarding ATM fees would not apply to
under a bona fide trust agreement. The may be charged to a cardholder with cards that do not have ATM access. A
Board understands that some health- respect to the card: (i) A fee or charge card that does not have ATM access will
related accounts are established as bona for an overdraft, including a shortage of not be subject to any fees for
fide trust accounts. Therefore, to the funds or a transaction processed for an withdrawals from an ATM; therefore,
extent an account is established as a amount exceeding the account balance, such a card would not lose the
bona fide trust account, electronic debit unless the fee or charge is imposed for exemption on the basis of § 235.5(d)(2).
transactions using a card that accesses transferring funds from another asset The Board has added a sentence to
such an account would not be covered account to cover a shortfall in the comment 5(d)–1 to clarify this point.
by the provisions of this part. account accessed by the card; or (ii) a The Board also received a comment
For HSAs, FSAs, or HRAs or qualified fee imposed by the issuer for the first from a prepaid card processor
transportation benefits that are not withdrawal per calendar month from an suggesting that the Board provide
established as bona fide trust accounts, automated teller machine that is part of alternatives for issuers without their
cards accessing such accounts may still the issuer’s designated automated teller own proprietary ATM network to meet
meet one of the exemptions under machine network.153 The Board’s the condition set forth in § 235.5(d)(2)
§ 235.5 from the interchange fee proposal clarified that the fee described by entering into an arrangement with
restrictions, depending on how the in § 235.5(d)(1) does not include a fee or either (i) a nonproprietary network
account is structured and the issuer of charge imposed for transferring funds where a fee will not be charged for the
the card. The Board addressed specific from another asset account to cover a first ATM withdrawal in a calendar
comments related to whether electronic shortfall in the account accessed by the month; or (ii) a local bank, bank agent,
debit transactions made using cards that card. Such a fee is not an ‘‘overdraft’’ fee or retail seller to allow for in-branch or
access HSAs, FSAs, and HRAs qualify because the cardholder has a means of in-store free cash withdrawal per
for the various exemptions from the covering a shortfall in the account calendar month using the card,
interchange fee restrictions in the connected to the card with funds regardless of whether any ATMs are
supplementary information to § 235.5(b) transferred from another asset account, available for use. With respect to the
and (c) above. and the fee is charged for making such first suggested alternative, the Board
In addition, a number of commenters a transfer. The Board has determined to notes that an issuer’s ‘‘designated ATM
agreed that issuers face significant adopt § 235.5(d) as proposed, but is network’’ is defined in § 235.2(g) as
complications in complying with the making some revisions to the including either a network in the name
network exclusivity provisions with commentary as discussed below. of the issuer or any network of ATMs
respect to certain health care and Several industry commenters identified by the issuer that provides
employee benefit cards under current suggested the Board clarify the proposed reasonable and convenient access to the
government rules governing these
exception. One prepaid card processor issuer’s customers. As a result, the

programs. As discussed further in the requested that the Board make clear that definition already contemplates the
supplementary information related to an issuer with its own proprietary ATM possibility of an issuer entering into an
§ 235.7(c)(3) and comment 7(c)–1, the network, which identifies the issuer’s arrangement with a nonproprietary
Board is providing a delayed effective name and does not charge a fee for the ATM network. With respect to the
date for electronic debit transactions second suggested alternative, tellers,
using debit cards that use point-of-sale 153 Section 235.2(g) defines the term ‘‘designated bank agents, and point-of-sale terminals
transaction qualification or automated teller machine (ATM) network.’’ are not considered ATMs and cannot
comprise an ATM network. If the card fees, but such authority is limited to network or its affiliates or for fraud
can be used to access ATMs with an regulations to ensure that a network fee detection and risk mitigation services.
issuer’s designated ATM network, then (i) ‘‘is not used to directly or indirectly On the acquirer and merchant side, a
in order for the card to qualify for the compensate an issuer with respect to’’ network similarly charges fees for
general-use prepaid exemption after July an electronic debit transaction; and (ii) accessing the network, as well as fees
21, 2012, a fee cannot be imposed by the ‘‘is not used to circumvent or evade’’ the for authorizing, clearing, and settling
issuer for the first withdrawal per interchange transaction fee restrictions debit card transactions through the
calendar month from an ATM that is under EFTA Section 920(a) and this network. Likewise, networks charge
part of the issuer’s designated ATM rule.154 Under EFTA Section network administration fees,
network, irrespective of whether a 920(a)(8)(B), using a network fee to membership or merchant acceptance
cardholder can obtain fee-free cash directly or indirectly compensate an fees, and licensing or member
withdrawals from a branch or a retail issuer with respect to an electronic debit registration fees to acquirers and/or
store. transaction is a separate prohibition merchants. There are also fees for
A prepaid card trade group suggested from using a network fee to circumvent various optional services offered by the
that the Board permit issuers to meet the or evade the interchange fee standards. network to acquirers or merchants,
condition in § 235.5(d)(2) by providing The proposed rule contained a general including fees for fraud detection and
a credit to the cardholder within the prohibition against circumventing or risk mitigation services.
month that a fee for withdrawal from an evading the interchange transaction fee A fee charged by the network can be
ATM is imposed. Although a cardholder restrictions, as well as a statement that assessed as a flat fee or on a per-
in this scenario would be reimbursed circumvention or evasion occurs if an transaction basis, and may also vary
the fee, and thus have a fee-free ATM issuer receives net compensation from a based on transaction size, transaction
withdrawal, there may be other negative payment card network with respect to type, or other network-established
consequences to the cardholder that electronic debit transactions. criteria. Issuers and merchants may be
would not occur if the fee for the ATM The final rule adopts the proposed given individualized discounts by a
withdrawal had not initially been rule’s general prohibition of network relative to its published
imposed. For example, the imposition of circumvention or evasion. Comment network fee based on their transaction
such a fee could cause a subsequent 6(a)–1 clarifies that the determination of volume.
transaction to be declined or returned. In addition to discounts, issuers and
circumvention or evasion will be based
The fact that the fee is later reimbursed merchants may receive incentive
on the particular facts and
does not reverse the negative payments or rebates from a network.
circumstances. The final rule also
consequence of the fee being imposed in These incentives may include upfront
prohibits an issuer from receiving net
the first place. Therefore, the final rule payments to encourage issuers to shift
compensation from a payment card
does not permit issuers to meet the some or all of their debit card volume
network, excluding interchange
condition in § 235.5(d)(2) by imposing to the network, such as signing bonuses
transaction fees received from acquirers.
the fee and providing a subsequent upon contract execution. Such
The commentary to the final rule
credit. payments may help issuers defray the
includes examples of situations that do
Finally, consumer groups were conversion cost of issuing new cards or
not involve net compensation, but may
supportive of the conditions in of marketing the network brand. In
nevertheless warrant additional
§ 235.5(d) and thought the conditions addition, issuers may receive incentive
supervisory scrutiny to determine
provided important consumer payments upon reaching or exceeding
whether circumvention or evasion
protections. However, they believed the debit card transaction, percentage share,
exists. Finally, the final rule clarifies the
Board should require additional or dollar volume threshold amounts.
protections, including extending the time period over which net Discounts and incentives enable
other provisions of Regulation E, such compensation will be measured. networks to compete for business from
as error resolution and periodic A. Overview of Network Fees, Discounts, issuers and merchants. Among other
statement requirements, to general-use and Incentives things, these pricing tools help networks
prepaid cards, and preventing any form attract new issuers and retain existing
Payment card networks charge
of credit that automatically triggers issuers, as well as expand merchant
network participants a variety of fees in
repayment of funds deposited on a acceptance to increase the attractiveness
connection with electronic debit
general-use prepaid card. The Board of the network brand. Discounts and
transactions. On the issuer side, fees
believes that these suggestions fall incentives also help networks to
charged by the network include access
outside the scope of this rulemaking and encourage specific processing behavior,
fees for connectivity and fees for
will not address these issues in this such as the use of enhanced
authorizing, clearing, and settling debit
final rule. authorization methods or the
card transactions through the network
deployment of additional merchant
V. Section 235.6 Prohibition on (i.e., switch fees). Issuers also pay fees
terminals.
Circumvention or Evasion to the network for the costs of
EFTA Section 920 contains two administering the network, such as B. Section 235.6(a) Prohibition of
separate grants of authority to the Board service fees for supporting the network Circumvention or Evasion
to address circumvention or evasion of infrastructure, and membership and A payment card network may
the restrictions on interchange licensing fees. In addition, a network consider a number of factors in
transaction fees. First, EFTA Section may charge fees to issuers for optional calibrating the appropriate level of
920(a)(1) provides the Board with services, such as for transaction routing network fees, discounts, and incentives
general authority to prescribe rules to and processing services provided by the in order to achieve network objectives.
prevent circumvention or evasion of the EFTA Section 920(a) does not directly
154 Under EFTA Section 920(a)(1), a network fee
interchange fee standards under EFTA regulate the fees that a network may
is defined as ‘‘any fee charged and received by a
Section 920(a). In addition, EFTA payment card network with respect to an electronic
charge for any of its services. Thus, the
Section 920(a)(8) authorizes the Board debit transaction, other than an interchange final rule does not seek to set or
to prescribe rules regarding any network transaction fee.’’ establish the amount, type, or level of
network fees that a network may in EFTA Section 920(a)(8) by also Comment 6(a)–1 is modified from the
permissibly impose on any network considering payments for ‘‘debit card- language in the proposed commentary
participant for its services. However, the related activities.’’ In the view of these to state more explicitly that
statute authorizes the Board to prescribe commenters, the only payments that circumvention or evasion may include,
rules to prevent circumvention or should be considered in the net but is not limited to, circumstances in
evasion of the interchange transaction compensation analysis are payments to which an issuer receives net
fee standards. This authority is both an issuer for its role in an electronic compensation from a payment card
general with respect to the Board’s debit transaction, or more precisely, network with respect to electronic debit
implementation of the interchange payments that vary with the number or transactions or other debit card related
transaction fee standards under EFTA volume of debit card transactions activity. Although the proposal
Section 920(a)(1), as well as specific processed on the network. Accordingly, established a per se circumstance in
with respect to the use of network fees issuers asserted that payments made by which circumvention or evasion of the
under EFTA Section 920(a)(8)(B)(ii). networks to issuers for other debit card- interchange transaction fee standards
Under the proposed rule, § 235.6(a) related purposes, such as for marketing occurs (i.e., when an issuer receives net
set out a general prohibition against or to encourage investment in network compensation with respect to electronic
circumventing or evading the infrastructure, should be excluded from debit card transactions), the Board did
interchange transaction fee standards in the net compensation analysis. Several not intend to limit potential findings of
§§ 235.3 and 235.4. In addition, issuer commenters further expressed the circumvention or evasion to such
proposed § 235.6 expressly prohibited, view that inclusion of payments that circumstances. Rather, as stated in the
as an example of circumvention or were not tied to debit card volume supplementary information to the
evasion of the interchange transaction would unnecessarily inhibit a network’s proposed rule, § 235.6 establishes a
fee standards, an issuer from receiving ability to attract issuers, promote ‘‘general prohibition against
net compensation from a payment card investment in the network, or provide circumventing or evading the
network with respect to electronic debit incentives for desirable issuer behavior, interchange transaction fee standards in
transactions because such compensation such as enhancing data security §§ 235.3 and 235.4.’’ 155 This concept is
could effectively serve as a transfer to procedures. made more explicit in the final rule by
issuers that may be in excess of the Merchant commenters and a member separating the prohibition against
amount of interchange transaction fee of Congress stated that the proposed circumvention and evasion and the
revenue allowed under the standards in rule was overly narrow in scope in prohibition against net compensation
§§ 235.3 and 235.4. into different subsections. Comment
limiting circumvention or evasion to
Proposed comment 6–1 further 6(a)–1 to the final rule retains the
circumstances in which an issuer
clarified that any finding of provision in the proposed commentary
circumvention or evasion of the receives net compensation from a
network in connection with electronic stating that a finding of circumvention
interchange transaction fee standards or evasion ‘‘will depend on all relevant
will depend on the relevant facts or debit transactions. These commenters
urged the Board to clarify that net facts and circumstances.’’
circumstances. Proposed comment 6– In the proposal, the Board requested
1.i. provided an example of net compensation is not the exclusive test
comment on whether increases in fees
compensation occurring in violation of for circumvention by, for example,
charged by the network to merchants or
the prohibition on circumvention or including general anti-circumvention
acquirers coupled with corresponding
evasion when an issuer receives language in the rule. According to decreases in fees charged by the
payments or incentives in connection merchant commenters, such general network to issuers should also be
with electronic debit transactions that anti-circumvention language would considered circumvention or evasion of
exceed the total amount of fees paid by address attempts by networks and the interchange fee standards in
the issuer to the network for such issuers to adjust their pricing policies or §§ 235.3 and 235.4. For example,
transactions. The proposed comment restructure their products to avoid being following the effective date of this rule,
also included examples of payments or subject to the standards set forth in the a network might increase network
incentives and fees that would be rule. Merchants also recommended that switch fees charged to merchants,
included in the net compensation the Board specifically include an acquirers, or processors while
determination, as well as those that enforcement mechanism to address decreasing switch fees paid by issuers
would not be included. Among the occurrences of circumvention or for the same types of electronic debit
payments or incentives that would be evasion. transactions. Under these
considered in the net compensation The final rule adopts the general circumstances, the increase in network
analysis were payments or rebates to prohibition on circumvention or evasion processing fees charged to merchants is
issuers for meeting or exceeding certain of the interchange transaction fee arguably ‘‘passed through’’ to issuers
transaction volume or dollar amount standards in §§ 235.3 and 235.4, through corresponding decreases in
thresholds, as well as marketing substantially as proposed. Comment 6– processing fees paid by issuers.
incentives and other fixed payments for 1, as in proposed comment 6–3, clarifies Issuers and payment card networks
‘‘debit card activities.’’ that the prohibition in § 235.6 against generally commented that the rule
Issuers and depository institution circumventing or evading the should not address the level of network
trade associations generally commented interchange transaction fee standards processing fees regardless of any
that the proposed rule appropriately does not apply to issuers or products changes to the proportion of such fees
limited the scope of the net that qualify for an exemption under
as applied to issuers and merchants.

compensation analysis to payments § 235.5. Thus, for example, § 235.6 does These commenters asserted that EFTA
made ‘‘with respect to electronic debit not apply to an issuer with consolidated Section 920 is only intended to address
transactions.’’ However, these assets below $10 billion holding the the level of interchange transaction fees
commenters further stated that the account that is debited in an electronic and therefore the statute does not
proposed commentary interpreting the debit transaction. The final rule adopts
rule exceeded the scope of the statutory the comment as proposed, redesignated 155 See 75 FR at 81747 (Dec. 28, 2010) (emphasis
prohibition on circumvention or evasion as comment 6–1. added).
regulate the structure or amount of non- merchants or acquirers and decreases in transactions, but also applies to
interchange fees set by networks, network fees charged to issuers do not circumstances in which network fees
including network processing fees. by themselves constitute circumvention are used to ‘‘indirectly’’ compensate an
Merchant commenters, however, stated or evasion of the interchange transaction issuer with respect to such transactions.
that decreases in network processing fee standards; however, such action may Moreover, EFTA Section 920(a)(8)(B)(ii)
fees charged to issuers and increases in warrant additional supervisory scrutiny also includes general authority to ensure
network processing fees charged to to determine whether the facts and that network fees are not used to
merchants or acquirers could easily circumstances constitute circumvention circumvent or evade the interchange
compensate issuers for reductions in the or evasion.156 New comment 6(a)–2.ii transaction fee standards of the rule.
level of interchange transaction fees in includes another example based on Pursuant to these statutory authorities,
circumvention of the interchange merchant comments regarding issuers the Board believes that the net
transaction fee standard. Merchants thus adjusting their products to avoid the compensation determination should
urged the Board to cap the level of final rule’s interchange fee limits. The take into consideration any payments or
network fees at current levels until the comment describes a situation where an incentives paid by a network to an
proposed network exclusivity and issuer replaces its debit cards with issuer for debit card-related activities. In
routing provisions were fully prepaid cards that are exempt from the particular, the Board believes that
implemented (in particular, Alternative interchange fee standards of §§ 235.3 limiting the payments or incentives to
B) to allow merchants the ability to and 235.4. The exempt cards are linked payments that are directly related to the
discipline network fees through their to its customers’ transaction accounts number or volume of debit card
routing choices. Merchants also urged and funds are swept from the transactions on the network would
the Board to carefully monitor the transaction accounts to the prepaid potentially create a significant loophole
networks’ operating rules for any accounts as needed to cover transactions as networks could respond by providing
changes that shift liability from issuers made. Although this situation may not sizable non-volume based incentive
to merchants as a way to make up for constitute per se circumvention or payments to an issuer for debit card
lost income from interchange. evasion, it warrants additional activities to offset the reduced revenue
Although the Board recognizes that supervisory scrutiny to determine from the limitations on interchange
decreases in issuer fees paid to the whether the facts and circumstances transaction fees in §§ 235.3 and 235.4.
network could have the effect of constitute circumvention or evasion. Accordingly, § 235.6(b) in the final rule
offsetting reductions in interchange states that payments and incentives paid
transaction fee revenue that will occur C. Section 235.6(b) Prohibition of Net
to an issuer by a network, and fees paid
under the interchange transaction fee Compensation
by an issuer to a network ‘‘with respect
standards in §§ 235.3 and 235.4, the The final rule sets out a prohibition to electronic debit transactions or debit
Board continues to believe that such against net compensation in § 235.6(b). card-related activities,’’ are not limited
circumstances would not necessarily The description of net compensation to volume-based or transaction-specific
indicate circumvention or evasion of the contained in proposed comment 6–1.i payments, incentives, or fees, but also
interchange transaction fee standards. has been moved to § 235.6(b) of the final include other payments, incentives, or
Moreover, the Board is concerned that rule’s regulatory text. As in the fees related to an issuer’s provision of
an outright prohibition on such shifts in proposed comment, an issuer has debit card services. Such payments
the allocation of network fees would received net compensation from a could include, for example, bonuses to
effectively lock in the current payment card network if the total convert an issuer’s card base to a new
distribution of network fees between amount of payments or incentives signature network, or marketing
issuers and merchants, thereby received by the issuer from the payment incentives. Comment 6(b)–2 to the final
constraining the ability of networks to card network during a calendar year in rule provides guidance on the payments
adjust their own sources of revenue in connection with electronic debit or incentives paid by a payment card
response to changing market conditions. transactions or other debit card-related network that could be considered in
Such a prohibition may preclude a activity, excluding interchange determining whether an issuer has
network from adopting a fee structure transaction fees that are passed through received net compensation. Consistent
similar to that used by a competing to the issuer by the network, exceeds the with the proposal, comment 6(b)–2.i
network that obtained a larger total of all fees paid by the issuer to the
proportion of its fees from the merchant states that payments or incentives paid
network for electronic debit transactions by a payment card network could
side of the transaction. Finally, to the
or other debit card related activity include, but are not limited to,
extent that networks alter fees for
during that calendar year. marketing incentives, payments or
issuers that are incorporated into the
The Board notes that the prohibition rebates for meeting or exceeding a
interchange fee standard, the
in EFTA Section 920(a)(8)(B)(i) is not specific transaction volume, percentage
permissible interchange fee under the
limited to direct compensation to an share, or dollar amount of transactions
standards will adjust to reflect those fee
issuer with respect to electronic debit processed, or other payments for debit
changes. Accordingly, the final rule
does not treat shifts in the relative card-related activities.
156 Merchants also commented that in permitting
proportion of network processing fees networks to raise their network fees for merchants
As noted above, signing bonuses are
paid by issuers and merchants as a per or to decrease them for issuers (or both) so long as used as a network tool for encouraging
se indication of circumvention or net compensation is not provided, the Board issuers to shift debit card volume to a
contradicted its own reasoning for excluding network, and for maintaining existing
evasion of the interchange transaction

network fees as an allowable cost that can be
fee standards. Instead, as discussed recovered through the interchange transaction fee
card volume on the network. For
above, individual determinations of standards, that is, to prevent merchants from having example, an initial upfront payment
circumvention or evasion would depend to pay all processing fees. As discussed above, from a network may serve to
of the particular facts and however, the final rule permits network processing compensate the issuer for its costs in
fees incurred by issuers to be recovered through the
circumstances. interchange transaction fee standards as such costs
converting its card base to a new
New comment 6(a)–2.i thus states that are incurred to effect an electronic debit card signature debit network. Signing
increases in network fees charged to transaction. bonuses may also offset the issuer’s
costs in upgrading its internal network to an issuer to retain or attract with the network. In such case, an
processing systems and establishing the issuer’s debit card portfolio. Just as issuer would be permitted to recover
connectivity to the new network. In its marketing incentives and other non- those costs from merchants and
proposal, the Board requested comment volume based payments for debit card- acquirers through the interchange fee
on whether signing bonuses should also related activities could be used by a standard to the extent such costs were
be considered as payments or incentives network to compensate an issuer for the related to the authorization, clearing, or
paid by a network to an issuer for issuer’s role in electronic debit settlement of electronic debit
purposes of the net compensation transactions above and beyond the transactions. If those recoverable costs
determination. limits permitted under §§ 235.3 and were also included in the net
Issuer commenters generally 235.4, the Board believes that signing compensation test, however, such
responded with similar arguments made bonuses could similarly be used as a processing costs could increase the
in connection with the treatment of mechanism to generate payments to an amount of incentives that could be
debit card-related payments unrelated to issuer in excess of the amount permitted transferred by the network to the issuer.
transaction volume, stating that such under §§ 235.3 and 235.4, absent The network could then fund the
bonuses should not be included in the inclusion in the net compensation additional incentives by increasing the
determination because they do not calculation. However, as further network fees paid by merchants or
compensate an issuer for the number or provided in comment 6(b)–2.ii, the acquirers.
volume of transactions processed on a Board agrees that it would be Merchant commenters proposed two
network. One payment card network appropriate to allocate such bonuses different approaches to address their
expressed concern that including over the life of the debit card contract concerns. First, they stated that the
signing bonuses in the net in calculating the payments or Board could limit the recoverable costs
compensation determination could incentives paid by a network to an through the interchange fee standards to
reduce a network’s ability to compete issuer. To the extent an issuer receives a processor’s actual costs of authorizing,
with another payment card network that signing bonuses for its entire card clearing, and settling an electronic debit
also offered products or services portfolio, including for the issuer’s transaction where debit card processing
unrelated to their operation of the credit card business, an appropriate is outsourced to the third-party
network at a discount. This network portion of such bonuses should be processor. Issuers, however, generally
stated that if the final rule curtailed allocated to the issuer’s debit card do not have knowledge of their
networks’ ability to offer signing business based on the proportion of the processors’ actual costs. Alternatively,
bonuses by including them in the net cards or transactions that are debit cards these commenters recommended that
compensation calculation, operators of or electronic debit transactions, as the final rule exclude fees paid by an
networks that did not offer additional appropriate to the situation, for issuer for third-party processing from
products or services would be left at a purposes of the net compensation the total amount of fees paid to a
competitive disadvantage in their ability determination. network for purposes of the net
to compete for debit card business. Comment 6(b)–2.iii lists types of compensation determination.
Some issuers observed that initial payments or incentives that need not be The Board agrees that the proposed
upfront payments and incentives were included in the total payments or approach could enable networks to
likely to exceed the fees charged to the incentives paid by a network to an substantially increase the incentives
issuer for the first year. For example, a issuer for purposes of the net paid to issuers without violating the net
network may provide a new issuer an compensation analysis. Among other compensation test and has determined
incentive to participate in the network payments that may be received from a that the test should be based on fees that
to offset the issuer’s costs to reissue network, issuers may exclude any are not incorporated into the
cards, promote the new network brand interchange transaction fees that are interchange fee standard. Therefore, the
to cardholders, and establish network passed through to the issuer by the Board has excluded from the net
connectivity. In this regard, because of network. The comment also clarifies compensation test fees for issuer-
the potential size of signing bonuses in that incentives paid by a payment card processor services paid by an issuer to
relation to fees paid by an issuer on a network do not include funds received a network or network affiliate. For
year-to-year basis, several issuers and by an issuer from a payment card similar reasons, the Board has excluded
one payment card network urged the network as a result of chargebacks or network processing, or switch, fees from
Board to clarify that signing bonuses fines paid by merchants or acquirers for the net compensation calculation
would be eligible for pro rata treatment violations of network rules. In response because under the final rule such fees
over the term of the contract. to issuer comments, the commentary are also incorporated in the interchange
Merchants, two payment card also clarifies that settlements or fee standard.
networks, and a processor with an recoveries from merchants or acquirers New comment 6(b)–3 incorporates the
affiliated payment card network, by to offset the costs of fraudulent proposed guidance describing the
contrast, believed that signing bonuses transactions or a data security breach do examples of fees paid by an issuer to a
should be included in the net not constitute payments or incentives payment card network for purposes of
compensation determination. Some of paid by a payment card network. the net compensation determination.
these commenters expressed the view The proposed commentary also stated Accordingly, the comment provides that
that excluding signing bonuses could that fees paid by an issuer could include fees paid by an issuer to a payment card
undermine the entire net compensation fees for optional services provided by network include, but are not limited to,
approach because networks could create the network. See proposed comment 6– network membership or licensing fees,
packages with signing bonuses, funded 2.ii. Merchants expressed concern that and network administration fees. Fees
by imposing increased network fee on the proposed approach created a paid by an issuer could also include fees
merchants, without violating the rule. loophole that could permit networks to for optional services provided by the
Comment 6(b)–2.i clarifies that the increase the incentives paid to issuers network, such as risk management
determination of whether net without providing net compensation if services.
compensation exists must also take into fees paid to a network included fees Comment 6(b)–4 provides an example
account signing bonuses paid by a paid to a third-party processor affiliated of circumstances that do not constitute
net compensation to the issuer. In the merchants to pay any particular level of implements these limitations on
example, an issuer receives an fees. Moreover, although the statute payment card network restrictions.
additional incentive payment from the provides an exemption from the EFTA Sections 920(b)(2) and (3)
network as a result of increased debit interchange transaction fee standards for impose certain limits on the ability of
card transaction volume over the issuers with less than $10 billion in payment card networks to restrict
network during a particular calendar consolidated assets, the statute neither merchants and other persons in
year. During the same period, however, imposes an affirmative duty on establishing the terms and conditions
the total network fees the issuer pays networks to implement different under which they may accept payment
the payment card network with respect interchange transaction fee rates for cards. Specifically, EFTA Section
to electronic debit transactions also covered and non-covered issuers, nor 920(b)(2) prohibits a payment card
increase so that the total amount of fees requires merchants to pay a particular network from establishing rules that
paid by the issuer to the network level of interchange fee revenue that prevent merchants from offering
continues to exceed the total amount of may be collected by an exempt issuer. discounts or in-kind incentives based on
incentive payments received by the Thus, the Board does not believe that the method of payment tendered to the
issuer from the network during that the circumvention or evasion authority extent that such discounts or incentives
calendar year. Under these confers authority on the Board to do not differentiate on the basis of the
circumstances, the issuer does not require networks to take specific actions issuer or payment card network. In
receive net compensation from the to implement the small issuer exception addition, EFTA Section 920(b)(3)
network for electronic debit (which do not involve the use of prohibits a payment card network from
transactions. See comment 6(b)–4.i. network fees) or merchants to pay establishing rules that prevent
A few large issuers and a payment higher interchange fees to small issuers. merchants from setting minimum
card network commented that the As discussed above, however, the transaction amounts for accepting credit
prohibition against circumventing or final rule relies on specific authority cards to the extent that such minimums
evading the interchange transaction fee granted in Section 920(a)(3)(B) to collect do not differentiate between issuers and
standards should apply only to payment card networks. These two
and publish information from issuers
contractual arrangements between a statutory provisions are self-executing
and networks to separately require
payment card network and an issuer and are not subject to the Board’s
networks to report to the Board the
that are entered into on or after the date rulemaking authority.159
interchange revenue and related debit
of enactment of the Dodd-Frank Act, EFTA Section 920(b) does not provide
card volumes for exempt and covered
July 21, 2010. The Board does not a statutory exemption for small issuers,
issuers. The Board intends to publish on
believe that such arrangements should government-administered payment
an annual basis the average interchange
be grandfathered, but the date on which cards, or covered reloadable prepaid
revenue received by covered and
such arrangements are entered into cards. Thus, the exemptions in section
exempt issuers by network. The Board
would be included in the facts and 235.5 of the rule do not extend to the
circumstances analysis for anticipates that greater transparency
regarding network interchange policies prohibitions on network exclusivity
circumvention or evasion. Such arrangements and merchant routing
arrangements would, however, be will facilitate issuers’ ability to more
easily choose the networks that best restrictions under EFTA Section 920(b)
subject to the prohibition against net implemented in § 235.7. See comment
compensation. serve their individual requirements,
including the level of interchange 7–1. As discussed below, however, the
D. Additional Uses of Circumvention or transaction fees that apply to issuers on final rule provides a delayed effective
Evasion Authority the network. date for certain types of debit cards to
As discussed above under § 235.5, allow issuers to address significant
VI. Section 235.7 Limitations on technological or operational
trade associations representing small Payment Card Restrictions
issuers, including credit unions, and impediments to an issuer’s ability to
one federal banking agency urged the EFTA Section 920(b)(1) directs the comply with the network exclusivity
Board to use its circumvention or Board to prescribe regulations with and routing provisions of the rule.
evasion authority to ensure that the respect to two limitations set out in the A. Section 235.7(a) Prohibition on
small issuer exemption in EFTA Section statute regarding transaction processing. Network Exclusivity
920(a)(6) from the interchange First, the Board must prescribe
transaction fee standards is given effect regulations prohibiting an issuer or EFTA Section 920(b)(1)(A) directs the
by the networks. In particular, these payment card network from restricting Board to prescribe rules prohibiting an
commenters were concerned that absent the number of payment card networks issuer or a payment card network from
an express requirement on networks to on which an electronic debit transaction directly, or indirectly through any agent,
adopt higher tiers of interchange fees for may be processed to fewer than two processor, or licensed member of a
exempt issuers, such issuers would unaffiliated networks (network payment card network, restricting the
experience a significant reduction in exclusivity restrictions).157 Second, the number of payment card networks on
interchange fee revenue, Board must prescribe regulations that which an electronic debit transaction
notwithstanding the exemption. prohibit an issuer or payment card may be processed to fewer than two
The Board notes that Section 920(a) network from directly or indirectly unaffiliated payment card networks.
imposes restrictions on the interchange inhibiting any person that accepts debit Section 235.7(a) implements the new
fees that issuers may charge or receive cards for payment from directing the requirement and prohibits an issuer or
and requires the Board to set standards routing of an electronic debit payment card network from restricting
regarding those fees—it does not confer transaction through any network that the number of payment card networks
authority on the Board to regulate the may process that transaction (merchant on which an electronic debit transaction
activities of networks (other than routing restrictions).158 Section 235.7 159 The Board may, however, increase from $10
regarding the use of network fees to the minimum value amount that a merchant may
compensate issuers or to circumvent the 157 See EFTA Section 920(b)(1)(A). set for credit card acceptance. EFTA Section
interchange fee standards) or to require 158 See EFTA Section 920(b)(1)(B). 920(b)(3)(B).
may be processed to fewer than two issuers may agree to shift some or all of generally may benefit to the degree that
unaffiliated networks, regardless of the their debit card transaction volume to a routing choice for merchants results in
method of authentication. network in exchange for higher lower debit interchange fees with
Currently, issuers, or in some cases, incentive payments (such as volume- savings that are passed on to consumers
networks, control the merchant routing based payments or marketing support) in the form of lower prices for goods
of electronic debit transactions. For or volume-based discounts on network and services.
example, for PIN debit transactions, fees charged to the issuer.
current network rules typically allow 1. Proposed Rule
From the merchant perspective, the
issuers to specify routing priorities availability of multiple card networks In the proposed rule, the Board
among the networks enabled on their for processing debit card transactions requested comment on two alternative
cards.160 These issuer-determined and the elimination of routing approaches for implementing the
routing priorities require a transaction restrictions are attractive because they restrictions on debit card network
to be performed using an issuer’s give merchants the flexibility to route exclusivity. The first alternative
preferred network, even if a merchant transactions over the network that will (Alternative A) would require a debit
may prefer to perform the transaction result in the lowest cost to the card to have at least two unaffiliated
over a lower-cost network that is merchant, such as through the network payment card networks available for
available for the transaction. Moreover, with the lowest interchange fee. This processing an electronic debit
issuers can influence routing by limiting flexibility may promote direct price transaction. Under this alternative, an
the networks enabled on their cards. For competition for merchants among the issuer could comply by, for example,
example, certain issuers have agreed to debit card networks that are enabled on having one payment card network
make a payment card network, or group the debit card. Accordingly, restrictions available for signature debit transactions
of affiliated networks, the exclusive on this choice, such as network and a second, unaffiliated payment card
network(s) associated with the issuer’s exclusivity arrangements, limit network available for PIN debit
debit cards in exchange for certain merchants’ ability to route transactions transactions. The second alternative
benefits.161 In particular, some issuers over lower-cost networks and may (Alternative B) would require a debit
have agreed to restrict their cards’ reduce network price competition. card to have at least two unaffiliated
signature debit functionality to a single From the cardholder perspective, payment card networks available for
signature debit network and their PIN however, requiring that merchants have processing an electronic debit
debit functionality to the PIN debit the ability to choose among multiple transaction for each method of
network that is affiliated with the payment card networks enabled on authentication available to the
signature debit network. Finally, at least debit cards—particularly multiple cardholder. For example, a debit card
one commenter raised concerns that signature debit networks—could have that can be used for both signature and
certain signature debit network rules adverse effects. In particular, such a PIN debit transactions would be
could be interpreted to prohibit issuers requirement could limit the required to offer at least two unaffiliated
of debit cards carrying the signature cardholder’s ability to obtain certain signature debit payment card networks
network brand from enabling other card benefits. For example, a cardholder and at least two unaffiliated PIN debit
signature debit networks or certain may receive zero liability protection or payment card networks. The second
competing PIN debit networks on the enhanced chargeback rights only if a alternative recognized in part that PIN
same card. Issuers and merchants, transaction is processed over a specific debit is not currently available for a
however, have different incentives card network. Similarly, insurance significant number of merchants, either
regarding the routing of transactions, as benefits for certain types of transactions because they do not accept PIN debit or
described below. or purchases or the ability to receive because PIN debit is not generally
Issuers may have a number of reasons text alerts regarding possible fraudulent feasible in some retail environments,
to prefer that a particular payment card activity may be tied to the use of a such as for Internet transactions, or
network carry their transactions. First, specific network.162 Requiring multiple transactions such as hotel stays and car
to the extent that interchange fees vary unaffiliated payment card networks, rentals, where the final amount of the
across networks, issuers would typically coupled with a merchant’s ability to transaction cannot be determined at the
prefer the network with the highest time a transaction is authorized.
route electronic debit transactions over
interchange fee, all else equal. Second, In the comments received, support for
any of those networks, could reduce the
in recent years, payment card networks the two alternative approaches was
ability of a cardholder to control the
have increasingly offered issuers other divided primarily along issuer and
network over which a transaction would
financial incentives in exchange for merchant perspectives, with issuers
be routed. Consequently, such a
directing a substantial portion of their strongly in support of Alternative A and
requirement could reduce the likelihood
debit card transaction volume to their merchants strongly in support of
that the cardholder would be able to
respective networks. For example, some Alternative B. Payment card networks
obtain benefits that are specific to a
also favored Alternative A, while the
particular card network. Moreover, it
160 In other cases, a PIN debit network itself may
one consumer group commenting on the
require, by rule or contract, that PIN debit may be challenging for issuers or
issue favored Alternative B.
transactions be routed over that network when networks to market a benefit to
multiple PIN networks are available. These issuer- cardholders if the issuer has to inform 2. Comments Received
or network-directed priority rules are generally
unnecessary for signature debit networks as there is cardholders that they will receive Issuers and networks stated that
typically only a single payment card network certain benefits only if a merchant Alternative A as proposed fully satisfies
available per card for processing a signature debit chooses to route their transaction over the text and intent of the network
transaction. that particular network. On the other
161 Some issuers also negotiate or enroll in exclusivity restrictions in EFTA Section
‘‘exclusivity arrangements’’ with payment card
hand, cardholders and consumers 920(b)(1)(A). Issuers and networks
networks for other business purposes. For example, further asserted that the approach taken
an issuer may want to limit its participation to one 162 These benefits are often provided for
network (or two affiliated networks) to reduce the transactions routed over signature debit networks;
in proposed Alternative B is
membership and compliance costs associated with they are less commonly available for PIN debit unsupported by the statute, which does
connecting to multiple networks. transactions. not distinguish between transactions by
the method of cardholder Finally, many issuers stated their predicted that new PIN debit networks
authentication. Issuers and networks belief that Alternative B is more likely would enter the market if Alternative B
also noted that Alternative A would be to cause consumer confusion and were adopted. Merchant commenters
far less disruptive to the payment potentially frustrate consumer choice to thus rejected issuer assertions regarding
system because many institutions are the extent that certain cardholder the operational burden associated with
already in compliance with Alternative benefits, such as zero liability, enhanced Alternative B, arguing that existing
A and support multiple unaffiliated PIN chargeback rights, rewards, or infrastructure already in place to
networks. insurance, are tied to the use of a support multiple PIN networks could be
By contrast, issuers and networks particular network. In their view, leveraged to also support multiple
expressed significant concern about the Alternative B, with the potential of signature debit networks.
operational cost and burden of requiring four networks on a debit card,
3. Section 235.7(a)(1)—General Rule
implementing Alternative B, which in would make it less likely that a
their view is not currently feasible cardholder would receive those benefits The final rule adopts Alternative A (at
because it would require enabling if a merchant opted to route a least two unaffiliated payment card
multiple signature networks on a card. transaction over a different network. networks) with respect to the network
In particular, issuers, networks, and Merchants strongly urged the Board to exclusivity provisions. The Board
card processors noted several changes adopt Alternative B to require debit believes that Alternative A is most
that would be required in order to cards to carry at least two unaffiliated consistent with EFTA Section
implement Alternative B. Among these networks for each method of 920(b)(1)(A), which provides that an
changes, these commenters stated that authentication in order to create issuer and payment card network do not
merchants, acquirers, issuer processors, network competition for every violate the prohibition against network
transaction. Merchants argued that exclusivity arrangements as long as the
and issuers would have to replace
Alternative B would give them the number of payment card networks on
routing logic to ensure that
ability to discipline the level of network which an electronic debit transaction
authorization, settlement, dispute
processing fees by routing transactions may be processed is not limited to fewer
processing, and fraud reporting records
to the lowest cost network. A consumer than two unaffiliated payment card
for electronic debit transactions are
group commenter agreed that networks. The plain language of the
routed to the network selected by the
Alternative B was more likely to lead to statute does not require that there be
merchant, instead of basing the logic on
greater competition between networks two unaffiliated payment card networks
the first digit of the account number or
through lower transaction fees and available to the merchant for each
card BIN. These commenters also
better services, which would in turn method of authentication. In other
suggested that point-of-sale terminals words, the statute does not expressly
benefit consumers through lower prices
would have to be re-programmed or require issuers to offer multiple
for goods and services.
replaced to ensure that transactions can unaffiliated signature and multiple
Merchant commenters described a
be routed to the appropriate network. number of situations in which unaffiliated PIN debit card network
Issuers also cited the expense of Alternative B would provide merchants choices on each card.
negotiating contracts with and with greater routing choice. These The Board has also considered the
participating in additional networks, commenters observed that certain retail compliance burden presented by the
including the costs of complying with environments, such as Internet two alternative approaches and the
multiple network rules, in order to transactions, cannot readily accept PIN benefits to consumers of each approach.
comply with Alternative B, a burden debit under current technology. These The Board understands that many
that could be particularly onerous for commenters further argued that, in other issuers, particularly small issuers, are
smaller issuers. Moreover, several cases, certain types of debit cards may already in compliance with Alternative
issuers contended that under the not be suited for PIN debit, such as A, as they may already have multiple
proposed interchange fee standards, health care cards that require unaffiliated PIN networks enabled on
they would be unable to recover the full specialized transaction qualification or their debit cards, or a signature network
costs of their current programs, much substantiation systems that currently and an unaffiliated PIN network. Thus,
less the additional costs required to operate only on signature debit Alternative A would minimize the
comply with Alternative B. networks. In each of these compliance burden on institutions,
Issuers and networks also expressed circumstances, a merchant would not particularly small issuers that might
concern that Alternative B would have any routing options under otherwise be adversely affected by a
discourage investment and innovation Alternative A. Merchants also noted that requirement to have multiple networks
in new authentication technologies. For under Alternative A, even where both for each method of debit card
example, these commenters argued that signature and PIN debit are available, a authentication. Alternative A would
networks and issuers may have less merchant’s routing choice would be also present less logistical burden on the
incentive to develop and deploy new limited to a single network once the payment system overall as it would
methods of authentication if they are consumer has selected his or her require little if any re-programming of
required to share that technology with authentication method. Merchants thus routing logic by issuers, networks,
other parties to ensure that the new asserted that Alternative B was most issuer processors, and acquirers.
authentication method could be used on consistent with statutory purpose From the consumer perspective, as
multiple unaffiliated networks. because it would not limit merchant noted above, requiring multiple
Several issuers asserted that in many payment card networks could limit the
routing choice either by the way a

cases where PIN debit is unavailable, it transaction is authorized or by the type cardholder’s ability to obtain card
is due to a merchant’s choice not to offer of transaction. benefits that are tied to a particular
PIN debit. These issuers also cited the Finally, merchant commenters network, such as zero liability
development of alternative technologies believed that Alternative B was more protection or the ability to receive text
that could facilitate the use of PIN debit likely to foster new entrants offering alerts regarding possible fraud.
in additional retail environments, signature debit to increase market Moreover, explaining the circumstances
including Internet transactions. competition. These commenters also under which a cardholder may receive
those benefits could be challenging for biometrics or other technologies may, in enabled on a debit card by adding a
issuers, regardless of the alternative the future, be more effective in reducing payment card network that is not
approach taken in the final rule. The fraud. An issuer, however, may be accepted on a nationwide basis. Thus,
Board believes that Alternative A would unable to implement these new methods for example, an issuer could not comply
result in less consumer confusion than of card authentication if the rule with the network exclusivity provision
might otherwise result under requires that such transactions be by having a second unaffiliated payment
Alternative B. capable of being processed on multiple card network that is accepted in only a
The Board acknowledges that unaffiliated networks offering the new limited geographic region of the
Alternative A provides merchants fewer authentication method. country. The proposal further provided,
routing options with respect to certain Thus, for the foregoing reasons, the however, that an issuer could comply
electronic debit transactions compared final rule provides that the network with proposed § 235.7(a)(1) if, for
to Alternative B. Nonetheless, under exclusivity provision in § 235.7(a)(1) is example, the debit card operates on one
Alternative A, merchants that currently satisfied as long as an electronic debit national network and multiple
accept PIN debit would have routing transaction may be processed on at least geographically limited networks that are
choice with respect to PIN debit two unaffiliated payment card networks. unaffiliated with the first network and
transactions in many cases where an Comment 7(a)–1 clarifies that that, taken together, provide nationwide
issuer chooses to participate in multiple § 235.7(a)(1) does not require an issuer coverage. The Board also requested
PIN debit networks. Moreover, the to have multiple, unaffiliated networks comment on the impact of the proposed
Board notes that EFTA Section available for each method of cardholder approach on the viability of regional
920(b)(1)(A) prohibits an ‘‘issuer or authentication. Under the final rule, it payment card networks and on small
payment card network’’ from restricting would be sufficient, for example, for an issuers that are more likely to use
the number of payment card networks issuer to issue a debit card that operates regional networks for their debit cards.
on which an electronic debit transaction on one signature-based card network Several issuers objected to the
may be processed. To the extent a and on one PIN-based card network, as proposed condition that a payment card
merchant has chosen not to accept PIN long as the two card networks are not network operate on a nationwide basis,
debit, the merchant, and not the issuer affiliated. Alternatively, an issuer could asserting that the rule should permit
or the payment card network, has issue a debit card that operates on two issuers broad discretion to select
restricted the available choices for or more unaffiliated signature-based unaffiliated networks that serve their
routing an electronic debit transaction card networks, but is not enabled for market areas and cardholder needs, and
under Alternative A. Similarly, where a PIN debit transactions, or that operates that a network with coast-to-coast
consumer selects signature or PIN debit on two or more unaffiliated PIN-based coverage may not be appropriate for all
as the method of payment, the card networks, but is not enabled for issuers. Issuers and a few networks
consumer, and not the issuer or the signature debit transactions. expressed concern that smaller regional
payment card network, has restricted networks would be affected adversely if
4. Section 235.7(a)(2)–(3) Permitted And
the available routing choices. the nationwide coverage requirement
The Board further understands that Prohibited Arrangements
were adopted, because the requirement
there exist emerging PIN debit products Proposed § 235.7(a)(2) described three would reduce competition between
and technologies that would allow PIN circumstances in which an issuer or large and small networks. A few issuers
debit to be used in additional retail payment card network would not satisfy commented that small issuers that
environments where PIN debit is not the general requirement to have at least currently use regional networks would
generally offered, such as for online two unaffiliated payment networks on incur additional costs to add nationwide
purchases. Some billers and at least one which an electronic debit transaction PIN networks under the proposed rule,
online merchant accept transactions that may be processed, regardless of which but would receive little benefit as most
are routed over PIN debit networks, of the alternatives is adopted. The of their card transactions currently take
without requiring the cardholder to proposed provision generally described place within their network’s geographic
provide his or her PIN.163 The Board circumstances in which a payment card coverage area. Moreover, commenters
anticipates that the elimination of network that is added to a debit card argued that requiring nationwide
network and issuer-based routing would not satisfy the network coverage would effectively prevent the
restrictions may further promote exclusivity provisions in § 235.7(a)(1) establishment of new networks, which
innovation to facilitate the use of PIN due to geographic or merchant coverage historically have started in small
debit in additional retail environments. restrictions. See proposed geographic markets.
See discussion in relation to § 235.7(b). §§ 235.7(a)(2)(i) and (ii). The proposal Issuers and networks suggested a
Finally, the Board is persuaded that also prohibited, as an impermissible number of alternative approaches to the
Alternative B and its requirement to exclusivity arrangement, contractual proposed rule, including providing that
enable multiple unaffiliated payment restrictions or limitations set by a a network must have general acceptance
card networks on a debit card for each payment card network on an issuer’s availability within the cardholder’s area
method of card authentication could ability to contract with another payment of residence; allowing a network to be
potentially limit the development and card network. See proposed added as long as is it accepted at the
introduction of new authentication § 235.7(a)(2)(iii). nation’s largest retailers; and providing
methods. Although PIN and signature The final rule generally adopts the that a regional network must establish
are the primary methods of debit card proposed provisions with modifications network connectivity or reciprocal
and adjustments in response to
transaction authentication today, new arrangements with other networks that

authentication measures involving comments. Section 235.7(a)(3) of the would allow a card to have nationwide
final rule describes prohibited coverage by routing transactions to the
163 A large online merchant is currently exclusivity arrangements by networks. regional network via a gateway
processing some online customer payments as PIN- Proposed § 235.7(a)(2)(i) provided that arrangement. A few issuers and one
less debit transactions. See http://
www.amazon.com/gp/help/customer/display.html/
an issuer would not satisfy the regional network suggested a coverage
ref=hp_518224_pinless?ie=UTF8&nodeId= requirement to have at least two test under which a certain percentage of
518224&#pinless unaffiliated payment card networks a debit card’s transactions must take
place within a network’s geographic taken steps reasonably designed to transactions would default to a larger
coverage area. enable the network to be able to process payment card network on the card. The
Merchants generally argued that a the electronic debit transactions that the Board agrees that such arrangements
network with limited geographic network reasonably expects will be would not meet the intent to provide
acceptance would not comply with the routed to it, based on projected merchants with routing choice in those
statute because there would be portions transaction volume. A smaller network cases where a network does not take
of the United States where merchants could be used to help satisfy an issuer’s steps reasonably designed to enable the
would not have a viable second debit requirement to enable two unaffiliated network to meet reasonably foreseeable
network option. Merchants further networks if the network was willing to demand for processing transactions
argued that an issuer could add other expand its coverage in response to given the number of cards enabled for
regional networks such that the increased merchant demand for access processing over the network and the
networks would collectively provide to its network, and the smaller network general usage patterns of the
merchants the ability to route an meets the other requirements of cardholders. The new prohibition is not
electronic debit transaction over at least § 235.7(a) for a permitted arrangement. intended, however, to address the rare
two unaffiliated payment card networks If, however, the network’s policy or circumstances where a network may be
throughout most of the country. In that practice was to limit such expansion, it off-line for technical reasons and an
regard, merchants disagreed that the would not qualify as one of the two electronic debit transaction is processed
proposed rule would reduce the unaffiliated networks. See comment on a different payment card network on
viability of regional networks, 7(a)–2.i. a stand-by basis or where volume is
contending that such networks would Proposed § 235.7(a)(2)(ii) provided unexpected. See comment 7(a)–2.iii.
likely gain volume if they are enabled that adding an unaffiliated payment Proposed § 235.7(a)(2)(iii) prohibited
on additional debit cards to comply card network that is accepted only at a a payment card network from restricting
with the rule. small number of merchant locations or or otherwise limiting an issuer’s ability
The final rule in § 235.7(a)(2) for limited merchant types would not to contract with any other payment card
describes the necessary conditions to comply with the requirement to have at network that may process an electronic
satisfy the requirement to have at least least two unaffiliated payment card debit transaction involving the issuer’s
two unaffiliated payment card networks networks on a debit card. For example, debit cards. Proposed comment 7(a)–5
available for processing an electronic an issuer could not solely add, as an provided examples of prohibited
debit transaction under § 235.7(a)(1).164 unaffiliated payment card network, a restrictions on an issuer’s ability to
As in the proposal, under the final rule, network that is accepted only at a contract with other payment card
an issuer may satisfy the network limited category of merchants (for networks, including network rules or
exclusivity provisions of § 235.7(a)(1) if example, at a particular supermarket guidelines that limited the number or
an electronic debit transaction may be chain or at merchants located in a location of network brands, marks, or
processed on at least two unaffiliated particular shopping mall). See proposed logos that may appear on a debit card.
payment card networks that operate comment 7(a)–4.ii. See proposed comment 7(a)–5.ii. The
throughout the United States. Debit Merchant comments supported the prohibition on payment card network
cards that operate on at least two proposed prohibition on limited restrictions on an issuer’s ability to
nationwide payment card networks merchant coverage networks. Issuers contract with other networks is adopted
would most effectively provide and networks did not object to proposed with certain revisions for clarity and is
merchants routing choice regardless of § 235.7(a)(2)(ii). The final rule adopts a redesignated as § 235.7(a)(3)(i). See also
where a cardholder uses the card. prohibition on networks that are limited comment 7(a)–3.
The Board does not believe, however, to particular merchants or merchant Depository institutions trade
that a payment card network operating types as part of the necessary conditions associations commented that the
on a nationwide basis should be the sole set out in § 235.7(a)(2) and expands the proposed network contracting
means by which an issuer could satisfy prohibition to include networks that are prohibition was overbroad and
the network exclusivity provisions. An limited to particular transaction types. impermissibly prohibited all
overly restrictive nationwide coverage Proposed comment 7(a)–4.ii is also arrangements between networks and
requirement may reduce network choice adopted, and is redesignated as issuers that in any way restrict the
for issuers, with little benefit to comment 7(a)–2.ii in the final rule. networks made available on a debit card
merchants, particularly where the vast Section 235.7(a)(2) of the final rule for processing a transaction. In their
majority of debit card transactions by an also provides that a payment card view, the provision as proposed would
issuer’s cardholders may take place network that has not taken steps prohibit an issuer from agreeing to limit
within the network’s geographic reasonably designed to enable the the number of networks enabled on its
coverage area. Accordingly, the final network to process the electronic debit debit cards to no more than two
rule provides additional flexibility for transactions that the network reasonably networks per method of authentication
issuers by permitting an issuer to expects will be routed to it would not even if such restriction would not
comply with the network exclusivity count towards the issuer’s requirement violate either Alternative A or B. One
provisions by enabling on its debit cards to have at least two unaffiliated issuer urged the Board to clarify that the
a network that does not, by rule or payment card networks on which an proposed provision is directed at rules-
policy, restrict the operation of the electronic debit transaction may be based, blanket prohibitions against an
network to a limited geographic area, processed. The new prohibition issuer enabling a competing network.
responds to merchant comments that The examples in proposed comment
specific merchant, or particular type of

merchant or transaction, and that has expressed concern that issuers may 7(a)–5 elicited several comments from
respond to the network exclusivity two payment card networks expressing
164 For clarity, the final rule describes the provisions by adding small, capacity- concern that the proposed examples
geographic coverage and other requirements for constrained networks with the conflicted with established principles in
payment card networks that would satisfy the
network exclusivity provisions through positive
expectation that such networks would trademark law. In particular, these
requirements, instead of describing payment card not have the capacity to handle their commenters argued that the example of
networks that would not satisfy the rule. additional volume such that network rules limiting the number or
location of network brands, marks, or brands, marks, or logos of other network’s ability to require an issuer to
logos in comment 7(a)–5.ii would payment card networks to appear on the commit a certain volume, percentage
impermissibly restrict their ability to debit card. Without this prohibition, share, or dollar amount of transactions
protect their investment in their marks network rules could inhibit an issuer’s over the network given that volume,
or brands and their ability to limit ability to add other payment card percentage share, or dollar amount
consumer confusion. These networks networks to a debit card, particularly if commitments generally could only be
also urged the Board to clarify that the the other networks also require that given effect through issuer or payment
proposed prohibition is not intended to their brand, mark, or logo appear on a card network priorities that direct how
change the card design and related debit card in order for a card to be a particular debit card transaction
security requirements that networks offered on that network. Comment 7(a)– should be routed by a merchant. The
may apply to their payment card 3.ii is revised from the proposed Board noted in the proposal, however,
products, such as size and location comment, which would have listed, as that such issuer or payment card
requirements for the network logo, card an example of a prohibited network network routing priorities could be
account number, and expiration date, as restriction on an issuer’s ability to prohibited by the proposed limitations
well as the location of the magnetic contract with other networks, any limits on merchant routing restrictions.
stripe and card verification number. on the number or location of network Issuers and one card processor agreed
One processor affiliated with a payment brands, marks, or logos that may appear that the merchant routing provisions in
card network urged the Board to include on the card. In the final rule, only proposed § 235.7(b) would make
safe harbor language in the final rule to contract provisions limiting the ability explicit rules relating to volume,
ensure that a payment card network of one or more network brands, marks, percentage share, or dollar amount
could not assert a trademark or logos to appear on the debit card are commitments unnecessary given that
infringement or other claim against an expressly prohibited, as such merchants would be able to choose the
acquirer or network for routing restrictions could prevent a consumer payment card network for processing a
transactions on that network’s branded from knowing the networks that are transaction. Merchants, however,
card through competing networks enabled on a debit card. Thus, the rule believed that if the Board were to adopt
enabled on the card in order to prevent is not intended to restrict networks from Alternative A with respect to the
merchants from exercising routing imposing branding, card-design, or network exclusivity provisions, it
choice as intended under EFTA Section security requirements on their cards to should prohibit a network’s ability to
920(b)(1)(B). promote brand recognition and impose volume, percentage share, or
The final rule adopts the prohibition consistency across payment card types dollar amount commitments
on payment card network restrictions or or to limit consumer confusion as long notwithstanding the routing provisions
limitations on an issuer’s ability to as such requirements do not effectively in § 235.7(b). According to these
contract with other payment card limit the ability of other payment card merchant commenters, if routing
networks that may process an electronic networks to appear on the debit card, options were reduced to a single
debit transaction generally as proposed such as when multiple signature signature debit and a single PIN debit
with certain revisions in § 235.7(a)(3). networks require their logo to appear in option, networks and issuers would
Specifically, § 235.7(a)(3) provides that, the same location on the card. The final
continue to be able to reasonably predict
for purposes of the network exclusivity rule does not, however, otherwise
and influence signature debit volumes.
provisions in § 235.7(a)(1), a payment address other trademark-related issues
card network may not restrict or raised by commenters as such issues are Under the final rule, the issuer’s
otherwise limit an issuer’s ability to outside the scope of the rule. ability to influence volume, percentage
contract with any other payment card Notwithstanding the examples in share, or dollar amount of transactions
network that may process an electronic comment 7(a)–3, comment 7(a)–4 in the that are processed through any
debit transaction involving the issuer’s final rule clarifies that nothing in the particular network will be significantly
debit cards. Thus, for example, the rule rule requires that a debit card display reduced, given that merchant routing
prohibits a network from limiting or the brand, mark, or logo of each preferences will take priority over issuer
otherwise restricting, by rule, contract, payment card network over which an and network routing preferences (see
or otherwise, the other payment card electronic debit transaction may be discussion of § 235.7(b) below). In
networks that may be enabled on a processed. For example, the rule does addition, as discussed above, any
particular debit card. See comment 7(a)– not require a debit card that operates on network that issuers add to debit cards
3.i. The rule would also prohibit a two or more different unaffiliated to fulfill the requirement for two
network from specifying the other payment card networks to bear the unaffiliated networks in § 235.7(a)(1)
payment card networks that may be brand, mark, or logo for each card must meet the requirements of
enabled on a particular debit card in network. The Board believes that this § 235.7(a)(2). The Board recognizes that
order to comply with § 235.7(a)(1). flexibility is necessary to facilitate an issuers may be able to use incentives to
Comment 7(a)–3.i includes as an issuer’s ability to add (or remove) influence cardholders to use a particular
example of a prohibited rule or contract payment card networks to a debit card authentication method (signature or
any express prohibition on an issuer’s without being required to incur the PIN) at the point of sale. At the same
ability to offer certain specified payment additional costs associated with the time, however, merchants may also steer
card networks on the debit card or any reissuance of debit cards as networks consumers toward a particular
requirement that only certain specified are added (or removed). The Board authentication method through, for
example, default settings on transaction
networks may be offered on the card. received one comment supporting

Comment 7(a)–3.ii clarifies that comment 7(a)–6 as proposed and it is terminals or discounts for choosing
§ 235.7(a)(3) would also prohibit adopted without substantive change, certain payment methods. Given the
network rules or guidelines that allow redesignated as comment 7(a)–4 in the issuer’s limited ability to control
only that network’s (or its affiliated final rule. volume, percentage share, or dollar
network’s) brand, mark, or logo to be In its proposal, the Board requested amount of transactions over a particular
displayed on a particular debit card, or comment as to whether it was necessary network, the Board has determined not
that otherwise limit the ability of to address in the rule a payment card to address this issue in the final rule.
A few issuers and two payment card rule of, or contract, arrangement or other the Board understands that adding an
networks opposed the prefatory agreement with, a payment card additional PIN network to a debit card
language in proposed § 235.7(a)(2) network requiring that all or a specified can be accomplished in a relatively
interpreting EFTA Section 920(b)(1)(A)’s minimum percentage of electronic debit short period of time, particularly in
prohibition on network exclusivity transactions be processed on the circumstances in which an issuer uses
arrangements as requiring a debit card network or its affiliated networks. a processor that is already connected to
‘‘to have at least two unaffiliated Comment 7(a)–6 (designated 7(a)–8 in several PIN debit networks. The
payment card networks on which an the proposal) clarifies that the network additional period of time in the final
electronic debit transaction may be exclusivity rule does not prevent an rule provides issuers more time if
processed.’’ These commenters argued issuer from including an affiliated necessary to negotiate new agreements
that EFTA Section 920(b)(1)(A) should payment card network among the and establish connectivity with the new
only be read as a prohibition on networks that may process an electronic network.
‘‘restricting’’ the number of payment debit transaction for a particular debit
card, as long as at least two of the 6. Applicability to All Form Factors
card networks on which an electronic
debit transaction may be processed to networks that accept the card are New comment 7(a)–7 addresses the
fewer than two unaffiliated payment unaffiliated. The Board proposed two applicability of the network exclusivity
card networks. In their view, the statute different versions of comment 7(a)–6 provisions with respect to cards, codes,
does not mandate a minimum number based on the appropriate network or devices that may be issued in a form
of payment card networks to be enabled exclusivity alternative. No comments factor other than a card. The Board
on a debit card as long as an issuer or were received under either version and requested comment on how to apply the
a payment card network does not the final rule adopts the Alternative A network exclusivity provisions to such
affirmatively create any impediments to version of the comment as proposed. cards, codes, or devices given that they
the addition of unaffiliated payment The final comment 7(a)–6 clarifies that may be capable of being processed using
card networks on a debit card. Thus, an issuer is permitted to offer debit only a single authentication method. For
these commenters argued that the cards that operate on both a signature example, a transaction using a mobile
statute does not prohibit voluntary debit network as well as an affiliated phone embedded with a contactless
arrangements by an issuer to limit the PIN debit network, as long as at least chip may be able to be processed only
number of payment card networks on a one other payment card network that is as a signature debit transaction or only
unaffiliated with either the signature or on certain networks. The Board noted
card.
PIN debit networks also accepts the that under the proposed rule (under
EFTA Section 920(b)(1)(A) states that card. either alternative), the issuer would be
‘‘an issuer or payment card network required to add at least a second
shall not directly or through any agent, 5. Section 235.7(a)(4) Subsequent unaffiliated signature debit network to
processor, or licensed member of a Affiliation the device to comply with the
payment card network, by contract, Proposed § 235.7(a)(3) addressed requirements of § 235.7(a). The Board
requirement, condition, penalty, or circumstances where previously thus requested comment on the effect of
otherwise, restrict the number of unaffiliated payment card networks the network exclusivity provisions in
payment card networks on which an subsequently become affiliated as a § 235.7(a) on the development of these
electronic debit transaction may be result of a merger or acquisition. Under devices in the future.
processed’’ to fewer than two these circumstances, an issuer that Some issuers, processors, and
unaffiliated payment card networks. issues cards with only the two networks commented that requiring new
Thus, by its terms, the statute’s previously unaffiliated networks payment devices or methods to be
prohibition on exclusivity arrangements enabled would no longer comply with processed by multiple networks would
is not limited to those that are mandated § 235.7(a)(1) until the issuer is able to inhibit the development of these
or otherwise required by a payment card add an additional unaffiliated payment innovations. They further asserted that
network. In the Board’s view, individual card network to the debit card. The it was unnecessary for the Board’s rule
issuer decisions to limit the number of Board requested comment regarding to cover new form factors given that
payment card networks enabled on a whether 90 days after the date on which merchant adoption and acceptance of
debit card to a single network or the prior unaffiliated payment card these innovations is voluntary. One
affiliated networks are also prohibited networks become affiliated provides payment card network argued that a
as a ‘‘direct’’ restriction on the number sufficient time for issuers to add a new consumer’s decision to use an
of such networks in violation of the unaffiliated network in order to comply alternative form factor in a transaction
statute. The Board believes that to with the rule. was analogous to a cardholder’s election
conclude otherwise would enable an Several issuers and one processor to initiate an electronic debit transaction
issuer to eliminate merchant routing stated that the proposed 90-day window by signature or PIN debit at the point of
choice for electronic debit transactions for adding a new network in the event sale. As an alternative approach, one
with respect to its cards, contrary to the of a payment network merger was too processor urged the Board to clarify that
overall purpose of EFTA Section 920(b). short. Some issuers suggested a alternative form factors would be
Accordingly, the final rule adopts the transition period of at least one year, compliant if they are associated with a
substance of proposed comment 7(a)–7 while one large issuer suggested 24 ‘‘companion card’’ that is compliant,
and prohibits voluntary exclusivity months from the date the merger closes. even if the alternative form factor itself
arrangements with respect to debit cards The final rule (§ 235.7(a)(4)) requires
may only be used to initiate transactions

(now designated as comment 7(a)–5). issuers to add an additional unaffiliated over a single network.
The final comment 7(a)–5 provides that payment card network to a debit card Merchants and one payment card
the network exclusivity provision in within six months after the date of a network, by contrast, urged the Board to
§ 235.7(a) requires that debit cards must merger or acquisition that causes the require the addition of a second
be enabled on at least two unaffiliated previously unaffiliated payment card unaffiliated network for any payment
payment card networks in all cases, networks enabled on a debit card to code or device, including cards with
even if the issuer is not subject to any become affiliated. Based on its outreach, contactless features. In their view,
current limitations restricting the use of means that merchants, not issuers or electronic debit transaction may be
contactless devices on a network have networks, will be able to direct the processed with respect to a particular
been attributable to a desire to limit routing of transactions. debit card.
competition from PIN networks rather Proposed § 235.7(b) prohibited both Issuers and networks agreed with the
than technological issues presented by issuers and payment card networks from proposed comment providing that a
the PIN networks. inhibiting, directly, or through any merchant’s routing choices should
The Board believes the statute is clear agent, processor, or licensed member of apply only with respect to the networks
that the network exclusivity provisions the network, by contract, requirement, that the issuer has enabled to process
apply to electronic debit transactions condition, penalty, or otherwise, a transactions for the card. By contrast,
involving any device that meets the merchant’s ability to route electronic comments of some merchants and a
definition of ‘‘debit card’’ under EFTA debit transactions over any payment payments processor stated that the plain
Section 920(c)(2). Accordingly, card network that may process such language of the statute indicated that
comment 7(a)–7 of the final rule transactions. Issuers commented Congress intended merchants to be able
provides that the network exclusivity generally that the routing provision to process electronic debit transactions
provisions in § 235.7(a) apply to all would likely frustrate consumer choice over any payment card network that
‘‘debit cards,’’ as that term is defined in and their ability to receive cardholder may process such transactions. In these
EFTA Section 920(c)(2), regardless of benefits, such as zero liability and commenters’ view, had Congress
whether the debit card is issued in card enhanced chargeback rights, which are intended to limit the routing choice
form or in the form of another ‘‘payment unique to a particular network. Issuers mandate to the payment card networks
code or device.’’ The final comment also expressed concern that the routing enabled by the issuer on a particular
thus clarifies that all debit cards must be provisions would make it difficult for debit card, it could have done so by
accepted on at least two unaffiliated them to explain to their customers the statute.
payment card networks on which an circumstances under which they would The Board continues to believe that
electronic debit transaction may be or would not receive such issuer- the appropriate reading of the routing
processed. Moreover, this is the case specific benefits. Issuers and one provisions in EFTA Section 920(b)(1)(B)
even if a supplemental debit card is payment card network urged the Board limits merchant routing choice to the
issued in connection with a card, code, to require merchants to continue to card networks that an issuer has chosen
or other device that fully complies with honor consumer choice for routing of to enable on a cardholder’s card. In
the rule. the electronic debit transaction or, at a particular, the Board notes that allowing
minimum, to require merchants to merchants to route transactions over any
B. Section 235.7(b) Prohibition on network, regardless of the networks
inform cardholders of the network that
Merchant Routing Restrictions enabled on the debit card, would render
will carry the transaction before the
EFTA Section 920(b)(1)(B) requires transaction is consummated to superfluous the requirement in EFTA
the Board to prescribe rules prohibiting minimize consumer confusion regarding Section 920(b)(1)(A) that electronic
an issuer or payment card network from the network that will process the debit transactions have the ability to be
directly or indirectly ‘‘inhibit[ing] the transaction. By contrast, merchants processed over at least two unaffiliated
ability of any person who accepts debit strongly supported the proposed networks. Also, the issuer (or its
cards for payments to direct the routing provision. processor) must be connected to a
of electronic debit transactions for Section 235.7(b), which tracks the network for that network to be able to
processing over any payment card language of the EFTA Section route the transaction information and
network that may process such 920(b)(1)(B), is adopted as proposed. data, and the issuer must have an
transactions.’’ The Board is The final rule does not include any agreement with the network to settle
implementing this restriction in requirement on merchants to disclose transactions cleared over that network.
§ 235.7(b). the network selected to process a Accordingly, comment 7(b)–1 is
As noted above, the rules of certain particular electronic debit transaction as adopted as proposed with some
PIN debit payment card networks some commenters suggested. EFTA revisions to clarify that the rule does not
currently require PIN debit transactions Section 920(b) does not impose such a permit a merchant to route the
to be routed based on the card issuer’s requirement, and the Board believes that transaction over a network that the
designated preferences when multiple issues regarding merchant card issuer did not enable to process
PIN debit networks are available to acceptance practices are best left to the transactions using that debit card.
process a particular debit card individual network-merchant Proposed comment 7(b)–2 provided
transaction. In other cases, the PIN debit relationship. examples of issuer or payment card
network itself may require, by rule or In the proposal, the Board did not network practices that would inhibit a
contract, that the particular PIN debit interpret EFTA Section 920(b)(1)(B) to merchant’s ability to direct the routing
transaction be routed over that network grant a person that accepts debit cards of an electronic debit transaction in
when multiple PIN networks are the ability to process an electronic debit violation of § 235.7(b). The proposed
available.165 Such rules or requirements transaction over any payment card comment addressed both practices
prevent merchants from applying their network of the person’s choosing. relating to the sending of transaction
own preferences with respect to routing Rather, the Board interpreted the phrase information to the issuer and certain
the particular debit card transaction to ‘‘any payment card network that may practices that may affect the network
the PIN debit network that will result in process such transactions’’ to mean that choices available to the merchant at the
the lowest cost to the merchant. EFTA a merchant’s choice is limited to the
time the transaction is processed. The

Section 920(b)(1)(B) prohibits these payment card networks that have been final commentary adopts the examples
practices. As a result, in practice, this enabled on a particular debit card. in 7(b)–2 generally as proposed with
Accordingly, the Board proposed certain adjustments for clarity.
165 These issuer- or network-directed priority
comment 7(b)–1 to clarify that the The first example of an impermissible
rules are generally unnecessary for signature debit
networks as there is only a single payment card
prohibition on merchant routing restriction on a merchant under
network available for processing a signature debit restrictions applies solely to the proposed comment 7(b)–2 addressed
transaction. payment card networks on which an issuer or card network rules or
requirements that prohibit a merchant in the event a merchant or its acquirer routing decisions on a transaction-by-
from ‘‘steering,’’ or encouraging or or processor does not indicate a routing transaction basis. As stated in the
discouraging, a cardholder’s use of a preference. In addition, comment 7(b)– supplementary information in the
particular method of debit card 2.ii does not prohibit an issuer or proposal, such a requirement may
authentication. See proposed comment payment card network from directing necessitate systematic programming
7(b)–2.i. For example, merchants may that an electronic debit transaction be changes and equipment upgrades, may
want to encourage cardholders to processed over a particular network if be operationally infeasible and cost-
authorize a debit card transaction by required to do so by state law.166 prohibitive in the near term, and is not
entering their PIN, rather than by Although one commenter urged the needed to carry out the purpose of these
providing a signature, because PIN debit Board to preempt state laws that provisions.167 Instead, under comment
carries a lower risk of fraud than mandate the routing of electronic debit 7(b)–3 as proposed, it is sufficient to
signature debit. Merchants supported transactions to prevent networks or allow a merchant to designate network
the proposed example in comment 7(b)– other parties from securing favorable routing decisions in a routing table in
2.i, stating that any rules that prohibit state laws requiring routing to a advance for its transactions, similar to
steering or that could inhibit merchants’ particular network, the final rule does the way that issuer-directed priorities
ability to steer—including anti- not adopt the recommendation because are established today. Alternatively, a
discrimination or no-surcharge rules— state laws do not constitute issuer or merchant could delegate to its acquirer
should be invalidated by § 235.7(b). network restrictions on merchant or processor the decision of how to
A payment card network and a few routing that are prohibited by the route transactions.
issuers opposed the Board’s statement statute. Proposed comment 7(b)–2.ii is One processor supported the
in the supplementary information that, adopted as proposed, with the proposed comment and urged the Board
under the proposed example, merchants clarification that issuer and network to further clarify that allowing more
would be permitted to block a practices that direct the processing of a complex routing logic beyond network
consumer’s choice of signature debit. transaction away from a specified choice, such as basing a routing
These commenters expressed concern network or its affiliates is prohibited. decision on the transaction amount,
that if merchants were permitted to Under the third example, a payment would be discretionary. Merchants did
block the use of signature debit, card network could not require a not oppose the proposed comment, but
consumers could be misled about which specific payment card network based on urged the Board to mandate that
payment networks’ cards the merchant the type of access device provided by merchants be given additional
accepted. In addition, issuer and the cardholder. See comment 7(b)–2.iii. information, including access to the BIN
payment card network commenters For example, a payment card network tables and the effective weighted
stated that allowing merchants to block would be prohibited from requiring that average interchange rates that are
signature debit would take away an electronic debit transaction that is applicable to each merchant, at no cost,
consumers’ ability to limit exposure of initiated using ‘‘contactless’’ or radio to facilitate merchants’ ability to
their PIN if they wanted to use their frequency identification device (RFID) determine which networks are lower
debit card. technology be processed over only a cost for purposes of directing routing.
This example is adopted as proposed. signature debit network. The Board Proposed comment 7(b)–3 is adopted
As discussed above under § 235.7(a), an received one comment from a processor with minor wording changes and
issuer may comply with the network that supported the example. The Board redesignated as comment 7(b)–4 to the
exclusivity provisions by enabling a is adopting the example with a revision final rule. The comment clarifies that
debit card with a single signature debit to clarify that the example applies to § 235.7(b) does not require that the
network and a single unaffiliated PIN payment card networks rather than merchant have the ability to select the
debit network. For such cards, a authentication methods. payment card network over which to
merchant can influence routing choice New comment 7(b)–3 clarifies that the route or direct a particular electronic
by, for example, determining whether a prohibition on merchant routing debit transaction at the time of the
debit card is PIN-enabled and, if it is, restrictions does not prohibit a payment transaction. Thus, under the comment
prompting the cardholder to input his or card network from offering payments or to the final rule, it would be sufficient
her PIN, rather than asking the incentives to merchants to encourage for a merchant and its acquirer or
consumer whether the transaction is the merchant to route electronic debit processor to agree to a pre-determined
‘‘debit’’ or ‘‘credit.’’ card transactions to that network for set of routing choices that apply to all
The second example of a prohibited processing. The Board believes that a electronic debit transactions that are
routing restriction is network rules or payment card network does not processed by the acquirer or processor
issuer-designated priorities that direct impermissibly ‘‘inhibit’’ the merchant’s on behalf of the merchant, or for the
the processing of an electronic debit ability to route transactions over any merchant to delegate the routing
transaction over a specified payment available networks within the scope of decisions to its acquirer or processor.
card network or its affiliated networks. the prohibition in EFTA Section The final rule does not specify criteria
See comment 7(b)–2.ii.) Thus, for 920(b)(1)(B) by offering such incentives regarding the routing choices that must
example, if multiple networks were because it is the merchant itself that has be provided to a merchant by its
available to process a particular debit voluntarily chosen to direct electronic acquirer or processor because the Board
transaction, neither the issuer nor the debit transactions over a particular believes such determinations are best
networks could specify the network network in exchange for consideration left to the individual merchant’s
over which a merchant would be
from the network. arrangement with its acquirer or

required to route the transaction (or be Although proposed § 235.7(b) processor. The final rule also does not
required to avoid in routing the provides merchants control over how an require networks to make BIN tables or
transaction). Nothing in comment 7(b)– electronic debit transaction is routed to merchant-specific effective average
2.ii, however, is intended to prevent an the issuer, the proposed rule did not interchange rates available to merchants
issuer or payment card network from require that a merchant make network as such a requirement is outside the
designating a default network for
routing an electronic debit transaction 166 See, e.g., Iowa Code § 527.5. 167 See 75 FR 81752 (Dec. 28, 2010).
scope of the statute. Nonetheless, the the different proposed alternatives commented that the proposed time
Board notes that, pursuant to EFTA under § 235.7(a). Specifically, the Board periods for the alternatives were
Section 920(a)(3)(B), the Board intends requested comment on a potential appropriate.
to periodically publish the average effective date of October 1, 2011, for the As discussed above, the final rule
interchange fee, by network, received by provisions under § 235.7 if the Board adopts Alternative A with respect to the
issuers, which may provide merchants were to adopt Alternative A under the network exclusivity provisions in
information regarding relative network exclusivity provisions. § 235.7(a). Thus, an issuer generally
interchange rates across networks. Recognizing that Alternative B would could comply with the rule by enabling
One issuer commented that the Board require significantly more time to a signature debit network and an
should clarify that the payment card comply with the rule, the Board unaffiliated PIN debit network on its
network that a merchant uses to process requested comment on an effective date debit cards for processing an electronic
the initial purchase transaction for of January 1, 2013, if Alternative B were debit transaction. Based on comments
goods or services must also be used by adopted in the final rule. received and the Board’s own outreach
the merchant for processing subsequent Several issuers stated that the and analysis, the final rule in
transactions related to the original proposed effective dates did not allow § 235.7(c)(1) states that, except as
purchase transaction. The Board has sufficient time for compliance under otherwise provided, the network
added new comment 7(b)–5 to clarify either proposed alternative. With exclusivity provisions in § 235.7(a) are
that the rule does not supersede any respect to Alternative A, issuers and effective for issuers on April 1, 2012.
network rule that requires the charge- some payment card networks requested Many issuers are already in
back or return of a transaction to be longer lead times, generally until 2012 compliance with the network
processed over the same network as the or 2013. Many such commenters exclusivity provisions in § 235.7(a)
original transaction. observed that a significant number of because they have multiple unaffiliated
issuers will be trying to add unaffiliated PIN networks enabled on their debit
C. Section 235.7(c) Effective Date cards. Based on the Board’s outreach,
payment card networks at the same time
The network exclusivity rules in to comply with the network exclusivity the Board understands that adding an
§ 235.7(a) are generally effective and provisions in § 235.7(a). Consequently, additional PIN network can generally be
compliance is mandatory on April 1, these commenters were concerned that accomplished in a matter of months
2012, with respect to issuers. With simultaneous efforts by numerous where an issuer connects to a network
respect to payment card networks, issuers will create a bottleneck at each through an issuer processor that has
however, the compliance date for the network with respect to negotiating new already established connectivity with
provisions in §§ 235.7(a)(1) and (a)(3) is membership agreements with the other PIN networks. Thus, the Board
October 1, 2011. In addition, as respective networks. These commenters believes that, in most cases, issuers
described below, the compliance date is urged the Board to provide additional would be able to comply with
delayed until April 1, 2013 for certain time for compliance to allow for an Alternative A by the October 1, 2011,
cards that use transaction qualification orderly transition. Issuer commenters date originally proposed. Nonetheless,
or substantiation systems. Non- also noted that time would be needed to relieve the burden on issuers that
reloadable general-use prepaid cards for establishing connectivity with new may need more time to negotiate new
sold on or after April 1, 2013, must payment card networks and for agreements with networks, establish
comply with the rule. Non-reloadable upgrading internal processing systems connectivity, and revise their internal
general-use prepaid cards sold prior to to support those networks. Some processing systems to support the new
April 1, 2013, are not subject to the rule. issuers, networks, and processors noted networks, the final rule provides an
Reloadable general-use prepaid cards that the proposed time periods were additional six months to April 1, 2012,
sold on or after April 1, 2013, must also unrealistic from acquirers’ for compliance with the network
comply with the rule. With respect to perspective as they must implement the exclusivity provisions in § 235.7(a).
reloadable general-use prepaid cards ability for individual merchants to The Board believes that issuers
sold and reloaded prior to April 1, 2013, designate customized transaction should have the opportunity to begin to
the compliance date is May 1, 2013. routing rules. Finally, networks and comply with § 235.7(a) in advance of the
With respect to reloadable general-use processors urged the Board to time any effective date, irrespective of any
prepaid cards sold prior to April 1, effective dates to coincide with existing network rules that would
2013, and reloaded after April 1, 2013, regularly scheduled industry-wide prohibit them from adding an additional
the compliance date is 30 days after the changes. network to their debit cards. Therefore,
date of reloading. By contrast, merchants, although in new § 235.7(c)(2), the Board is
The merchant routing provisions of recommending the adoption of making the provisions of § 235.7(a) that
§ 235.7(b) are effective on October 1, Alternative B, urged the Board, if it are applicable to payment card networks
2011. However, issuers and payment adopted Alternative A, to make it effective on October 1, 2011.
card networks may voluntarily comply effective promptly in order to void Accordingly, as of that date, a network
with these rules prior to these dates. ‘‘exclusivity’’ deals currently in place. may not enforce a rule that restricts the
Merchants also expressed the view that ability of an issuer to add a network to
1. Section 235.7(c)(1) and (c)(2)— there was little reason issuers could not comply with § 235.7(a).
General Rule and Effective Date for comply with Alternative A for all debit The final rule maintains the October
Payment Card Networks cards by October 1, 2011, given that 70 1, 2011, effective date for the merchant
The statute does not specify an routing provisions in § 235.7(b). The
percent of debit cards already have dual

effective date for the EFTA Section functionality. Merchants also stated that earlier effective date is intended to
920(b) provisions on network Alternative A would not require issuers allow merchants and acquirers to
exclusivity and merchant routing to reissue cards to meet the proposed implement and exercise the new routing
restrictions. The Board requested timeframe, and that issuers could easily authority as soon as issuers make
comment on the appropriate establish the necessary connectivity additional networks available on their
implementation time for the network through their processors during that debit cards. Thus, for transactions made
exclusivity and routing provisions given time. A member of Congress also using cards of issuers that comply with
the network exclusivity provisions in Information Approval System (IIAS) the point of sale, even if IRS rules do
§ 235.7(a) prior to April 1, 2012, required by the IRS for auto- not require the use of such systems in
merchants will be able to take advantage substantiating medical expenses for connection with verifying the eligibility
of the new routing flexibility, assuming eligibility is not currently supported by of expenses purchased with such cards.
their acquirers update the BIN tables to the PIN networks. Thus, commenters Although not specifically required by
reflect the new routing priorities expressed concern that the significant IRS rules, the Board understands that in
preferred by the merchants. costs associated with either adding a virtually all cases health savings
second signature network or developing account cards use the same IIAS
2. Sections 235.7(c)(3) and (c)(4)
PIN network support for the IIAS could systems as do health flexible spending
Delayed Compliance Date for Certain
limit the viability of such card programs accounts and health reimbursement
Debit Cards
and cause employers and plan account cards to reduce the
The final rule also establishes a administrators to return to the administrative burden for cardholders
delayed compliance date for the inefficient system of using paper associated with sending in paper
network exclusivity provisions in receipts to verify the eligibility of receipts for substantiating health-related
§ 235.7(a) in limited circumstances for transactions. Commenters thus urged expenses.
certain types of debit cards that present the Board to exempt cards linked to Several issuers and card program
technological or other operational such health spending accounts from the managers urged the Board to exempt
impediments to an issuer’s ability to network exclusivity and routing non-reloadable gift cards from the
comply with the rule. Although EFTA provisions. network exclusivity provisions. These
Section 920(b) does not provide the Similar requests for exemption were commenters noted that single-load
Board authority to exempt such debit made by commenters with respect to prepaid cards typically run only on the
cards from the network exclusivity other employee benefit cards, such as signature debit networks, and that such
provisions, the Board believes it is cards used to provide transit benefits, products would be adversely affected by
appropriate to establish a delayed which also require the use of a requirement to enable or support PIN
compliance date of April 1, 2013, to specialized transaction qualification debit transactions. In particular, these
allow issuers additional time to develop systems for verifying the eligibility of commenters stated that the addition of
technological solutions to enable tax-exempt expenses. For transit cards a PIN debit network could require the
compliance with the rule. The effective in particular, commenters also stated consumer to call a service center to
date for the merchant routing provisions that the time required to enter a PIN ran activate the card and obtain the PIN. By
in § 235.7(b) would not be delayed for counter to the processing-speed contrast, signature-only prepaid cards
these cards to allow merchants to objective of the transit authorities. can be activated at the point of sale, and
exercise routing choice once alternative Although EFTA Section 920 does not used immediately thereafter by the
networks are made available. grant the Board authority to exempt consumer. Commenters also stated that
In the proposal, the Board noted that cards linked to health spending PIN access was unnecessary for single
certain debit cards issued in connection accounts or other types of debit cards load cards that typically are depleted
with health flexible spending accounts from the network exclusivity and over a short period of time, and often
and health reimbursement accounts are routing provisions, the Board has after a single use.
required by Internal Revenue Service determined there is good cause to delay Other issuer commenters urged the
(IRS) rules to use certain technologies at the effective date of the network Board to exempt more broadly prepaid
the point of sale to ensure that the exclusivity provisions in § 235.7(a) to cards that are designed to only support
eligibility of a medical expense claim April 1, 2013 for debit cards that use a single method of authentication by a
can be substantiated at the time of the point-of-sale transaction qualification or cardholder, whether such cards were
transaction. The Board further stated its substantiation systems, such as the IIAS, reloadable or not. These commenters
understanding, however, that PIN debit to verify the eligibility of purchased stated that many prepaid card programs
networks may not currently offer the goods or services in connection with do not have PIN capability in order to
functionality or capability to support health care and employee benefit limit cash access by cardholders due to
the required technology. The Board accounts in accordance with IRS rules. potential money laundering and other
recognized therefore that applying the See § 235.7(c)(3). The Board believes it regulatory concerns. One depository
network exclusivity prohibition to these is necessary to provide a longer institution trade association stated that
health benefit cards in particular could compliance period for these cards to for reloadable prepaid cards, the
require an issuer or plan administrator give PIN networks time to develop the network exclusivity provisions should
to add a second signature debit network capability to handle transactions using only apply to cards sold after October 1,
to comply with IRS regulations if PIN these cards or to give industry 2013, to allow issuers to manage down
networks were unable to add the participants time to modify the manner their existing card inventories.
necessary functionality to comply with in which signature debit routing is The Board believes it is appropriate to
those regulations. The Board requested determined, so that these cards can be establish various delayed compliance
comment on the appropriate treatment enabled on multiple signature debit dates for general-use prepaid cards to
of these products with respect to the networks. allow issuers time to develop the ability
network exclusivity provisions in Comment 7(c)–1 provides examples of to enable cardholders to use PIN debit
§ 235.7(a). debit cards that may qualify for the networks for prepaid card transactions
Issuers and program administrators of delayed effective date in connection or to give industry participants time to
health spending cards generally asserted with certain health care or employee modify the manner in which signature
that Congress did not intend to cover benefit accounts. The comment clarifies debit transaction routing is determined,
healthcare and employee benefit cards that the delayed effective date for so that these cards can be enabled on
under any of the provisions in EFTA certain health care or employee benefit multiple signature debit networks.
Section 920, even though the statute did cards also applies to debit cards linked Accordingly, the effective date for non-
not include a specific statutory to health savings accounts that use reloadable general-use prepaid cards is
exemption for such products. These transaction substantiation or April 1, 2013. Non-reloadable general-
commenters noted that the Inventory qualification authorization systems at use prepaid cards sold prior to the
effective date are not subject to the identification information to contact the describes itself as a non-traditional or
requirements of § 235.7(a). The cardholder. Accordingly, reloadable emerging network.
additional time is intended to allow general-use prepaid cards sold prior to The purpose of the network
issuers to draw down existing card April 1, 2013, are not subject to exclusivity and routing provisions in
inventories, as well as to modify § 235.7(a) unless and until they are EFTA Section 920(b) is to provide
systems or develop solutions in order to reloaded. With respect to reloadable merchants with enhanced routing
comply with § 235.7(a). As noted above, general-use prepaid cards that are sold choice with respect to the networks
single-load cards typically are depleted and reloaded prior to April 1, 2013, the available for processing an electronic
over a short period of time, and often effective date is May 1, 2013. With debit transaction. In this regard, more,
after a single use. Instituting a PIN respect to reloadable general-use not fewer, networks would be desirable.
program for such cards in the short term prepaid cards sold prior to April 1, As new technologies are being
would not seem to be beneficial as the 2013, and reloaded after April 1, 2013, developed, the developers should take
cardholder would be unlikely to use the the effective date is 30 days after the into consideration the provisions of
PIN option. Issuers of non-reloadable date of reloading. The 30-day period is EFTA Section 920(b). The Board
general-use prepaid cards commonly intended to ensure that issuers have believes that emerging payments
may not have the customer sufficient time to provide card holders technologies that meet the definition of
identification information that would be with information on the additional ‘‘debit card’’ in the statute should not be
necessary to mail or otherwise provide network, such as a PIN, after obtaining subject to delayed effective dates for the
the cardholder with PIN information. the necessary information to contact the network exclusivity and routing
An alternate solution for non-reloadable card holder. provisions.
cards is to add a second signature The final rule does not delay the VII. Section 235.8 Reporting
network, similar to prepaid cards with effective date for the network Requirements and Record Retention
substantiation requirements. The exclusivity provisions for debit cards
delayed effective date provides issuers that are approved or issued for use on A. Summary of Proposal and Comments
and payment card networks additional alternative or emerging payment card The Board proposed to require issuers
lead time before all prepaid cards must networks that do not require a that are subject to §§ 235.3 and 235.4
be capable of supporting more than one cardholder’s use of a signature or entry and payment card networks to submit
network for processing electronic debit of a PIN to authenticate an electronic reports every two years, or more
transactions. Moreover, many of these debit transaction. Issuers were divided frequently as required, to the Board.
cards already have been sold to regarding whether the network Under the proposal, each entity required
customers and may be active through exclusivity and routing provisions to submit a report must do so in a form
that date, and the issuer likely does not should be applied to emerging payment prescribed by the Board and must
have the customer identification systems. Payment card networks provide information regarding costs
information necessary to provide the commenting on the issue were similarly incurred with respect to electronic debit
cardholder with a PIN. Application of divided on the issue. transactions, interchange transaction
these provisions to cards that have Those commenters requesting fees, network fees, fraud-prevention
already been sold to customers who may exemptions from the network costs, fraud losses, and any other
not be known to the issuers may create exclusivity and routing provisions information requested by the Board. The
difficulties for the issuers, as well as expressed concern that the application Board proposed that it would publish,
potential difficulties for the cardholders. of the rule would stifle innovation and in its discretion, summary or aggregate
With respect to reloadable general-use reduce competition in the payments information from these reports. The
prepaid cards, the effective date is April market. For example, commenters Board proposed that each entity
1, 2013 (or later, in some requesting an exemption for cards used required to submit the report to the
circumstances), and all reloadable on emerging payment systems stated Board by March 31 of the year the entity
general-use prepaid cards sold on or that competing networks could refuse to is required to report. Finally, the Board
after April 1, 2013, must be in add the emerging network’s debit cards requested comment on a requirement
compliance. Reloadable general-use to limit competition. These commenters that each entity required to report retain
prepaid cards share many of the suggested that an exemption for records of reports submitted to the
problems as non-reloadable cards. emerging payment systems would Board for five years. Such entities also
However, PIN technology appears more encourage investment in innovation and would be required to make each report
prevalent with reloadable prepaid cards provide sufficient time for the nascent available upon request to the Board or
than with non-reloadable cards. The systems to conduct pilots and achieve the entity’s primary supervisors.
Board, therefore, anticipates that issuers scale. Merchants commenting on the The Board received a few comments
of reloadable general-use prepaid cards issue agreed that it would be reasonable on the proposed reporting requirements.
are more likely to add an unaffiliated to permit new systems to undertake Some issuers commented that requiring
PIN network than another signature pilot programs until such time as they issuers to report interchange fee revenue
network to fulfill their obligations under achieve critical mass. was duplicative, and therefore
§ 235.7(a). Although cardholders of By contrast, commenters that unnecessary, because networks already
reloadable prepaid cards may be supported applying the network maintain records of each issuer’s
provided a PIN at activation, commonly exclusivity and routing provisions to interchange fee revenue. A few
the issuer does not obtain customer emerging payment systems stated that commenters suggested the Board survey
identification information until the card the rule should be equally applied to all all interested stakeholders, including
is reloaded. Thus, for cards sold before networks to prevent an unlevel playing small issuers, merchants of all sizes, and
April 1, 2013, an issuer may not have field. One such commenter stated that consumers to determine the impact of
the ability to provide the cardholder the Board’s rule should apply based on the restrictions on them. One
with a PIN (if a PIN network is enabled) whether an emerging payment system commenter suggested the Board
until the card is reloaded and the issuer qualifies as a debit card or payment card establish a process for affected entities
obtains the necessary customer network, regardless of whether it to inform the Board of significant
changes to previously reported 920(a)(3) authorizes the Board to require regulation is important to ensure that
processing costs and other information. only issuers and payment card networks supervisory agencies have the
The Board received one comment (and only as necessary to carry out the information required to enforce the rule
regarding the frequency of reporting in provisions of EFTA Section 920(a)) to and to determine whether the entity has
proposed § 235.8(c). One merchant provide information; this authority does circumvented or evaded the interchange
commenter asserted that the word ‘‘bi- not extend to merchants, cardholders, or fee standard. However, specifying the
annual’’ in EFTA section 920(a)(3)(B) others. Moreover, the Board is mindful precise form in which such evidence
mandated reporting twice a year, of the large reporting burden that could must be maintained is unnecessary. The
whereas the Board proposed to require be imposed on exempt entities through issuer and its primary supervisor can
reporting biennially, or every two years. a request that those entities isolate and determine in what form records must be
This commenter supported the more track various debit card costs. The retained to demonstrate compliance, so
frequent, twice-a-year reporting in order Board will continue to consider what, if long as the information is retrievable
to provide interested parties more any, additional information could be and useable by the agencies.
visibility into the costs and fees useful in assessing the effects of its final To minimize the burden on issuers to
received by issuer. rule and how such information could be retain information after the issuer’s
obtained with minimal burden on the supervisor has examined the issuer for
B. Analysis and Final Rule compliance, the Board is adopting
relevant parties.
EFTA Section 920(a)(3)(B) authorizes § 235.8(c) to require issuers to retain
the Board to collect from issuers and 2. Section 235.8(b) Report records that demonstrate compliance
payment card networks information that Proposed § 235.8(b) set forth a non- with the requirements of part 235 for
is necessary to carry out the provisions exhaustive list of the information the not less than five years after the end of
of Section 920(a). In addition, Section Board may require entities to report, but the calendar year in which the
920(a)(3)(B) requires the Board, in did not specify which entities would be electronic debit transaction occurred.
issuing rules on interchange fee required to report which types of For example, for an electronic debit
standards and on at least a ‘‘bi-annual’’ information. As stated in the proposal, transaction that occurred on March 1,
basis thereafter, to publish summary or the Board anticipates using forms 2012, an issuer must maintain records
aggregate information about costs and derived from the Interchange demonstrating compliance with the
interchange transaction fees as the Transaction Fee Surveys (FR 3062; OMB requirements of this part through
Board considers appropriate and in the No. 7100).169 At this time, the Board is December 31, 2017. The issuer’s
public interest. As summarized above in not specifying the information that primary regulator, however, may
the debit card industry overview section issuers and networks will be required to determine that a longer record retention
of this notice, the Board has collected submit. Section 235.8(b)’s list of period is warranted. See § 235.9. Section
information from issuers and networks, possible information required to be 235.8(c)(2) sets forth an exception to the
as well as acquirers, and is publishing reported is intended to illustrate the general rule—if an issuer receives actual
summary information about debit card kind of information the Board will notice that it is subject to an
transactions, processing costs, require. The Board is making revisions investigation by an enforcement agency,
interchange fees, network fees, fraud- to proposed § 235.8(b) to include the issuer shall retain the records until
prevention costs, and fraud losses in information about transaction value, final disposition of the matter unless an
connection with this final rule. More volume, and type, in part because the earlier time is allowed by court or
detailed summary information is Board plans to request information from agency order.
available on the Board’s Web site.168 networks to monitor the extent to which 4. Submission Timeframe and
1. Section 235.8(a) Entities Required To they have adopted a two-tier Frequency
Report interchange fee structure.170 The Board The Board proposed to require issuers
intends to request comment on the that are subject to §§ 235.3 and 235.4
The Board has considered the reporting forms prior to the first report.
comments regarding the entities from and payment card networks to submit
At that time, the Board will consider reports to the Board every two years.
which the Board should collect whether collecting interchange fee
information and has determined to The Board requested comment, under
revenue from both issuers and networks proposed § 235.8(c), on reserving
adopt § 235.8(a) as proposed—limiting is necessary. Except for the revisions
those entities required to report to discretion to require more frequent
discussed in this paragraph, the Board reporting. The Board proposed that
issuers that are not otherwise exempt is adopting § 235.8(b) as proposed.
under § 235.5(a) and payment card entities required to report submit the
networks, consistent with EFTA Section 3. Section 235.8(c) Record Retention report to the Board by March 31 of the
920(a)(3). There are several other year they are required to report in order
The Board requested comment on a
interested types of parties to debit card to provide a reasonable time to compile
requirement that each entity required to
transactions, including, but not limited the data necessary to complete the
report must retain records of reports
to, exempt issuers, acquirers, merchants, report.
submitted to the Board for five years. The Board did not receive comments
and cardholders. These other interested Such entities also would be required to
parties may or may not be able to explicitly regarding the submission
make each report available upon request timeframe of required reporting, but did
provide information regarding costs, to the Board or the entity’s primary
fees, fraud losses, volumes, and values receive a few comments on a similar
supervisors. The Board did not receive provision—issuer submission of cost
associated with debit card transactions. comments on this provision. Including

However, EFTA Section 920 does not information to networks under proposed
a requirement that an issuer retain Alternative 1. In relation to that
confer authority on the Board to compel records to evidence compliance with the
all of these parties to provide provision, commenters, although not
information to the Board. EFTA Section 169 Copies of the survey forms are available on the
necessarily supporting Board-required
Board’s Web site at http://www.federalreserve.gov/ certification, supported a March 31
168 http://www.federalreserve.gov/ newsevents/reform_meetings.htm. deadline for submission if adopted by
paymentsystems/files/debitfees_costs.pdf. 170 See discussion, above, in relation to § 235.5. the Board. The Board, however, has
determined not to mandate a specific comments from some merchants urging Board, in addition to adopting a rule
date in the regulatory text in order to the Board to require ex post verification with a higher safe harbor and/or cap,
retain flexibility to adjust the reporting by supervisors of issuer compliance study the impact of both the interchange
deadline or the reporting period to with the fee standards and to enumerate fee standards and exclusivity and
provide an appropriate period of time penalties for failure to comply.172 Any routing provisions prior to adjusting the
for institutions to respond. Accordingly, penalties for non-compliance are subject safe harbor and/or cap.
the Board is not adopting in its final to the discretion of an issuer’s or a Numerous issuers and networks
rule proposed § 235.8(c). Rather, similar network’s primary supervisor. contended that an issuer-specific
to other reports the Board requires to be Accordingly, the Board has not set forth standard would take longer to
filed, the instructions to the report will penalties for non-compliance with this implement than a cap because networks
indicate when the report is due. part. The Board received no other and issuers would need to time to
The Board also expects initially to comments on proposed § 235.9 and has calculate their allowable costs and
require different reporting frequencies determined to adopt § 235.9 as networks would need time to establish
for issuers and payment card networks. proposed. a process for obtaining this information,
As discussed above in relation to to write and implement new network
IX. Section 235.10 Effective Date rules, and to work with issuers,
§ 235.5, the Board plans to gather
information from networks regarding Except as provided in § 235.7 acquirers, processors, and merchants to
their interchange fee structures on an (discussed above), the provisions of this implement the new interchange fee
annual basis and from covered issuers final rule are effective and compliance structure. A few commenters suggested
regarding their costs every two years. is mandatory beginning October 1, specific compliance dates if the Board
The statute requires the Board to 2011.173 Issuers may voluntarily comply implemented proposed Alternative 2.
disclose aggregate or summary with these provisions prior to that date. The earliest suggested date was April
The Board proposed that the 2012. More commonly, commenters
information concerning costs and fees
interchange fee standards would be suggested an effective date of one year
on at least a biannual basis. ‘‘Biannual’’
effective on July 21, 2011, coinciding from publication, with other
can mean either twice a year or every
with the effective date of EFTA Section commenters suggesting that
two years.171 The Board believes it is
920(a) (set forth in EFTA Section implementation could not be
appropriate to interpret ‘‘biannual’’ as
920(a)(9)). The Board received accomplished until well after July 2013.
meaning every two years in the context
numerous comments regarding the One issuer suggested that July 2013
of the statute’s disclosure provision,
effective date of the interchange fee would permit networks to develop two-
given the substantial reporting burden
standards, many of which urged the tier interchange fee structures.
involved in collecting the issuer cost
Board to delay the rule’s effective date. Irrespective of the actual effective date,
data. More frequent reporting by Several issuers and networks
networks or issuers may be warranted in one commenter suggested a mid-month
expressed concern that the proposed effective date for changes to the
the future, depending on what the data effective date would not allow sufficient
collected and other industry practices interchange fees to align with current
time to make necessary system changes, network processes designed to reduce
reveal. Accordingly, the Board is not under either of the proposed fee
specifying the frequency of required the financial risk of month-end and
standard alternatives. For example, one quarter-end processing.
reporting in the regulatory text in order processor stated that, currently, there is The Dodd-Frank Act does not
to retain flexibility. Similar to other no interchange-fee data field transmitted specifically provide an effective date for
reporting forms, the Board plans to with the transaction data at the time the the Board’s rules implementing EFTA
indicate with publication of the form acquirer or processor makes the routing Section 920(a). The Board is directed to
the frequency with which entities are decision. This commenter contended issue final regulations within nine
required to report. that networks should be responsible for months of the Dodd-Frank Act’s
Additionally, the Board is deleting identifying the specific interchange fee enactment, and EFTA Section 920(a) is
proposed § 235.8(d), which stated that category to ensure merchants have effective one year after enactment,
the Board may, in its discretion, interchange fee information available at indicating that Congress intended at
disclose aggregate or summary the time of the routing decision. Many least a three-month implementation
information reported. This provision of these commenters suggested a period before the interchange fee
was a restatement of the Board’s phased-in approach of the new standards become effective. Moreover,
statutory authority to disclose such standards to mitigate the impact of the the final rule requires significant
information under EFTA Section standards on market participants. A few changes to existing interchange fee
920(a)(3) and is not necessary. issuers and networks suggested that the practices and systems changes by
VIII. Section 235.9 Administrative Board deem current interchange rates to issuers and payment card networks. An
Enforcement comply with the ‘‘reasonable and October 1 effective date also coincides
proportional’’ requirement for some with the normal schedule for many
EFTA Section 920(d) provides that the period of time until the industry can network releases of systems changes.
requirements of EFTA Section 920 may implement new standards (i.e., one to Additionally, the Congressional Review
be enforced by the relevant Federal two years). A few issuers suggested the Act dictates that the Board’s final rule—
administrative agencies in accordance as a major rule—cannot be enforced
with EFTA Section 918. Proposed 172 The Board received one comment suggesting
until the end of a 60-day Congressional
§ 235.9 set forth the agencies that may a mechanism for enforcing compliance with a
proposed network-average interchange fee

review period following transmission of
enforce compliance with part 235. The the final rule to Congress.174 For these
approach. The Board has determined not to adopt
Board received no comments explicitly a network-average approach to the interchange fee reasons, the Board believes that an
on proposed § 235.9, but received standards and, therefore, need not address the October 1, 2011 effective date balances
suggested approach to enforcement.
171 See Merriam-Webster’s Collegiate Dictionary 173 Section 235.4 and accompanying definitions,
Congress’s directions of prompt
(10th edition) defining ‘‘biannual’’ as meaning which are added by the interim final rule published effectiveness and sufficient time for
‘‘twice a year’’ or ‘‘biennial,’’ which in turn is separately in the Federal Register, also are effective
defined as occurring every two years. on October 1, 2011. 174 See 5 U.S.C. 801.
congressional review and for issuers and numerous non-merchant commenters issuers, consumers, payment card
payment networks to bring their systems asserted that merchants that are networks, and the payment system more
and practices into compliance. The unhappy with current interchange fee generally. A few commenters asserted
effective date for the provisions levels could stop accepting debit cards that the Board’s proposed rule would
implementing the routing and as a form of payment or could negotiate negatively impact small merchants as
exclusivity requirements of EFTA with networks and acquirers for lower well. Many of these commenters stated
Section 920(b) are discussed above in interchange fees and merchant that the Board’s proposed rule should
connection with the explanation of the discounts. Some of these commenters have included a competitive-impact
requirements of § 235.7. noted that merchants are able to offer analysis required by EFTA Section
cash discounts in order to encourage 904(a) that was performed in accordance
Effects of the Rule on Various Parties payment by other means. Some with the Board’s competitive-impact
I. Overview of Comments Received merchant commenters, however, stated analysis bulletin.
Comments from issuers, merchants, that offering cash discounts was
II. Effects on Consumers
payment card networks, and consumers impractical.175
Numerous commenters recognized A. Comments Received
addressed the benefits and drawbacks of
that consumers benefit from debit cards. A number of commenters, primarily
the current system, the impact of EFTA
Specifically, these commenters asserted issuers and networks, asserted that
Section 920 and the effect of the Board’s
that debit cards provide consumers with consumers would be harmed by the
proposed rule on various parties and on
a widely accepted payment method, proposed rule, contrary to the statutory
the current system overall, and
increased security (by reducing fraud intent. They predicted that the
alternatives to the proposed rule.
liability and the risk associated with substantial reduction in interchange fee
Numerous commenters (primarily
carrying cash), and increased revenue resulting from the proposed
issuers, networks, and some consumer
convenience (by reducing the need to rule would lead card issuers to raise fees
representatives) stated that the current carry cash). Several of these commenters
interchange fee system has resulted in charged to deposit account customers,
stated that the current interchange fee reduce benefits for users of debit cards
the development of a payment system system benefits consumers through
that provides significant benefits for (e.g., rewards or liability protections),
lower fees for accounts and banking not authorize the use of debit cards for
merchants, consumers, and issuers. services, as well as rewards for debit
Many of these commenters stated that high-risk or high-value transactions, or
card purchases. By contrast, several restrict or eliminate the issuance of
merchants should pay for the benefits merchants stated that consumers pay
they receive from accepting debit cards, debit cards. These commenters argued
higher retail prices as a result of that low income consumers would
which they said included cost savings merchants passing on the cost of
relative to accepting cash, checks, or likely experience the greatest harm, as
interchange fees. they would be unable or unwilling to
credit cards; faster check-out at the Commenters also stated that issuers
point of sale; higher consumer incur the higher costs associated with
receive benefits from debit cards,
spending; guaranteed payment; avoiding maintaining deposit accounts, and may
including interchange fee revenue.
liability for most fraudulent consequently be forced out of the
Several commenters stated that issuers
transactions; faster settlement; secure banking system.
use interchange revenue to cover At the same time, these commenters
online transactions; and less time and operating costs and offset fraud losses.
money spent on collections, billing, and asserted that consumers would not
Other commenters noted additional experience any benefits from lower
other administrative matters. Other benefits that debit cards provide for
commenters stated that the debit card interchange fees because they expect
issuers. For example, these commenters that merchants would not reduce prices
system enables small merchants to asserted that debit cards provide a
compete with larger merchants. charged to consumers, given that there
means for issuers to establish an is no statutory requirement for them to
Merchant commenters, by contrast, account relationship with customers, to
objected to the current interchange fee do so.176 They viewed the reduction in
reduce the need for issuers to hold cash interchange fees as a transfer of revenue
system, noting that although (and to maintain expensive brick-and-
transactions processing costs have fallen from card-issuing banks to merchants,
mortar branches in order to facilitate with no benefit flowing to consumers.
substantially, interchange fees have not. withdrawals), and to experience cost
These commenters also noted that In addition, some commenters argued
savings from processing fewer checks. that the exclusivity and routing
merchants often do not know at the time By contrast, one issuer stated that debit
of purchase the amount of the provisions would adversely affect
card transactions are more expensive to consumers by eliminating the ability of
interchange fee that will be assessed on process than checks due to processing
a transaction. In addition, many cardholders to ensure that a transaction
fees, cost of inquiries and disputes, and was routed over a network that provides
merchants objected to networks setting fraud losses.
interchange fees centrally for all certain benefits to its cardholders. In
Numerous commenters asserted that particular, these commenters noted that
participating issuers, noting that these the Board’s proposed rule would have
centrally determined fees bear no certain cardholder benefits, such as zero
adverse, unintended consequences on liability, enhanced chargeback rights,
relation to the costs of individual
issuers. 175 Several merchant commenters also objected to
rewards, or insurance, are often tied to
Merchant commenters explained that certain other practices, such as processors offering the use of a particular network. In their
high interchange fees force them either low rates for an introductory period only, imposing
hidden fees, and delaying availability of funds by 176 In support of their contentions, these
to accept lower gross margins, raise an extra day if the merchant routes the transaction commenters pointed to the experience of other
prices charged to their customers, or through a PIN-debit network. One merchant countries with regulating interchange fees, most
reduce other costs. These commenters commenter stated that because EFTA Section notably Australia and Canada. Issuers and some
stated that, as a practical matter, they 920(b)(2) does not restrict the ability of a payment consumers asserted that interchange fee regulation
card network to prohibit differential pricing on the in other countries demonstrates that merchants will
cannot discontinue acceptance of debit basis of the network used, networks would not have not pass on savings to consumers at the point of
cards because of their widespread sufficient incentives to reduce fees borne by sale and that issuers will increase per-transaction
adoption by consumers. By contrast, merchants. fees or other account fees.
view, requiring unaffiliated networks on However, if issuers encourage III. Effects on Issuers
a card with merchant control of routing consumers to shift from debit cards to
A. Comments Received
would make it less likely that a credit cards, which are more costly to
cardholder would receive those benefits merchants, overall merchant costs could Numerous commenters discussed the
if a merchant opted to route a rise, despite a reduction in the cost of anticipated effect of the proposed rule
transaction over the merchant’s accepting debit cards, and these higher on covered and exempt issuers; some
preferred network. costs could be passed on to consumers. commenters predicted that any adverse
Other commenters, primarily If merchants continue their current impact would be minimal, whereas
merchants and some consumer groups, practice of not varying their prices with other commenters predicted that the
asserted that consumers would benefit the form of payment, any benefits adverse impact would be far more
from the proposed rule. Several associated with price reductions, or severe. More specifically, merchant
commenters indicated that, currently, costs associated with price increases, commenters believed that reducing
the cost of interchange fees is being would likely accrue to all consumers, interchange fees would not have a
passed on to consumers through higher regardless of whether they use debit significant adverse impact on issuers’
retail prices, and therefore consumers cards. In addition, lower debit card profits (noting that issuers were
would benefit from a reduction in the interchange fees would likely provide profitable before they received
interchange fees. They argued that merchants that currently do not accept interchange revenue); they also
merchants would have no choice but to debit cards with a greater economic questioned claims that issuers would
pass on their cost savings to consumers, incentive to do so, which may benefit reduce debit card issuance, because they
given the competitive environment in consumers by increasing their ability to believe debit cards are a lower-cost
which they operate. They further argued use debit cards. means of access to deposit account
that low income consumers, who are At the same time, covered issuers are funds compared with checks.
likely to implement some changes in Numerous issuer commenters stated
currently less likely to use debit cards,
response to the reduction in interchange that the proposed rule’s substantial
would experience the greatest benefits
fee revenue. They may seek alternative reduction in interchange fee revenue
from lower prices at the point of sale.
sources of revenue, including higher would adversely affect debit card
Some commenters suggested that lower
fees from debit card users or deposit programs. Many of these issuers stated
interchange fees could enable merchants
account customers more generally, or that debit cards have become an
to enhance their operations through, for
may reduce or eliminate debit card essential tool for consumers; therefore,
example, more stores or improved
rewards programs. In addition, card not offering debit cards is not an option.
customer service, which would benefit
issuers may look for opportunities to Issuers were concerned that a
consumers. In addition, they questioned substantial drop in interchange fees
the claim that lower interchange fees reduce operating costs, which could
involve reducing benefits associated would adversely affect their financial
would lead to higher account fees for condition and raise safety and
deposit customers, noting that over the with deposit accounts or debit cards.
Finally, the exclusivity and routing soundness concerns. A few issuers
past decade both interchange fees and noted that the proposed rule’s adverse
provisions of the final rule may limit the
other bank fees have increased sharply. impact would be particularly
ability of cardholders to determine the
B. Analysis network over which a transaction is burdensome in light of the recent
routed and, thus, may limit their ability financial crisis and recent regulatory
The ultimate net effect of the final
to ensure that they receive benefits changes, including the repeal of the
rule on consumers will depend on the
associated with certain networks. prohibition on paying interest on
behavior of various participants in the demand deposits, limitations on
debit card networks. A reduction in Currently, however, consumers are
typically unaware of the network used overdraft fees, and increases in deposit
interchange fees would likely lead to a insurance fund premiums. Specifically,
decrease in merchants’ costs of debit to route PIN debit transactions in
situations where multiple PIN networks these issuers were concerned that they
card acceptance, which could be passed would be unable to earn sufficient
on to consumers in the form of lower are enabled on their cards. Therefore,
the effect on consumers of merchant revenue to attract capital and continue
prices. Merchants operating in highly to invest in fraud prevention,
competitive markets with low margins routing decisions in such situations may
be minimal. Moreover, under the final processing, and other technologies.
are likely to pass the bulk of these Numerous issuers indicated that, if
savings on to consumers, while rule, which does not require multiple
unaffiliated networks for each method the Board adopted its proposal, they
merchants operating in less competitive may impose or raise debit card or other
markets may retain a greater portion of of authentication, consumers may still
be able to influence transaction routing account fees, decrease cardholder
the savings. Thus, other things equal, rewards and other benefits including
the Board expects the rule to result in through their choice of authentication
method. interest, decrease the availability of
some reduction in prices for goods and debit cards and other banking services
services faced by consumers.177 Thus, the effect of the rule on any
individual consumer will depend on a (by, for example, imposing debit card
177 It is not practical, however, to measure the variety of factors, including the transaction size limits), or reduce the
extent to which lower interchange fees translate consumer’s current payment behavior scale of their operations. Some
into lower merchant prices, because of the many (e.g., cash user or debit card user), consumer group commenters argued
other factors that also influence those prices. changes in the consumer’s payment that, because covered issuers would
Australia has the longest experience with simply raise other fees to make up for
government limits on interchange fees. Although behavior, the competitiveness of the

the Reserve Bank of Australia acknowledges the merchants from which the consumer lost interchange revenue, the proposed
difficulties involved in measuring the effect of the makes purchases, changes in merchant rule would have little or no effect on
interchange fee reductions on merchant prices, it payment method acceptance, and covered issuers. Some issuer
has stated that it is confident that savings are passed commenters asserted, however, that
through to consumers, given that in a competitive changes in the behavior of banks.
market, changes in merchants’ costs are generally
they would not be able to recoup all of
reflected in the prices that merchants charge. See review-card-reforms/review-0708-pre-conclusions/ the lost interchange fee revenue through
http://www.rba.gov.au/payments-system/reforms/ index.html. other customer fees, and therefore
would need to scale back their debit interchange fees. In addition, some of allowable for covered issuers. Networks
card programs. One issuer claimed that these commenters expressed concern that collectively process about 80
the combination of higher customer fees that the proposed rule’s requirement for percent of debit card volume have
and reduced program benefits would at least two unaffiliated networks on a indicated that they will establish two
put covered issuers at a competitive card would result in increased costs for separate interchange fee schedules
disadvantage relative to exempt issuers. issuers that are exempt from the when the rule goes into effect. These
Numerous commenters interchange fee standards. Some plans likely reflect the incentives
(predominantly issuers) noted that commenters asserted that the harm to networks have to attract and retain
interchange fee revenue currently is small issuers might be sufficient to small issuers, which the Board estimates
used to offset fraud losses absorbed by cause some of them to fail. Some account for roughly 30 percent of debit
issuers, particularly those related to exempt issuers stated that they did not card transaction volume. Networks will
signature debit transactions. Several of believe they would be able to replace likely review the appropriateness of
these commenters asserted that most of lost revenue as readily as covered their interchange fee structures and
the losses result from action (or lack of issuers because they have less levels over time as the competitive
action) on the merchant side of diversified product lines than covered landscape continues to evolve.
transactions. Merchant commenters, by issuers. To the extent that two-tier pricing is
contrast, believed it was unfair for Merchant commenters argued that adopted by the networks, the Board
merchants to pay for fraud losses that issuers that are exempt from the believes that it is unlikely that
could be avoided through use of PIN interchange fee standards would not be merchants would discriminate against
debit transactions. In addition, harmed by the proposed rule. They exempt issuers’ cards. First, it would
merchants argued that issuer incentives argued that the exemption would be not appear to be in a merchant’s interest
to card holders to choose signature debit effective, noting that several networks to steer customers away from using an
over PIN debit would be diminished if have already indicated their intent to exempt issuer’s debit card, because the
fraud losses were not compensated establish separate interchange fee cardholder will often not have a
through interchange fees. In general, schedules for covered and exempt payment option that is more attractive
however, commenters disagreed on the issuers. They also dismissed the idea to the merchant. Although some
allocation of fraud losses between that merchants might discriminate merchants have been known to steer
merchants/acquirers and issuers.178 against exempt issuers’ cards, arguing customers who present a high-cost
As provided by the statute, issuers that (i) merchants cannot practically credit card to a lower-cost credit card,
with consolidated assets of less than $10 implement such discriminatory they have been able to do so because
billion are exempt from the rule’s practices and have an incentive to avoid consumers often carry multiple credit
interchange fee standards, but not from alienating customers who hold cards cards. That is generally not the case
the network exclusivity and routing issued by exempt issuers, and (ii) with debit cards; consumers typically
provisions. Some commenters, networks have rules requiring a have only one checking account and
primarily issuers and smaller networks, merchant that accepts any of a hence one debit card. Merchants would
argued that issuers that are exempt from network’s debit cards to accept all of have no incentive to steer customers to
the interchange fee standards would be that network’s debit cards, regardless of pay by credit card, because credit card
harmed by the proposed rule because issuer. payments generally involve a higher
either (i) the exemption would not be cost to merchants than do debit card
effective, and exempt issuers would face B. Analysis payments. Moreover, given that fewer
reductions in interchange fees that are It is not clear how covered issuers and fewer consumers carry checks or
similar to those required for covered will respond to the reduction in large amounts of cash, merchants risk
issuers; or (ii) the exemption would be interchange revenue. Experience in losing the sale entirely if they attempt
effective, and merchants would other countries has shown that the to steer customers away from exempt
discriminate against the higher-cost extent of debit card usage is not issuers’ debit cards and towards non-
cards issued by exempt banks. These necessarily related to the level of card methods of payment.
commenters believed that the interchange revenue received by In addition, as noted by some
exemption might not be effective issuers.179 Issuers may need to provide commenters, network rules prohibit
because networks are not required to debit cards on attractive terms in order such discrimination. For example, the
establish separate interchange fee to attract and retain consumer honor-all-cards rules of the networks
schedules for exempt and covered transaction account balances. Covered require a merchant that accepts a
issuers. Furthermore, they asserted that issuers may offset some or all lost network’s debit cards to accept all of
even if networks did establish separate interchange fee revenue through a that network’s debit cards, regardless of
schedules, market forces would put combination of customer fee increases the issuer. Moreover, although EFTA
downward pressure on exempt issuers’ (although competitive forces may limit Section 920(b)(2) provides that a
interchange fees. In part, these their practical ability to do so), payment card network cannot restrict
commenters argued that this downward reductions in debit card rewards merchant discounts across methods of
pressure on interchange fees would programs, and cost reductions. payment, it does not limit a network’s
result from the prohibition on network It is difficult to predict the market ability to prohibit discounts on the basis
exclusivity and routing restrictions, response to the rule, and thus the likely of the issuer.
which would allow merchants to route The network exclusivity and routing
overall effect of the rule on exempt
provisions, however, which by statute
transactions over networks with lower issuers. Both the statute and the final
apply to issuers that are exempt from
rule permit, but do not require,
178 For example, some issuers assert they cannot the interchange fee standards, may lead
networks to establish higher interchange
charge back some fraudulent transactions even to higher costs for some exempt issuers.
when a merchant does not follow network rules. fees for exempt issuers than would be
Moreover, these provisions could put
Other commenters assert that it is difficult for
merchants to prove they followed correct 179 In Canada, for example, debit card usage is some downward pressure on
procedures, and therefore merchants bear much of widespread, despite the absence of an interchange interchange fees overall if merchants are
the loss. fee. able to route transactions over lower-
cost networks. The ultimate effect of any Merchants generally expected the V. Effects on Other Parties
downward pressure on interchange fees proposed rule to result in significant A. Comments Received
due to the network exclusivity and merchant cost savings, which, they
routing provisions depends on the argued, could be the difference between Many issuer and network commenters
industry response once those provisions staying in business and going out of stated that the proposed rule’s reduction
are in effect. Thus, it is possible that, business. Merchant commenters in interchange fee revenue would
even with two-tier interchange fee adversely affect payment card networks,
supported the proposed rule’s cost-
schedules, some issuers that are exempt as well as the payment system more
based interchange fees and indicated
from the interchange fee standard may generally.182 These commenters stated
that the rule would increase that the proposed interchange fee levels
receive less interchange revenue than
competition among payment card would erode the current beneficial
they would have absent the rule. The
networks, improve pricing transparency, characteristics of debit cards and stifle
Board expects, however, that even if
interchange fee revenue received by and increase innovations by merchants. future innovation in the debit card
small issuers declines, it will remain Merchants also noted that cost savings industry (including the introduction of
above the level they would have could translate into increased hiring, alternative payment systems). These
received if they were not exempt from more stores, or other enhancements, commenters also stated that the
the interchange fee standard. such as improved customer service. proposal would lead to fewer payment
As discussed above, the Board is However, one merchant group was options for consumers because issuers
taking several steps to mitigate any concerned that merchants with a high would stop offering debit cards (leading
adverse effect on small issuers. First, it proportion of small-ticket transactions to increased reliance on cash and
will publish lists of institutions that fall may stop accepting debit cards because checks), promote the use of credit cards,
above and below the small issuer the interchange fees for these types of or both. Promoting the use of credit
exemption asset threshold, to assist transactions could increase under the cards, these commenters asserted,
payment card networks in determining proposed rule. would adversely affect consumers
which of the issuers participating in because credit cards do not have the
A few commenters were skeptical that same debt-management characteristics
their networks are subject to the rule’s
competition from the network routing as debit cards. Other commenters
interchange fee standards, and plans to
provisions would place material asserted that increased reliance on cash
update these lists annually. In addition,
the Board plans to survey payment card downward pressure on interchange fees. and checks would result in greater
issuers annually and publish a list of the Some commenters expect issuers to money laundering and tax compliance
average interchange fee that each promote use of credit cards over debit risks. By contrast, several merchants
network provides to its covered issuers cards, which could result in higher costs stated that a reduction in interchange
and to its exempt issuers.180 This list for merchants due to higher credit card fees would benefit the payment system
should enable issuers, including small interchange fees. by increasing merchant acceptance of
issuers, to more readily compare the debit cards (which have beneficial debt
B. Analysis management characteristics).
interchange revenue they would receive
from each network. As noted above, merchants that B. Analysis
IV. Effects on Merchants operate in highly competitive markets The effect of the rule on payment card
with low margins are likely to pass on networks and the payment system more
A. Comments Received most or all of the interchange cost generally will depend on the market
Some commenters, primarily issuers savings to their customers in the form of responses to the rule by the various
and networks, expected that merchants lower prices or improved service; by payment system participants. Based on
would benefit from the rule, as they contrast, merchants that operate in less experiences in other countries that have
would face lower costs associated with competitive markets may retain a greater adopted interchange fee regulations, the
debit card acceptance and would not portion of the interchange fee savings. Board does not expect a significant shift
pass these savings on to consumers. In The merchant-acquiring business, away from debit card payments or any
addition, they argued that the broadly speaking, is competitive; meaningful degradation of the integrity
exclusivity and routing provisions, therefore, the Board believes that of the payment system. The provisions
which give merchants the ability to acquirers would pass on the savings prohibiting network exclusivity and
direct their transactions over the lower- from lower interchange fees to their routing restrictions could spur
cost network, may further benefit merchant customers, regardless of competition among payment card
merchants. However, some of these merchant size. Consequently, the Board networks, which may have an overall
commenters argued that small and does not believe that the rule would positive effect on payment system
medium-sized merchants may be efficiency.
adversely affect small and medium-
harmed, as their acquirers would not
sized merchants.181 Although it is EFTA 904(a) Economic Analysis
necessarily pass on the benefits of lower
possible that merchants with a large I. Statutory Requirement
interchange fees to them, whereas large
merchants, which have more bargaining proportion of small-ticket transactions
may experience an increase in total Section 904(a)(2) of the EFTA requires
power in dealing with their acquirers, the Board to prepare an economic
would benefit from lower interchange interchange fees, the rule does not
fees and would thereby gain a require networks to raise the current
182 Some issuer and network commenters believe
competitive advantage relative to interchange fees for very-small-value that interchange fee restrictions are unfair because
smaller merchants. transactions. financial institutions and networks invested in
building the current network infrastructure. In
contrast, some merchant commenters asserted that
180 Under EFTA Section 920(a)(3)(B), the Board 181 Certain small and medium-sized merchants
issuers and networks have already been more than
may require any issuer or payment card network to that have entered into long-term contracts with compensated for historical investment in the debit
provide the Board with such information as may be independent resellers of payment card services may card system. Another commenter stated that
necessary to carry out the provisions of EFTA experience some delay before realizing lower reduced interchange fee revenues would increase
Section 920(a). transaction costs. the cost of leasing point-of-sale terminals.
analysis of the impact of the regulation A. Additional Paperwork B. Competition in the Provision of
that considers the costs and benefits to Services Among Financial Institutions
financial institutions, consumers, and Under the final rule, issuers that do
not qualify for the small issuer As discussed in ‘‘Effects of the rule on
other users of electronic fund transfers. various parties’’ above, numerous
The analysis must address the extent to exemption would be required to provide
commenters discussed the anticipated
which additional paperwork would be cost data to the Board. Covered issuers
effect of the proposed rule on covered
required, the effect upon competition in would also be required to retain records
and exempt issuers. The Board
the provision of electronic fund transfer that demonstrate compliance with the understands that payment card
services among large and small financial requirements of Regulation II for not networks that together process about 80
institutions, and the availability of such less than five years after the end of the percent of debit card transaction volume
services to different classes of calendar year in which the electronic have indicated their intent to establish
consumers, particularly low income debit transaction occurred. If an issuer two-tier interchange fee structures. To
consumers. receives actual notice that it is subject the extent payment card networks do
II. Cost/Benefit Analysis to an investigation by an enforcement not establish different interchange fee
agency, the issuer must retain the schedules for exempt and covered
The Section-by-Section Analysis
above, as well as the Final Regulatory records until final disposition of the issuers, exempt issuers that participate
Flexibility Analysis and Paperwork matter. in these networks will experience a
Reduction Act analysis below, contain a In addition, under the Interim Final decline in their interchange transaction
more detailed discussion of the costs Rule, published separately in the fees, for transactions routed over these
and benefits of various aspects of the Federal Register, issuers are required to networks, similar in magnitude to that
proposal. This discussion is develop, implement, and update experienced by covered issuers. If
incorporated by reference in this policies and procedures reasonably exempt issuers have higher costs for
section. debit card transactions than do covered
designed to (i) identify and prevent
As required by Section 920 of the issuers, this decline in interchange
fraudulent electronic debit transactions;
EFTA (15 U.S.C. 1693o–2), the final revenue may necessitate a larger
(ii) monitor the incidence of,
rule, which the Board is implementing adjustment of fees or other account
reimbursements received for, and losses terms by exempt issuers than by covered
in Regulation II, establishes standards
incurred from fraudulent electronic issuers. In addition, if exempt issuers
for assessing whether an interchange
debit transactions; (iii) respond typically offer narrower product or
transaction fee received or charged by
an issuer (and charged to the acquirer) appropriately to suspicious electronic service lines than covered issuers, as
is reasonable and proportional to the debit transactions so as to limit the suggested by some issuer commenters,
cost incurred by the issuer with respect fraud losses that may occur and prevent then exempt issuers may adjust fees and
to the transaction. Specifically, the final the occurrence of future fraudulent account terms that are closely tied to
rule provides that an issuer may not electronic debit transactions; and (iv) their debit card operations or deposit
receive or charge an interchange secure debit card and cardholder data. accounts, whereas covered issuers may
transaction fee in excess of the sum of If an issuer meets these standards and also modify fees and terms for other
a 21-cent base component and 5 basis wishes to receive the adjustment, it complementary or substitute products,
points of the transaction’s value (the ad must certify its eligibility to receive the such as credit cards, offered by those
valorem component). fraud-prevention adjustment to the issuers. Under a scenario in which some
Certain issuers and products are payment card networks in which the networks do not establish different
exempt from the interchange fee issuer participates. interchange fee schedules for exempt
restrictions, including small issuers and covered issuers, resulting disparate
For smaller institutions that are not
that, together with their affiliates, have changes in account fees or terms might
less than $10 billion in assets; certain required to submit cost information to
cause a shift of deposit customers from
cards accessing government- the Board under Regulation II, the
exempt to covered issuers.
administered payment programs; and regulation does not impose any To the extent payment card networks
certain reloadable general-use prepaid reporting requirements. However, it is do establish two-tier fee structures,
cards that are not marketed or labeled as possible small issuers may have covered issuers will likely experience a
a gift certificate or gift card. Payment reporting requirements to payment card greater decline in their interchange
card networks may, but are not required networks to certify their exempt status. revenue compared to exempt issuers. In
to, differentiate between interchange As discussed above, for those networks such a situation, covered issuers may
fees received by covered issuers and that choose to implement a two-tier need to adjust fees and account terms in
products versus exempt issuers and interchange fee structure that provides response to the lower interchange
products. different interchange rates to larger revenue, whereas exempt issuers may
Regulation II also prohibits issuers issuers and exempt small issuers, the not. Under this scenario, consumers
and payment card networks from both Board plans to publish annually lists of may shift their purchases of some
restricting the number of payment card institutions above and below the small financial services from covered issuers
networks over which an electronic debit issuer exemption asset threshold. If a to exempt issuers in response to changes
transaction may be processed to fewer payment card network decides to in fees and account terms at covered
than two unaffiliated networks and distinguish between large and small issuers. However, covered issuers with
inhibiting the ability of a merchant to
issuers, small issuers that are not on the diversified product lines may look to
direct the routing of an electronic debit Board’s list of institutions that, together retain customers by promoting
transaction over any payment card with their affiliates, have less than $10 alternative products not covered by the
network that may process such interchange fee standards, such as credit
billion in assets may need to provide
transactions. Under the final rule, cards.
information to the network in order to
issuers are required to have at least two Regardless of whether or not networks
take advantage of the exempt fee
unaffiliated payment card networks for establish two-tier fee structures, the
each debit card they issue. structure. competitive effects of any changes in
fees or account terms across covered of similar sizes than across depository Final Regulatory Flexibility Analysis
and exempt issuers due to a decline in institutions of different sizes. An initial regulatory flexibility
interchange revenue will depend on the analysis (IRFA) was included in the
III. Availability of Services to Different
degree of substitution between small, proposal in accordance with Section
Classes of Consumers
exempt issuers and large, covered 3(a) of the Regulatory Flexibility Act, 5
issuers. If the cross-price elasticity ‘‘Effects of the rule on various parties’’
above discussed the comments the U.S.C. 601 et seq. (RFA). In the IRFA,
between exempt and covered issuers is the Board requested comments on all
large, then substantial shifts in market Board received regarding the effect the
Board’s proposed regulation may have aspects of the IRFA, and, in particular,
share may occur in response to comments on the network exclusivity
disproportionate changes in fees and on consumers. Furthermore, as
discussed in ‘‘Effects of the rule on and routing alternatives (the provisions
account terms by exempt versus covered of the proposal that apply to small
issuers. Conversely, if substitution various parties’’, the ultimate net effect
of the final rule on consumers will issuers). The Board also requested
between exempt and covered issuers is
depend on the behavior of various comments on any approaches, other
low, then any changes in fees and
participants in the debit card networks. than the proposed alternatives, that
account terms by exempt versus covered
Specifically, the effect of the rule on any would reduce the burden on all entities,
issuers may generate small shifts in
individual consumer will depend on a including small issuers. Finally, the
market shares across exempt and
variety of factors, including the Board requested comments on any
covered issuers.
As the previous analysis suggests, the consumer’s current payment behavior significant alternatives that would
effect on competition among large and (e.g., cash user or debit card user), minimize the impact of the proposal on
small financial institutions will depend changes in the consumer’s payment small entities.
on a number of factors, including the behavior, the competitiveness of the The RFA requires an agency to
extent to which payment card networks merchants from which the consumer prepare a final regulatory flexibility
implement and retain two-tier fee makes purchases, changes in merchant analysis (FRFA) unless the agency
structures, the differentials in fees payment method acceptance, and certifies that the rule will not, if
across tiers in such structures, the changes in the behavior of banks. promulgated, have a significant
product and service lines offered by For low income consumers, to the economic impact on a substantial
large and small financial institutions, extent that fees and other account terms number of small entities. Although it is
and the substitutability of products and become less attractive as a result of the difficult to quantify the analysis at this
services across large and small financial rule, some low income consumers may point, the Board believes that the rule,
institutions. As noted above, the Board be unwilling or unable to obtain debit if promulgated, may have a significant
understands that most debit card cards and related deposit accounts. economic impact on a substantial
networks have indicated that they Similarly, less attractive fees and number of small entities and,
intend to implement two-tier fee account terms may cause certain low accordingly, the Board has prepared the
structures; however, these are not income consumers who previously held following FRFA pursuant to the RFA.
binding commitments, and the level of debit cards and deposit accounts to 1. Statement of the need for, and
interchange fees that will prevail in substitute away from those products. At objectives of, the final rule. As required
such systems is currently not known the same time, however, low income by EFTA Section 920, the Board is
and will depend on market responses. consumers who currently use cash for adopting new Regulation II to establish
Prior economic research suggests that purchases may face lower prices at the standards for assessing whether an
competition between large and small point of sale if retailers that they interchange transaction fee received or
depository institutions is weaker than frequent set lower prices to reflect lower charged by an issuer is reasonable and
competition within either group of costs of debit card transactions. proportional to the cost incurred by the
institutions, likely because these Therefore, the net effect on low income issuer with respect to the transaction.
institutions serve different customer consumers will depend on various Additionally, also as required by EFTA
bases.183 For example, large institutions factors, including each consumer’s Section 920, new Regulation II prohibits
have tended to attract customers who payment and purchase behavior, as well issuers and payment card networks from
desire expansive branch and ATM as market responses to the rule. both restricting the number of payment
networks and a wide variety of financial card networks over which an electronic
IV. Conclusion debit transaction may be processed to
instruments; by contrast, smaller
institutions often market themselves as EFTA Section 904(a)(3) states that: ‘‘to less than two unaffiliated networks and
offering more individualized, the extent practicable, the Board shall inhibiting the ability of a merchant to
relationship-based service and customer demonstrate that the consumer direct the routing of an electronic debit
support to consumers and small protections of the proposed regulations transaction over a particular payment
businesses. This evidence suggests that outweigh the compliance costs imposed card network that may process such
substitution effects in response to upon consumers and financial transactions.
changes in fees or account terms are institutions.’’ Based on the analysis 2. Summary of significant issues
stronger between depository institutions above and in the Section-by-Section raised by public comments in response
Analysis, the Board cannot, at this time, to the Board’s IRFA, the Board’s
183 See, e.g., Robert Adams, Kenneth Brevoort, determine whether the benefits to assessment of such issues, and a
and Elizabeth Kiser, ‘‘Who Competes with Whom? consumers exceed the possible costs to statement of any changes made as a
The Case of Depository Institutions,’’ Journal of financial institutions. As discussed result of such comments. The Board
Industrial Economics, March 2007, v. 55, iss. 1, pp.

141–67; Andrew M. Cohen and Michael J. Mazzeo,
above and in ‘‘Effects of the rule on received several comments on the IRFA.
‘‘Market Structure and Competition among Retail various parties,’’ the overall effects of Some commenters contended that the
Depository Institutions,’’ Review of Economics and the final rule on financial institutions IRFA should include an analysis of the
Statistics, February 2007, v. 89, iss. 1, pp. 60–74; and on consumers are dependent on a effect of the proposed rule on small
and Timothy H. Hannan and Robin A. Prager, ‘‘The
Profitability of Small Single-Market Banks in an Era
variety of factors, and the Board cannot entities, including small merchants and
of Multi-market Banking,’’ Journal of Banking and predict the market response to the final small business debit card holders, as
Finance, February 2009, v. 33, iss. 2, pp. 263–71. rule. well as a study of the disparate impact
of the rule on smaller and larger interchange fee revenue that may be final rule will apply to small financial
businesses. One commenter also collected by an exempt issuer. As noted institutions that issue debit cards. A
suggested that the IRFA should consider above, however, the Board is taking financial institution generally is
the effect on small businesses that steps to respond to this issue in two considered small if it has assets of $175
receive financial services from small ways. First, the Board plans to survey million or less.184 Based on 2010 Call
banks. Some commenters suggested that payment card issuers and networks Report data, approximately 11,000
the Board’s RFA analysis should take annually and publish annually a list of depository institutions had total
into consideration the effect of the rule the average interchange fees each domestic assets of $175 million or less.
on consumers, especially consumer network provides to its covered issuers The large majority of these institutions
debit card holders and lower income and to its exempt issuers. This issue debit cards.
individuals. Another commenter argued information will provide for more The sections above on ‘‘Effects on
that the IRFA was not reasonably transparency for issuers, including Various Parties’’ and the ‘‘EFTA 904(a)
complete because the cost survey on small issuers, to more readily compare Economic Analysis’’ provide a more
which the Board based its proposal did the interchange revenue they would detailed discussion of the direct and
not consider small issuers. As noted receive from each network. Second, to indirect impact of the rule on various
above in the sections on ‘‘Effects on facilitate a network’s implementation of parties.
Various Parties’’ and the ‘‘EFTA 904(a) a two-tier fee structure, the Board will 4. Projected reporting, recordkeeping,
Economic Analysis,’’ the overall effects also compile annual lists of institutions and other compliance requirements.
of the final rule on exempt issuers, above and below the small issuer With respect to the limitations on
small merchants, consumers, and other exemption asset threshold. Payment interchange transaction fees, the Board’s
parties are dependent on a variety of card networks and issuers may then rely final rule does not impose compliance
factors, and the Board cannot predict on such lists to determine which issuers requirements on small issuers.185 In
the market response to the final rule. qualify for the small issuer exemption. accordance with EFTA Section 920 the
In addition, numerous commenters Issuers not appearing on the list of Board’s rule exempts from the
discussed the proposed rule’s impact on issuers that, together with their limitations on interchange transaction
small entities, particularly small issuers. affiliates, have less than $10 billion in fees all issuers that, together with
As discussed in more detail in the assets may still be required by payment affiliates, have assets of less than $10
Section-by-Section Analysis, EFTA card networks in which they participate billion. The Board’s final rule does not,
Section 920(a)(6)(A) provides an to notify the networks that they qualify however, require payment card
exemption from the interchange fee for the small issuer exemption. The networks to distinguish between issuers
restrictions under EFTA Section 920(a) Board believes the publication of the with assets of $10 billion or more and
for any issuer that, together with its lists will greatly reduce the smaller issuers in setting interchange
affiliates, has assets of less than $10 administrative burden associated with rates. If a payment card network decides
billion. Consequently, the provisions identifying small issuers that qualify for to distinguish between large and small
related to the interchange fee the exemption. issuers, small issuers that are not on the
restrictions in the final rule do not With respect to the network Board’s list of institutions that, together
directly impact small issuers. exclusivity and routing provisions, with their affiliates, have less than $10
Commenters, however, were concerned some commenters suggested that the billion in assets may need to provide
that the small issuer exemption would Board exempt small issuers from these information to the network in order to
not be effective in practice if payment requirements. As explained above in the take advantage of the exempt fee
card networks do not implement two- Section-by-Section Analysis, the statute structure.
tier fee structures. As discussed above does not provide an exemption for small The final rule prohibiting network
in this notice, trade associations issuers for these provisions. In addition, exclusivity arrangements will affect
representing small issuers, including the exemption authority in EFTA small financial institutions that issue
credit unions, and one federal banking Section 904(c) is transferred to the debit cards if such institutions do not
agency urged the Board to use its Consumer Financial Protection Bureau currently comply with the final rule’s
circumvention or evasion authority to on July 21, 2011. standards. Under the final rule, a small
ensure that the small issuer exemption The Board has discretion, however, in issuer, like other issuers, would be
in EFTA Section 920(a)(6) from the setting the compliance date for these required to have at least two unaffiliated
interchange transaction fee restrictions provisions. In designating April 1, 2012, payment card networks for each debit
is given effect by the networks. In as the date by which most issuers must card it issues. If the issuer does not have
particular, these commenters were comply with the network exclusivity at least two unaffiliated payment card
concerned that absent an express provisions and October 1, 2011, as the networks for each debit card it issues, it
requirement on networks to adopt date by which issuers must comply with would be required to add an additional
higher tiers of interchange fees for the routing provisions, the Board has network. This process may require
exempt issuers, such issuers would taken into account the concerns of making a decision as to which
experience a significant reduction in issuers of all sizes. The technological additional network to add to the debit
interchange fee revenue, options available for issuers generally
card, establishing a connection to the
notwithstanding the exemption. will be the same for all issuers,
new network, and updating internal
Although the statute provides an regardless of asset size. Furthermore, as
processes and procedures.
exemption from the interchange discussed in more detail in the Section-
transaction fee restrictions for issuers by-Section Analysis, certain debit cards 184 U.S. Small Business Administration, Table of
with less than $10 billion in have a delayed effective date, and Small Business Size Standards Matched to North
consolidated assets, the statute neither issuers of such cards do not have to American Industry Classification System Codes,
imposes an affirmative duty on comply with the network exclusivity available at http://www.sba.gov/idc/groups/public/
networks to implement different documents/sba_homepage/serv_sstd_tablepdf.pdf.
provisions for these cards until April 1, 185 There may be some small financial institutions
interchange transaction fee rates for 2013. that have very large affiliates such that the
covered and exempt issuers, nor 3. Description and estimate of small institution does not qualify for the small issuer
guarantees a particular level of entities affected by the final rule. This exemption.
5. Steps taken to minimize the Use of ‘‘Plain Language’’ card network exclusivity arrangements
economic impact on small entities; Section 722 of the Gramm-Leach- and routing restrictions for debit card
significant alternatives. In its proposed Bliley Act of 1999 (12 U.S.C. 4809) transactions, and reporting requirements
rule, the Board requested comment on requires the Board to use ‘‘plain for debit card issuers and payment card
the impact of the prohibition on language’’ in all final rules published networks.
network exclusivity and routing after January 1, 2000. The Board has § 235.2 Definitions.
restrictions on small entities and sought to present this final rule in a
solicited comment on any approaches, For purposes of this part:
simple and straightforward manner. The (a) Account (1) Means a transaction,
other than the proposed alternatives, Board received no comments on savings, or other asset account (other
that would reduce the burden on all whether the proposed rule was clearly than an occasional or incidental credit
entities, including small issuers. The stated and effectively organized, or on balance in a credit plan) established for
Board received comment suggesting that how the Board might make the text of any purpose and that is located in the
small issuers should be exempt from the the rule easier to understand. United States; and
network exclusivity and routing (2) Does not include an account held
provisions. However, as noted above in Text of Final Rule
under a bona fide trust agreement that
the Section-by-Section Analysis, EFTA List of Subjects in 12 CFR Part 235 is excluded by section 903(2) of the
Section 920 does not provide for this Electronic Fund Transfer Act and rules
Banks, banking, Debit card routing,
exemption, and the Board does not have Electronic debit transactions, and prescribed thereunder.
authority to adopt an exemption for Interchange transaction fees. (b) Acquirer means a person that
small issuers from these provisions. As contracts directly or indirectly with a
noted above, the Board will publish lists Authority and Issuance merchant to provide settlement for the
of institutions above and below the For the reasons set forth in the merchant’s electronic debit transactions
small issuer exemption asset threshold preamble, the Board amends Title 12, over a payment card network. An
to facilitate the implementation of two- Chapter II of the Code of Federal acquirer does not include a person that
tier interchange fee structures by Regulations by adding a new part 235 to acts only as a processor for the services
payment card networks. In addition, the read as follows: it provides to the merchant.
Board plans to publish annually (c) Affiliate means any company that
information regarding the average PART 235—DEBIT CARD controls, is controlled by, or is under
interchange fees received by exempt INTERCHANGE FEES AND ROUTING common control with another company.
issuers and covered issuers in each (d) Cardholder means the person to
Sec. whom a debit card is issued.
payment card network; this information 235.1 Authority and purpose.
may assist exempt issuers in (e) Control of a company means—
235.2 Definitions. (1) Ownership, control, or power to
determining the networks in which they 235.3 Reasonable and proportional
wish to participate. vote 25 percent or more of the
interchange fees.
235.4 [Reserved] outstanding shares of any class of voting
The factual, policy, and legal reasons security of the company, directly or
235.5 Exemptions.
for selecting the alternatives adopted in 235.6 Prohibition on circumvention, indirectly, or acting through one or
the final rule regarding each provision evasion, or net compensation. more other persons;
of the rule are discussed above in the 235.7 Limitation on payment card (2) Control in any manner over the
Section-by-Section Analysis regarding restrictions. election of a majority of the directors,
each such provision. In addition, the 235.8 Reporting requirements and record trustees, or general partners (or
reasons for rejecting other significant retention. individuals exercising similar functions)
alternatives to the final rule considered 235.9 Administrative enforcement. of the company; or
by the Board are discussed in those 235.10 Effective and compliance dates. (3) The power to exercise, directly or
Appendix A to Part 235—Official Board indirectly, a controlling influence over
sections as well.
Commentary on Regulation II the management or policies of the
Paperwork Reduction Act Authority: 15 U.S.C. 1693o–2. company, as the Board determines.
In accordance with the Paperwork (f) Debit card (1) Means any card, or
§ 235.1 Authority and purpose.
Reduction Act of 1995 (PRA) (44 U.S.C. other payment code or device, issued or
(a) Authority. This part is issued by approved for use through a payment
3501–3521; 5 CFR Part 1320 Appendix the Board of Governors of the Federal card network to debit an account,
A.1), the Board reviewed this final rule Reserve System (Board) under section regardless of whether authorization is
under the authority delegated to the 920 of the Electronic Fund Transfer Act based on signature, personal
Board by the Office of Management and (EFTA) (15 U.S.C. 1693o–2, as added by identification number (PIN), or other
Budget. As mentioned in the preamble, section 1075 of the Dodd-Frank Wall means, and regardless of whether the
the Board is seeking comment, via an Street Reform and Consumer Protection issuer holds the account, and
interim final rulemaking, on the Act, Public Law 111–203, 124 Stat. 1376 (2) Includes any general-use prepaid
provisions required under § 235.4 for (2010)). card; and
the fraud-prevention adjustment, (b) Purpose. This part implements the (3) Does not include—
published separately in the Federal provisions of section 920 of the EFTA, (i) Any card, or other payment code
Register. No collections of information including standards for reasonable and or device, that is redeemable upon
pursuant to the PRA are contained in proportional interchange transaction
presentation at only a single merchant

this final rule. Once the Board develops fees for electronic debit transactions, or an affiliated group of merchants for
a survey to obtain information under standards for receiving a fraud- goods or services; or
§ 235.8, containing recordkeeping and prevention adjustment to interchange (ii) A check, draft, or similar paper
reporting requirements, staff will transaction fees, exemptions from the instrument, or an electronic
conduct an analysis under the PRA and interchange transaction fee limitations, representation thereof.
seek public comment in the Federal prohibitions on evasion and (g) Designated automated teller
Register. circumvention, prohibitions on payment machine (ATM) network means either—
(1) All ATMs identified in the name § 235.3 Reasonable and proportional (2) The cardholder may use the debit
of the issuer; or interchange transaction fees. card only to transfer or debit funds,
(2) Any network of ATMs identified (a) In general. The amount of any monetary value, or other assets that
by the issuer that provides reasonable interchange transaction fee that an have been provided pursuant to such
and convenient access to the issuer’s issuer may receive or charge with program.
customers. respect to an electronic debit transaction (c) Exemption for certain reloadable
(h) Electronic debit transaction (1) shall be reasonable and proportional to prepaid cards—(1) In general. Except as
Means the use of a debit card by a the cost incurred by the issuer with provided in paragraph (d) of this
person as a form of payment in the respect to the electronic debit section, §§ 235.3, 235.4, and 235.6 do
United States to initiate a debit to an transaction. not apply to an interchange transaction
account, and (b) Determination of reasonable and fee received or charged by an issuer
(2) Does not include transactions proportional fees. An issuer complies with respect to an electronic debit
initiated at an ATM, including cash with the requirements of paragraph (a) transaction using a general-use prepaid
withdrawals and balance transfers of this section only if each interchange card that is—
initiated at an ATM. transaction fee received or charged by (i) Not issued or approved for use to
(i) General-use prepaid card means a the issuer for an electronic debit access or debit any account held by or
card, or other payment code or device, transaction is no more than the sum of— for the benefit of the cardholder (other
that is— (1) 21 cents and; than a subaccount or other method of
(1) Issued on a prepaid basis in a (2) 5 basis points multiplied by the recording or tracking funds purchased
specified amount, whether or not that value of the transaction. or loaded on the card on a prepaid
amount may be increased or reloaded, basis);
in exchange for payment; and § 235.4 [Reserved]
(ii) Reloadable and not marketed or
(2) Redeemable upon presentation at § 235.5 Exemptions. labeled as a gift card or gift certificate;
multiple, unaffiliated merchants for
(a) Exemption for small issuers. (1) In and
goods or services.
general. Except as provided in (iii) The only means of access to the
(j) Interchange transaction fee means
paragraph (a)(3) of this section, §§ 235.3, underlying funds, except when all
any fee established, charged, or received
235.4, and 235.6 do not apply to an remaining funds are provided to the
by a payment card network and paid by
interchange transaction fee received or cardholder in a single transaction.
a merchant or an acquirer for the
charged by an issuer with respect to an (2) Temporary cards. For purposes of
purpose of compensating an issuer for
electronic debit transaction if— this paragraph (c), the term ‘‘reloadable’’
its involvement in an electronic debit
(i) The issuer holds the account that includes a temporary non-reloadable
transaction.
is debited; and card issued solely in connection with a
(k) Issuer means any person that
(ii) The issuer, together with its reloadable general-use prepaid card.
authorizes the use of a debit card to
affiliates, has assets of less than $10 (d) Exception. The exemptions in
perform an electronic debit transaction.
billion as of the end of the calendar year paragraphs (b) and (c) of this section do
(l) Merchant means any person that
preceding the date of the electronic not apply to any interchange transaction
accepts debit cards as payment.
(m) Payment card network means an debit transaction. fee received or charged by an issuer on
(2) Determination of issuer asset size. or after July 21, 2012, with respect to an
entity that—
(1) Directly or indirectly provides the A person may rely on lists published by electronic debit transaction if any of the
proprietary services, infrastructure, and the Board to determine whether an following fees may be charged to a
software that route information and data issuer, together with its affiliates, has cardholder with respect to the card:
to an issuer from an acquirer to conduct assets of less than $10 billion as of the (1) A fee or charge for an overdraft,
the authorization, clearance, and end of the calendar year preceding the including a shortage of funds or a
settlement of electronic debit date of the electronic debit transaction. transaction processed for an amount
transactions; and (3) Change in status. If an issuer exceeding the account balance, unless
(2) A merchant uses in order to accept qualifies for the exemption in paragraph the fee or charge is imposed for
as a form of payment a brand of debit (a)(1) in a particular calendar year, but, transferring funds from another asset
card or other device that may be used as of the end of that calendar year no account to cover a shortfall in the
to carry out electronic debit longer qualifies for the exemption account accessed by the card; or
transactions. because at that time it, together with its (2) A fee imposed by the issuer for the
(n) Person means a natural person or affiliates, has assets of $10 billion or first withdrawal per calendar month
an organization, including a more, the issuer must begin complying from an ATM that is part of the issuer’s
corporation, government agency, estate, with §§ 235.3, 235.4, and 235.6 no later designated ATM network.
trust, partnership, proprietorship, than July 1 of the succeeding calendar
cooperative, or association. year. § 235.6 Prohibition on circumvention,
(o) Processor means a person that (b) Exemption for government- evasion, and net compensation.
processes or routes electronic debit administered programs. Except as (a) Prohibition of circumvention or
transactions for issuers, acquirers, or provided in paragraph (d) of this evasion. No person shall circumvent or
merchants. section, §§ 235.3, 235.4, and 235.6 do evade the interchange transaction fee
(p) Route means to direct and send not apply to an interchange transaction restrictions in §§ 235.3 and 235.4.
information and data to an unaffiliated fee received or charged by an issuer (b) Prohibition of net compensation.
An issuer may not receive net
entity or to an affiliated entity acting on with respect to an electronic debit

behalf of an unaffiliated entity. transaction if— compensation from a payment card
(q) United States means the States, (1) The electronic debit transaction is network with respect to electronic debit
territories, and possessions of the made using a debit card that has been transactions or debit card-related
United States, the District of Columbia, provided to a person pursuant to a activities within a calendar year. Net
the Commonwealth of Puerto Rico, or Federal, State, or local government- compensation occurs when the total
any political subdivision of any of the administered payment program; and amount of payments or incentives
foregoing. received by an issuer from a payment
card network with respect to electronic may be processed no later than six § 235.8 Reporting requirements and record
debit transactions or debit card-related months after the date on which the retention.
activities, other than interchange previously unaffiliated payment card (a) Entities required to report. Each
transaction fees passed through to the networks consummate the affiliation. issuer that is not otherwise exempt from
issuer by the network, during a calendar (b) Prohibition on routing restrictions. the requirements of this part under
year exceeds the total amount of all fees An issuer or payment card network § 235.5(a) and each payment card
paid by the issuer to the network with shall not, directly or through any agent, network shall file a report with the
respect to electronic debit transactions processor, or licensed member of the Board in accordance with this section.
or debit card-related activities during (b) Report. Each entity required to file
network, by contract, requirement,
that calendar year. Payments and a report with the Board shall submit
condition, penalty, or otherwise, inhibit
incentives paid by a network to an data in a form prescribed by the Board
the ability of any person that accepts or
issuer, and fees paid by an issuer to a for that entity. Data required to be
honors debit cards for payments to
network, with respect to electronic debit reported may include, but may not be
transactions or debit card related direct the routing of electronic debit
limited to, data regarding costs incurred
activities are not limited to volume- transactions for processing over any with respect to an electronic debit
based or transaction-specific payments, payment card network that may process transaction, interchange transaction
incentives, or fees, but also include such transactions. fees, network fees, fraud-prevention
other payments, incentives or fees (c) Compliance dates—(1) General. costs, fraud losses, and transaction
related to an issuer’s provision of debit Except as otherwise provided in value, volume, and type.
card services. paragraphs (c)(2), (c)(3), and (c)(4) of (c) Record retention. (1) An issuer
this section, the compliance date of subject to this part shall retain evidence
§ 235.7 Limitations on payment card paragraph (a) of this section is April 1, of compliance with the requirements
restrictions.
2012. imposed by this part for a period of not
(a) Prohibition on network less than five years after the end of the
exclusivity—(1) In general. An issuer or (2) Restrictions by payment card
networks. The compliance date of calendar year in which the electronic
payment card network shall not directly debit transaction occurred.
or through any agent, processor, or paragraphs (a)(1) and (a)(3) of this
section for payment card networks is (2) Any person subject to this part
licensed member of a payment card having actual notice that it is the subject
network, by contract, requirement, October 1, 2011.
of an investigation or an enforcement
condition, penalty, or otherwise, restrict (3) Debit cards that use transaction proceeding by its enforcement agency
the number of payment card networks qualification or substantiation systems. shall retain the records that pertain to
on which an electronic debit transaction Issuers shall comply with the the investigation, action, or proceeding
may be processed to less than two requirements of paragraph (a) of this until final disposition of the matter
unaffiliated networks. section by April 1, 2013, for electronic unless an earlier time is allowed by
(2) Permitted arrangements. An issuer debit transactions using debit cards that court or agency order.
satisfies the requirements of paragraph use point-of-sale transaction
(a)(1) of this section only if the issuer qualification or substantiation systems § 235.9 Administrative enforcement.
allows an electronic debit transaction to for verifying the eligibility of purchased (a) (1) Compliance with the
be processed on at least two unaffiliated goods or services. requirements of this part shall be
payment card networks, each of which enforced under—
does not, by rule or policy, restrict the (4) General-use prepaid cards. Issuers
(i) Section 8 of the Federal Deposit
operation of the network to a limited shall comply with the requirements of
Insurance Act, by the appropriate
geographic area, specific merchant, or paragraph (a) of this section with
Federal banking agency, as defined in
particular type of merchant or respect to general-use prepaid cards as
section 3(q) of the Federal Deposit
transaction, and each of which has set out below.
Insurance Act (12 U.S.C. 1813(q)), with
taken steps reasonably designed to (i) With respect to non-reloadable respect to—
enable the network to process the general-use prepaid cards, the (A) National banks, federal savings
electronic debit transactions that the compliance date is April 1, 2013. Non- associations, and federal branches and
network would reasonably expect will reloadable general-use prepaid cards federal agencies of foreign banks;
be routed to it, based on expected sold prior to April 1, 2013 are not (B) Member banks of the Federal
transaction volume. subject to paragraph (a) of this section. Reserve System (other than national
(3) Prohibited exclusivity (ii) With respect to reloadable general- banks), branches and agencies of foreign
arrangements by networks. For purposes use prepaid cards, the compliance date banks (other than federal branches,
of paragraph (a)(1) of this section, a is April 1, 2013. Reloadable general-use federal Agencies, and insured state
payment card network may not restrict prepaid cards sold prior to April 1, 2013 branches of foreign banks), commercial
or otherwise limit an issuer’s ability to are not subject to paragraph (a) of this lending companies owned or controlled
contract with any other payment card section unless and until they are by foreign banks, and organizations
network that may process an electronic reloaded, in which case the following operating under section 25 or 25A of the
debit transaction involving the issuer’s compliance dates apply: Federal Reserve Act;
debit cards. (C) Banks and state savings
(4) Subsequent affiliation. If (A) With respect to reloadable associations insured by the Federal
unaffiliated payment card networks general-use prepaid cards sold and
Deposit Insurance Corporation (other

become affiliated as a result of a merger reloaded prior to April 1, 2013, the than members of the Federal Reserve
or acquisition such that an issuer is no compliance date is May 1, 2013. System), and insured state branches of
longer in compliance with paragraph (a) (B) With respect to reloadable general- foreign banks;
of this section, the issuer must add an use prepaid cards sold prior to April 1, (ii) The Federal Credit Union Act (12
unaffiliated payment card network 2013, and reloaded on or after April 1, U.S.C. 1751 et seq.), by the
through which electronic debit 2013, the compliance date is 30 days Administrator of the National Credit
transactions on the relevant debit card after the date of reloading. Union Administration (National Credit
Union Administration Board) with § 235.10 Effective and compliance dates. merchant’s transactions with the issuer.
respect to any federal credit union; Except as provided in § 235.7, this These institutions are considered processors
part becomes effective and compliance and in some circumstances may be
(iii) The Federal Aviation Act of 1958 considered payment card networks for
(49 U.S.C. 40101 et seq.), by the is mandatory on October 1, 2011. purposes of this part (See §§ 235.2(m),
Secretary of Transportation, with Appendix A to Part 235—Official Board 235.2(o), and commentary thereto).
respect to any air carrier or foreign air Commentary on Regulation II 2(c) Affiliate
carrier subject to that Act; and
Introduction 1. Types of entities. The term ‘‘affiliate’’
(iv) The Securities Exchange Act of includes any bank and nonbank affiliates
1934 (15 U.S.C. 78a et seq.), by the The following commentary to Regulation II
(12 CFR part 235) provides background located in the United States or a foreign
Securities and Exchange Commission, country.
material to explain the Board’s intent in
with respect to any broker or dealer adopting a particular part of the regulation. 2. Other affiliates. For commentary on
subject to that Act. The commentary also provides examples to whether merchants are affiliated, see
(2) The terms used in paragraph (a)(1) aid in understanding how a particular comment 2(f)–7.
of this section that are not defined in requirement is to work. 2(d) Cardholder
this part or otherwise defined in section Section 235.2 Definitions 1. Scope. In the case of debit cards that
3(s) of the Federal Deposit Insurance access funds in transaction, savings, or other
Act (12 U.S.C. 1813(s)) shall have the 2(a) Account similar asset accounts, ‘‘the person to whom
meaning given to them in section 1(b) of 1. Types of accounts. The term ‘‘account’’ a card is issued’’ generally will be the named
the International Banking Act of 1978 includes accounts held by any person, person or persons holding the account. If the
including consumer accounts (i.e., those account is a business account, multiple
(12 U.S.C. 3101).
established primarily for personal, family or employees (or other persons associated with
(b) Additional powers. (1) For the household purposes) and business accounts. the business) may have debit cards that can
purpose of the exercise by any agency Therefore, the limitations on interchange access the account. Each employee that has
referred to in paragraphs (a)(1)(i) transaction fees and the prohibitions on a debit card that can access the account is a
through (a)(1)(iv) of this section of its network exclusivity arrangements and cardholder. In the case of a prepaid card, the
power under any statute referred to in routing restrictions apply to all electronic cardholder generally is either the purchaser
those paragraphs, a violation of this part debit transactions, regardless of whether the of the card or a person to whom the
transaction involves a debit card issued purchaser gave the card, such as a gift
is deemed to be a violation of a primarily for personal, family, or household recipient.
requirement imposed under that statute. purposes or for business purposes. For
(2) In addition to its powers under example, an issuer of a business-purpose 2(e) Control [Reserved]
any provision of law specifically debit card is subject to the restrictions on 2(f) Debit Card
referred to in paragraphs (a)(1)(i) interchange transaction fees and is also
prohibited from restricting the number of 1. Card, or other payment code or device.
through (a)(1)(iv) of this section, each of The term ‘‘debit card’’ as defined in § 235.2(f)
payment card networks on which an
the agencies referred to in those electronic debit transaction may be processed applies to any card, or other payment code
paragraphs may exercise, for the under § 235.7. or device, even if it is not issued in a
purpose of enforcing compliance under 2. Bona fide trusts. This part does not physical form. Debit cards include, for
this part, any other authority conferred define the term bona fide trust agreement; example, an account number or code that can
be used to access funds in an account to
on it by law. therefore, institutions must look to state or
other applicable law for interpretation. An make Internet purchases. Similarly, the term
(c) Enforcement authority of Federal ‘‘debit card’’ includes a device with a chip
account held under a custodial agreement
Trade Commission. Except to the extent that qualifies as a trust under the Internal or other embedded mechanism, such as a
that enforcement of the requirements Revenue Code, such as an individual mobile phone or sticker containing a
imposed under this title is specifically retirement account, is considered to be held contactless chip that links the device to
granted to another government agency under a trust agreement for purposes of this funds stored in an account, and enables an
under paragraphs (a)(1)(i) through part. account to be debited. The term ‘‘debit card,’’
3. Account located in the United States. however, does not include a one-time
(a)(1)(iv) of this section, and subject to
This part applies only to electronic debit password or other code if such password or
subtitle B of the Consumer Financial code is used for the purposes of
Protection Act of 2010, the Federal transactions that are initiated to debit (or
credit, for example, in the case of returned authenticating the cardholder and is used in
Trade Commission has the authority to goods or cancelled services) an account addition to another card, or other payment
enforce such requirements. For the located in the United States. If a cardholder code or device, rather than as the payment
purpose of the exercise by the Federal uses a debit card to debit an account held code or device.
Trade Commission of its functions and outside the United States, then the electronic 2. Deferred debit cards. The term ‘‘debit
powers under the Federal Trade debit transaction is not subject to this part. card’’ includes a card, or other payment code
Commission Act, a violation of this part or device, that is used in connection with
2(b) Acquirer deferred debit card arrangements in which
shall be deemed a violation of a
1. In general. The term ‘‘acquirer’’ includes transactions are not immediately posted to
requirement imposed under the Federal and funds are not debited from the
only the institution that contracts, directly or
Trade Commission Act. All of the indirectly, with a merchant to provide underlying transaction, savings, or other
functions and powers of the Federal settlement for the merchant’s electronic debit asset account upon settlement of the
Trade Commission under the Federal transactions over a payment card network transaction. Instead, the funds in the account
Trade Commission Act are available to (referred to as acquiring the merchant’s typically are held and made unavailable for
the Federal Trade Commission to electronic debit transactions). In some other transactions for a period of time
enforce compliance by any person acquiring relationships, an institution specified in the issuer-cardholder agreement.
subject to the jurisdiction of the Federal provides processing services to the merchant After the expiration of the time period, the
and is a licensed member of the payment cardholder’s account is debited for the value
Trade Commission with the
card network, but does not settle the of all transactions made using the card that
requirements of this part, regardless of transactions with the merchant (by crediting have been submitted to the issuer for
whether that person is engaged in the merchant’s account) or with the issuer. settlement during that time period. For
commerce or meets any other These institutions are not ‘‘acquirers’’ example, under some deferred debit card
jurisdictional tests under the Federal because they do not provide credit to the arrangements, the issuer may debit the
Trade Commission Act. merchant for the transactions or settle the consumer’s account for all debit card
transactions that occurred during a particular by common corporate control. For purposes the cardholder of the debit card in
month at the end of the month. Regardless of of the ‘‘debit card’’ definition, franchisees are connection with the initial payment. For
the time period between the transaction and considered to be under common corporate example, the term ‘‘electronic debit
account posting, a card, or other payment control if they are subject to a common set transaction’’ includes using the debit card to
code or device, that is used in connection of corporate policies or practices under the return merchandise or cancel a service that
with a deferred debit arrangement is terms of their franchise licenses. then results in a debit to the merchant’s
considered a debit card for purposes of the 8. Checks, drafts, and similar instruments. account and a credit to the cardholder’s
requirements of this part. The term ‘‘debit card’’ does not include a account.
3. Decoupled debit cards. Decoupled debit check, draft, or similar paper instrument or 4. Cash withdrawal at the point of sale.
cards are issued by an entity other than the a transaction in which the check is used as The term ‘‘electronic debit transaction’’
financial institution holding the cardholder’s a source of information to initiate an includes a transaction in which a cardholder
account. In a decoupled debit arrangement, electronic payment. For example, if an uses the debit card both to make a purchase
transactions that are authorized by the card account holder provides a check to buy goods and to withdraw cash (known as a ‘‘cash-
issuer settle against the cardholder’s account or services and the merchant takes the back transaction’’).
held by an entity other than the issuer, account number and routing number 5. Geographic limitation. This regulation
generally via a subsequent ACH debit to that information from the MICR line at the bottom applies only to electronic debit transactions
account. The term ‘‘debit card’’ includes any of a check to initiate an ACH debit transfer that are initiated at a merchant located in the
card, or other payment code or device, issued from the cardholder’s account, the check is United States. If a cardholder uses a debit
or approved for use through a payment card not a debit card, and such a transaction is not card at a merchant located outside the United
network to debit an account, regardless of considered an electronic debit transaction. States to debit an account held in the United
whether the issuer holds the account. Likewise, the term ‘‘debit card’’ does not States, the electronic debit transaction is not
Therefore, decoupled debit cards are debit include an electronic representation of a subject to this part.
cards for purposes of this part. check, draft, or similar paper instrument. 2(i) General-Use Prepaid Card
4. Hybrid cards. 9. ACH transactions. The term ‘‘debit card’’
i. Some cards, or other payment codes or 1. Redeemable upon presentation at
does not include an account number when it
devices, may have both credit- and debit-like multiple, unaffiliated merchants. A prepaid
is used by a person to initiate an ACH
features (‘‘hybrid cards’’). For example, these card is redeemable upon presentation at
transaction that debits that person’s account.
cards may enable a cardholder to access a multiple, unaffiliated merchants if such
For example, if an account holder buys goods
line of credit, but select certain transactions merchants agree to honor the card.
or services over the Internet using an account
for immediate repayment (i.e., prior to the 2. Selective authorization cards. Selective
number and routing number to initiate an
end of a billing cycle) via a debit to the authorization cards, (e.g., mall cards) are
ACH debit, the account number is not a debit
cardholder’s account, as the term is defined generally intended to be used or redeemed
card, and such a transaction is not
in § 235.2(a), held either with the issuer or for goods or services at participating retailers
considered an electronic debit transaction.
at another institution. If a card permits a within a shopping mall or other limited
However, the use of a card to purchase goods geographic area. Selective authorization
cardholder to initiate transactions that debit or services that debits the cardholder’s
an account or funds underlying a prepaid cards are considered general-use prepaid
account that is settled by means of a cards, regardless of whether they carry the
card, the card is considered a debit card for subsequent ACH debit initiated by the card
purposes of this part. Not all transactions mark, logo, or brand of a payment card
issuer to the cardholder’s account, as in the network, if they are redeemable at multiple,
initiated by such a hybrid card, however, are case of a decoupled debit card arrangement,
electronic debit transactions. Rather, only unaffiliated merchants.
involves the use of a debit card for purposes
those transactions that debit an account as of this part. 2(j) Interchange Transaction fee
defined in this part or funds underlying a
2(g) Designated Automated Teller Machine 1. In general. Generally, the payment card
prepaid card are electronic debit
(ATM) Network network is the entity that establishes and
transactions. If the transaction posts to a line charges the interchange transaction fee to the
of credit, then the transaction is a credit 1. Reasonable and convenient access acquirers or merchants. The acquirers then
transaction. clarified. Under § 235.2(g)(2), a designated pay to the issuers any interchange transaction
ii. If an issuer conditions the availability of ATM network includes any network of ATMs fee established and charged by the network.
a credit or charge card that permits pre- identified by the issuer that provides Acquirers typically pass the interchange
authorized repayment of some or all reasonable and convenient access to the transaction fee through to merchant-
transactions on the cardholder maintaining issuer’s cardholders. Whether a network customers.
an account at the issuer, such a card is provides reasonable and convenient access 2. Compensating an issuer. The term
considered a debit card for purposes of this depends on the facts and circumstances, ‘‘interchange transaction fee’’ is limited to
part. including the distance between ATMs in the those fees that a payment card network
5. Virtual wallets. A virtual wallet is a designated network and each cardholder’s establishes, charges, or receives to
device (e.g., a mobile phone) that stores last known home or work address, or if a compensate the issuer for its role in the
several different payment codes or devices home or work address is not known, where electronic debit transaction. By contrast,
(‘‘virtual cards’’) that access different the card was first issued. payment card networks generally charge
accounts, funds underlying the card, or lines issuers and acquirers fees for services the
of credit. At the point of sale, the cardholder 2(h) Electronic Debit Transaction
network performs. Such fees are not
may select from the virtual wallet the virtual 1. Debit an account. The term ‘‘electronic interchange transaction fees because the
card he or she wishes to use for payment. debit transaction’’ includes the use of a card payment card network is charging and
The virtual card that the cardholder uses for to debit an account. The account debited receiving the fee as compensation for services
payment is considered a debit card under could be, for example, the cardholder’s asset it provides.
this part if the virtual card that initiates a account or the account that holds the funds 3. Established, charged, or received.
transaction meets the definition of debit card, used to settle prepaid card transactions. Interchange transaction fees are not limited
notwithstanding the fact that other cards in 2. Form of payment. The term ‘‘electronic to those fees for which a payment card
the wallet may not be debit cards. debit transaction’’ includes the use of a card network sets the value. A fee that
6. General-use prepaid card. The term as a form of payment that may be made in compensates an issuer is an interchange
‘‘debit card’’ includes general-use prepaid exchange for goods or services, as a transaction fee if the fee is set by the issuer
cards. See § 235.2(i) and related commentary charitable contribution, to satisfy an but charged to acquirers by virtue of the
for information on general-use prepaid cards. obligation (e.g., tax liability), or for other network determining each participant’s net
7. Store cards. The term ‘‘debit card’’ does purposes. settlement position.
not include prepaid cards that may be used 3. Subsequent transactions. The term
at a single merchant or affiliated merchants. ‘‘electronic debit transaction’’ includes both 2(k) Issuer
Two or more merchants are affiliated if they the cardholder’s use of a debit card for the 1. In general. A person issues a debit card
are related by either common ownership or initial payment and any subsequent use by by authorizing the use of debit card by a
cardholder to perform electronic debit omnibus or pooled account. Either the BIN 3. Processors as payment card networks. A
transactions. That person may provide the sponsor or the prepaid card program manager processor is considered a payment card
card directly to the cardholder or indirectly may keep track of the underlying funds for network if, in addition to acting as processor
by using a third party (such as a processor, each individual prepaid card through for an acquirer and issuer, the processor
or a telephone network or manufacturer) to subaccounts. While the cardholder may routes transaction information and data
provide the card, or other payment code or receive the card directly from the program
manager or at a retailer, the BIN sponsor received from a merchant or the merchant’s
device, to the cardholder. The following
examples illustrate the entity that is the authorizes the cardholder to use the card to acquirer to an issuer. For example, if a
issuer under various card program perform electronic debit transactions that merchant uses a processor in order to accept
arrangements. For purposes of determining access the funds in the pooled account and any, some, or all brands of debit cards and
whether an issuer is exempted under the cardholder’s relationship generally is the processor routes transaction information
§ 235.5(a), however, the term issuer is limited with the BIN sponsor. Accordingly, under and data to the issuer or issuer’s processor,
to the entity that holds the account being these circumstances, the BIN sponsor, or the the merchant’s processor is considered a
debited. bank holding the pooled account, is the payment card network with respect to the
2. Traditional debit card arrangements. In issuer.
electronic debit transaction. If the processor
a traditional debit card arrangement, the bank 4. Decoupled debit cards. In the case of
decoupled debit cards, an entity other than establishes, charges, or receives a fee for the
or other entity holds the cardholder’s funds
the bank holding the cardholder’s account purpose of compensating an issuer, that fee
and authorizes the cardholder to use the
debit card to access those funds through enters into a relationship with the cardholder is considered an interchange transaction fee
electronic debit transactions, and the authorizing the use of the card to perform for purposes of this part.
cardholder receives the card directly or electronic debit transactions. The entity 4. Automated clearing house (ACH)
indirectly (e.g., through an agent) from the authorizing the use of the card to perform operators. An ACH operator is not
bank or other entity that holds the funds electronic debit transaction typically arranges considered a payment card network for
(except for decoupled debit cards, discussed for the card to be provided directly or purposes of this part. While an ACH operator
below). In this system, the bank or entity indirectly to the cardholder and has a direct
processes transactions that debit an account
holding the cardholder’s funds is the issuer. relationship with the cardholder with respect
to the card. The bank holding the and provides for interbank clearing and
3. BIN-sponsor arrangements. Payment settlement of such transactions, a person
card networks assign Bank Identification cardholder’s account has agreed generally to
permit ACH debits to the account, but has does not use the ACH system to accept as a
Numbers (BINs) to member-institutions for
not authorized the use of the debit card to form of payment a brand of debit card.
purposes of issuing cards, authorizing,
clearing, settling, and other processes. In access the funds through electronic debit 5. ATM networks. An ATM network is not
transactions. Under these circumstances, the considered a payment card network for
exchange for a fee or other financial
entity authorizing the use of the debit card, purposes of this part. While ATM networks
considerations, some members of payment
and not the account-holding institution, is process transactions that debit an account
card networks permit other entities to issue
considered the issuer. An issuer of a
debit cards using the member’s BIN. The and provide for interbank clearing and
decoupled debit card is not exempt under
entity permitting the use of its BIN is referred § 235.5(a), even if, together with its affiliates, settlement of such transactions, a cash
to as the ‘‘BIN sponsor’’ and the entity that it has assets of less than $10 billion, because withdrawal from an ATM is not a payment
uses the BIN to issue cards is often referred it is not the entity holding the account to be because there is no exchange of money for
to as the ‘‘affiliate member.’’ BIN sponsor debited. goods or services, or payment made as a
arrangements can follow at least two different charitable contribution, to satisfy an
models: 2(l) Merchant [Reserved]
obligation (e.g., tax liability), or for other
i. Sponsored debit card model. In some 2(m) Payment Card Network
cases, a community bank or credit union may purposes.
provide debit cards to its account holders 1. In general. An entity is a considered a
2(n) Person [Reserved]
through a BIN sponsor arrangement with a payment card network with respect to an
member institution. In general, the bank or electronic debit transaction for purposes of 2(o) Processor
credit union will authorize its account this rule if it routes information and data to
the issuer from the acquirer to conduct 1. Distinction from acquirers. A processor
holders to use debit cards to perform may perform all transaction-processing
electronic debit transactions that access authorization, clearance, and settlement of
the electronic debit transaction. By contrast, functions for a merchant or acquirer, but if
funds in accounts at the bank or credit union.
The bank or credit union’s name typically if an entity receives transaction information it does not acquire (that is, settle with the
will appear on the debit card. The bank or and data from a merchant and authorizes and merchant for the transactions), it is not an
settles the transaction without routing the acquirer. The entity that acquirers electronic
credit union may directly or indirectly
information and data to another entity (i.e., debit transactions is the entity that is
provide the cards to cardholders. Under these
the issuer or the issuer’s processor) for responsible to other parties to the electronic
circumstances, the bank or credit union is the
authorization, clearance, or settlement, that
issuer for purposes of this part. If that bank debit transaction for the amount of the
entity is not considered a payment card
or credit union, together with its affiliates, network with respect to the electronic debit transaction.
has assets of less than $10 billion, then that transaction. 2. Issuers. A processor may perform
bank or credit union is exempt from the 2. Three-party systems. In the case of a services related to authorization, clearance,
interchange transaction fee restrictions. three-party system, electronic debit and settlement of transactions for an issuer
Although the bank or credit union may transactions are processed by an entity that without being considered to be an issuer for
distribute cards through the BIN sponsors, acts as system operator and issuer, and may purposes of this part.
the BIN sponsor does not enter into the also act as the acquirer. The entity acting as
agreement with the cardholder that system operator and issuer that receives the 2(p) Route
authorizes the cardholder to use the card to transaction information from the merchant or
perform electronic debit transactions that 1. An entity routes information if it both
acquirer also holds the cardholder’s funds.
access funds in the account at the bank or directs and sends the information to an
Therefore, rather than directing the
credit union, and therefore the BIN sponsor unaffiliated entity (or affiliated entity acting
transaction information to a separate issuer,

is not the issuer. the entity authorizes and settles the on behalf of the unaffiliated entity). This
ii. Prepaid card model. A member transaction based on the information other entity may be a payment card network
institution may also serve as the BIN sponsor received from the merchant. As these entities or processor (if the entity directing and
for a prepaid card program. Under these do not connect (or ‘‘network’’) multiple sending the information is a merchant or an
arrangements, a program manager distributes issuers and do not route information to acquirer) or an issuer or processor (if the
prepaid cards to the cardholders and the BIN- conduct the transaction, they are not entity directing and sending the information
sponsoring institution generally holds the ‘‘payment card networks’’ with respect to is a payment card network).
funds for the prepaid card program in an these transactions.
2(q) United States [Reserved] small issuer exemption set forth in promotional message. For example, a card
§ 235.5(a)(1). may be marketed or labeled as a gift card or
Section 235.3 Reasonable and Proportional gift certificate if anyone (other than the
Interchange Transaction Fees 5(a) Exemption for Small Issuers purchaser of the card), including the issuer,
3(a) [Reserved] 1. Asset size determination. An issuer the retailer, the program manager that may
would qualify for the small-issuer exemption distribute the card, or the payment network
3(b) Determining Reasonable and if its total worldwide banking and on which a card is used, promotes the use
Proportional Fees nonbanking assets, including assets of of the card as a gift card or gift certificate. A
1. Two components. The standard for the affiliates, other than trust assets under general-use prepaid card is marketed or
maximum permissible interchange management, are less than $10 billion, as of labeled as a gift card or gift certificate even
transaction fee that an issuer may receive December 31 of the preceding calendar year. if it is only occasionally marketed as a gift
consists of two components: a base 2. Change in status. If an exempt issuer card or gift certificate. For example, a
component that does not vary with a becomes covered based on its and its network-branded general purpose reloadable
transaction’s value and an ad valorem affiliates assets at the end of a calendar year, card would be marketed or labeled as a gift
component. The amount of any interchange that issuer must begin complying with the card or gift certificate if the issuer principally
transaction fee received or charged by an interchange fee standards (§ 235.3), the fraud- advertises the card as a less costly alternative
issuer may not exceed the sum of the prevention adjustment standards (to the to a bank account but promotes the card in
maximum permissible amounts of each extent the issuer wishes to receive a fraud- a television, radio, newspaper, or Internet
component and any fraud-prevention prevention adjustment) (§ 235.4), and the advertisement, or on signage as ‘‘the perfect
adjustment the issuer is permitted to receive provisions prohibiting circumvention, gift’’ during the holiday season.
under § 235.4 of this part. evasion, and net compensation (§ 235.6) no ii. The mere mention of the availability of
2. Variation in interchange fees. An issuer later than July 1. gift cards or gift certificates in an
is permitted to charge or receive, and a 5(b) Exemption for Government- advertisement or on a sign that also indicates
network is permitted to establish, Administered Payment Programs the availability of exempted general-use
interchange transaction fees that vary in their prepaid cards does not by itself cause the
base component and ad valorem component 1. Government-administered payment general-use prepaid card to be marketed as a
based on, for example, the type of transaction program. A program is considered gift card or a gift certificate. For example, the
or merchant, provided the amount of any government-administered regardless of posting of a sign in a store that refers to the
interchange transaction fee for any whether a Federal, State, or local government availability of gift cards does not by itself
transaction does not exceed the sum of the agency operates the program or outsources constitute the marketing of otherwise
maximum permissible base component of 21 some or all functions to third parties so long exempted general-use prepaid cards that may
cents and 5 basis points of the value of the as the program is operated on behalf of the also be sold in the store along with gift cards
transaction. government agency. In addition, a program or gift certificates, provided that a person
3. Example. For a $39 transaction, the may be government-administered even if a acting reasonably under the circumstances
maximum permissible interchange Federal, State, or local government agency is would not be led to believe that the sign
transaction fee is 22.95 cents (21 cents plus not the source of funds for the program it applies to all cards sold in the store. (See,
5 basis points of $39). A payment card administers. For example, child support however, comment 5(c)–4.ii.)
network may, for example, establish an programs are government-administered
4. Examples of marketed or labeled as a
interchange transaction fee of 22 cents programs even though a Federal, State, or
gift card or gift certificate.
without any ad valorem component. local government agency is not the source of
i. The following are examples of marketed
funds. A tribal government is considered a
Section 235.4 [Reserved] or labeled as a gift card or gift certificate:
local government for purposes of this
A. Using the word ‘‘gift’’ or ‘‘present’’ on
exemption.
Section 235.5 Exemptions for Certain a card or accompanying material, including
Electronic Debit Transactions 5(c) Exemption for Certain Reloadable documentation, packaging and promotional
1. Eligibility for multiple exemptions. An Prepaid Cards displays;
electronic debit transaction may qualify for 1. Subaccount clarified. A subaccount is an B. Representing or suggesting that a card
one or more exemptions. For example, a account within an account, opened in the can be given to another person, for example,
debit card that has been provided to a person name of an agent, nominee, or custodian for as a ‘‘token of appreciation’’ or a ‘‘stocking
pursuant to a Federal, State, or local the benefit of two or more cardholders, where stuffer,’’ or displaying a congratulatory
government-administered payment program the transactions and balances of individual message on the card or accompanying
may be issued by an entity that, together with cardholders are tracked in such subaccounts. material;
its affiliates, has assets of less than $10 An account that is opened solely in the name C. Incorporating gift-giving or celebratory
billion as of the end of the preceding of a single cardholder is not a subaccount. imagery or motifs, such as a bow, ribbon,
calendar year. In this case, an electronic debit 2. Reloadable. A general-use prepaid card wrapped present, candle, or a holiday or
transaction made using that card may qualify is ‘‘reloadable’’ if the terms and conditions of congratulatory message, on a card,
for the exemption under § 235.5(a) for small the agreement permit funds to be added to accompanying documentation, or
issuers or for the exemption under § 235.5(b) the general-use prepaid card at any time after promotional material;
for government-administered payment the initial purchase or issuance. A general- ii. The term does not include the following:
programs. A payment card network use prepaid card is not ‘‘reloadable’’ merely A. Representing that a card can be used as
establishing interchange fees for transactions because the issuer or processor is technically a substitute for a checking, savings, or
that qualify for more than one exemption able to add functionality that would deposit account;
need only satisfy itself that the issuer’s otherwise enable the general-use prepaid B. Representing that a card can be used to
transactions qualify for at least one of the card to be reloaded. pay for a consumer’s health-related
exemptions in order to exempt the electronic 3. Marketed or labeled as a gift card or gift expenses—for example, a card tied to a
debit transaction from the interchange fee certificate. i. Electronic debit transactions health savings account;
restrictions. made using a reloadable general-use prepaid C. Representing that a card can be used as
2. Certification process. Payment card card are not exempt from the interchange fee a substitute for travelers checks or cash;
networks that plan to allow issuers to receive restrictions if the card is marketed or labeled D. Representing that a card can be used as
higher interchange fees than permitted under as a gift card or gift certificate. The term a budgetary tool, for example, by teenagers,
§§ 235.3 and 235.4 pursuant to one of the ‘‘marketed or labeled as a gift card or gift or to cover emergency expenses.
exemptions in § 235.5 could develop their certificate’’ means directly or indirectly 5. Reasonable policies and procedures to
own processes for identifying issuers and offering, advertising or otherwise suggesting avoid marketing as a gift card. The
products eligible for such exemptions. the potential use of a general-use prepaid exemption for a general-use prepaid card that
Section 235.5(a)(2) permits payment card card as a gift for another person. Whether the is reloadable and not marketed or labeled as
networks to rely on lists published by the exclusion applies generally does not depend a gift card or gift certificate in § 235.5(c)
Board to help determine eligibility for the on the type of entity that makes the applies if a reloadable general-use prepaid
card is not marketed or labeled as a gift card display clearly differentiate between gift ATMs that are not part of the issuer’s
or gift certificate and if persons involved in cards and the other types of prepaid cards designated ATM network. An electronic
the distribution or sale of the card, including that are available for sale. The retailer does debit card transaction may still qualify for
issuers, program managers, and retailers, not use any more conspicuous signage the exemption under §§ 235.5(b) or (c) with
maintain policies and procedures reasonably suggesting the general availability of gift a respect to a card for which a fee may be
designed to avoid such marketing. Such cards, such as a large sign stating ‘‘Gift imposed for a withdrawal from an ATM that
policies and procedures may include Cards’’ at the top of the display or located is outside of the issuer’s designated ATM
contractual provisions prohibiting a near the display. The exemption in § 235.5(c) network as long as the card complies with
reloadable general-use prepaid card from applies because policies and procedures
the condition set forth in § 235.5(d)(2) for
being marketed or labeled as a gift card or gift reasonably designed to avoid the marketing
of the general-purpose reloadable cards as withdrawals within the issuer’s designated
certificate, merchandising guidelines or plans
gift cards or gift certificates are maintained, ATM network. The condition with respect to
regarding how the product must be displayed
in a retail outlet, and controls to regularly even if a retail clerk inadvertently stocks or ATM fees does not apply to cards that do not
monitor or otherwise verify that the general- a consumer inadvertently places a general- provide ATM access.
use prepaid card is not being marketed as a purpose reloadable card on the gift card Section 235.6 Prohibition on
gift card. Whether a general-use prepaid card display. Circumvention, Evasion, and Net
has been marketed as a gift card or gift iv. Same facts as in comment 5(c)–5.i,
Compensation
certificate will depend on the facts and except that the retailer sells a variety of
circumstances, including whether a prepaid card products, including store gift 1. No applicability to exempt issuers or
reasonable person would be led to believe cards and general-purpose reloadable cards, electronic debit transactions. The prohibition
that the general-use prepaid card is a gift card arranged side-by-side in the same checkout against circumventing or evading the
or gift certificate. The following examples lane. The retailer does not affirmatively interchange transaction fee restrictions or
illustrate the application of § 235.5(c): indicate or represent that gift cards are against net compensation does not apply to
i. An issuer or program manager of prepaid available, such as by displaying any signage issuers or electronic debit transactions that
cards agrees to sell general-purpose or other indicia at the checkout lane qualify for an exemption under § 235.5 from
reloadable cards through a retailer. The suggesting the general availability of gift the interchange transaction fee restrictions.
contract between the issuer or program cards. The exemption in § 235.5(c) applies
manager and the retailer establishes the terms because policies and procedures reasonably 6(a) Prohibition of Circumvention or Evasion
and conditions under which the cards may designed to avoid marketing the general- 1. Finding of circumvention or evasion. A
be sold and marketed at the retailer. The purpose reloadable cards as gift cards or gift finding of evasion or circumvention will
terms and conditions prohibit the general- certificates are maintained.
depend on all relevant facts and
purpose reloadable cards from being 6. On-line sales of prepaid cards. Some
circumstances. Although net compensation
marketed as a gift card or gift certificate, and web sites may prominently advertise or
promote the availability of gift cards or gift may be one form of circumvention or evasion
require policies and procedures to regularly prohibited under § 235.6(a), it is not the only
monitor or otherwise verify that the cards are certificates in a manner that suggests to a
consumer that the web site exclusively sells form.
not being marketed as such. The issuer or 2. Examples of circumstances that may
gift cards or gift certificates. For example, a
program manager sets up one promotional constitute circumvention or evasion.
web site may display a banner advertisement
display at the retailer for gift cards and The following examples do not constitute
or a graphic on the home page that
another physically separated display for per se circumvention or evasion, but may
prominently states ‘‘Gift Cards,’’ ‘‘Gift
exempted products under § 235.5(c),
Giving,’’ or similar language without mention warrant additional supervisory scrutiny to
including general-purpose reloadable cards,
of other available products, or use a web determine whether the totality of the facts
such that a reasonable person would not
address that includes only a reference to gift and circumstances constitute circumvention
believe that the exempted cards are gift cards.
cards or gift certificates in the address. In or evasion:
The exemption in § 235.5(c) applies because
such a case, a consumer acting reasonably i. A payment card network decreases
policies and procedures reasonably designed under the circumstances could be led to
to avoid the marketing of the general-purpose network processing fees paid by issuers for
believe that all prepaid products sold on the electronic debit transactions by 50 percent
reloadable cards as gift cards or gift web site are gift cards or gift certificates.
certificates are maintained, even if a retail and increases the network processing fees
Under these facts, the web site has marketed charged to merchants or acquirers with
clerk inadvertently stocks or a consumer all such products as gift cards or gift
inadvertently places a general-purpose respect to electronic debit transactions by a
certificates, and the exemption in § 235.5(c)
reloadable card on the gift card display. does not apply to any products sold on the similar amount. Because the requirements of
ii. Same facts as in comment 5(c)–5.i, web site. this subpart do not restrict or otherwise
except that the issuer or program manager 7. Temporary non-reloadable cards issued establish the amount of fees that a network
sets up a single promotional display at the in connection with a general-use reloadable may charge for its services, the increase in
retailer on which a variety of prepaid cards card. Certain general-purpose prepaid cards network fees charged to merchants or
are sold, including store gift cards and that are typically marketed as an account acquirers and decrease in fees charged to
general-purpose reloadable cards. A sign substitute initially may be sold or issued in issuers is not a per se circumvention or
stating ‘‘Gift Cards’’ appears prominently at the form of a temporary non-reloadable card. evasion of the interchange transaction fee
the top of the display. The exemption in After the card is purchased, the cardholder standards, but may warrant additional
§ 235.5(c) does not apply with respect to the is typically required to call the issuer to supervisory scrutiny to determine whether
general-purpose reloadable cards because register the card and to provide identifying the facts and circumstances constitute
policies and procedures reasonably designed information in order to obtain a reloadable circumvention or evasion.
to avoid the marketing of exempted cards as replacement card. In most cases, the ii. An issuer replaces its debit cards with
gift cards or gift certificates are not temporary non-reloadable card can be used prepaid cards that are exempt from the
maintained. for purchases until the replacement interchange limits of §§ 235.3 and 235.4. The
iii. Same facts as in comment 5(c)–5.i, reloadable card arrives and is activated by
except that the issuer or program manager exempt prepaid cards are linked to its
the cardholder. Because the temporary non-
sets up a single promotional multi-sided customers’ transaction accounts and funds
reloadable card may only be obtained in
display at the retailer on which a variety of are swept from the transaction accounts to
connection with the reloadable card, the
prepaid card products, including store gift exemption in § 235.5(c) applies so long as the the prepaid accounts as needed to cover
cards and general-purpose reloadable cards card is not marketed as a gift card or gift transactions made. Again, this arrangement is
are sold. Gift cards are segregated from certificate. not per se circumvention or evasion, but may
exempted cards, with gift cards on one side warrant additional supervisory scrutiny to
of the display and exempted cards on a 5(d) Exception determine whether the facts and
different side of a display. Signs of equal 1. Additional ATM access. Some debit circumstances constitute circumvention or
prominence at the top of each side of the cards may be used to withdraw cash from evasion.
6(b) Prohibition of Net Compensation following example illustrates circumstances ii. A payment card network that is
1. Net compensation. Net compensation to that would not indicate net compensation by accepted only at a limited category of
an issuer through the use of network fees is the payment card network to the issuer: merchants (such as a particular grocery store
prohibited. i. Because of an increase in debit card chain, merchants located in a particular
2. Consideration of payments or incentives transactions that are processed through a shopping mall, or a single class of merchants,
provided by the network in net compensation payment card network during a calendar such as grocery stores or gas stations) would
determination. year, an issuer receives an additional not satisfy the rule.
i. For purposes of the net compensation volume-based incentive payment from the iii. One of the steps a network can take to
determination, payments or incentives paid network for that period. Over the same form a reasonable expectation of transaction
period, however, the total network fees (other volume is to consider factors such as the
by a payment card network to an issuer with
than processing fees) the issuer pays the number of cards expected to be issued that
respect to electronic debit transactions or
payment card network with respect to debit are enabled on the network and expected
debit card related activities could include,
card transactions also increase so that the card usage patterns.
but are not limited to, marketing incentives;
total amount of fees paid by the issuer to the 3. Examples of prohibited network
payments or rebates for meeting or exceeding
network continue to exceed incentive restrictions on an issuer’s ability to contract.
a specific transaction volume, percentage
payments by the network to the issuer. Under The following are examples of prohibited
share, or dollar amount of transactions
these circumstances, the issuer does not network restrictions on an issuer’s ability to
processed; or other payments for debit card
receive net compensation from the network contract with other payment card networks:
related activities. For example, signing
for electronic debit transactions or debit card i. Network rules or contract provisions
bonuses paid by a network to an issuer for
related activities. limiting or otherwise restricting the other
the issuer’s debit card portfolio would also be
included in the total amount of payments or Section 235.7 Limitations on Payment Card payment card networks that may be enabled
incentives received by an issuer from a Restrictions on a particular debit card, or network rules
payment card network with respect to or contract provisions that specify the other
1. Application of small issuer, government- networks that may be enabled on a particular
electronic debit transactions. A signing bonus administered payment program, and
for an entire card portfolio, including credit debit card.
reloadable card exemptions to payment card ii. Network rules or guidelines that allow
cards, may be allocated to the issuer’s debit network restrictions. The exemptions under
card business based on the proportion of the only that network’s (or its affiliated
§ 235.5 for small issuers, cards issued network’s) brand, mark, or logo to be
cards or transactions that are debit cards or pursuant to government-administered
electronic debit transactions, as appropriate displayed on a particular debit card, or that
payment programs, and certain reloadable otherwise limit the ability of brands, marks,
to the situation, for purposes of the net prepaid cards do not apply to the limitations
compensation determination. or logos of other payment card networks to
on payment card network restrictions. For appear on the debit card.
ii. Incentives paid by the network with example, debit cards for government-
respect to multiple-year contracts may be 4. Network logos or symbols on card not
administered payment programs, although required. Section 235.7(a) does not require
allocated over the life of the contract. exempt from the restrictions on interchange
iii. For purposes of the net compensation that a debit card display the brand, mark, or
transaction fees, are subject to the logo of each payment card network over
determination, payments or incentives paid requirement that electronic debit transactions
by a payment card network with respect to which an electronic debit transaction may be
made using such cards must be capable of processed. For example, this rule does not
electronic debit transactions or debit card- being processed on at least two unaffiliated
related activities do not include interchange require a debit card that is enabled for two
payment card networks and to the
transaction fees that are passed through to or more unaffiliated payment card networks
prohibition on inhibiting a merchant’s ability
the issuer by the network, or discounts or to bear the brand, mark, or logo for each card
to determine the routing for electronic debit
rebates provided by the network or an network.
transactions.
affiliate of the network for issuer-processor 5. Voluntary exclusivity arrangements
services. In addition, funds received by an 7(a) Prohibition on Network Exclusivity prohibited. Section 235.7(a) requires the
issuer from a payment card network as a 1. Scope of restriction. Section 235.7(a) issuance of debit cards that are enabled on
result of chargebacks, fines paid by requires a debit card subject to the regulation at least two unaffiliated payment card
merchants or acquirers for violations of to be enabled on at least two unaffiliated networks, even if the issuer is not subject to
network rules, or settlements or recoveries payment card networks. This paragraph does any rule of, or contract or other agreement
from merchants or acquirers to offset the not, however, require an issuer to have two with, a payment card network requiring that
costs of fraudulent transactions or a data or more unaffiliated networks available for all or a specified minimum percentage of
security breach do not constitute incentives each method of cardholder authentication. electronic debit transactions be processed on
or payments made by a payment card For example, it is sufficient for an issuer to the network or its affiliated networks.
network. issue a debit card that operates on one 6. Affiliated payment card networks.
3. Consideration of fees paid by an issuer signature-based card network and on one Section 235.7(a) does not prohibit an issuer
in net compensation determination. PIN-based card network, as long as the two from including an affiliated payment card
i. For purposes of the net compensation card networks are not affiliated. network among the networks that may
determination, fees paid by an issuer to a Alternatively, an issuer may issue a debit process an electronic debit transaction with
payment card network with respect to card that is accepted on two unaffiliated respect to a particular debit card, as long as
electronic debit transactions or debit card signature-based card networks or on two at least two of the networks that are enabled
related activities include, but are not limited unaffiliated PIN-based card networks. See on the card are unaffiliated. For example, an
to, membership or licensing fees, network also, comment 7(a)–7. issuer may offer debit cards that are accepted
administration fees, and fees for optional 2. Permitted networks. i. A smaller on a payment card network for signature
network services, such as risk management payment card network could be used to help debit transactions and on an affiliated
services. satisfy the requirement that an issuer enable payment card network for PIN debit
ii. For purposes of the net compensation two unaffiliated networks if the network was transactions as long as those debit cards may
determination, fees paid by an issuer to a willing to expand its coverage in response to also be accepted on another unaffiliated
payment card network with respect to increased merchant demand for access to its payment card network.
electronic debit transactions or debit card- network and it meets the other requirements 7. Application of rule regardless of form
related activities do not include network for a permitted arrangement, including taking factor. The network exclusivity provisions in
processing fees (such as switch fees and steps reasonably designed to enable it to § 235.7(a) require that all debit cards be
network connectivity fees) or fees paid to an process the electronic debit transactions that enabled on at least two unaffiliated payment
issuer processor affiliated with the network it would reasonably expect to be routed to it. card networks for electronic debit
for authorizing, clearing, or settling an If, however, the network’s policy or practice transactions, regardless of whether the debit
electronic debit transaction. is to limit such expansion, it would not card is issued in card form. This applies to
4. Example of circumstances not involving qualify as one of the two unaffiliated any supplemental device, such as a fob or
net compensation to the issuer. The networks. token, or chip or application in a mobile
phone, that is issued in connection with a specified network or its affiliates, except as certain debit cards issued in connection with
plastic card, even if that plastic card fully a default rule in the event the merchant, or a health care or employee benefit account to
complies with the rule. its acquirer or processor, does not designate the extent such cards use (even if not
a routing preference, or if required by state required) transaction substantiation or
7(b) Prohibition on Routing Restrictions law. qualification authorization systems at point
1. Relationship to the network exclusivity iii. Requiring a specific payment card of sale to verify that the card is only used for
restrictions. An issuer or payment card network based on the type of access device
network is prohibited from inhibiting a eligible goods and services for purposes of
provided to the cardholder by the issuer.
merchant’s ability to route or direct an 3. Merchant payments not prohibited. A qualifying for favorable tax treatment under
electronic debit transaction over any of the payment card network does not restrict a Internal Revenue Code requirements. Debit
payment card networks that the issuer has merchant’s ability to route transactions over cards that may qualify for the delayed
enabled to process an electronic debit available payment card networks in violation effective date include, but may not be limited
transaction for that particular debit card. This of § 235.7(b) by offering payments or other to, cards issued in connection with flexible
rule does not permit a merchant to route the incentives to encourage the merchant to route spending accounts established under section
transaction over a network that the issuer did electronic debit card transactions to the 125 of the Internal Revenue Code for health
not enable to process transactions using that network for processing. care related expenses and health
debit card. 4. Real-time routing decision not required. reimbursement accounts established under
2. Examples of prohibited merchant A merchant need not make network routing section 105 of the Internal Revenue Code.
restrictions. The following are examples of decisions on a transaction-by-transaction
issuer or network practices that would basis. A merchant and its acquirer or Section 235.8 Reporting Requirements and
inhibit a merchant’s ability to direct the processor may agree to a pre-determined set Record Retention
routing of an electronic debit transaction that of routing choices that apply to all electronic [Reserved]
are prohibited under § 235.7(b): debit transactions that are processed by the
i. Prohibiting a merchant from encouraging acquirer or processor on behalf of the Section 235.9 Administrative Enforcement
or discouraging a cardholder’s use of a merchant. [Reserved]
particular method of debit card 5. No effect on network rules governing the
authorization, such as rules prohibiting routing of subsequent transactions. Section Section 235.10 Effective and Compliance
merchants from favoring a cardholder’s use 235.7 does not supersede a network rule that Dates
of PIN debit over signature debit, or from requires a chargeback or return of an [Reserved]
discouraging the cardholder’s use of electronic debit transaction to be processed
signature debit. By order of the Board of Governors of the
on the same network that processed the
ii. Establishing network rules or original transaction. Federal Reserve System, June 30, 2011.
designating issuer priorities directing the Jennifer J. Johnson,
processing of an electronic debit transaction 7(c) Effective Date
Secretary of the Board.
on a specified payment card network or its 1. Health care and employee benefit cards.
affiliated networks, or directing the Section 235.7(c)(1) delays the effective date [FR Doc. 2011–16861 Filed 7–19–11; 8:45 am]
processing of the transaction away from a of the network exclusivity provisions for BILLING CODE 6210–01–P

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Vol.

Federal Reserve System

Section 920(c)(8) defines ‘‘an interchange

issuers of 1 cent and a median fraud loss as a

Board should consider all costs that

35 Check clearing houses generally provide a

merchant. detect in remote deposit capture. Id. p.5.

suggested the Board initially monitor

cards. authorization, clearance, and settlement. separately in the Federal Register.

provisions. A three-party system urged

account held under a custodial agreement that

framework described in comment 2(f)–

defined in § 235.2(a). Further, cards that

transaction’’ not be limited to use as a use prepaid card’’ to mean a card, or

merchant to network and the fee flowing

to an account, but those debits settle

a payment card network for purposes of

systems places four-party systems at a party business model. One three-party

issuers currently have at least two transaction.’’

that excluding emerging payments of inclusion by demonstrating that

organizations, and individuals objected

compliance. affiliated issuers). The issuers responding to the

related to issuers’ costs of effecting the

allowable and which are not. determining the interchange fee

practical difficulties of measuring the marginal cost

transaction is not cleared until after the

does not affect the calculation of the overall cap

transaction fee that may be received by

(1920), in support of the proposition that the Board

adjustment, if addressed anywhere, and

chargeback rates. 143 EFTA Section 920(a)(6) and (7). 228.20(u).

acceptable to the merchant.

if an issuer replaces its debit cards with

an account, opened in the name of an make these determinations with respect

exception. One prepaid card processor issuer’s customers. As a result, the

as applied to issuers and merchants.

prohibition on circumvention or evasion as comment 6–1. added).

evasion of the interchange transaction

routing choice either by the way a

transaction authentication today, new arrangements with other networks that

specific merchant, or particular type of

networks may be offered on the card. received one comment supporting

may only be used to initiate transactions

time the transaction is processed. The

from the network. arrangement with its acquirer or

percent of debit cards already have dual

associated with debit card transactions. comments on this provision. Including

proposed network-average interchange fee

government limits on interchange fees. Although behavior, the competitiveness of the

182 Some issuer and network commenters believe

Industrial Economics, March 2007, v. 55, iss. 1, pp.

presentation at only a single merchant

entity or to an affiliated entity acting on with respect to an electronic debit

Deposit Insurance Corporation (other

transaction information to a separate issuer,

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