Debit Card Interchange Fees and Routing, 48684-48686 [2015-19979]
Download as PDF
<![CDATA[
48684
Federal Register / Vol. 80, No. 157 / Friday, August 14, 2015 / Rules and Regulations
require action by any person or entity
regulated by the NRC. Also, the final
rule does not change the substantive
responsibilities of any person or entity
regulated by the NRC. Accordingly, for
the reasons stated, the NRC finds,
pursuant to 5 U.S.C. 553(d)(3), that good
cause exists to make this rule effective
upon publication.
Correction to the Preamble
In FR Doc. 2015–14212 appearing on
page 33987 in the Federal Register of
Friday, June 12, 2015, the following
corrections to the preamble are made:
1. On page 33988, in the second
column, the FOR FURTHER INFORMATION
CONTACT section is corrected to read as
follows:
FOR FURTHER INFORMATION CONTACT:
Solomon Sahle, Office of Nuclear
Material Safety and Safeguards, U.S.
Nuclear Regulatory Commission,
Washington, DC 20555–0001, telephone:
301–415–3781; email: Solomon.Sahle@
nrc.gov.
2. On page 34010, in the third
column, last paragraph, in Section XVII,
Incorporation by Reference under 1 CFR
part 51—Reasonable Availability to
Interested Parties, the first sentence is
corrected to read as follows:
The two ISO standards incorporated
by reference into 10 CFR 71.75 may be
examined, by appointment, at the NRC’s
Technical Library, which is located at
Two White Flint North, 11545 Rockville
Pike, Rockville, Maryland 20852;
telephone: 301–415–7000; email:
Library.Resource@nrc.gov.
List of Subjects in 10 CFR Part 71
Criminal penalties, Hazardous
materials transportation, Incorporation
by reference, Nuclear materials,
Packaging and containers, Reporting
and recordkeeping requirements.
For the reasons set out in the
preamble and under the authority of the
Atomic Energy Act of 1954, as amended;
the Energy Reorganization Act of 1974,
as amended; and 5 U.S.C. 552 and 553,
the NRC is adopting the following
correcting amendments to 10 CFR part
71:
PART 71—PACKAGING AND
TRANSPORTATION OF RADIOACTIVE
MATERIAL
1. The authority citation for part 71
continues to read as follows:
tkelley on DSK3SPTVN1PROD with RULES
■
20:18 Aug 13, 2015
Jkt 235001
2. In § 71.4, revise the definition of
Contamination to read as follows:
■
§ 71.4
Definitions.
*
*
*
*
*
Contamination means the presence of
a radioactive substance on a surface in
quantities in excess of 0.4 Bq/cm2 (1 ×
10¥5 mCi/cm2) for beta and gamma
emitters and low toxicity alpha emitters,
or 0.04 Bq/cm2 (1 × 10¥6 mCi/cm2) for
all other alpha emitters.
(1) Fixed contamination means
contamination that cannot be removed
from a surface during normal conditions
of transport.
(2) Non-fixed contamination means
contamination that can be removed from
a surface during normal conditions of
transport.
*
*
*
*
*
■ 3. In § 71.70, revise paragraph (a), fifth
sentence, to read as follows:
§ 71.70
Incorporations by reference.
(a) * * * The materials can be
examined, by appointment, at the NRC’s
Technical Library, which is located at
Two White Flint North, 11545 Rockville
Pike, Rockville, Maryland 20852;
telephone: 301–415–7000; email:
Library.Resource@nrc.gov. The materials
are also available from the sources listed
below. * * *
*
*
*
*
*
Dated at Rockville, Maryland, this 7th day
of August, 2015.
For the Nuclear Regulatory Commission.
Helen Chang,
Acting Chief, Rules, Announcements, and
Directives Branch, Division of Administrative
Services, Office of Administration.
[FR Doc. 2015–20027 Filed 8–13–15; 8:45 am]
BILLING CODE 7590–01–P
FEDERAL RESERVE SYSTEM
12 CFR Part 235
[Regulation II; Docket No. R–1404]
RIN No. 7100–AD 63
Debit Card Interchange Fees and
Routing
Board of Governors of the
Federal Reserve System
ACTION: Clarification.
AGENCY:
Authority: Atomic Energy Act secs. 53, 57,
62, 63, 81, 161, 182, 183, 223, 234, 1701 (42
U.S.C. 2073, 2077, 2092, 2093, 2111, 2201,
2232, 2233, 2273, 2282, 2297f); Energy
Reorganization Act secs. 201, 202, 206, 211
(42 U.S.C. 5841, 5842, 5846, 5851); Nuclear
Waste Policy Act sec. 180 (42 U.S.C. 10175);
VerDate Sep<11>2014
Government Paperwork Elimination Act sec.
1704 (44 U.S.C. 3504 note); Energy Policy Act
of 2005, Pub. L. 109–58, 119 Stat. 594 (2005).
Section 71.97 also issued under sec. 301,
Pub. L. 96–295, 94 Stat. 789–790.
The Board is publishing a
clarification of Regulation II (Debit Card
Interchange Fees and Routing).
Regulation II implements, among other
SUMMARY:
PO 00000
Frm 00002
Fmt 4700
Sfmt 4700
things, standards for assessing whether
interchange transaction fees for
electronic debit transactions are
reasonable and proportional to the cost
incurred by the issuer with respect to
the transaction, as required by section
920 of the Electronic Fund Transfer Act.
On March 21, 2014, the Court of
Appeals for the District of Columbia
Circuit upheld the Board’s Final Rule.
The Court also held that one aspect of
the rule—the Board’s treatment of
transactions-monitoring costs—required
further explanation from the Board, and
remanded the matter for further
proceedings. The Board is explaining its
treatment of transactions-monitoring
costs in this Clarification.
DATES: Effective August 14, 2015.
FOR FURTHER INFORMATION CONTACT:
Stephanie Martin, Associate General
Counsel (202–452–3198), or Clinton
Chen, Attorney (202–452–3952), Legal
Division; for users of
Telecommunications Device for the Deaf
(TDD) only, contact (202–263–4869);
Board of Governors of the Federal
Reserve System, 20th and C Streets
NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION
I. Background
The Dodd-Frank Wall Street Reform
and Consumer-Protection Act (the
‘‘Dodd-Frank Act’’) was enacted on July
21, 2010.1 Section 1075 of the DoddFrank Act amends the Electronic Fund
Transfer Act (‘‘EFTA’’) (15 U.S.C. 1693
et seq.) to add a new section 920
regarding interchange transaction fees
and rules for payment card
transactions.2 EFTA section 920(a)(2)
provides that the amount of any
interchange transaction fee that an
issuer receives or charges with respect
to an electronic debit transaction must
be reasonable and proportional to the
cost incurred by the issuer with respect
to the transaction.3 Section 920(a)(3)
requires the Board to establish standards
for assessing whether an interchange
transaction fee is reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction.
Without limiting the full range of costs
that the Board may consider, section
920(a)(4)(B) requires the Board to
distinguish between two types of costs
1 Public
Law 111–203, 124 Stat. 1376 (2010).
section 920 is codified as 15 U.S.C.
1693o–2. EFTA section 920(c)(8) defines ‘‘an
interchange transaction fee’’ (or ‘‘interchange fee’’)
as any fee established, charged, or received by a
payment card network for the purpose of
compensating an issuer for its involvement in an
electronic debit transaction.
3 Electronic debit transaction (or ‘‘debit card
transaction’’) is defined in EFTA section 920(c)(5)
as a transaction in which a person uses a debit card.
2 EFTA
E:\FR\FM\14AUR1.SGM
14AUR1
tkelley on DSK3SPTVN1PROD with RULES
Federal Register / Vol. 80, No. 157 / Friday, August 14, 2015 / Rules and Regulations
when establishing standards under
section 920(a)(3). In particular, section
920(a)(4)(B) requires the Board to
distinguish between ‘‘the incremental
cost incurred by an issuer for the role of
the issuer in the authorization,
clearance, or settlement of a particular
electronic debit transaction,’’ which the
statute requires the Board to consider,
and ‘‘other costs incurred by an issuer
which are not specific to a particular
electronic debit transaction,’’ which the
statute prohibits the Board from
considering.
Under EFTA section 920(a)(5), the
Board may allow for an adjustment to
the amount of an interchange
transaction fee received or charged by
an issuer if (1) such adjustment is
reasonably necessary to make allowance
for costs incurred by the issuer in
preventing fraud in relation to
electronic debit card transactions
involving that issuer, and (2) the issuer
complies with fraud-prevention
standards established by the Board.
Those standards must, among other
things, require issuers to take effective
steps to reduce the occurrence of, and
costs from, fraud in relation to
electronic debit transactions, including
through the development and
implementation of cost-effective fraudprevention technology.
The Board promulgated its final rule
implementing standards for assessing
whether interchange transaction fees
meet the requirements of section 920(a)
in July 2011. (Regulation II, Debit Card
Interchange Fees and Routing, ‘‘Final
Rule,’’ codified at 12 CFR part 235).4
Among the provisions of the Final Rule
was one relating to transactionsmonitoring costs. Transactionsmonitoring costs are costs incurred by
the issuer during the authorization
process to detect indications of fraud or
other anomalies in order to assist in the
issuer’s decision to authorize or decline
the transaction. The Board included
transactions-monitoring costs as part of
the interchange fee standard called for
in section 920(a)(3)(A) (costs incurred
by an issuer for the issuer’s role in the
authorization of a particular transaction)
based on the Board’s determination that
these costs are incurred in the course of
effecting a particular transaction and an
integral part of the authorization of a
specific electronic debit transaction.
The Board amended Regulation II on
August 3, 2012 to implement the fraudprevention cost adjustment permitted by
EFTA section 920(a)(5).5 Fraud4 Regulation II also implemented a separate
provision of section 920 relating to network
exclusivity and routing.
5 See 77 FR 46,258 (Aug. 3, 2012).
VerDate Sep<11>2014
20:18 Aug 13, 2015
Jkt 235001
prevention costs included in that
adjustment included costs associated
with research and development of new
fraud technologies, card reissuance due
to fraudulent activity, data security, and
card activation.6 These costs are not
incurred during the transaction as part
of the authorization process.
On March 21, 2014, the Court of
Appeals for the District of Columbia
Circuit upheld the Board’s Final Rule
relating to the interchange fee standard.
NACS v. Board of Governors of the
Federal Reserve System, 746 F.3d 474
(D.C. Cir. 2014).7 The Court of Appeals
held, however, that one aspect of the
rule—the Board’s treatment of
transactions-monitoring costs—required
further explanation from the Board, and
remanded the matter for further
proceedings. The Court of Appeals
agreed with the Board’s position that
‘‘transactions-monitoring costs can
reasonably qualify both as costs ‘specific
to a particular transaction’ (section
920(a)(4)(B)) and as fraud-prevention
costs (section 920(a)(5)).’’ 746 F.3d at
492. The Court held, however, that the
Board had not adequately articulated its
reasons for including transactionsmonitoring in the interchange fee
standard rather than in the fraudprevention adjustment.
II. Rationale for Including
Transactions-Monitoring Costs in the
Interchange Fee Standard
In the Final Rule, the Board identified
the types of costs that could not be
included in the interchange fee standard
under section 920(a)(4)(B)(ii) (other
costs ‘‘not specific to a particular
transaction’’) on the basis of whether
those costs are ‘‘incurred in the course
of effecting’’ transactions.8 Costs that
were ‘‘not incurred in the course of
effecting any electronic debit
transaction’’ were determined to be
outside of the allowable ambit of the
interchange fee standard, but the
standard could include ‘‘any cost that is
not prohibited—i.e., any cost that is
incurred in effecting any electronic
debit transaction.’’ 9 Thus, for example,
the costs of equipment, hardware,
software, and labor associated with
transactions processing were properly
included in the interchange fee standard
because no particular transaction can
occur without incurring these costs, and
thus these costs are ‘‘specific to a
particular transaction.’’ 10 In upholding
6 See
77 FR at 46,264.
U.S. Supreme Court denied the retailers’
petition for a writ of certiorari on January 20, 2015.
135 S. Ct. 1170 (2015).
8 76 FR 43,394, 43,426 (July 20, 2011).
9 Id.
10 76 FR at 43,430.
7 The
PO 00000
Frm 00003
Fmt 4700
Sfmt 4700
48685
the rule, the Court of Appeals found this
to be ‘‘reasonable line-drawing.’’ 11
The same rationale supports
including transactions-monitoring costs
in the interchange fee standard.
Transactions-monitoring systems, such
as neural networks and fraud-risk
scoring systems, assist in the
authorization process by providing
information needed by the issuer in
deciding whether the issuer should
authorize the transaction before the
issuer decides to approve or decline the
transaction. Like other authorization
steps, such as confirming that a card is
valid and authenticating the cardholder,
transactions-monitoring is integral to an
issuer’s decision to authorize a specific
transaction.12 In fact, most costs of the
authorization process (which are costs
Congress required to be considered in
determining the interchange fee) assist
in preventing some type of fraud. Steps
in the authorization process may
include ensuring that the transaction is
not against an account that has been
closed, checking to be sure the card has
not been reported lost or stolen,
checking that there is an adequate
balance, and authenticating the
cardholder. Like transactionsmonitoring, these authorization steps
are all ‘‘specific to a particular
transaction’’ in the sense that they occur
in connection with each transaction that
is authorized or declined. Because the
statute requires the Board to consider
incremental authorization costs in
setting the interchange fee standard, the
Board concluded that that it should
consider the costs of all activities that
are integral to authorization, even if
those costs are also incurred for the dual
purpose of helping to prevent fraud.
By contrast, fraud-prevention costs
that the Board used to calculate the
separate fraud-prevention adjustment
authorized under section 920(a)(5) were
not necessary to effect a particular
transaction and were not part of the
authorization, clearing, or settlement
process, and thus a particular electronic
debit transaction could occur without
the issuer incurring these costs. As the
Board stated in the Final Rule, the types
of fraud-prevention activities
considered in connection with the
fraud-prevention adjustment were those
activities designed to prevent debit card
fraud at times other than when the
issuer is authorizing, settling, or
clearing a transaction.13 For example, in
setting the fraud-prevention adjustment,
the Board considered costs associated
with research and development of new
11 746
F.3d at 490.
FR at 43,430–31.
13 76 FR at 43,431.
12 76
E:\FR\FM\14AUR1.SGM
14AUR1
tkelley on DSK3SPTVN1PROD with RULES
48686
Federal Register / Vol. 80, No. 157 / Friday, August 14, 2015 / Rules and Regulations
fraud prevention technologies, card
reissuance due to fraudulent activity,
data security, and card activation.14
As noted above, section 920(a)(4)(B)
specifically directs the Board to
consider in establishing the interchange
fee standard the costs ‘‘incurred by the
issuer for the role of the issuer in the
authorization, clearance or settlement of
a particular transaction.’’ Transactions
monitoring is an integral part of the
authorization process, so that the costs
incurred in that process are part of the
authorization costs that the Board is
required by the statute to consider when
establishing the interchange fee
standard. In addition, the statutory
language of section 920(a)(5), which
differs in important respects from
section 920(a)(4)(B), supports the
Board’s decision to include
transactions-monitoring costs in the
interchange fee standard rather than in
the separate fraud prevention
adjustment. The costs considered in
section 920(a)(5)(A)(i) are those of
preventing fraud ‘‘in relation to
electronic debit transactions,’’ rather
than costs of ‘‘a particular electronic
debit transaction’’ referenced in section
920(a)(4)(B). Congress’s elimination of
the word ‘‘particular’’ and its use of the
more general phrase ‘‘in relation to,’’
along with its use of the plural
‘‘transactions,’’ indicates that the fraudprevention adjustment may take into
account an issuer’s fraud prevention
costs over a broad spectrum of
transactions that are not linked to a
particular transaction.
Moreover, section 920(a)(5) permits
the Board to adopt a separate
adjustment ‘‘to make allowance for costs
incurred by the issuer in preventing
fraud in relation to electronic debit
transactions involving that issuer’’ if
certain standards are met, and directs
that those standards include that the
issuers take steps to ‘‘reduce the
occurrence of, and costs from, fraud in
relation to electronic debit
transactions,’’ including ‘‘development
and implementation of cost-effective
fraud prevention technology.’’ Section
920(a)(5)(A)(i), (A)(ii)(II) (emphasis
supplied). The use of the general phrase
‘‘fraud in relation to electronic debit
transactions’’ and the specific reference
to developing fraud prevention
technology suggest a Congressional
intent to use the fraud prevention
adjustment to encourage issuers to
develop and adopt programmatic
improvements to address fraud outside
of the context of particular transactions
that incur costs for authorization,
clearance, or settlement. The types of
14 77
FR at 46,264.
VerDate Sep<11>2014
20:18 Aug 13, 2015
Jkt 235001
costs the Board included in the separate
fraud prevention adjustment are
programmatic costs, such as researching
and developing new fraud prevention
technologies and data security, and
other costs that encourage enhanced
fraud prevention that are not necessary
to effect particular transactions.
The Board is publishing this
explanation in accordance with the
opinion of the Court of Appeals.
By order of the Board of Governors of the
Federal Reserve System, August 10, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015–19979 Filed 8–13–15; 8:45 am]
BILLING CODE P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 1
Definitions and Abbreviations
CFR Correction
In Title 14 of the Code of Federal
Regulations, Parts 1 to 59, revised as of
January 1, 2015, on pages 12 and 13, in
§ 1.1, the definitions beginning with VA
and ending with VS are removed.
7400.9 and publication of conforming
amendments.
ADDRESSES: FAA Order 7400.9Y,
Airspace Designations and Reporting
Points, and subsequent amendments can
be viewed online at https://www.faa.gov/
airtraffic/publications/. The Order is
also available for inspection at the
National Archives and Records
Administration (NARA). For
information on the availability of this
material at NARA, call (202) 741–6030,
or go to https://www.archives.gov/
federal_register/code_of_federalregulations/ibr_locations.html.
FAA Order 7400.9, Airspace
Designations and Reporting Points, is
published yearly and effective on
September 15. For further information,
you can contact the Airspace Policy and
ATC Regulations Group, Federal
Aviation Administration, 800
Independence Avenue SW., Washington
DC 29591; Telephone: (202) 267–8783.
FOR FURTHER INFORMATION CONTACT: Rob
Riedl, Federal Aviation Administration,
Operations Support Group, Western
Service Center, 1601 Lind Avenue SW.,
Renton, WA, 98057; Telephone (425)
203–4534.
SUPPLEMENTARY INFORMATION:
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule, technical
amendment.
Authority for this Rulemaking
The FAA’s authority to issue rules
regarding aviation safety is found in
Title 49 of the United States Code.
Subtitle I, Section 106, describes the
authority of the FAA Administrator.
Subtitle VII, Aviation Programs,
describes in more detail the scope of the
agency’s authority. This rulemaking is
promulgated under the authority
described in Subtitle VII, Part A,
Subpart I, Section 40103. Under that
section, the FAA is charged with
prescribing regulations to assign the use
of airspace necessary to ensure the
safety of aircraft and the efficient use of
airspace. This regulation is within the
scope of that authority as it amends
Class D and Class E airspace at Santa
Rosa, CA.
This action amends Class D
airspace and Class E airspace designated
as an extension at Santa Rosa, CA, by
updating the geographic coordinates of
Charles M. Schulz-Sonoma County
Airport to coincide with the FAAs
database. This action does not involve a
change in the dimensions or operating
requirements of the airspace.
DATES: Effective 0901 UTC, October 15,
2015. The Director of the Federal
Register approves this incorporation by
reference action under title 1, Code of
Federal Regulations, part 51, subject to
the annual revision of FAA Order
History
The FAAs Aeronautical Information
Services identified that the airport
reference point (ARP) was not
coincidental with the FAA’s
aeronautical database. This action
makes these corrections. Accordingly,
since this action merely adjusts the
geographic coordinates of the airport,
notice and public procedure under
553(b) are unnecessary.
Class D and E airspace designations
are published in paragraphs 5000 and
6004, respectively, of FAA Order
7400.9Y, dated August 6, 2014, and
[FR Doc. 2015–20045 Filed 8–13–15; 8:45 am]
BILLING CODE 1505–01–D
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 71
[Docket No. FAA–2015–3325; Airspace
Docket No. 15–AWP–15]
Amendment of Class D and E
Airspace; Santa Rosa, CA
AGENCY:
SUMMARY:
PO 00000
Frm 00004
Fmt 4700
Sfmt 4700
E:\FR\FM\14AUR1.SGM
14AUR1
]]>Agencies
[Federal Register Volume 80, Number 157 (Friday, August 14, 2015)]
[Rules and Regulations]
[Pages 48684-48686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19979]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 235
[Regulation II; Docket No. R-1404]
RIN No. 7100-AD 63
Debit Card Interchange Fees and Routing
AGENCY: Board of Governors of the Federal Reserve System
ACTION: Clarification.
-----------------------------------------------------------------------
SUMMARY: The Board is publishing a clarification of Regulation II
(Debit Card Interchange Fees and Routing). Regulation II implements,
among other things, standards for assessing whether interchange
transaction fees for electronic debit transactions are reasonable and
proportional to the cost incurred by the issuer with respect to the
transaction, as required by section 920 of the Electronic Fund Transfer
Act. On March 21, 2014, the Court of Appeals for the District of
Columbia Circuit upheld the Board's Final Rule. The Court also held
that one aspect of the rule--the Board's treatment of transactions-
monitoring costs--required further explanation from the Board, and
remanded the matter for further proceedings. The Board is explaining
its treatment of transactions-monitoring costs in this Clarification.
DATES: Effective August 14, 2015.
FOR FURTHER INFORMATION CONTACT: Stephanie Martin, Associate General
Counsel (202-452-3198), or Clinton Chen, Attorney (202-452-3952), Legal
Division; for users of Telecommunications Device for the Deaf (TDD)
only, contact (202-263-4869); Board of Governors of the Federal Reserve
System, 20th and C Streets NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION
I. Background
The Dodd-Frank Wall Street Reform and Consumer-Protection Act (the
``Dodd-Frank Act'') was enacted on July 21, 2010.\1\ Section 1075 of
the Dodd-Frank Act amends the Electronic Fund Transfer Act (``EFTA'')
(15 U.S.C. 1693 et seq.) to add a new section 920 regarding interchange
transaction fees and rules for payment card transactions.\2\ EFTA
section 920(a)(2) provides that the amount of any interchange
transaction fee that an issuer receives or charges with respect to an
electronic debit transaction must be reasonable and proportional to the
cost incurred by the issuer with respect to the transaction.\3\ Section
920(a)(3) requires the Board to establish standards for assessing
whether an interchange transaction fee is reasonable and proportional
to the cost incurred by the issuer with respect to the transaction.
Without limiting the full range of costs that the Board may consider,
section 920(a)(4)(B) requires the Board to distinguish between two
types of costs
[[Page 48685]]
when establishing standards under section 920(a)(3). In particular,
section 920(a)(4)(B) requires the Board to distinguish between ``the
incremental cost incurred by an issuer for the role of the issuer in
the authorization, clearance, or settlement of a particular electronic
debit transaction,'' which the statute requires the Board to consider,
and ``other costs incurred by an issuer which are not specific to a
particular electronic debit transaction,'' which the statute prohibits
the Board from considering.
---------------------------------------------------------------------------
\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ EFTA section 920 is codified as 15 U.S.C. 1693o-2. EFTA
section 920(c)(8) defines ``an interchange transaction fee'' (or
``interchange fee'') as any fee established, charged, or received by
a payment card network for the purpose of compensating an issuer for
its involvement in an electronic debit transaction.
\3\ Electronic debit transaction (or ``debit card transaction'')
is defined in EFTA section 920(c)(5) as a transaction in which a
person uses a debit card.
---------------------------------------------------------------------------
Under EFTA section 920(a)(5), the Board may allow for an adjustment
to the amount of an interchange transaction fee received or charged by
an issuer if (1) such adjustment is reasonably necessary to make
allowance for costs incurred by the issuer in preventing fraud in
relation to electronic debit card transactions involving that issuer,
and (2) the issuer complies with fraud-prevention standards established
by the Board. Those standards must, among other things, require issuers
to take effective steps to reduce the occurrence of, and costs from,
fraud in relation to electronic debit transactions, including through
the development and implementation of cost-effective fraud-prevention
technology.
The Board promulgated its final rule implementing standards for
assessing whether interchange transaction fees meet the requirements of
section 920(a) in July 2011. (Regulation II, Debit Card Interchange
Fees and Routing, ``Final Rule,'' codified at 12 CFR part 235).\4\
Among the provisions of the Final Rule was one relating to
transactions-monitoring costs. Transactions-monitoring costs are costs
incurred by the issuer during the authorization process to detect
indications of fraud or other anomalies in order to assist in the
issuer's decision to authorize or decline the transaction. The Board
included transactions-monitoring costs as part of the interchange fee
standard called for in section 920(a)(3)(A) (costs incurred by an
issuer for the issuer's role in the authorization of a particular
transaction) based on the Board's determination that these costs are
incurred in the course of effecting a particular transaction and an
integral part of the authorization of a specific electronic debit
transaction.
---------------------------------------------------------------------------
\4\ Regulation II also implemented a separate provision of
section 920 relating to network exclusivity and routing.
---------------------------------------------------------------------------
The Board amended Regulation II on August 3, 2012 to implement the
fraud-prevention cost adjustment permitted by EFTA section
920(a)(5).\5\ Fraud-prevention costs included in that adjustment
included costs associated with research and development of new fraud
technologies, card reissuance due to fraudulent activity, data
security, and card activation.\6\ These costs are not incurred during
the transaction as part of the authorization process.
---------------------------------------------------------------------------
\5\ See 77 FR 46,258 (Aug. 3, 2012).
\6\ See 77 FR at 46,264.
---------------------------------------------------------------------------
On March 21, 2014, the Court of Appeals for the District of
Columbia Circuit upheld the Board's Final Rule relating to the
interchange fee standard. NACS v. Board of Governors of the Federal
Reserve System, 746 F.3d 474 (D.C. Cir. 2014).\7\ The Court of Appeals
held, however, that one aspect of the rule--the Board's treatment of
transactions-monitoring costs--required further explanation from the
Board, and remanded the matter for further proceedings. The Court of
Appeals agreed with the Board's position that ``transactions-monitoring
costs can reasonably qualify both as costs `specific to a particular
transaction' (section 920(a)(4)(B)) and as fraud-prevention costs
(section 920(a)(5)).'' 746 F.3d at 492. The Court held, however, that
the Board had not adequately articulated its reasons for including
transactions-monitoring in the interchange fee standard rather than in
the fraud-prevention adjustment.
---------------------------------------------------------------------------
\7\ The U.S. Supreme Court denied the retailers' petition for a
writ of certiorari on January 20, 2015. 135 S. Ct. 1170 (2015).
---------------------------------------------------------------------------
II. Rationale for Including Transactions-Monitoring Costs in the
Interchange Fee Standard
In the Final Rule, the Board identified the types of costs that
could not be included in the interchange fee standard under section
920(a)(4)(B)(ii) (other costs ``not specific to a particular
transaction'') on the basis of whether those costs are ``incurred in
the course of effecting'' transactions.\8\ Costs that were ``not
incurred in the course of effecting any electronic debit transaction''
were determined to be outside of the allowable ambit of the interchange
fee standard, but the standard could include ``any cost that is not
prohibited--i.e., any cost that is incurred in effecting any electronic
debit transaction.'' \9\ Thus, for example, the costs of equipment,
hardware, software, and labor associated with transactions processing
were properly included in the interchange fee standard because no
particular transaction can occur without incurring these costs, and
thus these costs are ``specific to a particular transaction.'' \10\ In
upholding the rule, the Court of Appeals found this to be ``reasonable
line-drawing.'' \11\
---------------------------------------------------------------------------
\8\ 76 FR 43,394, 43,426 (July 20, 2011).
\9\ Id.
\10\ 76 FR at 43,430.
\11\ 746 F.3d at 490.
---------------------------------------------------------------------------
The same rationale supports including transactions-monitoring costs
in the interchange fee standard. Transactions-monitoring systems, such
as neural networks and fraud-risk scoring systems, assist in the
authorization process by providing information needed by the issuer in
deciding whether the issuer should authorize the transaction before the
issuer decides to approve or decline the transaction. Like other
authorization steps, such as confirming that a card is valid and
authenticating the cardholder, transactions-monitoring is integral to
an issuer's decision to authorize a specific transaction.\12\ In fact,
most costs of the authorization process (which are costs Congress
required to be considered in determining the interchange fee) assist in
preventing some type of fraud. Steps in the authorization process may
include ensuring that the transaction is not against an account that
has been closed, checking to be sure the card has not been reported
lost or stolen, checking that there is an adequate balance, and
authenticating the cardholder. Like transactions-monitoring, these
authorization steps are all ``specific to a particular transaction'' in
the sense that they occur in connection with each transaction that is
authorized or declined. Because the statute requires the Board to
consider incremental authorization costs in setting the interchange fee
standard, the Board concluded that that it should consider the costs of
all activities that are integral to authorization, even if those costs
are also incurred for the dual purpose of helping to prevent fraud.
---------------------------------------------------------------------------
\12\ 76 FR at 43,430-31.
---------------------------------------------------------------------------
By contrast, fraud-prevention costs that the Board used to
calculate the separate fraud-prevention adjustment authorized under
section 920(a)(5) were not necessary to effect a particular transaction
and were not part of the authorization, clearing, or settlement
process, and thus a particular electronic debit transaction could occur
without the issuer incurring these costs. As the Board stated in the
Final Rule, the types of fraud-prevention activities considered in
connection with the fraud-prevention adjustment were those activities
designed to prevent debit card fraud at times other than when the
issuer is authorizing, settling, or clearing a transaction.\13\ For
example, in setting the fraud-prevention adjustment, the Board
considered costs associated with research and development of new
[[Page 48686]]
fraud prevention technologies, card reissuance due to fraudulent
activity, data security, and card activation.\14\
---------------------------------------------------------------------------
\13\ 76 FR at 43,431.
\14\ 77 FR at 46,264.
---------------------------------------------------------------------------
As noted above, section 920(a)(4)(B) specifically directs the Board
to consider in establishing the interchange fee standard the costs
``incurred by the issuer for the role of the issuer in the
authorization, clearance or settlement of a particular transaction.''
Transactions monitoring is an integral part of the authorization
process, so that the costs incurred in that process are part of the
authorization costs that the Board is required by the statute to
consider when establishing the interchange fee standard. In addition,
the statutory language of section 920(a)(5), which differs in important
respects from section 920(a)(4)(B), supports the Board's decision to
include transactions-monitoring costs in the interchange fee standard
rather than in the separate fraud prevention adjustment. The costs
considered in section 920(a)(5)(A)(i) are those of preventing fraud
``in relation to electronic debit transactions,'' rather than costs of
``a particular electronic debit transaction'' referenced in section
920(a)(4)(B). Congress's elimination of the word ``particular'' and its
use of the more general phrase ``in relation to,'' along with its use
of the plural ``transactions,'' indicates that the fraud-prevention
adjustment may take into account an issuer's fraud prevention costs
over a broad spectrum of transactions that are not linked to a
particular transaction.
Moreover, section 920(a)(5) permits the Board to adopt a separate
adjustment ``to make allowance for costs incurred by the issuer in
preventing fraud in relation to electronic debit transactions involving
that issuer'' if certain standards are met, and directs that those
standards include that the issuers take steps to ``reduce the
occurrence of, and costs from, fraud in relation to electronic debit
transactions,'' including ``development and implementation of cost-
effective fraud prevention technology.'' Section 920(a)(5)(A)(i),
(A)(ii)(II) (emphasis supplied). The use of the general phrase ``fraud
in relation to electronic debit transactions'' and the specific
reference to developing fraud prevention technology suggest a
Congressional intent to use the fraud prevention adjustment to
encourage issuers to develop and adopt programmatic improvements to
address fraud outside of the context of particular transactions that
incur costs for authorization, clearance, or settlement. The types of
costs the Board included in the separate fraud prevention adjustment
are programmatic costs, such as researching and developing new fraud
prevention technologies and data security, and other costs that
encourage enhanced fraud prevention that are not necessary to effect
particular transactions.
The Board is publishing this explanation in accordance with the
opinion of the Court of Appeals.
By order of the Board of Governors of the Federal Reserve
System, August 10, 2015.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2015-19979 Filed 8-13-15; 8:45 am]
BILLING CODE P
