Debit Card Interchange Fees and Routing, 78100-78132 [2023-24034]
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78100
Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules
FEDERAL RESERVE SYSTEM
12 CFR Part 235
[Regulation II; Docket No. R–1818]
RIN 7100–AG67
Debit Card Interchange Fees and
Routing
Board of Governors of the
Federal Reserve System (Board).
ACTION: Notice of proposed rulemaking.
AGENCY:
Regulation II implements a
provision of the Dodd-Frank Act that
requires the Board to establish standards
for assessing whether the amount of any
interchange fee received by a debit card
issuer is reasonable and proportional to
the cost incurred by the issuer with
respect to the transaction. Under the
current rule, for a debit card transaction
that does not qualify for a statutory
exemption, the interchange fee can be
no more than the sum of a base
component of 21 cents, an ad valorem
component of 5 basis points multiplied
by the value of the transaction, and a
fraud-prevention adjustment of 1 cent if
the issuer meets certain fraudprevention-standards. The Board
developed the current interchange fee
cap in 2011 using data voluntarily
reported to the Board by large debit card
issuers concerning transactions
performed in 2009. Since that time, data
collected by the Board every other year
on a mandatory basis from large debit
card issuers show that certain costs
incurred by these issuers have declined
significantly; however, the interchange
fee cap has remained the same. For this
reason, the Board proposes to update all
three components of the interchange fee
cap based on the latest data reported to
the Board by large debit card issuers.
Further, the Board proposes to update
the interchange fee cap every other year
going forward by directly linking the
interchange fee cap to data from the
Board’s biennial survey of large debit
card issuers. Initially, under the
proposal, the base component would be
14.4 cents, the ad valorem component
would be 4.0 basis points (multiplied by
the value of the transaction), and the
fraud-prevention adjustment would be
1.3 cents for debit card transactions
performed from the effective date of the
final rule to June 30, 2025. The Board
also proposes a set of technical revisions
to Regulation II.
DATES: Comments must be received on
or before February 12, 2024.
ADDRESSES: You may submit comments,
identified by Docket No. R–1818, RIN
7100–AG67, by any of the following
methods:
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SUMMARY:
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• Agency Website: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal:
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Email: regs.comments@
federalreserve.gov. Include docket
number in the subject line of the
message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Ann E. Misback, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue NW, Washington,
DC 20551.
All public comments are available
from the Board’s website at https://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
and will not be modified to remove
confidential, contact or any identifiable
information. Public comments may also
be viewed electronically or in person in
Room M–4365A, 2001 C St. NW,
Washington, DC 20551, between 9 a.m.
and 5 p.m. during Federal business
weekdays.
FOR FURTHER INFORMATION CONTACT:
Benjamin Snodgrass, Senior Counsel
(202–263–4877) or Cody Gaffney, Senior
Attorney (202–452–2674), Legal
Division; or Krzysztof Wozniak, Section
Chief (202–452–3878) or Elena
Falcettoni, Senior Economist (202–452–
2528), Division of Reserve Bank
Operations and Payment Systems. For
users of TTY–TRS, please call 711 from
any telephone, anywhere in the United
States or (202) 263–4869.
SUPPLEMENTARY INFORMATION:
I. Overview
A. Summary of Proposal
A section of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act known as the Durbin Amendment
requires the Board to establish standards
for assessing whether the amount of any
interchange fee received by a debit card
issuer is reasonable and proportional to
the cost incurred by the issuer with
respect to the debit card transaction.1
The Durbin Amendment also authorizes
the Board to allow for an adjustment to
such interchange fee in an amount that
is reasonably necessary to make
allowance for costs incurred by the
debit card issuer in preventing fraud in
relation to debit card transactions
involving that issuer.
1 Public Law 110–203, section 1075, 124 Stat.
1376, 2068 (codified at 15 U.S.C. 1693o–2).
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The Board implemented these and
other provisions of the Durbin
Amendment in 2011 and 2012 when the
Board adopted Regulation II (Debit Card
Interchange Fees and Routing).2 Under
the current rule, each interchange fee
received by a debit card issuer for a
debit card transaction that does not
qualify for a statutory exemption can be
no more than the sum of (i) 21 cents (the
‘‘base component’’), (ii) 5 basis points
multiplied by the value of the
transaction (the ‘‘ad valorem
component’’), and (iii) for a debit card
issuer that meets certain fraudprevention standards, a ‘‘fraudprevention adjustment’’ of 1 cent per
transaction. Together, the base
component and ad valorem component
comprise the ‘‘interchange fee
standards’’; the base component, ad
valorem component, and fraudprevention adjustment comprise the
‘‘interchange fee cap.’’
The Board developed the current
interchange fee cap using data reported
to the Board by large debit card issuers
on a voluntary survey that the Board
conducted during the original
Regulation II rulemaking. As such, the
current base component, ad valorem
component, and fraud-prevention
adjustment are based on the costs
incurred by large debit card issuers in
connection with debit card transactions
performed in 2009. Since that time, the
Board has collected data from large
debit card issuers on a mandatory basis
every other year, as required by the
Durbin Amendment.
When the Board established the
interchange fee standards in current
Regulation II, the Board stated that it
would, over time, adjust the interchange
fee standards based on reported costs, if
appropriate. Similarly, with respect to
the fraud-prevention adjustment, the
Board stated that it would take into
account data reported by large debit
card issuers in the future when
considering any future revisions to the
fraud-prevention adjustment. The Board
also noted that lower costs should result
in a lower interchange fee cap as issuers
become more efficient.
The data collected by the Board from
large debit card issuers since the
original Regulation II rulemaking show
that the costs incurred by large debit
card issuers in connection with debit
card transactions have changed
significantly over time. In particular, the
costs on which the Board based the base
component have nearly halved, the
issuer fraud losses on which the Board
based the ad valorem component have
fallen, and the fraud-prevention costs on
2 12
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which the Board based the fraudprevention adjustment have risen,
according to key metrics of those costs.3
As a result, the Board believes that the
current interchange fee standards may
no longer be effective for assessing
whether, for a debit card transaction
subject to the standards, the amount of
any interchange fee received by a debit
card issuer is reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction.
Further, the Board believes that the
current fraud-prevention adjustment
may not reflect an amount that is
reasonably necessary to make allowance
for costs incurred by the debit card
issuer in preventing fraud in relation to
debit card transactions involving that
issuer.
For these reasons, the Board proposes
to update all three components of the
interchange fee cap based on the latest
data reported to the Board by large debit
card issuers concerning transactions
performed in 2021. Under the proposal,
the base component would decrease
from 21.0 cents to 14.4 cents, the ad
valorem component would decrease
from 5.0 basis points (multiplied by the
value of the transaction) to 4.0 basis
points (multiplied by the value of the
transaction), and the fraud-prevention
adjustment would increase from 1.0
cents to 1.3 cents. The Board
determined the proposed base
component using a new methodology
that is informed by the cumulative data
reported to the Board every other year
since the original Regulation II
rulemaking. This methodology targets
full cost recovery over time for a
significant majority of transactions
across large debit card issuers through a
formula that relates the base component
to a key metric of issuer costs. By
contrast, the Board determined the
proposed ad valorem component and
proposed fraud-prevention adjustment
using generally the same methodologies
used in the original rulemaking.
In addition to updating the
interchange fee cap for the first time
since the original rulemaking, the
proposed revisions would codify in
Regulation II an approach for updating
the three components of the interchange
fee cap every other year going forward
based on the latest data reported to the
Board by large debit card issuers. By
directly linking the interchange fee cap
to data collected by the Board from large
debit card issuers every other year, the
proposed approach should ensure that
3 As described in section III.A, infra, the costs on
which the Board based the base component include
transaction-processing and transaction-monitoring
costs.
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the interchange fee cap will reflect
changes in the costs incurred by debit
card issuers. As a result, the Board
believes that the proposal would ensure
that, to the extent practicable, (i) the
interchange fee standards will be
effective going forward for assessing
whether, for a transaction subject to the
interchange fee standards, the amount of
any interchange fee received by a debit
card issuer is reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction,
and (ii) the fraud-prevention adjustment
will continue to reflect an amount that
is reasonably necessary to make
allowance for costs incurred by the
debit card issuer in preventing fraud in
relation to debit card transactions
involving that issuer. These future
updates to the interchange fee cap
would be implemented in accordance
with the proposed methodology and
would be published without inviting
public comment.
The Board has reviewed its
construction of the Durbin Amendment
and original analysis regarding the costs
incurred by debit card issuers that the
Board may consider in establishing the
interchange fee standards, and believes
that this prior analysis remains sound.
As such, the Board does not propose
any changes to the costs considered for
purposes of determining the base
component or the issuer fraud losses
considered for purposes of determining
the ad valorem component. The Board
also does not propose to modify the
fraud-prevention costs considered for
purposes of determining the fraudprevention adjustment, or the fraudprevention standards that large debit
card issuers must meet to receive the
fraud-prevention adjustment.
B. Outline of This Preamble
This preamble is divided into eight
sections, including this overview
section I. Section II provides additional
legal background for the proposal,
including a detailed description of the
Durbin Amendment and current
Regulation II.
Section III discusses the proposed
revisions to the interchange fee
standards in § 235.3. The Board
proposes to determine the base
component and ad valorem component
every other year based on the latest data
reported to the Board by debit card
issuers with consolidated assets of $10
billion or more—referred to in this
preamble as ‘‘covered issuers’’—on the
Board’s biennial Debit Card Issuer
Survey. The base component would be
determined using a new methodology
that is informed by the cumulative data
reported to the Board every other year
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since the original Regulation II
rulemaking. Specifically, the base
component would be the product of (i)
the transaction-weighted average of pertransaction allowable costs (excluding
fraud losses) across covered issuers
based on the latest data reported to the
Board, and (ii) a fixed multiplier
codified in Regulation II.4 The Board
proposes a fixed multiplier of 3.7,
which targets full cost recovery for 98.5
percent of covered issuer transactions
over time based on the cumulative data
reported to the Board by covered issuers
since the initial Debit Card Issuer
Survey.5 The ad valorem component
would be the median ratio of issuer
fraud losses to transaction value among
covered issuers (multiplied by the value
of the debit card transaction), which is
the same methodology the Board used to
determine the ad valorem component
during the original Regulation II
rulemaking.
Initially, under the proposal, the base
component would be 14.4 cents and the
ad valorem component would be 4.0
basis points (multiplied by the value of
the transaction) for debit card
transactions performed from the
effective date of the final rule to June 30,
2025. Going forward, the Board would
determine the base component and the
ad valorem component for debit card
transactions performed during the twoyear period beginning July 1, 2025,
based on the data reported to the Board
by covered issuers on the Board’s next
Debit Card Issuer Survey, and would
thereafter determine these amounts for
each succeeding two-year period based
on data reported to the Board on future
Debit Card Issuer Surveys.
Section IV discusses the proposed
revisions to the fraud-prevention
adjustment in § 235.4. As with the
interchange fee standards, the Board
proposes to determine the fraudprevention adjustment every other year
based on the latest data reported to the
Board by covered issuers on the biennial
4 As described in section III.A, infra, the costs on
which the Board based the base component include
transaction-processing and transaction-monitoring
costs. These costs may also be referred to as
‘‘allowable costs (excluding fraud losses)’’ or ‘‘base
component costs.’’
5 In this preamble, the term ‘‘covered issuer
transactions’’ refers to debit card transactions
performed with debit cards issued by covered
issuers. By targeting full cost recovery for 98.5
percent of covered issuer transactions, the Board
expects that, over time, the per-transaction
allowable costs (excluding fraud losses) of around
98.5 percent of covered issuer transactions will be
less than or equal to the base component. As
discussed in section III.B, infra, the proposed
approach would not guarantee that covered issuers
will fully recover their allowable costs for the target
percentage of covered issuer transactions in any
particular year.
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Debit Card Issuer Survey. The fraudprevention adjustment would be the
median per-transaction fraudprevention costs among covered issuers,
which is generally the same
methodology the Board used to
determine the fraud-prevention
adjustment in 2012.
Initially, under the proposal, the
fraud-prevention adjustment would be
1.3 cents for debit card transactions
performed from the effective date of the
final rule to June 30, 2025. Going
forward, the Board would determine the
fraud-prevention adjustment for debit
card transactions performed during the
two-year period beginning July 1, 2025,
based on the data reported to the Board
by covered issuers on the Board’s next
Debit Card Issuer Survey, and would
thereafter determine the fraudprevention adjustment for each
succeeding two-year period based on
data reported to the Board on future
Debit Card Issuer Surveys.
Section V discusses the proposed
technical revisions to Regulation II,
which are generally intended to make
Regulation II clearer. For example, the
Board proposes to add ‘‘covered issuer’’
as a defined term in Regulation II and
use this term throughout the regulation
and the Official Board Commentary on
Regulation II to refer to debit card
issuers with consolidated assets of $10
billion or more.
Section VI discusses the proposed
effective date for the revisions. The
Board proposes that the revisions
would, if adopted, take effect on the first
day of the next calendar quarter that
begins at least 60 days after the final
rule is published in the Federal
Register.
Section VII sets forth the Board’s
general request for comment, as well as
specific questions for feedback.
Section VIII sets forth certain
regulatory analyses that the Board is
required to complete under the Durbin
Amendment and certain other statutes,
such as the Regulatory Flexibility Act
and the Paperwork Reduction Act.
II. Legal Background
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A. Statutory Authority
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (the
Dodd-Frank Act) was enacted on July
21, 2010.6 Section 1075 of the DoddFrank Act amended the Electronic Fund
Transfer Act (EFTA) (15 U.S.C. 1693 et
seq.) to add a new section 920 regarding
interchange fees for debit card
6 See
Public Law 111–203, 124 Stat. 1376 (2010).
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transactions and rules for debit card and
credit card transactions.7
EFTA section 920(a)(2) provides that
the amount of any interchange fee that
an issuer may receive or charge with
respect to a debit card transaction shall
be reasonable and proportional to the
cost incurred by the issuer with respect
to the transaction.8 EFTA section
920(a)(3) requires the Board to establish
standards for assessing whether the
amount of any interchange fee is
reasonable and proportional to the cost
incurred by the issuer with respect to
the transaction. EFTA section 920(a)(4)
sets forth various considerations that the
Board must take into account when
establishing these interchange fee
standards. Specifically, the Board must
consider the functional similarity
between debit card transactions and
checking transactions that are required
within the Federal Reserve bank system
to clear at par. The Board must also
distinguish between (i) the incremental
cost incurred by an issuer for the role of
the issuer in the authorization,
clearance, or settlement of a particular
debit card transaction, which cost shall
be considered by the Board; and (ii)
other costs incurred by an issuer which
are not specific to a particular debit card
transaction, which costs shall not be
considered by the Board.
Under EFTA section 920(a)(5)(A), the
Board may allow for an adjustment to
the interchange fee received or charged
by an issuer under the interchange fee
standards if such adjustment is
reasonably necessary to make allowance
for costs incurred by the issuer in
preventing fraud in relation to debit
card transactions involving the issuer,
7 EFTA section 920 is codified at 15 U.S.C.
1693o–2. EFTA section 920(c)(2) defines ‘‘debit
card’’ to mean any card (including a general-use
prepaid card), or other payment code or device,
issued or approved for use through a payment card
network to debit an asset account, regardless of the
purpose for which the account is established, and
regardless of whether authorization is based on
signature, PIN, or other means. Most of EFTA
section 920’s requirements relate to debit card
transactions—referred to in the statute and in
Regulation II as ‘‘electronic debit transactions’’—
which are defined in EFTA section 920(c)(5) as
transactions in which a person uses a debit card.
This preamble uses the term ‘‘debit card
transaction’’ interchangeably with ‘‘electronic debit
transaction.’’ Similarly, this preamble uses the term
‘‘interchange fee’’ interchangeably with the
statutory term ‘‘interchange transaction fee.’’ EFTA
section 905(c)(8) defines ‘‘interchange transaction
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. For an overview of the
debit card industry, see 76 FR 43393, 43395–96
(July 20, 2011).
8 ‘‘Issuer’’ is defined in EFTA section 920(c)(9) to
mean any person who issues a debit card, or credit
card, or the agent of such person with respect to
such card.
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provided that the issuer complies with
fraud-related standards established by
the Board. The Board’s fraud-related
standards must, among other things,
require issuers to take effective steps to
reduce the occurrence of, and costs
from, fraud in relation to debit card
transactions, including through the
development and implementation of
cost-effective fraud prevention
technology.
Certain issuers and debit card
transactions are exempt from the
interchange fee standards. EFTA section
920(a)(6) exempts any issuer that,
together with its affiliates, has assets of
less than $10 billion.9 EFTA section
920(a)(7)(A)(i) exempts an interchange
fee charged or received with respect to
a debit card transaction in which a
person uses a debit card or general-use
prepaid card that has been provided to
a person pursuant to a Federal, State, or
local government-administered payment
program, in which the person may only
use the debit card or general-use
prepaid card to transfer or debit funds,
monetary value, or other assets that
have been provided pursuant to such
program. EFTA section 920(a)(7)(A)(ii)
exempts an interchange fee charged or
received with respect to a debit card
transaction in which a person uses
certain general-use prepaid cards.10
EFTA section 920(a)(3)(B) authorizes
the Board to require any issuer or
payment card network to provide the
Board with such information as may be
necessary to carry out the provisions of
EFTA section 920(a). This provision
additionally requires the Board, in
issuing rules under EFTA section 920(a)
and on at least a biannual basis
thereafter, to disclose such aggregate or
summary information concerning the
costs incurred, and interchange fees
charged or received, by issuers or
payment card networks in connection
with the authorization, clearance, or
settlement of debit card transactions as
9 For purposes of this exemption, EFTA section
920(a)(6) provides that the term ‘‘issuer’’ shall be
limited to the person holding the asset account that
is debited through a debit card transaction.
10 Specifically, EFTA section 920(a)(7)(A)(ii)
exempts an interchange fee charged or received
with respect to a debit card transaction in which a
person uses a plastic card, payment code, or device
that is (i) linked to funds, monetary value, or assets
purchased or loaded on a prepaid basis; (ii) not
issued or approved for use to access or debit any
account held by or for the benefit of the cardholder
(other than a subaccount or other method of
recording or tracking funds purchased or loaded on
the card on a prepaid basis); (iii) redeemable at
multiple, unaffiliated merchants or service
providers, or automated teller machines; (iv) used
to transfer or debit funds, monetary value, or other
assets; and (v) reloadable and not marketed or
labeled as a gift card or gift certificate.
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B. Regulation II
The Board adopted a final rule
implementing the interchange fee
standards and an interim final rule
implementing the fraud-prevention
adjustment in July 2011.12 In August
2012, the Board adopted a final rule
amending its interim final rule
regarding the fraud-prevention
adjustment.13 These rules were codified
as Regulation II.
Section 235.3(a) of Regulation II
implements EFTA section 920(a)(2) by
providing that the amount of any
interchange fee that an issuer may
receive or charge with respect to a debit
card transaction shall be reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction.
Section 235.3(b) implements EFTA
section 920(a)(3) by providing that an
issuer complies with the requirements
of § 235.3(a) only if each interchange fee
received or charged by the issuer for a
debit card transaction is no more than
the sum of (i) 21 cents and (ii) 5 basis
points multiplied by the value of the
transaction.14 These amounts, together
with any fraud-prevention adjustment
permitted under § 235.4, comprise the
interchange fee cap.
Section 235.4 implements the fraudprevention adjustment permitted by
EFTA section 920(a)(5). Specifically,
§ 235.4(a) allows an issuer that meets
the fraud-prevention standards
enumerated in § 235.4(b) to receive or
charge an amount of no more than 1
cent per transaction in addition to any
interchange fee it receives or charges in
accordance with § 235.3. Section
235.4(b) provides that to be eligible to
receive or charge the fraud-prevention
adjustment, an issuer must develop,
implement, and periodically review
fraud-related policies and procedures
meeting certain requirements. Section
235.4(c) provides that to be eligible to
receive or charge a fraud-prevention
adjustment, an issuer must annually
notify its payment card networks that it
complies with the fraud-prevention
standards in § 235.4(b). Section 235.4(d)
sets forth rules for when an issuer, or
the appropriate agency, determines that
the issuer is not eligible to receive or
charge a fraud-prevention adjustment.15
Section 235.5 implements the
statutory exemptions from the
interchange fee standards. Section
235.5(a) generally provides that the
interchange fee standards do not apply
to an interchange fee received or
charged by an issuer with respect to a
debit card transaction if the issuer,
together with its affiliates, has assets of
less than $10 billion as of the end of the
calendar year preceding the date of the
transaction and holds the account that
is debited. Section 235.5(b) implements
the statutory exemption for governmentadministered payment programs.
Section 235.5(c) implements the
statutory exemption for certain
reloadable prepaid cards.
Section 235.8 implements the data
collection provisions in EFTA section
920(a)(3)(B). Specifically, § 235.8(a)
provides that each issuer that is not
otherwise exempt from the requirements
of this part under § 235.5(a) and each
payment card network shall file a report
with the Board.16 Section 235.8(b)
provides that each entity required to file
a report with the Board shall submit
data in a form prescribed by the Board
for that entity. Pursuant to this
authority, the Board collects
information from debit card issuers with
consolidated assets of $10 billion or
more every other year through the Debit
Card Issuer Survey.17 The Board also
collects information from payment card
networks every year through the
Payment Card Network Survey.18 The
Board has published a summary of
findings from these two surveys on a
11 EFTA section 920 contains various other
provisions, but the proposed revisions to Regulation
II discussed in this preamble would not
substantively amend the provisions of Regulation II
that implement these other statutory provisions.
Specifically, EFTA section 920(a)(1) authorizes the
Board to prescribe regulations to prevent
circumvention or evasion of EFTA section 920(a).
EFTA section 920(a)(8) confers upon the Board
additional authority to prescribe regulations
concerning network fees. EFTA section 920(b)
requires the Board to prescribe regulations related
to the routing of debit card transactions.
12 Regulation II, Debit Card Interchange Fees and
Routing, codified at 12 CFR part 235. See 76 FR
43393 (July 20, 2011) (final rule); 76 FR 43477 (July
20, 2011) (interim final rule).
13 See 77 FR 46258 (Aug. 3, 2012).
14 The Official Board Commentary on Regulation
II, found in appendix A to part 235, refers to these
amounts as the ‘‘base component’’ and the ‘‘ad
valorem component,’’ respectively.
15 The appropriate agency for a particular entity
is determined pursuant to § 235.9 and EFTA section
918 (15 U.S.C. 1693o). For example, the Board is
the appropriate agency with respect to member
banks of the Federal Reserve System (other than
national banks), branches and agencies of foreign
banks (other than federal branches, federal
Agencies, and insured state branches of foreign
banks), commercial lending companies owned or
controlled by foreign banks, and organizations
operating under section 25 or 25A of the Federal
Reserve Act.
16 The reference to ‘‘the requirements of this part’’
in § 235.8(a) is erroneous, as debit card issuers that
qualify for the exemption in § 235.5(a) are not
exempt from the requirements of § 235.7 (network
exclusivity and debit card transaction routing) or
§ 235.8(c) (record retention). As described in section
V, infra, the Board proposes a technical correction
to fix this error.
17 See FR 3064a.
18 See FR 3064b.
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the Board considers appropriate and in
the public interest.11
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biennial basis since 2013, consistent
with EFTA section 920(a)(3)(B).19 The
Board’s most recent biennial report was
published concurrently with this
proposal.20
Appendix A to part 235 is the Official
Board Commentary on Regulation II. In
general, the commentary provides
background material to explain the
Board’s intent in adopting a particular
part of the regulation and examples to
aid in understanding how a particular
requirement is to work.21
III. Proposed Revisions to the
Interchange Fee Standards (§ 235.3)
A. Background
As described above, EFTA section
920(a)(3) directs the Board to establish
standards for assessing whether the
amount of any interchange fee is
reasonable and proportional to the cost
incurred by the issuer with respect to
the transaction. To fulfill this statutory
mandate, the Board (i) defined the costs
incurred by debit card issuers that the
Board considers, consistent with the
statute (referred to herein as ‘‘allowable
costs’’), and (ii) established standards
for assessing interchange fees relative to
allowable costs. A brief overview of how
the Board developed the interchange fee
standards in current § 235.3 follows.
1. Allowable Costs
EFTA section 920(a)(4)(B) requires the
Board, in establishing interchange fee
standards, to distinguish between (i) the
incremental cost incurred by an issuer
19 See Board of Governors of the Federal Reserve
System, 2011 Interchange Fee Revenue, Covered
Issuers Costs, and Covered Issuer and Merchant
Fraud Losses Related to Debit Card Transactions
(Mar. 5, 2013), https://www.federalreserve.gov/
paymentsystems/files/debitfees_costs_2011.pdf.
20 The Board’s reports may be found on the
Board’s website. See Board of Governors of the
Federal Reserve System, Regulation II (Debit Card
Interchange Fees and Routing): Reports and Data
Collections, https://www.federalreserve.gov/
paymentsystems/regii-data-collections.htm.
Additionally, on an annual basis, the Board
publishes average interchange fees by network. See
Board of Governors of the Federal Reserve System,
Regulation II (Debit Card Interchange Fees and
Routing): Average Debit Card Interchange Fee by
Payment Card Network, https://www.federal
reserve.gov/paymentsystems/regii-averageinterchange-fee.htm.
21 Other provisions of Regulation II implement
provisions of EFTA section 920 that are not directly
relevant to the proposed revisions discussed in this
preamble. Specifically, § 235.6 prohibits
circumvention or evasion of the interchange fee
restrictions in Regulation II and prohibits an issuer
from receiving net compensation from a payment
card network within a calendar year. Section 235.7
sets forth rules related to network exclusivity and
the routing of debit card transactions. To address
certain issues related to the routing of card-notpresent debit card transactions, the Board recently
revised § 235.7 and the commentary thereto, with
an effective date of July 1, 2023. See 87 FR 61217
(Oct. 11, 2022).
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for the role of the issuer in the
authorization, clearance, or settlement
of a particular debit card transaction,
which cost shall be considered by the
Board; and (ii) other costs incurred by
an issuer which are not specific to a
particular debit card transaction, which
costs shall not be considered by the
Board.22 When the Board adopted
current § 235.3 in 2011, the Board
identified a third category of costs that
the Board is permitted, but not required,
to consider: costs incurred by an issuer
that are specific to a particular debit
card transaction but are not incremental
costs related to a debit card issuer’s role
in authorization, clearance, and
settlement.23
Using this framework, the Board
defined the allowable costs that the
Board considered in establishing the
interchange fee standards set forth in
§ 235.3. For reasons explained in the
preamble accompanying the 2011 final
rule, allowable costs comprise (i)
transaction-processing costs, including
fixed and variable authorization,
clearance, and settlement costs, network
processing fees (e.g., switch fees), and
the costs of processing chargebacks and
other non-routine transactions; (ii)
transaction-monitoring costs; and (iii)
issuer fraud losses.24 Allowable costs do
not include other costs incurred by
debit card issuers in connection with
their debit card programs, such as
22 EFTA section 920(a)(4)(a) also requires the
Board to consider the functional similarity between
debit card transactions and checking transactions
that are required within the Federal Reserve bank
system to clear at par. For a discussion of this
requirement, see section VIII.B, infra.
23 The Board observed in 2011 that EFTA does
not define ‘‘other costs incurred by an issuer which
are not specific to a particular electronic debit
transaction,’’ which the Board is prohibited from
considering. See 76 FR 43393, 43426 (July 20,
2011). In 2010, the Board initially proposed to
exclude costs that could not be attributed to any
identified debit card transaction (referred to as
‘‘fixed costs’’ in the proposal), even if those costs
were specific to effecting debit card transactions as
a whole. See 75 FR 81721, 81735–36 (Dec. 28,
2010). After considering public comments, the
Board at the final rule stage interpreted the category
of prohibited costs to include only those costs that
are not incurred in the course of effecting any debit
card transaction. See 76 FR at 43426. Further, the
Board noted that the statute is silent on those costs
that are not incremental costs related to a debit card
issuer’s role in authorization, clearance, and
settlement, but that are specific to a particular debit
card transaction. See id. The Board determined that
EFTA section 920(a)(4)(B) did not specifically
instruct the Board to consider this third category of
costs but did not prohibit their consideration. See
id. The Board’s interpretation of the statute was
upheld by the U.S. Court of Appeals for the District
of Columbia Circuit. See NACS v. Board of
Governors of the Federal Reserve System, 746 F.3d
474, 488–89 (D.C. Cir. 2014). See also 80 FR 48684
(Aug. 14, 2015) (clarifying the treatment of
transaction-monitoring costs, as required by the
D.C. Circuit).
24 See 76 FR at 43429–31.
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corporate overhead and accountrelationship costs, general debit card
program costs (e.g., card production and
delivery costs, marketing costs, and
research and development costs), or
costs of non-sufficient funds handling,
cardholder rewards, and cardholder
inquiries.25
The Board has reviewed its
construction of the statute and prior
analysis regarding the allowable costs
that the Board considered in
establishing the interchange fee
standards, and believes that this prior
analysis remains sound. As such, the
Board does not propose any changes to
the allowable costs considered for
purposes of the interchange fee
standards.
As described below, the Board
established the base component based
on transaction-processing and
transaction-monitoring costs, but
separately assessed issuer fraud losses
through the ad valorem component.
Transaction-processing and transactionmonitoring costs are collectively
referred to in this preamble as ‘‘base
component costs.’’
2. Interchange Fee Standards
For reasons explained in the preamble
accompanying the 2011 final rule, the
Board adopted a uniform, transactionlevel standard that, subject to any fraudprevention adjustment that a covered
issuer may be permitted to receive or
charge under § 235.4, establishes the
maximum permissible interchange fee
that a covered issuer may receive for a
debit card transaction subject to the
interchange fee standards.26 This
maximum interchange fee is the sum of
a base component and an ad valorem
component.
To determine the base component, the
Board referred to the data that the Board
had collected shortly after the DoddFrank Act was signed into law via a
voluntary survey of covered issuers
concerning debit card transactions
performed in the 2009 calendar year.27
25 See
76 FR at 43427–29.
76 FR at 43431–35.
27 See Board of Governors of the Federal Reserve
System, 2009 Debit Card Issuer Survey (Sep. 13,
2010), https://www.federalreserve.gov/
paymentsystems/files/payment_card_network_
survey_20100920.pdf. The survey respondents
included 66 covered issuers, representing about 57
percent of total debit card transactions by volume
and 60 percent of total debit card transactions by
value in 2009. However, because some covered
issuers did not respond to the voluntary survey, the
proportion of total debit card transactions
performed in 2009 that are attributable to covered
issuers (including respondents and nonrespondents) was greater than 57 percent (by
volume) and 60 percent (by value). The Board
discussed preliminary summary findings from this
survey in its 2010 proposal to establish interchange
26 See
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Based on these data, the Board
computed the per-transaction base
component costs of each covered issuer
that reported such costs by summing the
base component costs reported by the
covered issuer and dividing this sum by
the total number of debit card
transactions reported by the covered
issuer. The Board then arranged these
per-transaction costs in ascending order
from lowest- to highest-cost covered
issuer.28
The Board observed that this
distribution of per-transaction base
component costs across covered issuers
was quite skewed. These costs ranged
from 3 cents to 66 cents per transaction,
with a considerable majority of covered
issuers concentrated in the range of
costs below 21 cents, and a scattered set
of covered issuers having significantly
higher costs above 21 cents. Further,
below 21 cents, the difference between
the per-transaction base component
costs of adjacently ranked covered
issuers was small, but at around 21
cents, the distribution showed a marked
discontinuity, with base component
costs varying more significantly across
these higher-cost covered issuers.
The Board concluded that
establishing interchange fee standards to
accommodate these higher-cost covered
issuers would not be reasonable or
proportional to the overall cost
experience of the substantial majority of
covered issuers.29 For that reason, the
Board adopted a base component of 21
cents per transaction. Had that base
component been in effect in 2009,
approximately 80 percent of covered
issuers that responded to the Board’s
voluntary survey would have fully
recovered their base component costs.30
The Board recognized that issuer
fraud losses are distinct from the other
types of allowable costs in that the
amount of a fraud loss varies with the
fee standards. See 75 FR at 81724–26. The Board
subsequently published a report summarizing the
data collected from the survey. See Board of
Governors of the Federal Reserve System, 2009
Interchange Fee Revenue, Covered Issuer Costs, and
Covered Issuer and Merchant Fraud Losses Related
to Debit Card Transactions (June 2011), https://
www.federalreserve.gov/paymentsystems/files/
debitfees_costs.pdf.
28 See 76 FR at 43433.
29 See id.
30 In other words, for approximately 80 percent of
covered issuers that responded to the Board’s
voluntary survey, the covered issuer’s base
component costs in 2009 were less than or equal to
the product of 21 cents and the number of
transactions involving that issuer’s debit cards in
2009. However, the Board did not indicate that the
Board was adopting any particular cost-recovery
target across covered issuers (i.e., that 80 percent of
covered issuers should fully recover their base
component costs) or across covered issuer
transactions.
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amount of the transaction.31 For this
reason, the Board determined that these
fraud losses were best assessed through
a separate ad valorem component. To
determine the ad valorem component,
the Board computed the ratio of issuer
fraud losses to transaction value for
each covered issuer that reported such
costs in response to the voluntary
survey.32 Specifically, for each such
issuer, the Board divided (i) the issuer
fraud losses by (ii) the total value of the
issuer’s debit card transactions. The
Board then sorted these ratios,
expressed in basis points, in ascending
order from lowest to highest.
The resulting distribution showed
that the ratio of issuer fraud losses to
transaction value varied considerably
among covered issuers, ranging from 0.9
to 19.6 basis points, but the distribution
was not skewed like that of pertransaction base component costs. For
the reasons explained in the preamble
accompanying the 2011 final rule, the
Board adopted an ad valorem
component of 5 basis points of the
transaction value, which corresponded
to the median ratio of issuer fraud losses
to transaction value among covered
issuers, rounded to the nearest basis
point, based on the Board’s voluntary
survey.33
The Board described the foregoing
methodologies for determining the base
component and ad valorem component
in the preamble accompanying the 2011
final rule. The Board did not, however,
codify these methodologies in § 235.3.
Rather, § 235.3(b) simply provides that
each interchange fee received or charged
by a debit card issuer for a debit card
transaction shall be no more than the
sum of 21 cents and 5 basis points
multiplied by the value of the
transaction.
B. Rationale for Proposal
When the Board established the
interchange fee standards in current
§ 235.3, the Board stated that it would
regularly collect data on the costs
incurred by covered issuers in
connection with debit card transactions
and, over time, would adjust the
interchange fee standards based on
reported costs, if appropriate. The Board
also noted that lower costs should result
in a lower interchange fee cap as issuers
become more efficient.34 To date, the
Board has not proposed or finalized any
31 See
76 FR at 43431.
the preamble accompanying the 2011 final
rule, the Board used the term ‘‘per-transaction fraud
losses’’ for this metric, but the Board now believes
that ‘‘ratio of issuer fraud losses to transaction
value’’ is a more accurate description.
33 See 76 FR at 43434.
34 See 76 FR at 43432.
32 In
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adjustments to the interchange fee
standards in § 235.3.35
Consistent with EFTA section
920(a)(3)(B), the Board has surveyed
covered issuers on a mandatory basis
every other year since the reporting
requirements in § 235.8 of Regulation II
were adopted. Through these biennial
surveys, the Board has collected data
from covered issuers concerning the
costs incurred by those issuers in
connection with debit card transactions
performed in calendar years 2011, 2013,
2015, 2017, 2019, and 2021. The Board
has reviewed the interchange fee
standards in § 235.3 in light of both the
most recently collected data from 2021
and the cumulative data collected from
covered issuers since the original
Regulation II rulemaking. As a result of
this analysis, and as described below,
the Board believes that revisions to the
current interchange fee standards are
appropriate at this time.
While the interchange fee standards
have remained the same since § 235.3
was adopted, several data points show
that the allowable costs incurred by
covered issuers have fallen significantly
since the original Regulation II
rulemaking. In particular, the Board
monitors one especially important
metric that approximates the base
component costs of the average covered
issuer transaction: the transactionweighted average of per-transaction base
component costs across covered
issuers.36 That metric was 3.9 cents in
35 In December 2022, two trade associations
representing merchants submitted a rulemaking
petition to the Board regarding the interchange fee
standards in Regulation II. Specifically, the
petitioners requested that the Board initiate a
rulemaking to lower the base component from 21
cents to 9.7 cents, and eliminate or substantially
reduce the ad valorem component and the fraudprevention adjustment. The Board views the
rulemaking petition as an additional consideration
related to the proposal; however, the Board’s
rationale for the proposal is discussed in this
section III.B.
36 The Board computes the transaction-weighted
average of per-transaction base component costs
across covered issuers by (i) summing base
component costs across covered issuers that
reported these costs; and (ii) dividing this sum by
the sum of the total number of debit card
transactions across covered issuers that reported
base component costs. The transaction-weighted
average of per-transaction base component costs
across covered issuers can be viewed as a broad
measure of whether covered issuers collectively are
becoming more or less efficient at processing debit
card transactions. Specifically, this metric
corresponds to the average base component costs of
a debit card transaction for covered issuers as a
whole. The Board believes that, for skewed
distributions like the distribution of per-transaction
base component costs, the transaction-weighted
average is preferable to alterative metrics, such as
the unweighted average across covered issuers, or
a given percentile across covered issuers. In
particular, the transaction-weighted average is less
affected than these alternative metrics by outliers,
including covered issuers with low transaction
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2021, which represents a decline of
nearly 50 percent since 2009 (7.7 cents)
and over 23 percent since 2011 (5.1
cents), the first year for which the Board
collected data on a mandatory basis.
The Board also monitors issuer fraud
losses, on which the Board based the ad
valorem component. The median ratio
of issuer fraud losses to transaction
value among covered issuers declined
by around 15 percent from 2011 (4.7
basis points, or 5.0 basis points if
rounded to the nearest basis point) to
2021 (4.0 basis points).
Taken together, these declines in base
component costs and issuer fraud losses
have resulted in a substantial increase
in the percentage of covered issuers that
fully recovered their allowable costs
from 2011 (61.1 percent) to 2021 (77.4
percent).37
As a result of the significant decline
in the allowable costs incurred by
covered issuers since 2009, the Board
believes that the current interchange fee
standards in § 235.3 may no longer be
effective for assessing whether, for a
debit card transaction subject to the
interchange fee standards, the amount of
any interchange fee received or charged
by a debit card issuer is reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction, as
required by EFTA section 920(a)(2). As
such, the Board believes it is necessary
to revise the interchange fee standards
to reflect the decline since 2009 in base
component costs and the decline over
time in the ratio of issuer fraud losses
to transaction value for covered issuers.
Furthermore, the Board believes that,
as much as practicable, the base
component and ad valorem component
should be updated regularly and
volumes but per-transaction base component costs
considerably greater than the vast majority of
covered issuers. Further, for skewed distributions
like the distribution of per-transaction base
component costs, the transaction-weighted average
is preferable to the median because, unlike that
metric, its value depends on all covered issuers’
per-transaction base component costs, rather than
only on whether such values fall above or below the
median. For example, a reduction in the pertransaction base component costs of the less
efficient 50 percent of covered issuers (e.g., due to
the adoption of a new transaction-processing
technology by these issuers) would cause a decline
in the transaction-weighted average but may not
affect the median.
37 A covered issuer is considered to have fully
recovered its allowable costs if the covered issuer’s
allowable costs in a particular year were less than
or equal to the aggregate amount of interchange fees
permitted under the interchange fee cap for
transactions involving that issuer’s debit cards in
the particular year. In contrast to the increase in the
percentage of covered issuers that fully recovered
their allowable costs from 2011 to 2021, the
percentage of covered issuer transactions for which
covered issuers fully recovered their allowable costs
was the same in 2021 as it was in 2011 (99.5
percent).
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predictably to reflect changes in the
allowable costs incurred by covered
issuers as those changes occur. Such an
approach would avoid long periods
during which the interchange fee
standards may not be effective for
assessing whether, for a debit card
transaction subject to the interchange
fee standards, the amount of any
interchange fee received or charged by
a debit card issuer is reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction. In
addition, directly linking the
interchange fee standards to the data
reported to the Board by covered issuers
on the Board’s biennial survey would
capture changes in allowable costs as
quickly as practicable. Further, the
Board believes that the patterns
observed in the cumulative data
collected by the Board since the original
rulemaking, described further below, are
consistent over time and thus support
the establishment at this time of a
repeatable process that directly links the
interchange fee standards to the data
reported on the Debit Card Issuer
Survey. Finally, this approach would
create predictability for the debit card
industry regarding how and when
updates to the interchange fee cap
would occur.
For these reasons, and as described
below, the Board proposes to determine
the base component and ad valorem
component in § 235.3 every other year
based on the latest data reported to the
Board by covered issuers. The Board
believes that, under this approach, the
interchange fee standards in § 235.3 will
be effective going forward for assessing
whether, for a debit card transaction
subject to the interchange fee standards,
the amount of any interchange fee
received or charged by a debit card
issuer is reasonable and proportional to
the cost incurred by the issuer with
respect to the transaction.38
The Board also proposes a new
methodology for determining the base
component. As described above, in
38 In lieu of directly linking the interchange fee
standards to data from the Board’s biennial survey
of covered issuers going forward, the Board could
consider adopting a one-time update to the base
component and ad valorem component in § 235.3.
Following such an approach, the Board would
continue to monitor changes in the allowable costs
incurred by covered issuers and would propose
further updates to the base component and ad
valorem component in the future, if appropriate.
However, such ad hoc updates to the base
component and ad valorem component would not
be predictable, and they could result in periods
during which the interchange fee standards may not
be effective for assessing whether, for a debit card
transaction subject to the interchange fee standards,
the amount of any interchange fee received or
charged by a debit card issuer is reasonable and
proportional to the cost incurred by the issuer with
respect to the transaction.
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2011, the Board adopted a base
component of 21 cents per transaction.
The Board selected 21 cents because
that value was the site of a clear
discontinuity in the distribution of pertransaction base component costs across
covered issuers, arranged from lowestto highest-cost covered issuer, for debit
card transactions performed in 2009.39
The Board has reviewed the distribution
of per-transaction base component costs
across covered issuers, arranged from
lowest- to highest-cost covered issuer,
from each biennial survey of covered
issuers conducted since Regulation II
was adopted. In some survey years, the
distribution contained no clear
discontinuity; in other survey years,
there were multiple apparent
discontinuities. In addition, in some
cases, the amount corresponding to a
particular discontinuity did not reflect
the overall trend in the transactionweighted average of per-transaction base
component costs across covered issuers.
For these reasons, the Board believes
that the original methodology that the
Board used to determine the base
component by reference to a clear
discontinuity in the distribution of pertransaction base component costs across
covered issuers, arranged from lowestto highest-cost covered issuer, is not
appropriate for determining the base
component at this time and, going
forward, would not facilitate the regular
and predictable updates to the
interchange fee standards that the Board
proposes.
Instead, as described below, the Board
proposes to determine the base
component as a function of the
transaction-weighted average of pertransaction base component costs across
covered issuers. Under this
methodology, any change in the base
component costs of the average covered
issuer transaction would result in a
proportional change to the base
component. As such, this methodology
will ensure that the maximum
interchange fee that a covered issuer
may receive will be proportional to the
base component costs incurred by
covered issuers with respect to the
average covered issuer transaction,
consistent with the Durbin Amendment.
Combined with the Board’s proposal to
39 As described above, the Board noted that, had
the current base component been in effect in 2009,
approximately 80 percent of covered issuers would
have fully recovered their base component costs
through the base component. However, the Board
did not indicate that the Board was selecting a costrecovery target of 80 percent of covered issuers (or
any other cost-recovery target across covered issuers
or covered issuer transactions) and did not codify
in Regulation II an approach for updating the base
component to reflect any particular cost-recovery
target.
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determine the base component every
other year based on the latest data
reported to the Board by covered
issuers, this approach is designed to
ensure that, to the extent practicable,
any interchange fee that a covered issuer
receives or charges will remain
proportional to the costs incurred by
covered issuers with respect to the
average debit card transaction over
time.40
More specifically, the Board proposes
to determine the base component as the
product of a fixed multiplier and the
transaction-weighted average of pertransaction base component costs across
covered issuers. Under this formula, the
fixed multiplier would be codified in
Regulation II and would remain
constant. The fixed multiplier would
correspond to a target selected by the
Board for a reasonable percentage of
covered issuer transactions for which
covered issuers should fully recover
their base component costs over time,
consistent with the Durbin Amendment.
Consistent patterns that the Board has
observed in the data collected from
covered issuers since 2009 related to
per-transaction base component costs
make it possible to derive such a
formula. Specifically, while the
transaction-weighted average of pertransaction base component costs across
covered issuers has declined
significantly since the original
Regulation II rulemaking, the shape of
the distribution of per-transaction costs
across covered issuer transactions has
not changed markedly between the data
collections.41 Importantly, this
particular shape can be wellcharacterized by a probability
40 In 2011, the Board rejected a mathematical
interpretation of the word ‘‘proportional’’ that
would have required a constant proportion between
allowable costs and interchange fees. See 76 FR
43393, 43423 (July 20, 2011). The Board continues
to believe that the statute requires only that the
interchange fees must have a relationship to
allowable costs, as the Board stated in 2011. See id.
Determining the base component as a fixed multiple
of the transaction-weighted average of pertransaction base component costs across covered
issuers is thus consistent with the statute, and is
desirable because it will enable the Board, going
forward, to determine the base component based on
the latest data reported to the Board by covered
issuers.
41 The Board generates the distribution of pertransaction base component costs across covered
issuer transactions as follows. For each covered
issuer that reported base component costs, the
Board first determines the per-transaction base
component costs of the covered issuer by (i)
summing the base component costs reported by the
covered issuer and (ii) dividing this sum by the
total number of debit card transactions reported by
the covered issuer. The Board then assigns this
result to each of the covered issuer’s transactions.
Finally, the Board arranges the per-transaction base
component costs of all covered issuer transactions
in ascending order from lowest- to highest-cost
covered issuer transaction.
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distribution with a key property: the
value of per-transaction base component
costs at a target percentile across
covered issuer transactions is a multiple
of the transaction-weighted average of
per-transaction base component costs
across covered issuers.42 The stability of
the shape of the distribution over time
means that the Board can identify a
fixed multiplier that, when multiplied
by the transaction-weighted average of
per-transaction base component costs in
each year, should yield full cost
recovery for the target percentage of
covered issuer transactions over time.43
The stability of the shape of the
distribution observed in data collected
from covered issuers since 2009
suggests that there are features inherent
to the covered issuer segment of the
debit card market that persist over time.
For this reason, the Board believes that,
in future data collections, the
distribution of per-transaction base
component costs across covered issuer
transactions will continue to exhibit a
similar shape. Thus, the fixed multiplier
derived from the cumulative data
collected by the Board since 2009
should continue to yield full cost
recovery over time for the target
percentage of covered issuer
transactions going forward.
Although the proposed fixed
multiplier would correspond to a target
percentage of covered issuer
transactions for which covered issuers
should fully recover their base
component costs over time, the
proposed approach would not guarantee
this precise level of cost recovery in any
particular year. Rather, in some years,
42 In particular, the data on per-transaction base
component costs across covered issuer transactions,
arranged from lowest- to highest-cost covered issuer
transaction, for each year closely approximates the
Weibull distribution. The Weibull distribution,
commonly used in social sciences and engineering,
has the property that the value of the distribution
at a particular percentile is a fixed multiple of the
average value of the distribution. The Weibull
distribution captures a number of key features of
the data on covered issuer transactions, including
the existence of a small number of high-cost
transactions associated with relatively low-volume,
high-cost covered issuers.
43 A particular Weibull distribution is described
by two parameters: (i) its scale, which determines
the magnitude of the values along the distribution;
and (ii) its shape, which determines the degree to
which the distribution is skewed to one side. The
Board’s analysis determined that the consistent
patterns in the distribution of per-transaction base
component costs across covered issuer transactions
for each set of survey data collected since 2009 can
be best captured using the Weibull distribution
with (i) a scale parameter that is proportional to the
transaction-weighted average of per-transaction
base component costs across covered issuers for
each year, and (ii) a shape parameter that is stable
over time. The Board’s analysis did not find a
statistically significant improvement in the fit of the
Weibull distribution to the data when the shape
parameter is allowed to differ across years.
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covered issuers may fully recover their
base component costs for more than the
target percentage of covered issuer
transactions; in other years, covered
issuers may fully recover their base
component costs for less than the target
percentage of covered issuer
transactions. Over time, however, the
Board expects the actual cost recovery
of covered issuer transactions to be
close to the Board’s cost-recovery
target.44 The Board intends to monitor
over time the actual cost recovery of
covered issuer transactions relative to
the Board’s cost-recovery target, and in
the future may seek comment on
potential adjustments to improve the
proposed methodology for determining
the base component, if appropriate. For
example, adjustments to the proposed
methodology may be appropriate in the
event of fundamental changes to the
debit card industry that significantly
change the shape of the distribution of
per-transaction base component costs
across covered issuer transactions
relative to the consistent patterns the
Board has observed in the cumulative
data collected from covered issuers
since 2009.
To ensure that, for a debit card
transaction subject to the interchange
fee standards, the amount of any
44 The Board assesses how close actual cost
recovery is to the cost-recovery target for a
particular fixed multiplier by evaluating, for each
year, the extent to which actual cost recovery would
have diverged from the target had the relevant base
component been in effect, and then considering the
average deviation over time resulting from these
calculations. Specifically, the Board first calculates
the difference between the cost-recovery target and
the percentage of covered issuer transactions
performed in 2009 for which covered issuers would
have fully recovered their base component costs if,
in 2009, the base component had been the product
of (i) the transaction-weighted average of pertransaction base component costs across covered
issuers in 2009, and (ii) the fixed multiplier.
Second, the Board performs the same calculation
for transactions performed in 2011. The Board then
takes the simple average of the differences
calculated for each year (i.e., for 2009 and 2011).
Third, the Board repeats this process for
transactions performed in 2013, 2015, 2017, 2019,
and 2021, in each case taking the average of the
differences calculated for each year so far. These
averages represent the extent to which actual cost
recovery would have diverged over time from the
target had the relevant base components been in
effect.
For the fixed multiplier that the Board proposes
(i.e., 3.7, as described below), using the measure of
closeness described above, the Board found that the
actual cost-recovery rate drew nearer to the target
cost-recovery rate with each subsequent data
collection that was incorporated into the Board’s
analysis. In other words, the simple average of the
differences for 2009–13 transactions improved on
that for 2009–11 transactions, which improved on
the difference for 2009, and so on. This result
suggests that, while for a particular data collection
the actual cost-recovery rate may diverge from the
target cost-recovery rate, over time actual cost
recovery is likely to be close to the cost-recovery
target.
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interchange fee received or charged by
a debit card issuer is reasonable, the
Board proposes a cost-recovery target of
98.5 percent of covered issuer
transactions, which corresponds to a
fixed multiplier of 3.7 based on the
cumulative data collected from covered
issuers since 2009. The Board believes
that this cost-recovery target, and the
base component that would result from
multiplying this fixed multiplier and
the transaction-weighted average of pertransaction base component costs, is
reasonable because it would allow
covered issuers to fully recover their
base component costs over time for a
significant majority of covered issuer
transactions. At the same time, this
target acknowledges that full cost
recovery for the highest-cost covered
issuer transactions would not be
reasonable.45
A useful measure of the difference
between covered issuer transactions
above the target percentile (for which
the Board believes full cost recovery
would be unreasonable) and covered
issuer transactions below the target
percentile (for which the Board believes
full cost recovery would be reasonable)
is the efficiency gap with respect to
transaction processing between covered
issuers whose transactions are above
and below the target percentile. This
efficiency gap may be represented by
the ratio of the transaction-weighted
average of per-transaction base
component costs for covered issuers
whose transactions are above the target
percentile to that for covered issuers
whose transactions are below the target
percentile. The Board computed this
ratio for a range of potential costrecovery targets using each set of data
collected from covered issuers since
2009.46 For the proposed cost-recovery
target of 98.5 percent of covered issuer
transactions, the average value of this
ratio across these data collections is
approximately 5.2, meaning that
covered issuers whose transactions are
above the 98.5 percentile are, on
average, more than five times less
efficient than covered issuers whose
transactions are below the 98.5
45 In 2011, the Board stated that the term
‘‘reasonable’’ implies that, above some amount, an
interchange fee is not reasonable, and noted that
common definitions of the term ‘‘reasonable’’
include ‘‘fair, proper, or moderate’’ and ‘‘not
excessive.’’ See 76 FR at 43423. The Board also
noted that the Board did not believe that it was
consistent with the statutory purpose to permit
networks to set interchange fees in order to
accommodate 100 percent of the average pertransaction costs of the highest-cost issuers. See 76
FR at 43433.
46 See section VII, infra, for the average value of
this ratio across these data collections for a range
of potential cost-recovery targets.
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percentile. Accordingly, the Board
believes that targeting full cost recovery
over time for 98.5 percent of covered
issuers transactions is reasonable.
Although the proposed new
methodology for determining the base
component would ultimately rely on a
simple formula (i.e., the transactionweighted average of per-transaction base
component costs across covered issuers
multiplied by 3.7), the Board
appreciates that the underlying
statistical analysis is complex. The
Board considered other methodologies
for determining the base component.
For example, the Board considered
setting the base component equal to the
transaction-weighted average of pertransaction base component costs across
covered issuers (i.e., effectively with a
fixed multiplier of 1.0), but determined
that this methodology would result in
an unreasonably low percentage of
covered issuers fully recovering their
costs.47 The Board also considered
determining the base component by
reference to a target percentile in (i) the
distribution of per-transaction base
component costs, arranged from lowestto highest-cost covered issuer, or (ii) the
distribution of per-transaction base
component costs across covered issuer
transactions. In both cases, however, the
Board determined that these
methodologies could result in a base
component that does not reflect changes
over time in the transaction-weighted
average of per-transaction base
component costs across covered issuers
due to the sensitivity of these alternative
methodologies to low-volume, high-cost
covered issuers. Finally, the Board
considered adopting a tiered approach
that would establish different base
components for high-volume, low-cost
covered issuers and low-volume, highcost covered issuers. However, the
Board determined that such an
approach would create numerous
practical challenges for both the Board
and debit card industry participants and
could disincentivize covered issuers in
the tier with the higher base component
from growing their debit card
programs.48
47 Specifically, setting the base component equal
to the transaction-weighted average of pertransaction base component costs across covered
issuers would have resulted in only around 15
percent of covered issuers, on average across the
biennial data collections, fully recovering their base
component costs. Such a methodology would,
however, permit covered issuers as a whole to
recover their aggregate base component costs.
48 For example, a tiered base component
approach would require the Board to demarcate
different tiers of issuers, and the Board’s
demarcations would likely need to be adjusted over
time. In addition, networks would need to track
covered issuers by tier to ensure that the
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Whereas the Board proposes a new
methodology to determine the base
component, the Board does not propose
to revise the original methodology that
the Board used to determine the ad
valorem component (i.e., the median
ratio of issuer fraud losses to transaction
value among covered issuers, multiplied
by the value of the transaction). Since
the Board adopted the interchange fee
standards in 2011, the Board has
observed an overall increase in fraud
losses to all parties related to covered
issuer transactions, but the share of such
fraud losses absorbed by covered issuers
(i.e., issuer fraud losses) has declined
during that time. Accordingly, as noted
above, the median ratio of issuer fraud
losses to transaction value among
covered issuers has declined from 2011
to 2021, despite the overall increase in
fraud losses to all parties.49 The Board
originally determined the ad valorem
component using only those fraud
losses absorbed by covered issuers, and
analysis of the data collected by the
Board since the original Regulation II
rulemaking shows that, despite these
changes in the fraud environment, the
median ratio of issuer fraud losses to
transaction value among covered issuers
remains a representative metric of the
cost of fraud incurred by covered
issuers. Therefore, for the reasons
explained in the preamble
accompanying the 2011 final rule, the
Board believes that the original
methodology continues to be
appropriate for determining the ad
valorem component.50
C. Description of Proposal
The Board proposes to determine, for
every two-year period, the base
component and the ad valorem
interchange fees received by each covered issuer do
not exceed the interchange fee standards.
49 For additional information regarding fraud
losses with respect to covered issuer transactions,
see section VIII.C, infra.
50 See 76 FR at 43431 and 43434. The Board
recognizes that some aspects of the fraud
environment have changed with, for example, the
introduction of increased security for in-person
card payments through the issuance of chip-based
EMV cards and the growth of ecommerce and
remote fraud. As discussed in section VIII.C, infra,
covered issuers now absorb a smaller percentage of
fraud losses from covered issuer transactions than
they did in 2009, with both cardholders and
merchants absorbing larger proportions of such
losses over time. Notwithstanding these changes,
the Board believes that its conclusions with respect
to the ad valorem component remain sound.
Furthermore, because the methodology for
determining the ad valorem component is based on
actual fraud losses absorbed by covered issuers, any
future decrease or increase in the median ratio of
issuer fraud losses to transaction value among
covered issuers would, pursuant to the Board’s
proposed methodology, result in a corresponding
future reduction or increase to the ad valorem
component.
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component using the latest data
reported to the Board by covered issuers
on the Debit Card Issuer Survey.
Further, the Board proposes a new
methodology for determining the base
component. Initially, under the
proposed approach, the base component
would be 14.4 cents and the ad valorem
component would be 4.0 basis points
(multiplied by the value of the
transaction) for debit card transactions
performed from the effective date of the
final rule to June 30, 2025. The Board
does not propose to modify the
allowable costs considered for purposes
of determining the base component and
the ad valorem component, or the
original methodology used to determine
the ad valorem component.
Proposed § 235.3(b)(1) would provide
that the current base component of 21.0
cents and the current ad valorem
component of 5.0 basis points
(multiplied by the value of the
transaction) would continue to apply for
debit card transactions performed from
October 1, 2011 (the original effective
date of § 235.3) until the calendar day
prior to the effective date of the final
rule. Proposed § 235.3(b)(2) would
establish the base component and the ad
valorem component that would apply
for debit card transactions performed
from the effective date of the final rule
to June 30, 2025. Specifically, for these
transactions, the base component would
be 14.4 cents, and the ad valorem
component would be 4.0 basis points
(multiplied by the value of the
transaction). As described in section
III.B, supra, the proposed base
component of 14.4 cents is the
transaction-weighted average of pertransaction allowable costs (excluding
fraud losses) across covered issuers
based on the data reported on the 2021
Debit Card Issuer Survey (3.9 cents)
multiplied by the fixed multiplier of 3.7
and rounded to the nearest tenth of one
cent. The proposed ad valorem
component of 4.0 basis points
(multiplied by the value of the
transaction) is the median ratio of issuer
fraud losses to transaction value among
covered issuers based on the data
reported on the 2021 Debit Card Issuer
Survey, rounded to the nearest quarter
of one basis point.51
51 The Board proposes to round the ad valorem
component to the nearest quarter of one basis point
to achieve a similar degree of accuracy as for the
base component, which the Board proposes to
round to the nearest tenth of one cent. Specifically,
for a $50 debit card transaction subject to the
interchange fee standards, a change in the ad
valorem component of one quarter of one basis
point would result in a change of around one tenth
of one cent to the maximum interchange fee
permitted under the interchange fee standards.
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The Board proposes a set of
conforming revisions to comments
235.3(b)–2 and 235.3(b)–3 of the Official
Commentary to make clear that the base
component and the ad valorem
component for a particular transaction
depend on the date on which the
transaction is performed. Proposed new
comment 235.3(b)–4 would provide
that, for this purpose, a debit card
transaction is considered to be
performed on the date on which the
transaction is settled on an interbank
basis.
Proposed new paragraph (c) to § 235.3
would set forth the basis for
determining the amounts in proposed
§ 235.3(b). Specifically, proposed
§ 235.3(c) would provide that, for every
two-year period, beginning with the
period from July 1, 2025, to June 30,
2027, the Board will determine the base
component and the ad valorem
component using the approach
described in a new proposed appendix
B to Regulation II. Paragraph (a) to
proposed appendix B would similarly
state that the Board will determine the
base component and the ad valorem
component for each ‘‘applicable period’’
(i.e., every two-year period beginning
with the period from July 1, 2025, to
June 30, 2027) using the approach
described in proposed appendix B.
Paragraph (b) of proposed appendix B
would set forth the data that the Board
would use to determine the base
component and ad valorem component
for each applicable period—namely, the
latest data reported to the Board by
covered issuers on the Debit Card Issuer
Survey. Specifically, paragraph (b)
would provide that the Board will
determine the base component and the
ad valorem component for each
applicable period using the data
reported to the Board by covered issuers
pursuant to § 235.8 concerning
transactions performed during the
calendar year that is two years prior to
the year in which that applicable period
begins. For example, in the case of the
applicable period beginning July 1,
2025, the Board would use the data
reported to the Board by covered issuers
on the Debit Card Issuer Survey
concerning debit card transactions
performed in calendar year 2023, which
the Board will collect in 2024.
Paragraph (c)(1) of proposed appendix
B would establish the formula that the
Board would use to determine the base
component for each applicable period.
Specifically, for each applicable period,
the base component would be the
product of the transaction-weighted
average of per-transaction allowable
costs (excluding fraud losses) across
covered issuers and 3.7, rounded to the
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nearest tenth of one cent.52 Paragraph
(c)(2) would define ‘‘allowable costs
(excluding fraud losses)’’—which is
synonymous with the term ‘‘base
component costs’’ used elsewhere in
this preamble—as the sum of the costs
of authorization, clearance, and
settlement, as reported on the Debit
Card Issuer Survey,53 and transactionmonitoring costs tied to authorization,
as reported on the Debit Card Issuer
Survey.54 Paragraph (c)(3) would set
forth how the Board calculates the
transaction-weighted average of pertransaction allowable costs (excluding
fraud losses) across issuers. Specifically,
using the latest data reported to the
Board by covered issuers, the Board
would (i) sum allowable costs
(excluding fraud losses) across covered
issuers that reported allowable costs
(excluding fraud losses); (ii) divide this
sum by the sum of the total number of
debit card transactions across covered
issuers that reported allowable costs
(excluding fraud losses); and (iii) round
this result to the nearest tenth of one
cent.55
Paragraph (d)(1) of proposed
appendix B would establish the metric
that the Board would use to determine
the ad valorem component for each
applicable period. Specifically, for each
applicable period, the ad valorem
component for a particular debit card
transaction would be the median ratio of
issuer fraud losses to transaction value
among covered issuers, rounded to the
nearest quarter of one basis point,
multiplied by the value of the debit card
transaction. Paragraph (d)(2) would
define ‘‘ratio of issuer fraud losses to
transaction value’’ as the value of fraud
losses incurred by the covered issuer, as
reported on the Debit Card Issuer
Survey,56 divided by the total value of
debit card transactions, as reported on
the Debit Card Issuer Survey.57
52 Section III.B, supra, describes the Board’s
rationale for proposing 3.7 as the fixed multiplier
for determining the base component.
53 These costs are reported on line 3a of section
II of the Debit Card Issuer Survey as ‘‘costs of
authorization, clearance, and settlement.’’ See FR
3064a.
54 These costs are reported on line 5a.1 of section
II of the Debit Card Issuer Survey as ‘‘transactions
monitoring costs tied to authorization.’’ See id.
55 The total number of debit card transactions
attributable to a covered issuer is reported on line
1a of section II of the Debit Card Issuer Survey as
the volume of ‘‘settled purchase transactions
(excluding pre-authorizations, denials, adjustments,
returns, and cash back amounts).’’ See id.
56 These costs are reported on line 8b of section
II of the Debit Card Issuer Survey as ‘‘losses
incurred by issuer’’ (i.e., gross value of fraudulent
transactions, less fraud-related chargebacks to
acquirers net of representments, and less losses
absorbed by cardholders). See id.
57 The total value of debit card transactions
attributable to a covered issuer is reported on line
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Paragraph (d)(3) would set forth how the
Board calculates the median ratio of
issuer fraud losses to transaction value
among covered issuers. Specifically,
using the latest data reported to the
Board by covered issuers, the Board
would (i) determine the ratio of issuer
fraud losses to transaction value for
each covered issuer that reported issuer
fraud losses, (ii) sort these ratios in
ascending order, and (iii) select the ratio
in the middle (if the number of ratios is
odd) or calculate the simple average of
the two ratios in the middle (if the
number of ratios is even).
Paragraph (f) of proposed appendix B
would establish the timing of the
publication of the base component and
ad valorem component for an applicable
period. Specifically, the Board would
publish these amounts in the Federal
Register no later than March 31 of the
calendar year in which the applicable
period begins. Because the Board would
determine these amounts by applying
the approach described in proposed
appendix B and using the latest data
reported to the Board by covered
issuers, the Board would not intend to
seek public comment on future updates
to these amounts.58
IV. Proposed Revisions to Fraud
Prevention Adjustment (§ 235.4)
A. Background
As described above, under EFTA
section 920(a)(5)(A), the Board may
allow for an adjustment to the
interchange fee received or charged by
an issuer under the interchange fee
standards if such adjustment is
reasonably necessary to make allowance
for costs incurred by the issuer in
preventing fraud in relation to debit
card transactions involving the issuer,
provided that the issuer complies with
fraud-related standards established by
the Board. The Board’s fraud-related
standards must (i) be designed to ensure
that any fraud-prevention adjustment is
limited to the amount that is reasonably
necessary to make allowance for costs
1a of section II of the Debit Card Issuer Survey as
the value of ‘‘settled purchase transactions
(excluding pre-authorizations, denials, adjustments,
returns, and cash back amounts).’’ See id.
58 See, e.g., 5 U.S.C. 553(b)(3)(B) (exempting
agencies from notice and comment rulemaking
when the agency for good cause finds that such
procedures are impracticable, unnecessary, or
contrary to the public interest). The Board believes
that future determinations of the base component
and the ad valorem component should qualify for
the good cause exemption from notice and
comment rulemaking because such determinations
would involve the ministerial application of the
approach described in proposed appendix B, and
the Board would not be exercising any discretion
in connection with such determinations. The Board
would seek public comment on any future
substantive changes to the proposed approach.
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incurred by the issuer in preventing
fraud in relation to debit card
transactions involving the issuer and
takes into account any fraud-related
reimbursements (including amounts
from chargebacks) received from
consumers, merchants, or payment card
networks in relation to debit card
transactions involving the issuer; and
(ii) require issuers to take effective steps
to reduce the occurrence of, and costs
from, fraud in relation to debit card
transactions, including through the
development and implementation of
cost-effective fraud prevention
technology.59 EFTA section 920(a)(5)(B)
requires the Board to prescribe
regulations to establish standards for
making any such fraud-prevention
adjustment.60
The Board adopted a fraud-prevention
adjustment and fraud-prevention
standards in § 235.4 of Regulation II.61
59 EFTA section 920(a)(5)(A)(ii). The Board does
not propose revisions to the current fraudprevention standards in § 235.4(b). For the reasons
explained in the preamble accompanying the 2012
final rule, the Board adopted a non-prescriptive
approach to these standards. See 77 FR 46258,
46268–75 (Aug. 3, 2012). The fraud-prevention
standards require issuers to develop and implement
policies and procedures reasonably designed to take
effective steps to reduce the occurrence of, and
costs to all parties from, fraudulent debit card
transactions, including through the development
and implementation of cost-effective fraudprevention technology. See § 235.4(b)(1).
Specifically, an issuer’s policies and procedures
must address: (i) methods to identify and prevent
fraudulent debit card transactions; (ii) monitoring of
the volume and value of its fraudulent debit card
transactions; (iii) appropriate responses to
suspicious debit card transactions in a manner
designed to limit the costs to all parties from and
prevent the occurrence of future fraudulent debit
card transactions; (iv) methods to secure debit card
and cardholder data; and (v) such other factors as
the issuer considers appropriate. See § 235.4(b)(2).
An issuer must review, at least annually, its fraudprevention policies and procedures, and their
implementation, and update them as necessary in
light of: (i) their effectiveness in reducing the
occurrence of, and costs to all parties from,
fraudulent debit card transactions involving the
issuer; (ii) their cost-effectiveness; and (iii) changes
in the types of fraud, methods used to commit
fraud, and available methods for detecting and
preventing fraudulent debit card transactions that
the issuer identifies from (A) its own experience or
information, (B) information provided to the issuer
by its payment card networks, law enforcement
agencies, and fraud-monitoring groups in which the
issuer participates, and (C) applicable supervisory
guidance. See § 235.4(b)(3). In order to charge or
receive the fraud-prevention adjustment, an issuer
must annually notify its payment card networks
that it complies with the Board’s fraud-prevention
standards, and must notify its payment card
networks if it is no longer eligible to receive or
charge the fraud-prevention adjustment. See
§ 235.4(c) and (d).
60 In issuing regulations to implement any fraudprevention adjustment, the Board must consider
certain factors set forth in EFTA section
920(a)(5)(B)(ii), which are discussed in section
VIII.C, infra.
61 Section 235.4 was initially adopted via an
interim final rule in July 2011. See 76 FR 43477
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In adopting the fraud-prevention
adjustment, the Board (i) defined the
fraud-prevention costs that issuers incur
and (ii) structured the fraud-prevention
adjustment to allow issuers to recover a
portion of these costs. A brief overview
of how the Board developed the fraudprevention adjustment in current
§ 235.4 follows.
1. Fraud-Prevention Costs
EFTA section 920 does not specify
types of fraud-prevention costs incurred
by issuers that the Board may or may
not consider in determining the fraudprevention adjustment. When the Board
adopted current § 235.4, the Board
explained that fraud prevention
involves a broad range of activities in
which an issuer may engage before,
during, or after a debit card
transaction.62 Accordingly, and for
reasons explained in the preamble
accompanying the 2012 final rule, the
Board considered costs incurred by
debit card issuers associated with a
variety of activities that contribute to
preventing fraud, including research
and development of new fraudprevention technologies, card
reissuance due to fraudulent activity,
data security, card activation, and
merchant blocking. However, the Board
did not consider transaction-monitoring
costs to be a fraud-prevention cost for
purposes of determining the fraudprevention adjustment because the
Board included transaction-monitoring
costs in allowable costs for purposes of
the interchange fee standards.63 The
Board also did not consider costs
incurred to prevent fraud to a
cardholder’s transaction account
through means other than debit card
transactions, or costs incurred to
prevent fraud in connection with other
payment methods such as credit cards.
Additionally, fraud losses, lost revenue
attributable to cardholders waiting for
replacement cards, fraud-loss insurance,
and recovering losses were not included
in fraud-prevention costs.64
2. Fraud-Prevention Adjustment
When the Board adopted the fraudprevention adjustment as an interim
final rule in 2011, the Board noted that
(July 20, 2011). The Board subsequently issued a
final rule that made various amendments to the
interim final rule. See 77 FR 46258 (Aug. 3, 2012).
62 77 FR 46258, 46264 (Aug. 3, 2012).
63 See id.; see also 76 FR 43393, 43431 (July 20,
2011) (noting that the types of fraud-prevention
activities considered in connection with the fraudprevention adjustment are those activities that
prevent fraud with respect to debit card
transactions at times other than when the issuer is
effecting the transaction); 80 FR 48684, 48685 (Aug.
14, 2015) (same).
64 77 FR at 46264.
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the statute does not specify what
amount, or range of amounts, is
reasonably necessary to make allowance
for an issuer’s fraud-prevention costs.
The Board concluded that an amount
that makes allowance for an issuer’s
fraud-prevention costs is one that gives
consideration to those costs and allows
a reasonable recovery of those costs
based on the considerations set forth in
EFTA section 920(a)(5)(B)(ii).65
For the reasons explained in the
preamble accompanying the 2012 final
rule, the Board adopted a fraudprevention adjustment of 1 cent per
transaction.66 This amount
corresponded to the difference, rounded
to the nearest whole cent, between the
median per-transaction fraudprevention costs aggregated with
transaction-monitoring costs among
covered issuers (1.8 cents) and the
median per-transaction transactionmonitoring costs among covered issuers
(0.7 cents), based on the data collected
on the Board’s voluntary survey.67
The Board described the foregoing
methodology for determining the fraudprevention adjustment in the preamble
accompanying the 2012 final rule. The
Board did not, however, codify this
methodology in § 235.4. Rather,
§ 235.4(a) simply provides that, subject
to compliance with the Board’s fraudprevention standards, an issuer may
receive or charge an amount of no more
than 1.0 cent per transaction in addition
to any interchange fee it receives or
charges in accordance with § 235.3.
B. Rationale for Proposal
When the Board adopted the fraudprevention adjustment in current
§ 235.4, the Board stated that it would
take into account data from future Debit
Card Issuer Surveys when considering
any future revisions to the fraudprevention adjustment.68 Consistent
with EFTA section 920(a)(3)(B), the
Board has surveyed covered issuers on
a mandatory basis every other year since
the reporting requirements in § 235.8 of
Regulation II were adopted. Through
these biennial surveys, the Board has
collected data from covered issuers
concerning the costs incurred by
covered issuers in connection with debit
card transactions performed in calendar
years 2011, 2013, 2015, 2017, 2019, and
65 76 FR at 43482. The Board rejected an
interpretation that would require a direct
connection between the fraud-prevention
adjustment and actual issuer costs. The Board also
did not interpret the statute to require the fraudprevention adjustment to permit each (or any)
issuer to fully recover its fraud-prevention costs.
See id.
66 77 FR at 46265–66.
67 77 FR at 46263.
68 77 FR at 46266.
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2021. These data show that fraudprevention costs have risen since 2009.
Specifically, the median per-transaction
fraud-prevention costs among covered
issuers was 1.3 cents in 2021.69
Given this development, the Board
believes it is necessary to revise the
fraud-prevention adjustment to reflect
the increase since 2009 in fraudprevention costs. In addition—and for
the reasons explained in section III.B,
supra, in connection with the
interchange fee standards—the Board
believes that, as much as practicable,
the fraud-prevention adjustment should
be updated regularly and predictably to
reflect changes in the fraud-prevention
costs incurred by covered issuers as
those changes occur. Accordingly, the
Board proposes to determine the fraudprevention adjustment in § 235.4 every
other year based on the latest data
reported to the Board by covered
issuers. The Board believes that, under
this approach, the fraud-prevention
adjustment in § 235.4 will continue over
time to reflect an amount that is
reasonably necessary to make allowance
for costs incurred by an issuer in
preventing fraud in relation to debit
card transactions involving that issuer.
The Board also proposes to modify
the original methodology used to
determine the fraud-prevention
adjustment. When the Board adopted
current § 235.4, the Board’s objective
was to determine the fraud-prevention
adjustment as the median pertransaction fraud-prevention costs
among covered issuers. However, due to
limitations in the data reported to the
Board by covered issuers on the Board’s
voluntary survey, the Board did not
directly calculate this metric, but rather
approximated it by calculating the
difference between (i) the median pertransaction fraud-prevention costs
aggregated with transaction-monitoring
costs among covered issuers, and (ii) the
median per-transaction transactionmonitoring costs among covered issuers,
rounded to the nearest cent.70 However,
69 The Board computes the median pertransaction fraud-prevention among covered issuers
by (i) for each covered issuer that reported fraudprevention costs, dividing the covered issuer’s
fraud-prevention costs by the total number of debit
card transactions reported by the covered issuer; (ii)
sorting these values in ascending order; and (iii)
selecting the value in the middle (if the number of
values is odd) or calculating the simple average of
the two values in the middle (if the number of
values is even).
70 Specifically, the Board’s voluntary survey
asked covered issuers to report (i) their fraudprevention costs aggregated with transactionmonitoring costs, and also to break out, if possible,
(ii) their transaction-monitoring costs. Some
covered issuers reported the first figure but not the
second. Instead of directly calculating the median
per-transaction fraud-prevention costs among
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these limitations no longer persist in the
data collected since the reporting
requirements in § 235.8 of Regulation II
were adopted.71 As a result, the Board
is now able to directly calculate this
metric. Therefore, as described below,
the Board proposes to determine the
fraud-prevention adjustment as the
median per-transaction fraudprevention costs among covered issuers,
rounded to the nearest tenth of one cent.
The Board believes that the original
methodology, with the proposed
modification, continues to be an
appropriate methodology for
determining the fraud-prevention
adjustment, both for the reasons
explained in the preamble
accompanying the 2012 final rule, and
in light of the factors set forth in EFTA
section 920(a)(5)(B)(ii), which are
discussed in section VIII.C, infra.
C. Description of Proposal
The Board proposes to determine, for
every two-year period, the fraudprevention adjustment based on the
latest data reported to the Board by
covered issuers on the Debit Card Issuer
Survey. Further, the Board proposes to
modify the original methodology used
to determine the fraud-prevention
adjustment. The Board does not propose
to modify the fraud-prevention costs
considered for purposes of determining
the fraud-prevention adjustment, or the
fraud-prevention standards that covered
issuers must meet to receive the fraudprevention adjustment.
Proposed § 235.4(a)(1) would provide
that the fraud-prevention adjustment of
1.0 cents would continue to apply for
debit card transactions performed from
October 1, 2011 (the original effective
date of § 235.4) until the calendar day
prior to the effective date of the final
rule. Proposed § 235.4(a)(2) would
establish the fraud-prevention
adjustment (1.3 cents) that would apply
for debit card transactions performed
from the effective date of the final rule
to June 30, 2025. Proposed new
comment 235.4(a)-1 would provide that,
for purposes of § 235.4(a), a debit card
covered issuers—which would have required the
Board to rely on a smaller data set comprised only
of those covered issuers that reported both figures—
the Board approximated this metric by calculating
the difference between (i) the median pertransaction fraud-prevention costs aggregated with
transaction-monitoring costs among covered issuers
that reported their fraud prevention costs
aggregated with transaction-monitoring costs, and
(ii) the median per-transaction transactionmonitoring costs among covered issuers that broke
out their transaction-monitoring costs.
71 Specifically, beginning with the first
mandatory Debit Card Issuer Survey, a more
representative number of covered issuers have
reported their fraud-prevention costs disaggregated
from their transaction-monitoring costs.
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transaction is considered to be
performed on the date on which the
transaction is settled on an interbank
basis.
Proposed new paragraph (b) to § 235.4
would set forth the basis for
determining the fraud-prevention
adjustment in proposed § 235.4(a).
Specifically, proposed § 235.4(b) would
provide that, for every two-year period,
beginning with the period from July 1,
2025, to June 30, 2027, the Board will
determine the fraud-prevention
adjustment using the approach
described in proposed appendix B to
Regulation II. Paragraph (a) to proposed
appendix B similarly would state that
the Board will determine the fraudprevention adjustment for each
‘‘applicable period’’ (i.e., every two-year
period beginning with the period from
July 1, 2025, to June 30, 2027) using the
approach described in proposed
appendix B.
Paragraph (b) of proposed appendix B
would set forth the data that the Board
would use to determine the fraudprevention adjustment for each
applicable period—namely, the latest
data reported to the Board by covered
issuers on the Debit Card Issuer Survey.
Specifically, paragraph (b) would
provide that the Board will determine
the fraud-prevention adjustment for
each applicable period using the data
reported to the Board by covered issuers
pursuant to § 235.8 concerning
transactions performed during the
calendar year that is two years prior to
the year in which that applicable period
begins. For example, in the case of the
applicable period beginning July 1,
2025, the Board would use the data
reported to the Board by covered issuers
on the Debit Card Issuer Survey
concerning debit card transactions
performed in calendar year 2023, which
the Board will collect in 2024.
Paragraph (e)(1) of proposed appendix
B would establish the metric that the
Board would use to determine the fraudprevention adjustment for each
applicable period. Specifically, for each
applicable period, the fraud-prevention
adjustment would be the median pertransaction fraud-prevention costs
among covered issuers, rounded to the
nearest tenth of one cent. Paragraph
(e)(2) would define ‘‘per-transaction
fraud-prevention costs’’ as fraudprevention costs, as reported on the
Debit Card Issuer Survey,72 divided by
72 Fraud-prevention costs are (i) ‘‘total fraudprevention and data-security costs,’’ as reported on
line 5a of section II of the Debit Card Issuer Survey,
minus (ii) ‘‘transactions monitoring costs tied to
authorization,’’ as reported on line 5a.1 of section
II of the Debit Card Issuer Survey. See FR 3064a.
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the total number of debit card
transactions, as reported on the Debit
Card Issuer Survey.73 Paragraph (e)(3)
would set forth how the Board
calculates the median per-transaction
fraud-prevention costs among covered
issuers. Specifically, using the latest
data reported to the Board by covered
issuers, the Board would (i) determine
the per-transaction fraud-prevention
costs for each covered issuer that
reported fraud-prevention costs, (ii) sort
these values in ascending order, and (iii)
select the value in the middle (if the
number of values is odd) or calculate
the simple average of the two values in
the middle (if the number of values is
even).
Paragraph (f) of proposed appendix B
would set forth the timing of the
publication of the fraud-prevention
adjustment for an applicable period.
Specifically, the Board would publish
the fraud-prevention adjustment in the
Federal Register no later than March 31
of the calendar year in which the
applicable period begins. Because the
Board would determine the fraudprevention adjustment by applying the
methodology described in proposed
appendix B and using the latest data
reported to the Board by covered
issuers, the Board would not intend to
seek public comment on future updates
to the fraud-prevention adjustment.74
V. Other Proposed Revisions
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In addition to the proposed revisions
to the interchange fee standards in
§ 235.3 and the fraud-prevention
adjustment in § 235.4, the Board
proposes a set of technical revisions to
Regulation II. In general, these proposed
revisions are intended to make
Regulation II clearer. Additionally, some
of the proposed revisions are intended
to ensure the text of the regulation
directly incorporates the Board’s current
construction of the rule.
First, to improve the readability of
Regulation II, the Board proposes to add
‘‘covered issuer’’ as a defined term in
§ 235.2. Under the proposal, ‘‘covered
issuer’’ would mean, for a particular
calendar year, an issuer that, together
with its affiliates, has assets of $10
billion or more as of the end of the
73 The total number of debit card transactions
attributable to a covered issuer is reported on line
1a of section II of the Debit Card Issuer Survey as
the volume of ‘‘settled purchase transactions
(excluding pre-authorizations, denials, adjustments,
returns, and cash back amounts).’’ See id.
74 As with future determinations of the base
component and the ad valorem component, the
Board believes that future determinations of the
fraud-prevention adjustment should qualify for the
good cause exemption from notice and comment
rulemaking. See supra note 58.
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preceding calendar year.75 Further, the
Board proposes certain conforming
revisions to the regulation to reflect the
addition of ‘‘covered issuer’’ as a
defined term. For example, the Board
proposes to move current comment
235.5(a)–1, which describes which
assets do and do not count toward the
$10 billion threshold, to the
commentary under § 235.2. In addition,
the Board proposes to incorporate the
defined term ‘‘covered issuer’’ where
relevant in other sections of Regulation
II, particularly in § 235.5(a) (the small
issuer exemption) and § 235.8(a)
(reporting requirements) and the
commentary thereto. The Board does
not intend the addition and
incorporation of the defined term
‘‘covered issuer’’ to be a substantive
change.
Second, the Board identified three
sentences in the commentary to current
§ 235.2(k) (definition of ‘‘issuer’’) that
relate to an issuer’s eligibility for the
small issuer exemption in § 235.5(a).
The Board proposes to move the
substance of these sentences into the
commentary to § 235.5(a). The Board
does not intend this proposed revision
to modify the definition of ‘‘issuer’’ or
alter any issuer’s eligibility for the small
issuer exemption.
Third, the Board proposes minor
revisions to add specificity to § 235.8
(reporting requirements and record
retention) and the commentary thereto.
Specifically, the Board proposes to
specify in § 235.8(a) that each covered
issuer must file a report with the Board
on a biennial basis, and that each
payment card network must file a report
with the Board on an annual basis,
consistent with the Board’s survey
practices since 2011. Further, the Board
proposes to add new comment 235.8(a)1 to specify that the reports referred to
in proposed § 235.8(a) are the Board’s
biennial Debit Card Issuer Survey and
annual Payment Card Network Survey,
and that each survey collects
information concerning debit card
transactions performed during the
previous calendar year. In addition, the
Board proposes to add new comment
235.8(a)–2 to specify that newly covered
issuers are exempt from the Debit Card
Issuer Survey, consistent with the
current instructions to that survey.76
The Board believes that these proposed
revisions are helpful in light of the
75 The proposed definition is derived from
current § 235.5(a)(1)(ii).
76 The General Instructions to the Debit Card
Issuer Survey currently provide that ‘‘[i]f an issuer
that is covered by the interchange fee standards in
Regulation II at the time of this data collection was
not also covered in [the previous calendar year], it
does not need to file a report . . . .’’ See FR 3064a.
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significance of the data collected on the
Debit Card Issuer Survey to the
proposed approach for determining the
base component, the ad valorem
component, and the fraud-prevention
adjustment.
Fourth, the Board proposes to remove
§ 235.7(c), the commentary to § 235.7(c),
and § 235.10 of Regulation II. These
sections of the regulation specify the
original effective date of Regulation II
(October 1, 2011) and give debit card
issuers and networks additional time to
comply with the requirements in
§ 235.7(a) for certain types of debit
cards, such as general-use prepaid cards
and debit cards that use point-of-sale
transaction qualification or
substantiation systems for verifying the
eligibility of purchased goods or
services. Both the original effective date
of Regulation II and these extended
compliance dates have long since
passed. As such, the Board believes that
these provisions of Regulation II are no
longer necessary.77 In addition, deleting
these provisions would avoid the
potential for confusion regarding the
effective date of any future revisions to
the requirements in § 235.7(a).78
Fifth, the Board proposes minor
revisions to § 235.4 (in addition to those
described in section IV.C, supra) and
the commentary to § 235.3(b) (in
addition to those described in section
III.C, supra) to clarify the relationship
between the interchange fee standards
in § 235.3 and the fraud-prevention
adjustment in § 235.4. Specifically, the
Board proposes to modify the first
sentence of § 235.4(a) to clarify that the
fraud-prevention adjustment is in
addition to any interchange fee an issuer
receives or charges in accordance with
§ 235.3. Further, the Board proposes to
add a sentence in both comments
235.3(b)–1 and 235.3(b)–3 stating that,
in addition to the base component and
ad valorem component, an issuer may
be permitted to receive a fraudprevention adjustment under § 235.4.
77 For the same reason, the Board proposes to
remove § 235.5(a)(4), which temporarily modified
the application of the small issuer exemption due
the COVID–19 pandemic. See 85 FR 77345 (Dec. 2,
2020). Because the last debit card transactions to
which § 235.5(a)(4) applied were performed on
December 31, 2021, the Board proposes to remove
§ 235.5(a)(4) with an effective date of January 1,
2027, which is after the five-year record retention
requirement prescribed in § 235.8(c)(1) will have
elapsed with respect to these transactions. The
effective date of the other proposed revisions
described in this preamble is discussed in section
VI, infra.
78 The Board does not anticipate any future
revisions to § 235.7(a) at this time. However,
questions regarding the effective date arose in
connection with the Board’s recent revisions to
§ 235.7(a) and the commentary thereto. See 87 FR
61217 (Oct. 11, 2022).
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Although the Board does not believe
that debit card industry participants
currently misunderstand the
relationship between the interchange fee
standards in § 235.3 and the fraudprevention adjustment in § 235.4, the
proposed revisions would eliminate any
doubt that the maximum permissible
interchange fee amount that a covered
issuer may receive for a transaction
subject to the interchange fee standards
is the sum of the base component, the
ad valorem component, and, if the
covered issuer is eligible, the fraudprevention adjustment.
Finally, the Board proposes to remove
the first clause of § 235.5(a)(1), which
cross-references § 235.5(a)(3) (transition
period for newly covered issuers) and
characterizes the latter paragraph as an
exception to the small issuer exemption
in § 235.5(a)(1). The Board believes that
characterizing § 235.5(a)(3) as an
exception to § 235.5(a)(1) is potentially
confusing, as § 235.5(a)(3) adds to,
rather than subtracts from, the relief
provided in § 235.5(a)(1) by providing
additional, temporary relief to newly
covered issuers that would not
otherwise qualify for the relief provided
in § 235.5(a)(1). The proposed revision
would clarify the relationship between
these two paragraphs in § 235.5(a) but is
not intended to alter any issuer’s
eligibility for the small issuer
exemption.
Cost-recovery
target
(percentage of
covered issuer
transactions)
(%)
Current
99.5
99.0
* 98.5
98.0
95.0
Fixed multiplier
78113
VI. Effective Date of Proposed Revisions
VII. Request for Comment
With one exception,79 the Board
proposes that the revisions would, if
adopted, take effect on the first day of
the next calendar quarter that begins at
least 60 days after the final rule is
published in the Federal Register.80
Such an implementation period would
be similar to the implementation period
of the current interchange fee standards,
which the Board published on July 20,
2011, and became effective on October
1, 2011.81
Once the proposed revisions are
effective, and as described in sections
III.C and IV.C, supra, the proposed base
component (14.4 cents), ad valorem
component (4.0 basis points multiplied
by the value of the transaction), and
fraud-prevention adjustment (1.3 cents)
would be in effect through June 30,
2025. On July 1, 2025, a new base
component, ad valorem component, and
fraud-prevention adjustment would take
effect. The Board would determine these
amounts using the approach described
in proposed appendix B based on the
data reported to the Board by covered
issuers on the Debit Card Issuer Survey
in 2024 (concerning debit card
transactions performed in calendar year
2023), and would publish these values
in the Federal Register no later than
March 31, 2025.
The Board invites comment on all
aspects of the proposed revisions.82 In
addition, the Board invites feedback on
the following specific questions related
to the proposal:
1. As stated in paragraph (a) of
proposed appendix B to Regulation II,
the Board would determine the base
component, ad valorem component, and
fraud-prevention adjustment for every
two-year period, beginning with the
period from July 1, 2025, to June 30,
2027. Is the proposed two-year cadence
appropriate, or should the Board
determine these amounts more or less
frequently?
2. As described in paragraph (c)(1) of
proposed appendix B to Regulation II,
the Board would determine the base
component as a fixed multiple of the
transaction-weighted average of pertransaction base component costs (i.e.,
allowable costs (excluding fraud losses))
across covered issuers. As described in
section III.B, supra, the fixed multiplier
corresponds to the percentage of
covered issuer transactions for which
the Board believes covered issuers
should fully recover their base
component costs over time. Should the
Board select an alternative cost-recovery
target from among the possibilities
below, or another cost-recovery target
not included below? If so, why?
3.
Base component
(based on 2021
data) 83
(cents)
Decline in base
component
relative to current
(based on 2021
data)
(%)
Efficiency gap with respect to
transaction processing
between covered issuers
whose transactions are above
and below the
cost-recovery target
(based on 2021 data) 84
Percentage of covered issuers
that would have fully
recovered their base
component costs in 2021 had
the relevant base component
been in effect in 2021
(based on 2021 data)
(%)
21.0
17.6
15.6
14.4
13.7
10.5
.............................
16
26
31
35
50
.................................................
7.7
5.8
5.2
4.7
3.8
77
76
71
66
63
52
.............................
4.5
4.0
3.7
3.5
2.7
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* Proposal.
79 Unlike the other proposed revisions described
in this preamble, the proposed deletion of
§ 235.5(a)(4) would, if adopted, take effect on
January 1, 2027. See supra note 77.
80 Section 302 of the Riegle Community
Development and Regulatory Improvement Act,
Public Law 103–325, requires that amendments to
regulations prescribed by a Federal banking agency
that impose additional requirements on insured
depository institutions must take effect on the first
day of a calendar quarter that begins on or after the
date of publication in the Federal Register. See 12
U.S.C. 4802.
81 The Board notes that, compared with the
original rulemaking in which the Board adopted
current § 235.3, the proposed revisions would
represent a significantly smaller reduction in the
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amount of interchange fees that covered issuers may
receive for transactions subject to the interchange
fee standards. In addition, at the time of the original
rulemaking, there was significant uncertainty as to
whether payment card networks would implement
different interchange fee schedules for transactions
subject to and exempt from the interchange fee cap.
Since that time, all networks have established
different interchange fee schedules for transactions
subject to and exempt from the interchange fee cap.
82 As noted in section III.A, supra, the Board has
reviewed its construction of the statute and prior
analysis regarding the allowable costs that the
Board considered in establishing the interchange
fee standards, and believes that this prior analysis
remains sound. As such, the Board is not inviting
comments on the allowable costs considered for
purposes of the interchange fee standards.
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83 The transaction-weighted average of pertransaction base component costs across covered
issuers, rounded to the nearest tenth of one cent,
for transactions performed in 2021 was 3.9 cents.
For purposes of comparison, the same average for
transactions performed in 2009 and 2011 was 7.7
cents and 5.1 cents, respectively. The base
component values listed are the product of 3.9 cents
and the relevant fixed multiplier.
84 As described in section III.B, supra, this
efficiency gap is represented by the ratio of the
transaction-weighted average of per-transaction
base component costs for covered issuers whose
transactions are above the target percentile to that
for covered issuers whose transactions are below
the target percentile.
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4. As described in paragraph (d)(1) of
proposed appendix B to Regulation II,
the Board would determine the ad
valorem component, for a particular
debit card transaction, as the median
ratio of issuer fraud losses to transaction
value among covered issuers, multiplied
by the value of the transaction. Should
the Board adopt an alternative
methodology for determining the ad
valorem component? If so, why?
5. As described in paragraph (e)(1) of
proposed appendix B to Regulation II,
the Board would determine the fraudprevention adjustment as the median
per-transaction fraud-prevention costs
among covered issuers. Should the
Board adopt an alternative methodology
for determining the fraud-prevention
adjustment? If so, why?
6. As described in paragraphs (c)(1),
(d)(1), and (e)(1) of proposed appendix
B to Regulation II, respectively, the
Board proposes to round the base
component to the nearest tenth of one
cent, the ad valorem component to the
nearest quarter of one basis point, and
the fraud-prevention adjustment to the
nearest tenth of one cent. Further, as
described in paragraph (c)(3) of
proposed appendix B to Regulation II, in
determining the base component, the
Board proposes to round the
transaction-weighted average of pertransaction allowable costs (excluding
fraud losses) across covered issuers to
the nearest tenth of one cent. Do these
rounding conventions provide an
appropriate degree of precision? If not,
what alternative rounding conventions
should the Board adopt?
7. As described in paragraphs (c)
through (e) of proposed appendix B to
Regulation II, the Board would
determine the base component, ad
valorem component, and fraudprevention adjustment for an applicable
period using data reported on lines 1a,
3a, 5a, 5a.1, and 8b of the Debit Card
Issuer Survey (FR 3064a).
a. Are there any reporting challenges
or data quality issues associated with
these line items of which the Board
should be aware? If so, how could the
Board address these challenges or
issues?
b. Should the Board amend § 235.8 of
Regulation II to specify that a covered
issuer is required to retain records
supporting the data that the covered
issuer reports on the Debit Card Issuer
Survey? Would this record retention
requirement be duplicative of any
existing recordkeeping requirements for
covered issuers? If not, what would be
the estimated additional annual burden
of this requirement, in terms of hours
and cost, for covered issuers?
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8. As described in section VI, with
one exception, the Board proposes that
the revisions would take effect on the
first day of the next calendar quarter
that begins at least 60 days after the
final rule is published in the Federal
Register. Would this proposed effective
date provide sufficient notice to covered
issuers, payment card networks, and
other industry stakeholders to prepare
for the initial changes to the base
component, ad valorem component, and
fraud-prevention adjustment?
9. As stated in paragraph (f) of
proposed appendix B to Regulation II,
going forward, the Board would publish
the base component, ad valorem
component, and fraud-prevention
adjustment in the Federal Register no
later than March 31 for an applicable
period beginning July 1. Would this
timeline provide sufficient notice to
covered issuers, payment card networks,
and other industry stakeholders to
prepare for changes to these amounts?
Should the Board increase or decrease
the period between publication of these
values and the beginning of the next
applicable period?
10. Proposed comments 235.3(b)–4
and 235.4(b)–1 would provide that, for
purposes of determining in which twoyear period a debit card transaction is
considered to be performed, a debit card
transaction is considered to be
performed on the date on which it is
settled on an interbank basis. Is this
proposed convention sufficiently clear?
For example, should the Board specify
which time zone is controlling for
purposes of determining the date on
which a transaction is settled on an
interbank basis? Should the Board adopt
an alternative standard, such as
considering a transaction to be
performed on the date on which the
cardholder presents the debit card to the
merchant for payment?
11. Would any of the proposed
technical revisions described in section
V, which are generally intended to make
Regulation II clearer, create unintended
consequences?
12. Does the Board’s economic
analysis of the proposal, set forth in
section VIII.A, appropriately describe
the likely impact of the proposal on
various participants in the debit card
market? Are there additional impacts of
the proposal that the Board has not
considered?
VIII. Regulatory Analyses
A. EFTA Section 904(a) Analysis
1. Statutory Requirement
Section 904(a)(2) of the EFTA requires
the Board, in prescribing regulations to
carry out the purposes of EFTA section
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920, to prepare an economic analysis
that considers the costs and benefits to
financial institutions, consumers, and
other users of electronic fund transfers.
The analysis must address the extent to
which additional paperwork will be
required, the effect upon competition in
the provision of electronic fund transfer
services among large and small financial
institutions, and the availability of such
services to different classes of
consumers, particularly low-income
consumers. EFTA section 904(a)(2) also
requires, to the extent practicable, the
Board to demonstrate that the consumer
protections of the proposed regulations
outweigh the compliance costs imposed
upon consumers and financial
institutions. The Board interprets these
requirements as applying with respect
to both proposed and final rules
implementing EFTA section 920.
In analyzing the potential effects of
the proposal, the Board considered
predictions of economic theory,
information regarding debit card
industry structure and practices, and
issues raised during the original
Regulation II rulemaking. The analysis
also incorporates the experience of debit
card industry participants since the
current interchange fee cap was adopted
in 2011.
2. Cost/Benefit Analysis
(a) Effects on Merchants 85
The Board believes that the primary
way in which the proposal would
impact merchants is by lowering their
costs of accepting debit card
transactions. The proposal would
generally decrease the interchange fee
paid by an acquirer (i.e., a merchant’s
depository institution) on an average
transaction performed using a debit card
issued by a covered issuer, which would
in turn decrease a merchant’s costs by
decreasing the merchant discount that
the merchant pays to its acquirer for a
debit card transaction.86 Although the
precise extent to which acquirers would
pass on savings from lower debit card
interchange fees to merchants may vary,
competition between acquirers in the
industry should generally result in
acquirers passing on savings from lower
85 The Board interprets ‘‘other users of electronic
fund transfer services’’ in EFTA section 904(a)(2) to
refer primarily to merchants.
86 Data collected by the Board show that, since
adoption of the current interchange fee cap, actual
per-transaction interchange fees for transactions
subject to the interchange fee standards have been
close in value to the amount permitted under the
interchange fee cap. Thus, the Board expects that
the proposed revisions to the interchange fee cap
will directly lower per-transaction interchange fees
for most transactions subject to the interchange fee
standards.
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interchange fees to their merchant
customers.87
Merchants that experience a decrease
in the costs of accepting debit card
transactions may pass on some or all
these savings to consumers in the form
of lower prices, foregone future price
increases, or improved products or
services.88 The extent to which
merchants would pass on such savings
to consumers may depend on many
factors. For example, merchants in more
competitive markets would be likely to
pass on more of their cost savings to
consumers compared with merchants
facing less competition.
Measuring the extent to which
merchants pass on cost savings to
consumers, including any decrease in
the costs of accepting certain forms of
payment, is generally difficult.89 Efforts
to measure the extent to which
merchants passed on to consumers any
savings associated with the decrease in
the costs of accepting debit card
transactions in the period following the
adoption of the current interchange fee
cap in 2011 have yielded a wide range
of results. For example, in response to
a survey conducted soon after the
introduction of the interchange fee cap,
merchants did not consistently report
making adjustments to their prices in
response to the interchange fee cap.90
By contrast, later research efforts
analyzing data from longer time periods
found evidence that merchants passed
on to consumers a portion of their debit
card acceptance costs (e.g., by adjusting
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87 The
extent to which an acquirer passes on
savings from lower interchange fees to a merchant
may depend on many factors, including the
merchant’s type and size.
88 In addition, merchants may use savings from
lower costs of accepting debit card transactions to
enhance their operations, for example, by adding
staff, improving their facilities, or implementing
new technology.
89 Potential challenges include (i) a lack of
detailed price and cost data at the merchant level,
(ii) contemporaneous changes in other costs for
merchants, (iii) the small magnitude of cost
variation due to changes in interchange fees relative
to total price, and (iv) asymmetric price stickiness
in the short term, meaning that merchants are more
likely to increase prices in response to cost
increases than to lower prices in response to cost
decreases. For an overview of research looking to
measure merchant cost pass-through, see Howard
Chang, David S. Evans & Daniel D. Garcia Swartz,
The Effect of Regulatory Intervention in Two-Sided
Markets: An Assessment of Interchange-Fee
Capping in Australia, 4 Review of Network
Economics 328 (2005), https://doi.org/10.2202/
1446-9022.1080.
90 See Wang, Zhu, Scarlett Schwartz, & Neil
Mitchell, The Impact of the Durbin Amendment on
Merchants: A Survey Study, 100 Federal Reserve
Bank of Richmond Economic Quarterly 183 (2014),
https://www.richmondfed.org/-/media/
RichmondFedOrg/publications/research/economic_
quarterly/2014/q3/pdf/wang.pdf.
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their prices) and that the degree of passthrough depended on merchant size.91
Finally, the decrease in costs of
accepting debit card transactions may
incentivize some merchants that until
now have not accepted debit cards as a
form of payment to begin doing so. In
particular, while debit card acceptance
is already high for most in-person
transactions, the proposal may
encourage greater adoption of debit
cards in market segments where
acceptance may be lower, such as cardnot-present (e.g., ecommerce)
transactions. Another market segment
for which merchants may increase debit
card acceptance are small-dollar
purchases because, for this market
segment, the proposed decrease in the
base component would substantially
reduce debit card acceptance costs as a
proportion of the transaction value.
Faced with lower debit card acceptance
costs, some merchants may also look to
provide incentives to their customers, or
otherwise steer them, to pay with debit
cards over alternative payment methods.
(b) Effects on Debit Card Issuers 92
The Board believes that the proposal
would have a direct effect on covered
issuers but would not directly affect
debit card issuers exempt from the
interchange fee cap (exempt issuers).
The primary way in which the
proposal would affect covered issuers
would be by lowering their revenue
from debit card transactions. In
particular, covered issuers’ interchange
fee revenue would decline as the
proposal would decrease the average
interchange fee they collect on debit
card transactions subject to the
interchange fee standards. This
reduction in covered issuers’ total debit
card interchange fee revenue could be
offset to some extent by the likely
continued growth in total debit card
volume, with the offset potentially
varying between different issuers. Debit
card popularity has grown substantially
since the current interchange fee cap
was adopted; over this period, debit
cards have become the most commonly
used noncash payment method in the
91 See, e.g., Vladmir Mukharlyamov & Natasha
Sarin, Price Regulation in Two-Sided Markets:
Empirical Evidence from Debit Cards (last rev. Nov.
28, 2022) (unpublished manuscript), https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3328579; Efraim Berkovich & Zheli He,
Rewarding the Rich: Cross Subsidies from
Interchange Fees (Hispanic Leadership Fund, May
3, 2022), https://hispanicleadershipfund.org/wpcontent/uploads/2022/05/HLF_Report_
RewardingTheRich-InterchangeFees_03May22.pdf.
92 The Board interprets ‘‘financial institutions’’ in
EFTA section 904(a)(2) to refer primarily to issuers
of debit cards.
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78115
United States.93 As noted above, further
reduction in interchange fee levels may
support continued growth in debit card
volumes to the extent that more
merchants accept debit cards as a form
of payment or encourage their
customers to use debit cards.
Faced with lower interchange revenue
from debit card transactions, covered
issuers may offset some or all lost
interchange fee revenue through a
combination of customer fee increases
and issuer cost reductions (e.g.,
improvements to transaction-processing
efficiency).94 Depending on a variety of
factors, such adjustments may make
covered issuers’ checking account and
debit card programs less attractive to
consumers. In response to these
adjustments, consumers may switch to
checking account or debit card programs
offered by exempt issuers, or to
alternative payment methods such as
credit cards and digital payment
methods, potentially leading to a further
reduction in covered issuers’ revenues
from debit cards.95
The experience following the
introduction of the current interchange
fee cap in 2011 provides information
about how covered issuers may adjust
their debit card programs in response to
the proposal. Research shows that the
adoption of the current interchange fee
cap resulted in covered issuers
increasing customer fees on checking
accounts more than they otherwise
would have, although these increases
offset the reduction in interchange fee
revenue only partially.96 Furthermore,
93 Board of Governors of the Federal Reserve
System, The Federal Reserve Payments Study: 2022
Triennial Initial Data Release, https://www.federal
reserve.gov/paymentsystems/fr-paymentsstudy.htm.
94 An issuer seeking to reduce costs may reduce
transaction-processing costs and/or other types of
costs. Under the proposed approach, the former
could result in a reduction to the interchange fee
cap once data collected by the Board show a
reduction in the transaction-weighted average of
per-transaction transaction-processing costs across
covered issuers. Although another way in which
covered issuers could offset a loss in interchange
fee revenue could be through reductions in debit
card reward programs, data collected by the Board
show that following the adoption of the current
interchange fee cap, covered issuers significantly
limited or eliminated such programs, suggesting
that issuers may not be able to reduce such
programs much further. See generally Board of
Governors of the Federal Reserve System,
Regulation II (Debit Card Interchange Fees and
Routing): Reports and Data Collections, https://
www.federalreserve.gov/paymentsystems/regii-datacollections.htm.
95 In addition, the reduction in covered issuers’
interchange fee revenue could theoretically lead
some covered issuers, particularly those serving
niche market segments, such as high net-worth
individuals, to downsize or potentially discontinue
their debit card programs.
96 Benjamin S. Kay, Mark D. Manuszak & Cindy
M. Vojtech, Competition and Complementarities in
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the continued growth in debit card
popularity since the adoption of
Regulation II, and the lack of a
pronounced shift by consumers from
covered issuers’ to exempt issuers’ debit
card programs, suggest that such fee
increases and other adjustments to
checking accounts and debit card
programs offered by covered issuers did
not make them substantially less
attractive to consumers.97 Finally, the
Board is not aware of any evidence that
the adoption of the current interchange
fee cap led any covered issuers to
discontinue their debit card programs.
By contrast, the proposal would not
directly or, the Board believes,
indirectly affect exempt issuers (i.e.,
those with consolidated assets under
$10 billion).98 The experience following
the introduction of the current
interchange fee cap in 2011 provides
information about whether exempt
issuers are likely to be affected by the
proposal. First, the adoption of the
current interchange fee cap and the
statutory exemptions for certain issuers
and debit card transactions led all debit
card networks to adopt pricing
structures with different interchange
fees for covered and exempt issuers.
Second, data collected by the Board
demonstrate that average per-transaction
interchange fees for exempt issuers
across all payment card networks did
not decline after the current interchange
fee cap was introduced in 2011 and
Retail Banking: Evidence from Debit Card
Interchange Regulation, 34 Journal of Financial
Intermediation 91 (2018); Mark D. Manuszak &
Krzysztof Wozniak, The Impact of Price Controls in
Two-Sided Markets: Evidence from US Debit Card
Interchange Fee Regulation, Finance and
Economics Discussion Series 2017–074, https://
www.federal6reserve.gov/econres/feds/files/
2017074pap.pdf; Vladmir Mukharlyamov & Natasha
Sarin, Price Regulation in Two-Sided Markets:
Empirical Evidence from Debit Cards (last rev. Nov.
28, 2022) (unpublished manuscript), https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3328579.
97 See generally Board of Governors of the Federal
Reserve System, Regulation II (Debit Card
Interchange Fees and Routing): Reports and Data
Collections, https://www.federalreserve.gov/
paymentsystems/regii-data-collections.htm.
98 The Board collects and reports annual
information from payment card networks about
their interchange fees for transactions subject to and
exempt from the interchange fee cap. See Board of
Governors of the Federal Reserve System,
Regulation II (Debit Card Interchange Fees and
Routing): Average Debit Card Interchange Fee by
Payment Card Network, https://www.federal
reserve.gov/paymentsystems/regii-averageinterchange-fee.htm. The Board also annually
publishes lists of covered and exempt institutions
that issuers, payment card networks, and other
market participants can use to determine which
issuers qualify for the small issuer exemption. See
Board of Governors of the Federal Reserve System,
Interchange Fee Standards: Small Issuer
Exemption, https://www.federalreserve.gov/
paymentsystems/regii-interchange-feestandards.htm.
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have not declined since then.99 Average
per-transaction interchange fees for
exempt issuers have remained at a level
substantially higher than average pertransaction interchange fees for covered
issuers, with the latest data collected by
the Board documenting that average pertransaction interchange fees for exempt
issuers increased in 2020 and 2021.100
(c) Effects on Consumers and
Availability of Services to Different
Classes of Consumers
As discussed above in the context of
effects on merchants and debit card
issuers, the proposal could affect
consumers in two main ways. On the
one hand, consumers could benefit if
merchants pass on savings associated
with the decrease in costs of accepting
debit card transactions in the form of
lower prices, forgone future price
increases, or improvements in product
or service quality. On the other hand,
consumers could be negatively affected
if covered issuers increase fees on debit
cards or checking accounts, or make
other adjustments that make these
products less attractive to consumers.
The net effect on consumers, both
individually and in the aggregate, will
depend on which of these two effects
predominates, which would in turn
depend on many factors and is thus
difficult to predict. As noted above,
merchants in more competitive markets
would likely pass on a larger portion of
their cost savings to consumers. In a
similar way, in response to declines in
interchange fee revenue, covered issuers
in more competitive markets would be
less likely to increase fees or make other
changes that negatively affect
consumers. Covered issuers that face
strong competition from exempt issuers
may be less likely to raise fees, as doing
so could increase the probability that
customers switch to these competing
institutions.
In addition, the effect of the proposal
could differ between particular classes
of consumers in several ways. First, if
the proposal results in merchants
further increasing debit card acceptance
(e.g., for card-not-present transactions),
consumers’ ability to make such
payments could increase, generating
benefits to consumers without access to
alternative non-cash payment methods,
such as credit cards. Second, if the
proposal results in covered issuers
increasing fees, banking services could
99 See Board of Governors of the Federal Reserve
System, Regulation II (Debit Card Interchange Fees
and Routing): Average Debit Card Interchange Fee
by Payment Card Network, https://www.federal
reserve.gov/paymentsystems/regii-averageinterchange-fee.htm.
100 See id.
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become less accessible to lower-income
consumers who may be more sensitive
to such fees.101
(d) Additional Paperwork
The proposal would not substantively
alter the reporting and recordkeeping
requirements that § 235.8 of Regulation
II imposes on covered issuers and
networks, and would not alter the
recordkeeping requirement for exempt
issuers.102 Regulation II does not impose
any reporting or recordkeeping
requirements on consumers or
merchants.
(e) Effects Upon Competition in the
Provision of Electronic Banking
Services 103
The proposal could affect competition
between covered and exempt issuers by
reducing the average per-transaction
debit card interchange fee received by
covered issuers without affecting the
amount received by exempt issuers. As
noted above, the competitive effect of
any adjustments made by covered
issuers to their fee structures in
response to the reduction in interchange
fee revenue would depend on the degree
of substitution between exempt and
covered issuers. Research suggests that
competition between smaller and larger
depository institutions is weaker than
competition between large depository
institutions or competition between
small depository institutions, likely
because these institutions serve
different customer bases.104 In addition,
101 However, the Board notes that the unbanked
rate in the United States has been steadily declining
over time, including after the introduction of the
current interchange fee cap in 2011. According to
the data collected by the Federal Deposit Insurance
Corporation, the rate of unbanked in the population
fell from 8.2 percent in 2011 to an all-time low of
4.5 percent in 2021. See Federal Deposit Insurance
Corporation, 2021 FDIC National Survey of
Unbanked and Underbanked Households, https://
www.fdic.gov/analysis/household-survey/
2021report.pdf.
102 However, the Board requests comment on
whether § 235.8 of Regulation II should be amended
to specify that a covered issuer is required to retain
records supporting the data that the covered issuer
reports on the Debit Card Issuer Survey. See section
VII, supra (Question 6(b)).
103 Although EFTA section 904(a)(2) requires the
Board to consider the effects upon competition in
the provision of electronic banking services among
large and small financial institutions, the Board is
considering the impact of the final rule on
competition generally, including competition
between large and small financial institutions.
104 See, e.g., Robert M. Adams, Kenneth P.
Brevoort & Elizabeth K. Kiser, Who Competes with
Whom? The Case of Depository Institutions, 55
Journal of Industrial Economics 141 (2007); Andrew
M. Cohen & Michael J. Mazzeo, Market Structure
and Competition Among Retail Depository
Institutions, 89 Review of Economics and Statistics
60 (2007); Timothy H. Hannan & Robin A. Prager,
The Profitability of Small Single-Market Banks in
an Era of Multi-Market Banking, 33 Journal of
Banking and Finance 263 (2009).
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data collected by the Board indicates
that the proportion of debit card
transactions attributable to covered and
exempt issuers did not significantly
change before and after the adoption of
the current interchange fee cap.105 In
light of this evidence, the Board does
not expect the proposal to have a
significant impact on competitive
dynamics between the two groups of
issuers. The Board further does not
believe that the proposal would affect
competition between debit card
networks.
(f) Consumer Protection and
Compliance Costs 106
Based on the analysis above, the
Board cannot, at this time, determine
whether the potential benefits of the
proposal to consumers exceed the
possible costs imposed on consumers
and financial institutions. As described
above, the proposal may yield benefits
for consumers, but the magnitude of
these benefits will depend on the
behavior of various participants in the
debit card industry. The proposal may
also impose costs on consumers and
financial institutions, but the net effect
on any individual or entity will depend
on its particular circumstances. Because
the overall effects of the proposal on
consumers and on financial institutions
are dependent on a variety of factors,
the Board cannot determine at this time
whether the potential benefits of the
proposal to consumers exceed the
possible costs imposed on consumers
and financial institution.
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B. Statutory Considerations for
Proposed Revisions to the Interchange
Fee Standards
In prescribing regulations to establish
interchange fee standards, EFTA section
920(a)(4) requires the Board to consider
the functional similarity between debit
card transactions and checking
transactions that are required within the
Federal Reserve bank system to clear at
par.107
105 See generally Board of Governors of the
Federal Reserve System, Regulation II (Debit Card
Interchange Fees and Routing): Reports and Data
Collections, https://www.federalreserve.gov/
paymentsystems/regii-data-collections.htm.
106 To the extent that the interchange fee
standards and fraud-prevention adjustment
constitute consumer protections, the Board believes
that the aim of those protections is broadly to
benefit consumers, rather than to address specific
consumer rights. As such, the Board has, to the
extent practicable, considered broadly whether the
overall benefits of the proposed revisions to
consumers outweigh other costs imposed on
consumers or financial institutions.
107 The same provision of the statute additionally
requires the Board to (i) distinguish between certain
types of costs incurred by debit card issuers and (ii)
consult with certain other agencies. The allowable
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The Board considered the functional
similarity between debit card
transactions and checking transactions
when the Board adopted Regulation II,
and this analysis informed certain
decisions the Board made when the
Board established the interchange fee
standards.108 The similarities noted by
the Board included the fact that both
types of transactions result in a debit to
an asset account; both involve electronic
processing and deposit; both involve
processing fees paid by merchants to
banks and other intermediaries; and
both have similar settlement
timeframes. The differences noted by
the Board included the closed nature of
debit card systems compared to the
open check clearing and collection
system (and limitations on routing a
debit card transaction based on the set
of networks the issuer has enabled or
that the merchant accepts); the payment
authorization that is an integral part of
debit card transactions (but not check
transactions), which generally
guarantees that the transaction will not
be returned for insufficient funds or
certain other reasons (e.g., a closed
account); processing and collection
costs incurred by the issuer (analogous
to the payor’s bank) for debit card
transactions but not for check
transactions; par clearance in the check
system; payee deposit and availability;
the amount of time in which a payor
may reverse a transaction (which is
much longer in the case of a debit card
transaction compared to a check); and
the increasing popularity of debit card
payments (and declining use of check).
The Board has reviewed its analysis
from 2011 regarding the functional
similarity between debit card
transactions and checking transactions
and believes that the factual predicates
underlying that analysis remain
unchanged. For that reason, the Board
continues to believe that its prior
analysis remains sound.
C. Statutory Considerations for
Proposed Revisions to the Fraud
Prevention Adjustment 109
1. Statutory Requirement
EFTA section 920(a)(5)(B)(ii) requires
the Board, in prescribing regulations for
costs that the Board considered in establishing the
interchange fee standards are discussed in section
III.A, supra. The interagency consultation
requirement is discussed in section VIII.D, infra.
108 See 76 FR 43393, 43399 (July 20, 2011). For
example, similarities and differences between debit
card transactions and check transactions were
factors in the Board’s decision to include or exclude
from allowable costs a number of types of costs
incurred by debit card issuers. See 76 FR at 43428
(July 20, 2011).
109 All data used in this section have been
sourced from the Board’s Debit Card Issuer Surveys
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any fraud-prevention adjustment, to
consider (i) the nature, type, and
occurrence of fraud in debit card
transactions; (ii) the extent to which the
occurrence of fraud depends on whether
authorization in a debit card transaction
is based on signature, personal
identification number (PIN), or other
means; (iii) the available and
economical means by which fraud on
debit card transactions may be reduced;
(iv) the fraud-prevention and datasecurity costs expended by each party
involved in debit card transactions
(including consumers, persons who
accept debit cards as a form of payment,
financial institutions, retailers, and
payment card networks); (v) the costs of
fraudulent transactions absorbed by
each party involved in such transactions
(including consumers, persons who
accept debit cards as a form of payment,
financial institutions, retailers, and
payment card networks); (vi) the extent
to which interchange fees have in the
past reduced or increased incentives for
parties involved in debit card
transactions to reduce fraud on such
transactions; and (vii) such other factors
as the Board considers appropriate.110
The Board has considered the factors set
forth in EFTA section 920(a)(5)(B)(ii) in
light of the latest data from covered
issuers from 2021 and the cumulative
data collected from covered issuers
since the original Regulation II
rulemaking.
When the Board adopted the current
fraud-prevention adjustment of 1.0 cent,
the Board focused on one factor in
particular: the fraud-prevention costs
expended by various parties involved in
debit card transactions.111 As discussed
below, the Board believes that all parties
continue to incur fraud-prevention costs
and that the Board’s proposed
methodology for determining the fraudprevention adjustment appropriately
considers those costs.
and Payment Card Network Surveys. Reports and
data tables published by the Board, as well as notes
regarding the figures cited in this section, may be
found on the Board’s website. See Board of
Governors of the Federal Reserve System,
Regulation II (Debit Card Interchange Fees and
Routing): Reports and Data Collections, https://
www.federalreserve.gov/paymentsystems/regii-datacollections.htm.
110 EFTA section 920(a)(5)(B)(ii) does not specify
precisely how the Board should evaluate each of
these factors.
111 See 77 FR 46258, 46265 (Aug. 3, 2012). The
Board also considered the costs of losses absorbed
by different parties to fraudulent transactions when
it developed the fraud-prevention standards, which
the Board does not propose to revise. See 77 FR at
46270. The Board additionally considered certain
other factors in connection with the overall
structure of the fraud-prevention adjustment, such
as the incentives created by the adjustment. See 76
FR 43477, 43483 (July 20, 2011).
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Notably, as described below, data
reported by covered issuers since the
adoption of Regulation II show that the
incidence, types, and relative rates of
absorption of fraud losses have changed.
As noted in section III.B, supra, in
connection with the Board’s proposed
revisions to the ad valorem component,
the Board has observed an overall
increase in fraud losses to all parties
related to covered issuer transactions,
but the share of such fraud losses
absorbed by covered issuers has
declined. Changes in the median ratio of
issuer fraud losses to transaction value
among covered issuers would be
reflected in the Board’s proposed
revisions to the ad valorem component.
2. Factors
(a) Nature, Type, and Occurrence of
Fraud
With respect to covered issuer
transactions, fraud losses to all parties
as a share of transaction value increased
from 9.0 basis points in 2009 to 17.5
basis points in 2021, and have displayed
an upward trend since 2011 (the first
year for which the Debit Card Issuer
Survey was mandatory). In 2021, the
most commonly reported and highestvalue fraud types for covered issuer
transactions were card-not-present
fraud, lost and stolen card fraud, and
counterfeit fraud. Card-not-present
fraud, at 8.6 basis points of transaction
value, accounted for almost half of
overall fraud in 2021. Lost and stolen
card fraud accounted for 4.6 basis points
of transaction value, and counterfeit
card fraud accounted for 3.4 basis points
of transaction value. In 2009, counterfeit
card fraud, card-not-present fraud, and
lost and stolen card fraud accounted for
4.3 basis points, 1.8 basis points, and
1.5 basis points, respectively, as a share
of transaction value.
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(b) Extent to Which the Occurrence of
Fraud Depends on Authentication
Mechanism
Overall fraud incidence for covered
issuer transactions approximately
doubled from 2009 to 2021, and dualmessage (traditionally mainly signatureauthenticated) debit card transactions
exhibited a considerably higher fraud
incidence than single-message
(traditionally mainly PIN-authenticated)
debit card transactions, as has been the
case since 2009. In 2021, 0.11 percent of
covered issuer transactions were
reported as fraudulent. Covered issuers
reported as fraudulent 0.13 percent of
dual-message transactions and 0.02
percent of single-message transactions.
Across all covered issuer transactions,
the average loss for dual-message
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transactions was 8.6 cents per
transaction and represented 17.5 basis
points of transaction value. For singlemessage transactions, the average loss
was 1.9 cents per transaction and
represented 4.2 basis points of
transaction value. In 2009, 0.04 percent
of covered issuer transactions were
reported as fraudulent. The average loss
for dual-message transactions was 4.7
cents per transaction and represented
12.7 basis points of transaction value.
The average loss for single-message
transactions was 1.3 cent per transaction
and represented approximately 3.2 basis
points of transaction value.
The differential in fraud losses
between single- and dual-message
transactions can be explained in part by
differences in the use of single- and
dual-message networks for card-notpresent transactions. As noted above,
card-not-present fraud accounted for
almost half of overall fraud on covered
issuer transactions in 2021, and single
message networks continue to be used
relatively rarely for card-not-present
transactions. In 2021, the percentage of
card-not-present transactions out of the
total number and value of all debit card
transactions processed over singlemessage networks, at 6.1 and 6.7
percent, respectively, continued to be
significantly lower than the analogous
percentages for dual-message networks,
at 44.2 and 60.7 percent, respectively.
(c) Available and Economical Means by
Which Fraud May Be Reduced
In response to the Board’s voluntary
survey of covered issuers concerning
transactions performed in 2009, covered
issuers identified several categories of
activities used to detect, prevent, and
mitigate fraudulent debit card
transactions, including transaction
monitoring; merchant blocking; card
activation and authentication systems;
PIN customization; system and
application security measures, such as
firewalls and virus protection software;
and ongoing research and development
focused on making fraud-prevention
activities more effective.112 Since that
time, the Board identified tokenization
as an important emerging fraudprevention technique, and added it to
the list of fraud-prevention activities
starting from the 2019 Debit Card Issuer
Survey.113
(d) Fraud-Prevention Costs Expended by
Parties Involved in Debit Card
Transactions
When the Board adopted current
§ 235.4 in 2012, the Board reviewed
112 See
113 See
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84 FR 65815 (Nov. 29, 2019).
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fraud-prevention costs expended by
parties involved in debit card
transactions.114 The Board continues to
believe that all parties involved in debit
card transactions incur fraud-prevention
costs. For example, some consumers
routinely monitor their accounts for
unauthorized debit card purchases, but
the opportunity cost of consumers’ time
to monitor their account is difficult to
put into monetary terms. Merchants and
acquirers incur costs for fraudprevention tools, such as terminals that
enable merchants to use various cardand cardholder-authentication
mechanisms, address verification,
geolocation services, and dataencryption technologies. Merchants may
purchase services from third parties and
may also develop their own fraudprevention tools. In addition, merchants
may also take steps and incur costs to
secure data and comply with Payment
Card Industry Data Security Standards
(PCI–DSS) and other fraud-prevention
standards.
As discussed in section IV of this
preamble, supra, the Board has
collected data from covered issuers
concerning the costs incurred by
covered issuers in connection with debit
card transactions performed in calendar
years 2011, 2013, 2015, 2017, 2019, and
2021. These data show that fraudprevention costs incurred by covered
issuers have risen since 2009, such that
the median per-transaction fraudprevention costs among covered issuers
was 1.3 cents in 2021.
(e) Costs of Fraudulent Transactions
Absorbed by Different Parties Involved
in Fraudulent Transactions
Most fraud losses associated with
covered issuer transactions in 2021 were
borne by covered issuers and merchants.
In 2009, covered issuers, merchants, and
cardholders bore 61.2 percent, 38.3
percent, and 0.5 percent of these fraud
losses, respectively. In 2021, covered
issuers, merchants, and cardholders
bore 33.5 percent, 47.0 percent, and 19.5
percent of fraud losses, respectively.
This shift reflects a number of factors.
First, card-not-present transactions grew
from 9.8 percent of covered issuer
transactions in 2009 to 32.1 percent of
covered issuer transactions in 2021.
Second, card-not-present fraud
accounted for almost half of overall
fraud in 2021, and merchants bear a
greater share of fraud losses for this type
of transactions (almost two-thirds of
card-not-present fraud in 2021). Third,
merchants absorbed an increasing share
of fraud losses across almost all
transaction categories and fraud types in
114 See
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2021, relative to 2009. For example,
merchants’ share of fraud losses has also
increased over time for single-message
transactions, from around 4 percent in
2009 to 31.9 percent in 2021.
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(f) Extent to Which Interchange
Transaction Fees Have in the Past
Affected Fraud-Prevention Incentives
In 2012, the Board noted that issuers
have a strong incentive to protect
cardholders and reduce fraud
independently of interchange fees, and
that competition among issuers for
cardholders suggested that protecting
cardholders from fraud is good business
practice for issuers. At the time,
merchants commented that, historically,
higher interchange fee revenue for
signature debit relative to PIN debit may
have encouraged issuers to promote the
use of signature debit over PIN debit,
even though signature debit had
substantially higher rates of fraud.115
The Board continues to believe that
covered issuers have an incentive to
protect cardholders and reduce fraud,
despite a reduction in the proportion of
fraud losses borne by covered issuers
and an increase in the proportion born
by cardholders. Covered issuers
continue to bear more than a quarter of
all fraud losses, which means that their
efforts to reduce fraud rates translate
directly into lower fraud losses.
Moreover, competition with other debit
card issuers continues to provide
downward pressure on the proportion of
fraud losses that an issuer passes on to
its cardholders, as passing on more
fraud losses to cardholders increases the
likelihood that they switch to competing
issuers. Notwithstanding the adoption
of the interchange fee standards and the
fraud-prevention adjustment, the
median per-transaction fraudprevention costs among covered issuers
has risen since 2009, to 1.3 cents per
transaction in 2021.
Furthermore, data collected by the
Board show that interchange fees on
most transactions subject to the
interchange fee cap are at or close to the
cap, including for different
authentication methods, which suggests
that covered issuers have no incentives
to promote the use of networks or
authentication mechanisms that have
higher rates of fraud.
D. Interagency Consultation
In addition to the economic analysis
provided above, EFTA section 904(a)(2)
requires the Board to consult with the
other agencies that have enforcement
authority under the EFTA on any
rulemakings related to EFTA section
115 77
FR at 46262.
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920.116 Separately, EFTA section
920(a)(4)(C) requires the Board to
consult with certain other agencies in
prescribing regulations under EFTA
section 920(a)(3)(A).117 The Board
consulted with each of the relevant
agencies prior to issuing this proposal.
E. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (RFA), requires an
agency to consider the impact of its
rules on small entities. In connection
with a proposed rule, the RFA generally
requires an agency to prepare an Initial
Regulatory Flexibility Analysis (IRFA)
describing the impact of the rule on
small entities, unless the head of the
agency certifies that the proposal will
not have a significant economic impact
on a substantial number of small entities
and publishes such certification along
with a statement providing the factual
basis for such certification in the
Federal Register. An IRFA must contain
(i) a description of the reasons why
action by the agency is being
considered; (ii) a succinct statement of
the objectives of, and legal basis for, the
proposal; (iii) a description of, and,
where feasible, an estimate of the
number of small entities to which the
proposal will apply; (iv) a description of
the projected reporting, recordkeeping,
and other compliance requirements of
the proposal, including an estimate of
the classes of small entities that will be
subject to the requirement and the type
of professional skills necessary for
preparation of the report or record; (v)
an identification, to the extent
practicable, of all relevant Federal rules
that may duplicate, overlap with, or
conflict with the proposal; and (vi) a
description of any significant
alternatives to the proposal that
accomplish its stated objectives.
The Board is providing an IRFA with
respect to the proposal. The Board
invites comment on all aspects of this
IRFA.
1. Reasons Action Is Being Considered
The Board proposes revisions to the
interchange fee standards in § 235.3 and
the fraud-prevention adjustment in
§ 235.4 of Regulation II.118 Under the
116 These agencies include the Office of the
Comptroller of the Currency (OCC), the Federal
Deposit Insurance Corporation (FDIC), the National
Credit Union Administration (NCUA), the
Department of Transportation, the Securities and
Exchange Commission, the Consumer Financial
Protection Bureau (CFPB), and the Federal Trade
Commission. See EFTA section 918.
117 These agencies include the OCC, FDIC, Office
of Thrift Supervision, NCUA, Small Business
Administration (SBA), and CFPB.
118 As described in section V, supra, the Board
additionally proposes a set of technical revisions to
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78119
proposal, the Board would determine,
for every two-year period, the base
component, ad valorem component, and
fraud-prevention adjustment based on
the latest data reported to the Board by
covered issuers on the Debit Card
Survey using the methodology
described in proposed appendix B.
Initially, the base component and the ad
valorem component would decrease to
14.4 cents and 4.0 basis points
(multiplied by the value of the
transaction), respectively, while the
fraud-prevention adjustment would
increase to 1.3 cents, for debit card
transactions performed from the
effective date of the final rule to June 30,
2025.
As described in section III.B, supra,
one key rationale for the proposal is the
significant decline in the average cost of
a debit card transaction, as measured by
the transaction-weighted average of pertransaction base component costs across
covered issuers, since the Board first
adopted § 235.3. In addition, in lieu of
an ad hoc approach to updating the
interchange fee cap components, the
Board believes that, as much as
practicable, these components should be
updated regularly and predictably to
reflect changes in the allowable costs
and fraud-prevention costs incurred by
covered issuers as those changes occur.
2. Objectives of and Legal Basis for the
Proposal
Consistent with EFTA section
920(a)(3), the proposed revisions to
§ 235.3 are intended to ensure that the
interchange fee standards will be
effective going forward for assessing
whether, for a debit card transaction
subject to the interchange fee standards,
the amount of any interchange fee
received or charged by a debit card
issuer is reasonable and proportional to
the cost incurred by the issuer with
respect to the transaction. Consistent
with EFTA section 920(a)(5), the
proposed revisions to § 235.4 are
intended to ensure that eligible covered
issuers receive an adjustment to any
interchange fee permitted under § 235.3
in an amount that is reasonably
necessary to make allowance for the
costs incurred by the covered issuer in
preventing fraud in relation to debit
card transactions involving that issuer.
3. Description and Estimate of the
Number of Small Entities
The proposed revisions to § 235.3 and
§ 235.4 apply to debit card issuers
subject to the interchange fee standards
Regulation II. Because these proposed revisions are
not intended to be substantive changes, the Board’s
IRFA does not address these aspects of the
proposal.
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(i.e., covered issuers). Pursuant to EFTA
section 920(a)(6) and § 235.5(a), a debit
card issuer that, together with its
affiliates, has assets of less than $10
billion as of the end of the calendar year
preceding the date of the debit card
transaction is exempt from the
interchange fee standards, provided that
such issuer holds the account that is
debited.
The Board generally uses the
industry-specific size standards adopted
by the SBA for purposes of estimating
the number of small entities to which a
proposal would apply.119 The SBA has
adopted size standards that provide that
card-issuing institutions with average
assets of less than $850 million over the
preceding year (based on the
institution’s four quarterly financial
statements) are considered small
entities.120 Because all such issuers
would qualify for the exemption from
the interchange fee standards in
§ 235.5(a) provided that they hold the
account that is debited, the proposed
revisions would not apply to any small
entities.
4. Description of Compliance
Requirements
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The proposal would not substantively
alter the reporting or recordkeeping
requirements that apply to debit card
issuers and payment card networks in
§ 235.8 of Regulation II.121 Rather, the
proposed revisions would adjust the
amount of any interchange fee that a
covered issuer may receive or charge
with respect to a debit card transaction
subject to the interchange fee standards.
Because interchange fees are collected
by networks from acquirers and paid to
issuers, a covered issuer should not
need to make any changes to its systems
to ensure that the amount of any
interchange fee does not exceed the
amount permitted under Regulation II.
119 See 13 CFR 121.210. Consistent with the
SBA’s General Principles of Affiliation, the Board
generally includes the assets of all domestic and
foreign affiliates toward the applicable size
threshold when determining whether to classify a
particular entity as a small entity. See 13 CFR
121.103.
120 See 13 CFR 121.201 (sector 522210). Although
this size standard applies to credit card-issuing
institutions, the Board believes that the same size
standard should apply to debit card-issuing
institutions.
121 However, the Board requests comment on
whether § 235.8 of Regulation II should be amended
to specify that a covered issuer is required to retain
records supporting the data that the covered issuer
reports on the Debit Card Issuer Survey. See section
VII, supra (Question 6(b)).
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5. Duplicative, Overlapping, and
Conflicting Rules
The Board is not aware of any federal
rules that may duplicate, overlap with,
or conflict with the proposal.
6. Significant Alternatives Considered
As described in section III.B, supra,
the Board considered several alternative
methodologies for determining the base
component. In addition, the Board
considered a variety of different costrecovery targets from which the fixed
multiplier for determining the base
component under the proposed formula
is derived. However, due to the
statutory exemption from the
interchange fee standards for debit card
issuers with consolidated assets under
$10 billion that hold the account that is
debited, the Board does not believe that
any of the alternatives considered by the
Board would have affected the
economic impact of the proposal on
small entities.
F. Paperwork Reduction Act
Regulation II contains ‘‘collections of
information’’ within the meaning of the
Paperwork Reduction Act of 1995 (PRA)
(44 U.S.C. 3501–3521). In accordance
with the requirements of the PRA, the
Board may not conduct or sponsor, and
a respondent is not required to respond
to, an information collection unless it
displays a currently valid Office of
Management and Budget (OMB) control
number. The Board reviewed the
proposal under the authority delegated
to the Board by OMB.
Sections 235.8(a) and (b) of
Regulation II (12 CFR 235.8(a) and (b))
currently require the reporting of
information to the Board, and this
reporting requirement is conducted in
the form of two surveys collected by the
Board: the Debit Card Issuer Survey (FR
3064a; OMB No. 7100–0344) and
Payment Card Network Survey (FR
3064b; OMB No. 7100–0344). The
proposal would amend section 235.8(a)
of Regulation II to reflect the reporting
frequency of the FR 3064a and FR 3064b
surveys. No revisions to these surveys
are being proposed at this time, but the
Board is proposing to extend the FR
3064a and FR 3064b for three years.
However, the Board requests
comment on whether § 235.8 of
Regulation II should be amended to
specify that a covered issuer is required
to retain records supporting the data
that the covered issuer reports on the
Debit Card Issuer Survey. See section
VII.6, supra (Question 6(b)). The Board
may revise § 235.8 of Regulation II based
on comments received in response to
this question.
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Comments are invited on the
following:
(a) Whether the collections of
information are necessary for the proper
performance of the Board’s functions,
including whether the information has
practical utility;
(b) The accuracy of the Board’s
estimates of the burden of the
information collections, including the
validity of the methodology and
assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collections on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start-up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
Comments on aspects of this
document that may affect reporting,
recordkeeping, or disclosure
requirements and burden estimates
should be sent to the addresses listed in
the ADDRESSES section. A copy of the
comments may also be submitted to the
OMB desk officer for the Agencies: By
mail to U.S. Office of Management and
Budget, 725 17th Street NW, #10235,
Washington, DC 20503 or by facsimile
to (202) 395–5806, Attention, Federal
Banking Agency Desk Officer.
Proposed Extension, Without Revision,
of the Following Information Collection
(1) Collection title: Interchange
Transaction Fees Survey.
Collection identifier: FR 3064.
OMB control number: 7100–0344.
General description of report: This
information collection comprises the
following reports:
Debit Card Issuer Survey (FR 3064a)
collects data from issuers of debit cards
(including general-use prepaid cards)
that, together with their affiliates, have
assets of $10 billion or more, including
information regarding the volume and
value of debit card transactions;
chargebacks and returns; costs of
authorization, clearance, and settlement
of debit card transactions; other costs
incurred in connection with particular
debit card transactions; fraud
prevention costs and fraud losses; and
interchange fee revenue.
Payment Card Network Survey (FR
3064b) collects data from payment card
networks, including the volume and
value of debit card transactions;
interchange fees; network fees; and
payments and incentives paid by
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networks to acquirers, merchants, and
issuers.
The data from the FR 3064a and FR
3064b are used to fulfill a statutory
requirement that the Board disclose
certain information regarding debit card
transactions on a biennial basis. In
addition, the Board uses data from the
Payment Card Network Survey (FR
3064b) to publicly report on an annual
basis the extent to which networks have
established separate interchange fees for
exempt and covered issuers.
Frequency: Annual and biennial.
Affected public: Businesses or other
for-profit.
Respondents: Debit card issuers and
payment card networks.
Estimated number of respondents:
FR 3064a—534.
FR 3064b—15.
Estimated average hours per response:
FR 3064a—160.
FR 3064b—75.
Estimated annual burden hours:
FR 3064a—85,440.
FR 3064b—1,125.
G. Solicitation of Comments on the Use
of Plain Language
Section 722 of the Gramm-LeachBliley Act (Pub. L. 106–102, 113 Stat.
1338, 1471, 12 U.S.C. 4809) requires the
federal banking agencies to use plain
language in all proposed and final rules
published after January 1, 2000. The
Board has sought to present the
proposal in a simple and
straightforward manner and invites
comment on the use of plain language
and whether any part of the proposal
could be more clearly stated.
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H. Providing Accountability Through
Transparency Act of 2023
The Providing Accountability
Through Transparency Act of 2023 (5
U.S.C. 553(b)(4)) requires that a notice
of proposed rulemaking include the
internet address of a summary of not
more than 100 words in length of the
proposed rule, in plain language, that
shall be posted on the internet website
under section 206(d) of the EGovernment Act of 2002 (44 U.S.C. 3501
note).
In summary, the Board requests
comment on a proposal to update the
debit card interchange fee cap, which
the Board established in 2011, based on
the latest data reported to the Board
concerning the costs incurred by large
debit card issuers. The Board also
requests comment on a proposal to
establish an approach for updating the
interchange fee cap every other year
going forward.
The proposal and such a summary
can be found at https://
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www.regulations.gov and https://
www.federalreserve.gov/supervisionreg/
reglisting.htm.
List of Subjects in 12 CFR Part 235
Banks, banking, Debit card routing,
Electronic debit transactions,
Interchange transaction fees.
Authority and Issuance
For the reasons set forth in the
preamble, the Board is proposing to
revise Regulation II, 12 CFR part 235, as
follows:
PART 235—DEBIT CARD
INTERCHANGE FEES AND ROUTING
(REGULATION II)
Sec.
235.1 Authority and purpose.
235.2 Definitions.
235.3 Reasonable and proportional
interchange transaction fees.
235.4 Fraud-prevention adjustment.
235.5 Exemptions.
235.6 Prohibition on circumvention,
evasion, and net compensation.
235.7 Limitations on payment card
restrictions.
235.8 Reporting requirements and record
retention.
235.9 Administrative enforcement.
Appendix A to Part 235—Official Board
Commentary on Regulation II
Appendix B to Part 235—Determination of
Base Component, Ad Valorem
Component, and Fraud-Prevention
Adjustment
Authority: 15 U.S.C. 1693o–2.
§ 235.1
Authority and purpose.
(a) Authority. This part is issued by
the Board of Governors of the Federal
Reserve System (Board) under section
920 of the Electronic Fund Transfer Act
(EFTA) (15 U.S.C. 1693o–2, as added by
section 1075 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act, Public Law 111–203, 124 Stat. 1376
(2010)).
(b) Purpose. This part implements the
provisions of section 920 of the EFTA,
including standards for reasonable and
proportional interchange transaction
fees for electronic debit transactions,
standards for receiving a fraudprevention adjustment to interchange
transaction fees, exemptions from the
interchange transaction fee limitations,
prohibitions on evasion and
circumvention, prohibitions on payment
card network exclusivity arrangements
and routing restrictions for debit card
transactions, and reporting requirements
for debit card issuers and payment card
networks.
§ 235.2
Definitions.
For purposes of this part:
(a) Account:
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(1) Means transaction, savings, or
other asset account (other than an
occasional or incidental credit balance
in a credit plan) established for any
purpose and that is located in the
United States; and
(2) Does not include an account held
under a bona fide trust agreement that
is excluded by section 903(2) of the
Electronic Fund Transfer Act and rules
prescribed thereunder.
(b) Acquirer means a person that
contracts directly or indirectly with a
merchant to provide settlement for the
merchant’s electronic debit transactions
over a payment card network. An
acquirer does not include a person that
acts only as a processor for the services
it provides to the merchant.
(c) Affiliate means any company that
controls, is controlled by, or is under
common control with another company.
(d) Cardholder means the person to
whom a debit card is issued.
(e) Control of a company means:
(1) Ownership, control, or power to
vote 25 percent or more of the
outstanding shares of any class of voting
security of the company, directly or
indirectly, or acting through one or
more other persons;
(2) Control in any manner over the
election of a majority of the directors,
trustees, or general partners (or
individuals exercising similar functions)
of the company; or
(3) The power to exercise, directly or
indirectly, a controlling influence over
the management or policies of the
company, as the Board determines.
(f) Covered issuer means, for a
particular calendar year, an issuer that,
together with its affiliates, has assets of
$10 billion or more as of the end of the
preceding calendar year.
(g) Debit card:
(1) Means any card, or other payment
code or device, issued or approved for
use through a payment card network to
debit an account, regardless of whether
authorization is based on signature,
personal identification number (PIN), or
other means, and regardless of whether
the issuer holds the account, and
(2) Includes any general-use prepaid
card; and
(3) Does not include:
(i) Any card, or other payment code
or device, that is redeemable upon
presentation at only a single merchant
or an affiliated group of merchants for
goods or services; or
(ii) A check, draft, or similar paper
instrument, or an electronic
representation thereof.
(h) Designated automated teller
machine (ATM) network means either:
(1) All ATMs identified in the name
of the issuer; or
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(2) Any network of ATMs identified
by the issuer that provides reasonable
and convenient access to the issuer’s
customers.
(i) Electronic debit transaction:
(1) Means the use of a debit card by
a person as a form of payment in the
United States to initiate a debit to an
account, and
(2) Does not include transactions
initiated at an ATM, including cash
withdrawals and balance transfers
initiated at an ATM.
(j) General-use prepaid card means a
card, or other payment code or device,
that is—
(1) Issued on a prepaid basis in a
specified amount, whether or not that
amount may be increased or reloaded,
in exchange for payment; and
(2) Redeemable upon presentation at
multiple, unaffiliated merchants for
goods or services.
(k) Interchange transaction fee means
any fee established, charged, or received
by a payment card network and paid by
a merchant or an acquirer for the
purpose of compensating an issuer for
its involvement in an electronic debit
transaction.
(l) Issuer means any person that
authorizes the use of a debit card to
perform an electronic debit transaction.
(m) Merchant means any person that
accepts debit cards as payment.
(n) Payment card network means an
entity that:
(1) Directly or indirectly provides the
proprietary services, infrastructure, and
software that route information and data
to an issuer from an acquirer to conduct
the authorization, clearance, and
settlement of electronic debit
transactions; and
(2) A merchant uses in order to accept
as a form of payment a brand of debit
card or other device that may be used
to carry out electronic debit
transactions.
(o) Person means a natural person or
an organization, including a
corporation, government agency, estate,
trust, partnership, proprietorship,
cooperative, or association.
(p) Processor means a person that
processes or routes electronic debit
transactions for issuers, acquirers, or
merchants.
(q) Route means to direct and send
information and data to an unaffiliated
entity or to an affiliated entity acting on
behalf of an unaffiliated entity.
(r) United States means the States,
territories, and possessions of the
United States, the District of Columbia,
the Commonwealth of Puerto Rico, or
any political subdivision of any of the
foregoing.
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§ 235.3 Reasonable and proportional
interchange transaction fees.
(a) In general. The amount of any
interchange transaction fee that an
issuer may receive or charge with
respect to an electronic debit transaction
shall be reasonable and proportional to
the cost incurred by the issuer with
respect to the electronic debit
transaction.
(b) Reasonable and proportional fees.
An issuer complies with the
requirements of paragraph (a) of this
section only if each interchange
transaction fee received or charged by
the issuer for an electronic debit
transaction is no more than the sum of—
(1) For an electronic debit transaction
performed from October 1, 2011, to [one
calendar day prior to effective date of
final rule], a base component of 21.0
cents, and an ad valorem component of
5.0 basis points multiplied by the value
of the transaction; and
(2) For an electronic debit transaction
performed from [effective date of final
rule], to June 30, 2025, a base
component of 14.4 cents, and an ad
valorem component of 4.0 basis points
multiplied by the value of the
transaction.
(c) Determination of base component
and ad valorem component. For every
two-year period, beginning with the
period from July 1, 2025, to June 30,
2027, the Board will determine the base
component and the ad valorem
component using the approach
described in appendix B to this part.
§ 235.4
Fraud-prevention adjustment.
(a) In general. In addition to any
interchange transaction fee an issuer
receives or charges in accordance with
§ 235.3, and subject to paragraph (c) of
this section, an issuer may receive or
charge an amount of no more than—
(1) For an electronic debit transaction
performed from October 1, 2011, to [one
calendar day prior to effective date of
final rule], a fraud-prevention
adjustment of 1.0 cent; and
(2) For an electronic debit transaction
performed from [effective date of final
rule], to June 30, 2025, a fraudprevention adjustment of 1.3 cents.
(b) Determination of fraud-prevention
adjustment. For every two-year period,
beginning with the period from July 1,
2025, to June 30, 2027, the Board will
determine the fraud-prevention
adjustment using the approach
described in appendix B to this part.
(c) Issuer standards. (1) To be eligible
to receive or charge the fraudprevention adjustment in paragraph (a)
of this section, an issuer must develop
and implement policies and procedures
reasonably designed to take effective
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steps to reduce the occurrence of, and
costs to all parties from, fraudulent
electronic debit transactions, including
through the development and
implementation of cost-effective fraudprevention technology.
(2) An issuer’s policies and
procedures must address—
(i) Methods to identify and prevent
fraudulent electronic debit transactions;
(ii) Monitoring of the volume and
value of its fraudulent electronic debit
transactions;
(iii) Appropriate responses to
suspicious electronic debit transactions
in a manner designed to limit the costs
to all parties from and prevent the
occurrence of future fraudulent
electronic debit transactions;
(iv) Methods to secure debit card and
cardholder data; and
(v) Such other factors as the issuer
considers appropriate.
(3) An issuer must review, at least
annually, its fraud-prevention policies
and procedures, and their
implementation and update them as
necessary in light of—
(i) Their effectiveness in reducing the
occurrence of, and cost to all parties
from, fraudulent electronic debit
transactions involving the issuer;
(ii) Their cost-effectiveness; and
(iii) Changes in the types of fraud,
methods used to commit fraud, and
available methods for detecting and
preventing fraudulent electronic debit
transactions that the issuer identifies
from—
(A) Its own experience or information;
(B) Information provided to the issuer
by its payment card networks, law
enforcement agencies, and fraudmonitoring groups in which the issuer
participates; and
(C) Applicable supervisory guidance.
(d) Notification. To be eligible to
receive or charge a fraud-prevention
adjustment, an issuer must annually
notify its payment card networks that it
complies with the standards in
paragraph (c) of this section.
(e) Change in status. An issuer is not
eligible to receive or charge a fraudprevention adjustment if the issuer is
substantially non-compliant with the
standards set forth in paragraph (c) of
this section, as determined by the issuer
or the appropriate agency under § 235.9.
Such an issuer must notify its payment
card networks that it is no longer
eligible to receive or charge a fraudprevention adjustment no later than 10
days after determining or receiving
notification from the appropriate agency
under § 235.9 that the issuer is
substantially non-compliant with the
standards set forth in paragraph (c) of
this section. The issuer must stop
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receiving and charging the fraudprevention adjustment no later than 30
days after notifying its payment card
networks.
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§ 235.5
Exemptions.
(a) Exemption for small issuers—(1) In
general. Sections 235.3, 235.4, and
235.6 do not apply to an interchange
transaction fee received or charged by
an issuer that—
(i) Holds the account that is debited;
and
(ii) Is not a covered issuer when the
electronic debit transaction is
performed.
(2) Determination of issuer asset size.
A person may rely on lists published by
the Board to determine whether an
issuer is a covered issuer for a particular
calendar year.
(3) Change in status. If an issuer
qualifies for the exemption in paragraph
(a)(1) of this section in a particular
calendar year, but, as of the end of that
calendar year the issuer, together with
its affiliates, has assets of $10 billion or
more, the issuer must begin complying
with §§ 235.3, 235.4, and 235.6 no later
than July 1 of the succeeding calendar
year.
(b) Exemption for governmentadministered programs. Except as
provided in paragraph (d) of this
section, §§ 235.3, 235.4, and 235.6 do
not apply to an interchange transaction
fee received or charged by an issuer
with respect to an electronic debit
transaction if—
(1) The electronic debit transaction is
made using a debit card that has been
provided to a person pursuant to a
Federal, State, or local governmentadministered payment program; and
(2) The cardholder may use the debit
card only to transfer or debit funds,
monetary value, or other assets that
have been provided pursuant to such
program.
(c) Exemption for certain reloadable
prepaid cards—(1) In general. Except as
provided in paragraph (d) of this
section, §§ 235.3, 235.4, and 235.6 do
not apply to an interchange transaction
fee received or charged by an issuer
with respect to an electronic debit
transaction using a general-use prepaid
card that is—
(i) Not issued or approved for use to
access or debit any account held by or
for the benefit of the cardholder (other
than a subaccount or other method of
recording or tracking funds purchased
or loaded on the card on a prepaid
basis);
(ii) Reloadable and not marketed or
labeled as a gift card or gift certificate;
and
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(iii) The only means of access to the
underlying funds, except when all
remaining funds are provided to the
cardholder in a single transaction.
(2) Temporary cards. For purposes of
this paragraph (c), the term ‘‘reloadable’’
includes a temporary non-reloadable
card issued solely in connection with a
reloadable general-use prepaid card.
(d) Exception. The exemptions in
paragraphs (b) and (c) of this section do
not apply to any interchange transaction
fee received or charged by an issuer on
or after July 21, 2012, with respect to an
electronic debit transaction if any of the
following fees may be charged to a
cardholder with respect to the card:
(1) A fee or charge for an overdraft,
including a shortage of funds or a
transaction processed for an amount
exceeding the account balance, unless
the fee or charge is imposed for
transferring funds from another asset
account to cover a shortfall in the
account accessed by the card; or
(2) A fee imposed by the issuer for the
first withdrawal per calendar month
from an ATM that is part of the issuer’s
designated ATM network.
§ 235.6 Prohibition on circumvention,
evasion, and net compensation.
(a) Prohibition of circumvention or
evasion. No person shall circumvent or
evade the interchange transaction fee
restrictions in §§ 235.3 and 235.4.
(b) Prohibition of net compensation.
An issuer may not receive net
compensation from a payment card
network with respect to electronic debit
transactions or debit card-related
activities within a calendar year. Net
compensation occurs when the total
amount of payments or incentives
received by an issuer from a payment
card network with respect to electronic
debit transactions or debit card-related
activities, other than interchange
transaction fees passed through to the
issuer by the network, during a calendar
year exceeds the total amount of all fees
paid by the issuer to the network with
respect to electronic debit transactions
or debit card-related activities during
that calendar year. Payments and
incentives paid by a network to an
issuer, and fees paid by an issuer to a
network, with respect to electronic debit
transactions or debit card related
activities are not limited to volumebased or transaction-specific payments,
incentives, or fees, but also include
other payments, incentives or fees
related to an issuer’s provision of debit
card services.
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§ 235.7 Limitations on payment card
restrictions.
(a) Prohibition on network
exclusivity—(1) In general. An issuer or
payment card network shall not directly
or through any agent, processor, or
licensed member of a payment card
network, by contract, requirement,
condition, penalty, or otherwise, restrict
the number of payment card networks
on which an electronic debit transaction
may be processed to less than two
unaffiliated networks.
(2) Permitted arrangements. An issuer
satisfies the requirements of paragraph
(a)(1) of this section only if the issuer
enables at least two unaffiliated
payment card networks to process an
electronic debit transaction—
(i) Where such networks in
combination do not, by their respective
rules or policies or by contract with or
other restriction imposed by the issuer,
result in the operation of only one
network or only multiple affiliated
networks for a geographic area, specific
merchant, particular type of merchant,
or particular type of transaction, and
(ii) Where each of these networks has
taken steps reasonably designed to be
able to process the electronic debit
transactions that it would reasonably
expect will be routed to it, based on
expected transaction volume.
(3) Prohibited exclusivity
arrangements by networks. For purposes
of paragraph (a)(1) of this section, a
payment card network may not restrict
or otherwise limit an issuer’s ability to
contract with any other payment card
network that may process an electronic
debit transaction involving the issuer’s
debit cards.
(4) Subsequent affiliation. If
unaffiliated payment card networks
become affiliated as a result of a merger
or acquisition such that an issuer is no
longer in compliance with paragraph (a)
of this section, the issuer must add an
unaffiliated payment card network
through which electronic debit
transactions on the relevant debit card
may be processed no later than six
months after the date on which the
previously unaffiliated payment card
networks consummate the affiliation.
(b) Prohibition on routing restrictions.
An issuer or payment card network
shall not, directly or through any agent,
processor, or licensed member of the
network, by contract, requirement,
condition, penalty, or otherwise, inhibit
the ability of any person that accepts or
honors debit cards for payments to
direct the routing of electronic debit
transactions for processing over any
payment card network that may process
such transactions.
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§ 235.8 Reporting requirements and record
retention.
(a) Entities required to report. Each
covered issuer shall file a report with
the Board on a biennial basis in
accordance with this section. Each
payment card network shall file a report
with the Board on an annual basis in
accordance with this section.
(b) Report. Each entity required to file
a report with the Board shall submit
data in a form prescribed by the Board
for that entity. Data required to be
reported may include, but may not be
limited to, data regarding costs incurred
with respect to an electronic debit
transaction, interchange transaction
fees, network fees, fraud-prevention
costs, fraud losses, and transaction
value, volume, and type.
(c) Record retention. (1) An issuer
subject to this part shall retain evidence
of compliance with the requirements
imposed by this part for a period of not
less than five years after the end of the
calendar year in which the electronic
debit transaction occurred.
(2) Any person subject to this part
having actual notice that it is the subject
of an investigation or an enforcement
proceeding by its enforcement agency
shall retain the records that pertain to
the investigation, action, or proceeding
until final disposition of the matter
unless an earlier time is allowed by
court or agency order.
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§ 235.9
Administrative enforcement.
(a) Appropriate agency. (1)
Compliance with the requirements of
this part shall be enforced under—
(i) Section 8 of the Federal Deposit
Insurance Act, by the appropriate
Federal banking agency, as defined in
section 3(q) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q)), with
respect to—
(A) National banks, Federal savings
associations, and Federal branches and
Federal agencies of foreign banks;
(B) Member banks of the Federal
Reserve System (other than national
banks), branches and agencies of foreign
banks (other than federal branches,
federal Agencies, and insured state
branches of foreign banks), commercial
lending companies owned or controlled
by foreign banks, and organizations
operating under section 25 or 25A of the
Federal Reserve Act;
(C) Banks and state savings
associations insured by the Federal
Deposit Insurance Corporation (other
than members of the Federal Reserve
System), and insured state branches of
foreign banks;
(ii) The Federal Credit Union Act (12
U.S.C. 1751 et seq.), by the
Administrator of the National Credit
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Union Administration (National Credit
Union Administration Board) with
respect to any Federal credit union;
(iii) The Federal Aviation Act of 1958
(49 U.S.C. 40101 et seq.), by the
Secretary of Transportation, with
respect to any air carrier or foreign air
carrier subject to that Act; and
(iv) The Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.), by the
Securities and Exchange Commission,
with respect to any broker or dealer
subject to that Act.
(2) The terms used in paragraph (a)(1)
of this section that are not defined in
this part or otherwise defined in section
3(s) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(s)) shall have the
meaning given to them in section 1(b) of
the International Banking Act of 1978
(12 U.S.C. 3101).
(b) Additional powers. (1) For the
purpose of the exercise by any agency
referred to in paragraphs (a)(1)(i)
through (iv) of this section of its power
under any statute referred to in those
paragraphs, a violation of this part is
deemed to be a violation of a
requirement imposed under that statute.
(2) In addition to its powers under
any provision of law specifically
referred to in paragraphs (a)(1)(i)
through (iv) of this section, each of the
agencies referred to in those paragraphs
may exercise, for the purpose of
enforcing compliance under this part,
any other authority conferred on it by
law.
(c) Enforcement authority of Federal
Trade Commission. Except to the extent
that enforcement of the requirements
imposed under this title is specifically
granted to another government agency
under paragraphs (a)(1)(i) through (iv) of
this section, and subject to subtitle B of
the Consumer Financial Protection Act
of 2010, the Federal Trade Commission
has the authority to enforce such
requirements. For the purpose of the
exercise by the Federal Trade
Commission of its functions and powers
under the Federal Trade Commission
Act, a violation of this part shall be
deemed a violation of a requirement
imposed under the Federal Trade
Commission Act. All of the functions
and powers of the Federal Trade
Commission under the Federal Trade
Commission Act are available to the
Federal Trade Commission to enforce
compliance by any person subject to the
jurisdiction of the Federal Trade
Commission with the requirements of
this part, regardless of whether that
person is engaged in commerce or meets
any other jurisdictional tests under the
Federal Trade Commission Act.
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Appendix A to Part 235—Official Board
Commentary on Regulation II
Introduction
The following commentary to Regulation II
(12 CFR part 235) provides background
material to explain the Board’s intent in
adopting a particular part of the regulation.
The commentary also provides examples to
aid in understanding how a particular
requirement is to work.
Section 235.2—Definitions
2(a)—Account
1. Types of accounts. The term ‘‘account’’
includes accounts held by any person,
including consumer accounts (i.e., those
established primarily for personal, family or
household purposes) and business accounts.
Therefore, the limitations on interchange
transaction fees and the prohibitions on
network exclusivity arrangements and
routing restrictions apply to all electronic
debit transactions, regardless of whether the
transaction involves a debit card issued
primarily for personal, family, or household
purposes or for business purposes. For
example, an issuer of a business-purpose
debit card is subject to the restrictions on
interchange transaction fees and is also
prohibited from restricting the number of
payment card networks on which an
electronic debit transaction may be processed
under § 235.7.
2. Bona fide trusts. This part does not
define the term bona fide trust agreement;
therefore, institutions must look to state or
other applicable law for interpretation. An
account held under a custodial agreement
that qualifies as a trust under the Internal
Revenue Code, such as an individual
retirement account, is considered to be held
under a trust agreement for purposes of this
part.
3. Account located in the United States.
This part applies only to electronic debit
transactions that are initiated to debit (or
credit, for example, in the case of returned
goods or cancelled services) an account
located in the United States. If a cardholder
uses a debit card to debit an account held
outside the United States, then the electronic
debit transaction is not subject to this part.
2(b)—Acquirer
1. In general. The term ‘‘acquirer’’ includes
only the institution that contracts, directly or
indirectly, with a merchant to provide
settlement for the merchant’s electronic debit
transactions over a payment card network
(referred to as acquiring the merchant’s
electronic debit transactions). In some
acquiring relationships, an institution
provides processing services to the merchant
and is a licensed member of the payment
card network, but does not settle the
transactions with the merchant (by crediting
the merchant’s account) or with the issuer.
These institutions are not ‘‘acquirers’’
because they do not provide credit to the
merchant for the transactions or settle the
merchant’s transactions with the issuer.
These institutions are considered processors
and in some circumstances may be
considered payment card networks for
purposes of this part (See §§ 235.2(n),
235.2(p), and commentary thereto).
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2(c)—Affiliate
1. Types of entities. The term ‘‘affiliate’’
includes any bank and nonbank affiliates
located in the United States or a foreign
country.
2. Other affiliates. For commentary on
whether merchants are affiliated, see
comment 2(g)–7.
2(d)—Cardholder
1. Scope. In the case of debit cards that
access funds in transaction, savings, or other
similar asset accounts, ‘‘the person to whom
a card is issued’’ generally will be the named
person or persons holding the account. If the
account is a business account, multiple
employees (or other persons associated with
the business) may have debit cards that can
access the account. Each employee that has
a debit card that can access the account is a
cardholder. In the case of a prepaid card, the
cardholder generally is either the purchaser
of the card or a person to whom the
purchaser gave the card, such as a gift
recipient.
2(e)—Control [Reserved]
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2(f)—Covered Issuer
1. Asset size determination. An issuer
would qualify as a covered issuer in a
particular calendar year if its total worldwide
banking and nonbanking assets, including
assets of affiliates, other than trust assets
under management, are at least $10 billion,
as of December 31 of the preceding calendar
year.
2(g)—Debit Card
1. Card, or other payment code or device.
The term ‘‘debit card’’ as defined in
§ 235.2(g) applies to any card, or other
payment code or device, even if it is not
issued in a physical form. Debit cards
include, for example, an account number or
code that can be used to access funds in an
account to make internet purchases.
Similarly, the term ‘‘debit card’’ includes a
device with a chip or other embedded
mechanism, such as a mobile phone or
sticker containing a contactless chip that
links the device to funds stored in an
account, and enables an account to be
debited. The term ‘‘debit card,’’ however,
does not include a one-time password or
other code if such password or code is used
for the purposes of authenticating the
cardholder and is used in addition to another
card, or other payment code or device, rather
than as the payment code or device.
2. Deferred debit cards. The term ‘‘debit
card’’ includes a card, or other payment code
or device, that is used in connection with
deferred debit card arrangements in which
transactions are not immediately posted to
and funds are not debited from the
underlying transaction, savings, or other
asset account upon settlement of the
transaction. Instead, the funds in the account
typically are held and made unavailable for
other transactions for a period of time
specified in the issuer-cardholder agreement.
After the expiration of the time period, the
cardholder’s account is debited for the value
of all transactions made using the card that
have been submitted to the issuer for
settlement during that time period. For
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example, under some deferred debit card
arrangements, the issuer may debit the
consumer’s account for all debit card
transactions that occurred during a particular
month at the end of the month. Regardless of
the time period between the transaction and
account posting, a card, or other payment
code or device, that is used in connection
with a deferred debit arrangement is
considered a debit card for purposes of the
requirements of this part.
3. Decoupled debit cards. Decoupled debit
cards are issued by an entity other than the
financial institution holding the cardholder’s
account. In a decoupled debit arrangement,
transactions that are authorized by the card
issuer settle against the cardholder’s account
held by an entity other than the issuer,
generally via a subsequent ACH debit to that
account. The term ‘‘debit card’’ includes any
card, or other payment code or device, issued
or approved for use through a payment card
network to debit an account, regardless of
whether the issuer holds the account.
Therefore, decoupled debit cards are debit
cards for purposes of this part.
4. Hybrid cards.
i. Some cards, or other payment codes or
devices, may have both credit- and debit-like
features (‘‘hybrid cards’’). For example, these
cards may enable a cardholder to access a
line of credit, but select certain transactions
for immediate repayment (i.e., prior to the
end of a billing cycle) via a debit to the
cardholder’s account, as the term is defined
in § 235.2(a), held either with the issuer or
at another institution. If a card permits a
cardholder to initiate transactions that debit
an account or funds underlying a prepaid
card, the card is considered a debit card for
purposes of this part. Not all transactions
initiated by such a hybrid card, however, are
electronic debit transactions. Rather, only
those transactions that debit an account as
defined in this part or funds underlying a
prepaid card are electronic debit
transactions. If the transaction posts to a line
of credit, then the transaction is a credit
transaction.
ii. If an issuer conditions the availability of
a credit or charge card that permits preauthorized repayment of some or all
transactions on the cardholder maintaining
an account at the issuer, such a card is
considered a debit card for purposes of this
part.
5. Virtual wallets. A virtual wallet is a
device (e.g., a mobile phone) that stores
several different payment codes or devices
(‘‘virtual cards’’) that access different
accounts, funds underlying the card, or lines
of credit. At the point of sale, the cardholder
may select from the virtual wallet the virtual
card he or she wishes to use for payment.
The virtual card that the cardholder uses for
payment is considered a debit card under
this part if the virtual card that initiates a
transaction meets the definition of debit card,
notwithstanding the fact that other cards in
the wallet may not be debit cards.
6. General-use prepaid card. The term
‘‘debit card’’ includes general-use prepaid
cards. See § 235.2(j) and related commentary
for information on general-use prepaid cards.
7. Store cards. The term ‘‘debit card’’ does
not include prepaid cards that may be used
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at a single merchant or affiliated merchants.
Two or more merchants are affiliated if they
are related by either common ownership or
by common corporate control. For purposes
of the ‘‘debit card’’ definition, franchisees are
considered to be under common corporate
control if they are subject to a common set
of corporate policies or practices under the
terms of their franchise licenses.
8. Checks, drafts, and similar instruments.
The term ‘‘debit card’’ does not include a
check, draft, or similar paper instrument or
a transaction in which the check is used as
a source of information to initiate an
electronic payment. For example, if an
account holder provides a check to buy goods
or services and the merchant takes the
account number and routing number
information from the MICR line at the bottom
of a check to initiate an ACH debit transfer
from the cardholder’s account, the check is
not a debit card, and such a transaction is not
considered an electronic debit transaction.
Likewise, the term ‘‘debit card’’ does not
include an electronic representation of a
check, draft, or similar paper instrument.
9. ACH transactions. The term ‘‘debit card’’
does not include an account number when it
is used by a person to initiate an ACH
transaction that debits that person’s account.
For example, if an account holder buys goods
or services over the internet using an account
number and routing number to initiate an
ACH debit, the account number is not a debit
card, and such a transaction is not
considered an electronic debit transaction.
However, the use of a card to purchase goods
or services that debits the cardholder’s
account that is settled by means of a
subsequent ACH debit initiated by the card
issuer to the cardholder’s account, as in the
case of a decoupled debit card arrangement,
involves the use of a debit card for purposes
of this part.
2(h)—Designated Automated Teller Machine
(ATM) Network
1. Reasonable and convenient access
clarified. Under § 235.2(h)(2), a designated
ATM network includes any network of ATMs
identified by the issuer that provides
reasonable and convenient access to the
issuer’s cardholders. Whether a network
provides reasonable and convenient access
depends on the facts and circumstances,
including the distance between ATMs in the
designated network and each cardholder’s
last known home or work address, or if a
home or work address is not known, where
the card was first issued.
2(i)—Electronic Debit Transaction
1. Debit an account. The term ‘‘electronic
debit transaction’’ includes the use of a card
to debit an account. The account debited
could be, for example, the cardholder’s asset
account or the account that holds the funds
used to settle prepaid card transactions.
2. Form of payment. The term ‘‘electronic
debit transaction’’ includes the use of a card
as a form of payment that may be made in
exchange for goods or services, as a
charitable contribution, to satisfy an
obligation (e.g., tax liability), or for other
purposes.
3. Subsequent transactions. The term
‘‘electronic debit transaction’’ includes both
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the cardholder’s use of a debit card for the
initial payment and any subsequent use by
the cardholder of the debit card in
connection with the initial payment. For
example, the term ‘‘electronic debit
transaction’’ includes using the debit card to
return merchandise or cancel a service that
then results in a debit to the merchant’s
account and a credit to the cardholder’s
account.
4. Cash withdrawal at the point of sale.
The term ‘‘electronic debit transaction’’
includes a transaction in which a cardholder
uses the debit card both to make a purchase
and to withdraw cash (known as a ‘‘cashback transaction’’).
5. Geographic limitation. This regulation
applies only to electronic debit transactions
that are initiated at a merchant located in the
United States. If a cardholder uses a debit
card at a merchant located outside the United
States to debit an account held in the United
States, the electronic debit transaction is not
subject to this part.
2(j)—General-Use Prepaid Card
1. Redeemable upon presentation at
multiple, unaffiliated merchants. A prepaid
card is redeemable upon presentation at
multiple, unaffiliated merchants if such
merchants agree to honor the card.
2. Selective authorization cards. Selective
authorization cards, (e.g., mall cards) are
generally intended to be used or redeemed
for goods or services at participating retailers
within a shopping mall or other limited
geographic area. Selective authorization
cards are considered general-use prepaid
cards, regardless of whether they carry the
mark, logo, or brand of a payment card
network, if they are redeemable at multiple,
unaffiliated merchants.
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2(k)—Interchange Transaction Fee
1. In general. Generally, the payment card
network is the entity that establishes and
charges the interchange transaction fee to the
acquirers or merchants. The acquirers then
pay to the issuers any interchange transaction
fee established and charged by the network.
Acquirers typically pass the interchange
transaction fee through to merchantcustomers.
2. Compensating an issuer. The term
‘‘interchange transaction fee’’ is limited to
those fees that a payment card network
establishes, charges, or receives to
compensate the issuer for its role in the
electronic debit transaction. By contrast,
payment card networks generally charge
issuers and acquirers fees for services the
network performs. Such fees are not
interchange transaction fees because the
payment card network is charging and
receiving the fee as compensation for services
it provides.
3. Established, charged, or received.
Interchange transaction fees are not limited
to those fees for which a payment card
network sets the value. A fee that
compensates an issuer is an interchange
transaction fee if the fee is set by the issuer
but charged to acquirers by virtue of the
network determining each participant’s net
settlement position.
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2(l)—Issuer
1. In general. A person issues a debit card
by authorizing the use of debit card by a
cardholder to perform electronic debit
transactions. That person may provide the
card directly to the cardholder or indirectly
by using a third party (such as a processor,
or a telephone network or manufacturer) to
provide the card, or other payment code or
device, to the cardholder. The following
examples illustrate the entity that is the
issuer under various card program
arrangements.
2. Traditional debit card arrangements. In
a traditional debit card arrangement, the bank
or other entity holds the cardholder’s funds
and authorizes the cardholder to use the
debit card to access those funds through
electronic debit transactions, and the
cardholder receives the card directly or
indirectly (e.g., through an agent) from the
bank or other entity that holds the funds
(except for decoupled debit cards, discussed
below). In this system, the bank or entity
holding the cardholder’s funds is the issuer.
3. BIN-sponsor arrangements. Payment
card networks assign Bank Identification
Numbers (BINs) to member-institutions for
purposes of issuing cards, authorizing,
clearing, settling, and other processes. In
exchange for a fee or other financial
consideration, some members of payment
card networks permit other entities to issue
debit cards using the member’s BIN. The
entity permitting the use of its BIN is referred
to as the ‘‘BIN sponsor’’ and the entity that
uses the BIN to issue cards is often referred
to as the ‘‘affiliate member.’’ BIN sponsor
arrangements can follow at least two different
models:
i. Sponsored debit card model. In some
cases, a community bank or credit union may
provide debit cards to its account holders
through a BIN sponsor arrangement with a
member institution. In general, the bank or
credit union will authorize its account
holders to use debit cards to perform
electronic debit transactions that access
funds in accounts at the bank or credit union.
The bank or credit union’s name typically
will appear on the debit card. The bank or
credit union may directly or indirectly
provide the cards to cardholders. Under these
circumstances, the bank or credit union is the
issuer for purposes of this part. Although the
bank or credit union may distribute cards
through the BIN sponsors, the BIN sponsor
does not enter into the agreement with the
cardholder that authorizes the cardholder to
use the card to perform electronic debit
transactions that access funds in the account
at the bank or credit union, and therefore the
BIN sponsor is not the issuer.
ii. Prepaid card model. A member
institution may also serve as the BIN sponsor
for a prepaid card program. Under these
arrangements, a program manager distributes
prepaid cards to the cardholders and the BINsponsoring institution generally holds the
funds for the prepaid card program in an
omnibus or pooled account. Either the BIN
sponsor or the prepaid card program manager
may keep track of the underlying funds for
each individual prepaid card through
subaccounts. While the cardholder may
receive the card directly from the program
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manager or at a retailer, the BIN sponsor
authorizes the cardholder to use the card to
perform electronic debit transactions that
access the funds in the pooled account and
the cardholder’s relationship generally is
with the BIN sponsor. Accordingly, under
these circumstances, the BIN sponsor, or the
bank holding the pooled account, is the
issuer.
4. Decoupled debit cards. In the case of
decoupled debit cards, an entity other than
the bank holding the cardholder’s account
enters into a relationship with the cardholder
authorizing the use of the card to perform
electronic debit transactions. The entity
authorizing the use of the card to perform
electronic debit transaction typically arranges
for the card to be provided directly or
indirectly to the cardholder and has a direct
relationship with the cardholder with respect
to the card. The bank holding the
cardholder’s account has agreed generally to
permit ACH debits to the account, but has
not authorized the use of the debit card to
access the funds through electronic debit
transactions. Under these circumstances, the
entity authorizing the use of the debit card,
and not the account-holding institution, is
considered the issuer.
2(m)—Merchant [Reserved]
2(n)—Payment Card Network
1. In general. An entity is a considered a
payment card network with respect to an
electronic debit transaction for purposes of
this rule if it routes information and data to
the issuer from the acquirer to conduct
authorization, clearance, and settlement of
the electronic debit transaction. By contrast,
if an entity receives transaction information
and data from a merchant and authorizes and
settles the transaction without routing the
information and data to another entity (i.e.,
the issuer or the issuer’s processor) for
authorization, clearance, or settlement, that
entity is not considered a payment card
network with respect to the electronic debit
transaction.
2. Three-party systems. In the case of a
three-party system, electronic debit
transactions are processed by an entity that
acts as system operator and issuer, and may
also act as the acquirer. The entity acting as
system operator and issuer that receives the
transaction information from the merchant or
acquirer also holds the cardholder’s funds.
Therefore, rather than directing the
transaction information to a separate issuer,
the entity authorizes and settles the
transaction based on the information
received from the merchant. As these entities
do not connect (or ‘‘network’’) multiple
issuers and do not route information to
conduct the transaction, they are not
‘‘payment card networks’’ with respect to
these transactions. 3. Processors as payment
card networks. A processor is considered a
payment card network if, in addition to
acting as processor for an acquirer and issuer,
the processor routes transaction information
and data received from a merchant or the
merchant’s acquirer to an issuer. For
example, if a merchant uses a processor in
order to accept any, some, or all brands of
debit cards and the processor routes
transaction information and data to the issuer
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or issuer’s processor, the merchant’s
processor is considered a payment card
network with respect to the electronic debit
transaction. If the processor establishes,
charges, or receives a fee for the purpose of
compensating an issuer, that fee is
considered an interchange transaction fee for
purposes of this part.
4. Automated clearing house (ACH)
operators. An ACH operator is not
considered a payment card network for
purposes of this part. While an ACH operator
processes transactions that debit an account
and provides for interbank clearing and
settlement of such transactions, a person
does not use the ACH system to accept as a
form of payment a brand of debit card.
5. ATM networks. An ATM network is not
considered a payment card network for
purposes of this part. While ATM networks
process transactions that debit an account
and provide for interbank clearing and
settlement of such transactions, a cash
withdrawal from an ATM is not a payment
because there is no exchange of money for
goods or services, or payment made as a
charitable contribution, to satisfy an
obligation (e.g., tax liability), or for other
purposes.
2(o)—Person [Reserved]
2(p)—Processor
1. Distinction from acquirers. A processor
may perform all transaction-processing
functions for a merchant or acquirer, but if
it does not acquire (that is, settle with the
merchant for the transactions), it is not an
acquirer. The entity that acquires electronic
debit transactions is the entity that is
responsible to other parties to the electronic
debit transaction for the amount of the
transaction.
2. Issuers. A processor may perform
services related to authorization, clearance,
and settlement of transactions for an issuer
without being considered to be an issuer for
purposes of this part.
2(q)—Route
1. An entity routes information if it both
directs and sends the information to an
unaffiliated entity (or affiliated entity acting
on behalf of the unaffiliated entity). This
other entity may be a payment card network
or processor (if the entity directing and
sending the information is a merchant or an
acquirer) or an issuer or processor (if the
entity directing and sending the information
is a payment card network).
2(r)—United States [Reserved]
Section 235.3—Reasonable and Proportional
Interchange Transaction Fees
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3(a)—[Reserved]
3(b)—Reasonable and Proportional Fees
1. Two components. The standard for the
maximum permissible interchange
transaction fee that an issuer may receive
consists of two components: a base
component that does not vary with a
transaction’s value and an ad valorem
component. The amount of any interchange
transaction fee received or charged by an
issuer may not exceed the sum of these
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components. In addition, an issuer may be
permitted to receive or charge a fraudprevention adjustment under § 235.4 of this
part. 2. Variation in interchange fees. An
issuer is permitted to charge or receive, and
a network is permitted to establish,
interchange transaction fees that vary based
on, for example, the transaction value or the
type of transaction or merchant, provided the
amount of any interchange transaction fee for
any transaction does not exceed the sum of
the base component and the ad valorem
component.
3. Examples. For a $50 electronic debit
transaction performed on June 30, 2023, the
maximum permissible interchange
transaction fee is 23.5 cents (21.0 cents plus
5.0 basis points multiplied by $50). For a $50
electronic debit transaction performed on
July 1, 2023, the maximum permissible
interchange transaction fee is 16.4 cents (14.4
cents plus 4.0 basis points multiplied by
$50). In addition, an issuer may be permitted
to receive a fraud-prevention adjustment
under § 235.4 of this part.
4. Performance of an electronic debit
transaction. For purposes of § 235.3(b), an
electronic debit transaction is considered to
be performed on the date on which such
transaction is settled on an interbank basis.
For example, an electronic debit transaction
that is authorized and cleared on June 30,
2023, but is settled on an interbank basis on
July 1, 2023, is considered to be performed
on July 1, 2023.
3(c)—[Reserved]
Section 235.4—Fraud-Prevention
Adjustment
4(a)—Fraud-Prevention Adjustment Amount
1. Performance of an electronic debit
transaction. For purposes of § 235.4(a), an
electronic debit transaction is considered to
be performed on the date on which such
transaction is settled on an interbank basis.
For example, an electronic debit transaction
that is authorized and cleared on June 30,
2023, but is settled on an interbank basis on
July 1, 2023, is considered to be performed
on July 1, 2023.
4(b)—[Reserved]
4(c)(1)—Issuer Standards
1. An issuer’s policies and procedures
should address fraud related to debit card use
by unauthorized persons. Examples of use by
unauthorized persons include, but are not
limited to, the following:
i. A thief steals a cardholder’s wallet and
uses the debit card to purchase goods,
without the authority of the cardholder.
ii. A cardholder makes a purchase at a
merchant. Subsequently, the merchant’s
employee uses information from the debit
card to initiate a subsequent transaction,
without the authority of the cardholder.
iii. A hacker steals cardholder account
information from the issuer or a merchant
processor and uses the stolen information to
make unauthorized card-not-present
purchases or to create a counterfeit card to
make unauthorized card-present purchases.
2. An issuer’s policies and procedures
must be designed to reduce fraud, where cost
effective, across all types of electronic debit
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transactions in which its cardholders engage.
Therefore, an issuer should consider whether
its policies and procedures are effective for
each method used to authenticate the card
(e.g., a chip or a code embedded in the
magnetic stripe) and the cardholder (e.g., a
signature or a PIN), and for different sales
channels (e.g., card-present and card-notpresent).
3. An issuer’s policies and procedures
must be designed to take effective steps to
reduce both the occurrence of and costs to all
parties from fraudulent electronic debit
transactions. An issuer should take steps
reasonably designed to reduce the number
and value of its fraudulent electronic debit
transactions relative to its non-fraudulent
electronic debit transactions. These steps
should reduce the costs from fraudulent
transactions to all parties, not merely the
issuer. For example, an issuer should take
steps to reduce the number and value of its
fraudulent electronic debit transactions
relative to its non-fraudulent transactions
whether or not it bears the fraud losses as a
result of regulations or network rules.
4. For any given issuer, the number and
value of fraudulent electronic debit
transactions relative to non-fraudulent
transactions may vary materially from year to
year. Therefore, in certain circumstances, an
issuer’s policies and procedures may be
effective notwithstanding a relative increase
in the transactions that are fraudulent in a
particular year. However, continuing
increases in the share of fraudulent
transactions would warrant further scrutiny.
5. In determining which fraud-prevention
technologies to implement or retain, an
issuer must consider the cost-effectiveness of
the technology, that is, the expected cost of
the technology relative to its expected
effectiveness in controlling fraud. In
evaluating the cost of a particular technology,
an issuer should consider whether and to
what extent other parties will incur costs to
implement the technology, even though an
issuer may not have complete information
about the costs that may be incurred by other
parties, such as the cost of new merchant
terminals. In evaluating the costs, an issuer
should consider both initial implementation
costs and ongoing costs of using the fraudprevention method.
6. An issuer need not develop fraudprevention technologies itself to satisfy the
standards in § 235.4(c). An issuer may
implement fraud-prevention technologies
that have been developed by a third party
that the issuer has determined are
appropriate under its own policies and
procedures.
4(c)(2)—Elements of Fraud-Prevention
Policies and Procedures
1. In general. An issuer may tailor its
policies and procedures to address its
particular debit card program, including the
size of the program, the types of transactions
in which its cardholders commonly engage,
fraud types and methods experienced by the
issuer, and the cost of implementing new
fraud-prevention methods in light of the
expected fraud reduction.
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4(c)(2)(i)—Methods To Identify and Prevent
Fraudulent Debit Card Transactions
1. In general. Examples of policies and
procedures reasonably designed to identify
and prevent fraudulent electronic debit
transactions include the following:
i. Practices to help determine whether a
card is authentic and whether the user is
authorized to use the card at the time of a
transaction. For example, an issuer may
specify the use of particular authentication
technologies or methods, such as dynamic
data, to better authenticate a card and
cardholder at the time of the transaction, to
the extent doing so does not inhibit the
ability of a merchant to direct the routing of
electronic debit transactions for processing
over any payment card network that may
process such transactions. (See § 235.7 and
commentary thereto.)
ii. An automated mechanism to assess the
risk that a particular electronic debit
transaction is fraudulent during the
authorization process (i.e., before the issuer
approves or declines an authorization
request). For example, an issuer may use
neural networks to identify transactions that
present increased risk of fraud. As a result of
this analysis, the issuer may decide to
decline to authorize these transactions. An
issuer may not be able to determine whether
a given transaction in isolation is fraudulent
at the time of authorization, and therefore
may have implemented policies and
procedures that monitor sets of transactions
initiated with a cardholder’s debit card. For
example, an issuer could compare a set of
transactions initiated with the card to a
customer’s typical transactions in order to
determine whether a transaction is likely to
be fraudulent. Similarly, an issuer could
compare a set of transactions initiated with
a debit card and common fraud patterns in
order to determine whether a transaction or
future transaction is likely to be fraudulent.
iii. Practices to support reporting of lost
and stolen cards or suspected incidences of
fraud by cardholders or other parties to a
transaction. As an example, an issuer may
promote customer awareness by providing
text alerts of transactions in order to detect
fraudulent transactions in a timely manner.
An issuer may also report debit cards
suspected of being fraudulent to their
networks for inclusion in a database of
potentially compromised cards.
4(c)(2)(ii)—Monitoring of the Issuer’s Volume
and Value of Fraudulent Electronic Debit
Transactions
1. Tracking its fraudulent electronic debit
transactions over time enables an issuer to
assess whether its policies and procedures
are effective. Accordingly, an issuer must
include policies and procedures designed to
monitor trends in the number and value of
its fraudulent electronic debit transactions.
An effective monitoring program would
include tracking issuer losses from
fraudulent electronic debit transactions,
fraud-related chargebacks to acquirers, losses
passed on to cardholders, and any other
reimbursements from other parties. Other
reimbursements could include payments
made to issuers as a result of fines assessed
to merchants for noncompliance with
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Payment Card Industry (PCI) Data Security
Standards or other industry standards. An
issuer should also establish procedures to
track fraud-related information necessary to
perform its reviews under § 235.4(c)(3) and to
retain and report information as required
under § 235.8.
4(c)(2)(iii)—Appropriate Responses to
Suspicious Electronic Debit Transactions
1. An issuer may identify transactions that
it suspects to be fraudulent after it has
authorized or settled the transaction. For
example, a cardholder may inform the issuer
that the cardholder did not initiate a
transaction or transactions, or the issuer may
learn of a fraudulent transaction or possibly
compromised debit cards from the network,
the acquirer, or other parties. An issuer must
implement policies and procedures designed
to provide an appropriate response once an
issuer has identified suspicious transactions
to reduce the occurrence of future fraudulent
electronic debit transactions and the costs
associated with such transactions. The
appropriate response may differ depending
on the facts and circumstances, including the
issuer’s assessment of the risk of future
fraudulent electronic debit transactions. For
example, in some circumstances, it may be
sufficient for an issuer to monitor more
closely the account with the suspicious
transactions. In other circumstances, it may
be necessary to contact the cardholder to
verify a transaction, reissue a card, or close
an account. An appropriate response may
also require coordination with industry
organizations, law enforcement agencies, and
other parties, such as payment card
networks, merchants, and issuer or merchant
processors.
4(c)(2)(iv)—Methods To Secure Debit Card
and Cardholder Data
1. An issuer must implement policies and
procedures designed to secure debit card and
cardholder data. These policies and
procedures should apply to data that are
transmitted by the issuer (or its service
provider) during transaction processing, that
are stored by the issuer (or its service
provider), and that are carried on media (e.g.,
laptops, transportable data storage devices)
by employees or agents of the issuer. This
standard may be incorporated into an issuer’s
information security program, as required by
Section 501(b) of the Gramm-Leach-Bliley
Act.
4(c)(3)—Review of and Updates to Policies
and Procedures
1. i. An issuer’s assessment of the
effectiveness of its policies and procedures
should consider whether they are reasonably
designed to reduce the number and value of
fraudulent electronic debit transactions
relative to non-fraudulent electronic debit
transactions and are cost effective. (See
comment 4(c)(1)–3 and comment 4(c)(1)–5).
ii. An issuer must also assess its policies
and procedures in light of changes in fraud
types (e.g., the use of counterfeit cards, lost
or stolen cards) and methods (e.g., common
purchase patterns indicating possible
fraudulent behavior), as well as changes in
the available methods of detecting and
preventing fraudulent electronic debit
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transactions (e.g., transaction monitoring,
authentication methods) as part of its
periodic review of its policies and
procedures. An issuer’s review of its policies
and procedures must consider information
from the issuer’s own experience and that the
issuer otherwise identified itself; information
from payment card networks, law
enforcement agencies, and fraud-monitoring
groups in which the issuer participates; and
supervisory guidance. For example, an issuer
should consider warnings and alerts it
receives from payment card networks
regarding compromised cards and data
breaches.
2. An issuer should review its policies and
procedures and their implementation more
frequently than annually if the issuer
determines that more frequent review is
appropriate based on information obtained
from monitoring its fraudulent electronic
debit transactions, changes in the types or
methods of fraud, or available methods of
detecting and preventing fraudulent
electronic debit transactions. (See
§ 235.4(c)(1)(ii) and commentary thereto.)
3. In light of an issuer’s review of its
policies and procedures, and their
implementation, the issuer may determine
that updates to its policies and procedures,
and their implementation, are necessary.
Merely determining that updates are
necessary does not render an issuer ineligible
to receive or charge the fraud-prevention
adjustment. To remain eligible to receive or
charge a fraud-prevention adjustment,
however, an issuer should develop and
implement such updates as soon as
reasonably practicable, in light of the facts
and circumstances.
4(d)—Notification
1. Payment card networks that plan to
allow issuers to receive or charge a fraudprevention adjustment can develop processes
for identifying issuers eligible for this
adjustment. Each issuer that wants to be
eligible to receive or charge a fraudprevention adjustment must notify annually
the payment card networks in which it
participates of its compliance through the
networks’ processes.
Section 235.5—Exemptions for Certain
Electronic Debit Transactions
1. Eligibility for multiple exemptions. An
electronic debit transaction may qualify for
one or more exemptions. For example, a
debit card that has been provided to a person
pursuant to a Federal, State, or local
government-administered payment program
may be issued by an issuer that is not a
covered issuer. In this case, an electronic
debit transaction made using that card may
qualify for the exemption under § 235.5(a) for
small issuers or for the exemption under
§ 235.5(b) for government-administered
payment programs. A payment card network
establishing interchange fees for transactions
that qualify for more than one exemption
need only satisfy itself that the issuer’s
transactions qualify for at least one of the
exemptions in order to exempt the electronic
debit transaction from the interchange fee
restrictions.
2. Certification process. Payment card
networks that plan to allow issuers to receive
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higher interchange fees than permitted under
§§ 235.3 and 235.4 pursuant to one of the
exemptions in § 235.5 could develop their
own processes for identifying issuers and
products eligible for such exemptions.
Section 235.5(a)(2) permits payment card
networks to rely on lists published by the
Board to help determine eligibility for the
small issuer exemption set forth in
§ 235.5(a)(1).
5(a)—Exemption for Small Issuers
1. Account that is debited. An issuer that
is not a covered issuer is exempt under
§ 235.5(a) only if the issuer holds the account
that is debited. For example, in the case of
the sponsored debit card model described in
comment 235.2(l)–3(i), if the bank or credit
union is not a covered issuer, then that bank
or credit union is exempt from the
interchange fee restrictions because the
issuer holds the account that is debited.
However, in the case of the decoupled debit
card described in comment 235.2(l)–4, the
issuer of a decoupled debit card is not
exempt under § 235.5(a), regardless of asset
size, because it does not hold the account
that is debited.
2. Change in status. If an exempt issuer
becomes a covered issuer based on its and its
affiliates assets at the end of a calendar year,
that issuer must begin complying with the
interchange fee standards (§ 235.3), the fraudprevention adjustment standards (to the
extent the issuer wishes to receive a fraudprevention adjustment) (§ 235.4), and the
provisions prohibiting circumvention,
evasion, and net compensation (§ 235.6) no
later than July 1.
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5(b)—Exemption for GovernmentAdministered Payment Programs
1. Government-administered payment
program. A program is considered
government-administered regardless of
whether a Federal, State, or local government
agency operates the program or outsources
some or all functions to third parties so long
as the program is operated on behalf of the
government agency. In addition, a program
may be government-administered even if a
Federal, State, or local government agency is
not the source of funds for the program it
administers. For example, child support
programs are government-administered
programs even though a Federal, State, or
local government agency is not the source of
funds. A tribal government is considered a
local government for purposes of this
exemption.
5(c)—Exemption for Certain Reloadable
Prepaid Cards
1. Subaccount clarified. A subaccount is an
account within an account, opened in the
name of an agent, nominee, or custodian for
the benefit of two or more cardholders, where
the transactions and balances of individual
cardholders are tracked in such subaccounts.
An account that is opened solely in the name
of a single cardholder is not a subaccount.
2. Reloadable. A general-use prepaid card
is ‘‘reloadable’’ if the terms and conditions of
the agreement permit funds to be added to
the general-use prepaid card at any time after
the initial purchase or issuance. A generaluse prepaid card is not ‘‘reloadable’’ merely
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because the issuer or processor is technically
able to add functionality that would
otherwise enable the general-use prepaid
card to be reloaded.
3. Marketed or labeled as a gift card or gift
certificate.
i. Electronic debit transactions made using
a reloadable general-use prepaid card are not
exempt from the interchange fee restrictions
if the card is marketed or labeled as a gift
card or gift certificate. The term ‘‘marketed or
labeled as a gift card or gift certificate’’ means
directly or indirectly offering, advertising or
otherwise suggesting the potential use of a
general-use prepaid card as a gift for another
person. Whether the exclusion applies
generally does not depend on the type of
entity that makes the promotional message.
For example, a card may be marketed or
labeled as a gift card or gift certificate if
anyone (other than the purchaser of the card),
including the issuer, the retailer, the program
manager that may distribute the card, or the
payment network on which a card is used,
promotes the use of the card as a gift card
or gift certificate. A general-use prepaid card
is marketed or labeled as a gift card or gift
certificate even if it is only occasionally
marketed as a gift card or gift certificate. For
example, a network-branded general purpose
reloadable card would be marketed or labeled
as a gift card or gift certificate if the issuer
principally advertises the card as a less costly
alternative to a bank account but promotes
the card in a television, radio, newspaper, or
internet advertisement, or on signage as ‘‘the
perfect gift’’ during the holiday season.
ii. The mere mention of the availability of
gift cards or gift certificates in an
advertisement or on a sign that also indicates
the availability of exempted general-use
prepaid cards does not by itself cause the
general-use prepaid card to be marketed as a
gift card or a gift certificate. For example, the
posting of a sign in a store that refers to the
availability of gift cards does not by itself
constitute the marketing of otherwise
exempted general-use prepaid cards that may
also be sold in the store along with gift cards
or gift certificates, provided that a person
acting reasonably under the circumstances
would not be led to believe that the sign
applies to all cards sold in the store. (See,
however, comment 5(c)–4.ii.)
4. Examples of marketed or labeled as a
gift card or gift certificate.
i. The following are examples of marketed
or labeled as a gift card or gift certificate:
A. Using the word ‘‘gift’’ or ‘‘present’’ on
a card or accompanying material, including
documentation, packaging and promotional
displays;
B. Representing or suggesting that a card
can be given to another person, for example,
as a ‘‘token of appreciation’’ or a ‘‘stocking
stuffer,’’ or displaying a congratulatory
message on the card or accompanying
material;
C. Incorporating gift-giving or celebratory
imagery or motifs, such as a bow, ribbon,
wrapped present, candle, or a holiday or
congratulatory message, on a card,
accompanying documentation, or
promotional material;
ii. The term does not include the following:
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A. Representing that a card can be used as
a substitute for a checking, savings, or
deposit account;
B. Representing that a card can be used to
pay for a consumer’s health-related
expenses—for example, a card tied to a
health savings account;
C. Representing that a card can be used as
a substitute for travelers checks or cash;
D. Representing that a card can be used as
a budgetary tool, for example, by teenagers,
or to cover emergency expenses.
5. Reasonable policies and procedures to
avoid marketing as a gift card. The
exemption for a general-use prepaid card that
is reloadable and not marketed or labeled as
a gift card or gift certificate in § 235.5(c)
applies if a reloadable general-use prepaid
card is not marketed or labeled as a gift card
or gift certificate and if persons involved in
the distribution or sale of the card, including
issuers, program managers, and retailers,
maintain policies and procedures reasonably
designed to avoid such marketing. Such
policies and procedures may include
contractual provisions prohibiting a
reloadable general-use prepaid card from
being marketed or labeled as a gift card or gift
certificate, merchandising guidelines or plans
regarding how the product must be displayed
in a retail outlet, and controls to regularly
monitor or otherwise verify that the generaluse prepaid card is not being marketed as a
gift card. Whether a general-use prepaid card
has been marketed as a gift card or gift
certificate will depend on the facts and
circumstances, including whether a
reasonable person would be led to believe
that the general-use prepaid card is a gift card
or gift certificate. The following examples
illustrate the application of § 235.5(c):
i. An issuer or program manager of prepaid
cards agrees to sell general-purpose
reloadable cards through a retailer. The
contract between the issuer or program
manager and the retailer establishes the terms
and conditions under which the cards may
be sold and marketed at the retailer. The
terms and conditions prohibit the generalpurpose reloadable cards from being
marketed as a gift card or gift certificate, and
require policies and procedures to regularly
monitor or otherwise verify that the cards are
not being marketed as such. The issuer or
program manager sets up one promotional
display at the retailer for gift cards and
another physically separated display for
exempted products under § 235.5(c),
including general-purpose reloadable cards,
such that a reasonable person would not
believe that the exempted cards are gift cards.
The exemption in § 235.5(c) applies because
policies and procedures reasonably designed
to avoid the marketing of the general-purpose
reloadable cards as gift cards or gift
certificates are maintained, even if a retail
clerk inadvertently stocks or a consumer
inadvertently places a general-purpose
reloadable card on the gift card display.
ii. Same facts as in comment 5(c)–5.i,
except that the issuer or program manager
sets up a single promotional display at the
retailer on which a variety of prepaid cards
are sold, including store gift cards and
general-purpose reloadable cards. A sign
stating ‘‘Gift Cards’’ appears prominently at
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the top of the display. The exemption in
§ 235.5(c) does not apply with respect to the
general-purpose reloadable cards because
policies and procedures reasonably designed
to avoid the marketing of exempted cards as
gift cards or gift certificates are not
maintained.
iii. Same facts as in comment 5(c)–5.i,
except that the issuer or program manager
sets up a single promotional multi-sided
display at the retailer on which a variety of
prepaid card products, including store gift
cards and general-purpose reloadable cards
are sold. Gift cards are segregated from
exempted cards, with gift cards on one side
of the display and exempted cards on a
different side of a display. Signs of equal
prominence at the top of each side of the
display clearly differentiate between gift
cards and the other types of prepaid cards
that are available for sale. The retailer does
not use any more conspicuous signage
suggesting the general availability of gift
cards, such as a large sign stating ‘‘Gift
Cards’’ at the top of the display or located
near the display. The exemption in § 235.5(c)
applies because policies and procedures
reasonably designed to avoid the marketing
of the general-purpose reloadable cards as
gift cards or gift certificates are maintained,
even if a retail clerk inadvertently stocks or
a consumer inadvertently places a generalpurpose reloadable card on the gift card
display.
iv. Same facts as in comment 5(c)–5.i,
except that the retailer sells a variety of
prepaid card products, including store gift
cards and general-purpose reloadable cards,
arranged side-by-side in the same checkout
lane. The retailer does not affirmatively
indicate or represent that gift cards are
available, such as by displaying any signage
or other indicia at the checkout lane
suggesting the general availability of gift
cards. The exemption in § 235.5(c) applies
because policies and procedures reasonably
designed to avoid marketing the generalpurpose reloadable cards as gift cards or gift
certificates are maintained.
6. On-line sales of prepaid cards. Some
websites may prominently advertise or
promote the availability of gift cards or gift
certificates in a manner that suggests to a
consumer that the website exclusively sells
gift cards or gift certificates. For example, a
website may display a banner advertisement
or a graphic on the home page that
prominently states ‘‘Gift Cards,’’ ‘‘Gift
Giving,’’ or similar language without mention
of other available products, or use a web
address that includes only a reference to gift
cards or gift certificates in the address. In
such a case, a consumer acting reasonably
under the circumstances could be led to
believe that all prepaid products sold on the
website are gift cards or gift certificates.
Under these facts, the website has marketed
all such products as gift cards or gift
certificates, and the exemption in § 235.5(c)
does not apply to any products sold on the
website.
7. Temporary non-reloadable cards issued
in connection with a general-use reloadable
card. Certain general-purpose prepaid cards
that are typically marketed as an account
substitute initially may be sold or issued in
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the form of a temporary non-reloadable card.
After the card is purchased, the cardholder
is typically required to call the issuer to
register the card and to provide identifying
information in order to obtain a reloadable
replacement card. In most cases, the
temporary non-reloadable card can be used
for purchases until the replacement
reloadable card arrives and is activated by
the cardholder. Because the temporary nonreloadable card may only be obtained in
connection with the reloadable card, the
exemption in § 235.5(c) applies so long as the
card is not marketed as a gift card or gift
certificate.
5(d)—Exception
1. Additional ATM access. Some debit
cards may be used to withdraw cash from
ATMs that are not part of the issuer’s
designated ATM network. An electronic
debit card transaction may still qualify for
the exemption under §§ 235.5(b) or (c) with
a respect to a card for which a fee may be
imposed for a withdrawal from an ATM that
is outside of the issuer’s designated ATM
network as long as the card complies with
the condition set forth in § 235.5(d)(2) for
withdrawals within the issuer’s designated
ATM network. The condition with respect to
ATM fees does not apply to cards that do not
provide ATM access.
Section 235.6—Prohibition on
Circumvention, Evasion, and Net
Compensation
6(a)—Prohibition of Circumvention or
Evasion
1. Finding of circumvention or evasion. A
finding of evasion or circumvention will
depend on all relevant facts and
circumstances. Although net compensation
may be one form of circumvention or evasion
prohibited under § 235.6(a), it is not the only
form.
2. Examples of circumstances that may
constitute circumvention or evasion. The
following examples do not constitute per se
circumvention or evasion, but may warrant
additional supervisory scrutiny to determine
whether the totality of the facts and
circumstances constitute circumvention or
evasion:
i. A payment card network decreases
network processing fees paid by issuers for
electronic debit transactions by 50 percent
and increases the network processing fees
charged to merchants or acquirers with
respect to electronic debit transactions by a
similar amount. Because the requirements of
this subpart do not restrict or otherwise
establish the amount of fees that a network
may charge for its services, the increase in
network fees charged to merchants or
acquirers and decrease in fees charged to
issuers is not a per se circumvention or
evasion of the interchange transaction fee
standards, but may warrant additional
supervisory scrutiny to determine whether
the facts and circumstances constitute
circumvention or evasion.
ii. An issuer replaces its debit cards with
prepaid cards that are exempt from the
interchange limits of §§ 235.3 and 235.4. The
exempt prepaid cards are linked to its
customers’ transaction accounts and funds
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are swept from the transaction accounts to
the prepaid accounts as needed to cover
transactions made. Again, this arrangement is
not per se circumvention or evasion, but may
warrant additional supervisory scrutiny to
determine whether the facts and
circumstances constitute circumvention or
evasion.
6(b)—Prohibition of Net Compensation
1. Net compensation. Net compensation to
an issuer through the use of network fees is
prohibited.
2. Consideration of payments or incentives
provided by the network in net compensation
determination.
i. For purposes of the net compensation
determination, payments or incentives paid
by a payment card network to an issuer with
respect to electronic debit transactions or
debit card related activities could include,
but are not limited to, marketing incentives;
payments or rebates for meeting or exceeding
a specific transaction volume, percentage
share, or dollar amount of transactions
processed; or other payments for debit card
related activities. For example, signing
bonuses paid by a network to an issuer for
the issuer’s debit card portfolio would also be
included in the total amount of payments or
incentives received by an issuer from a
payment card network with respect to
electronic debit transactions. A signing bonus
for an entire card portfolio, including credit
cards, may be allocated to the issuer’s debit
card business based on the proportion of the
cards or transactions that are debit cards or
electronic debit transactions, as appropriate
to the situation, for purposes of the net
compensation determination.
ii. Incentives paid by the network with
respect to multiple-year contracts may be
allocated over the life of the contract.
iii. For purposes of the net compensation
determination, payments or incentives paid
by a payment card network with respect to
electronic debit transactions or debit cardrelated activities do not include interchange
transaction fees that are passed through to
the issuer by the network, or discounts or
rebates provided by the network or an
affiliate of the network for issuer-processor
services. In addition, funds received by an
issuer from a payment card network as a
result of chargebacks, fines paid by
merchants or acquirers for violations of
network rules, or settlements or recoveries
from merchants or acquirers to offset the
costs of fraudulent transactions or a data
security breach do not constitute incentives
or payments made by a payment card
network.
3. Consideration of fees paid by an issuer
in net compensation determination.
i. For purposes of the net compensation
determination, fees paid by an issuer to a
payment card network with respect to
electronic debit transactions or debit card
related activities include, but are not limited
to, membership or licensing fees, network
administration fees, and fees for optional
network services, such as risk management
services.
ii. For purposes of the net compensation
determination, fees paid by an issuer to a
payment card network with respect to
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electronic debit transactions or debit cardrelated activities do not include network
processing fees (such as switch fees and
network connectivity fees) or fees paid to an
issuer processor affiliated with the network
for authorizing, clearing, or settling an
electronic debit transaction.
4. Example of circumstances not involving
net compensation to the issuer. The
following example illustrates circumstances
that would not indicate net compensation by
the payment card network to the issuer:
i. Because of an increase in debit card
transactions that are processed through a
payment card network during a calendar
year, an issuer receives an additional
volume-based incentive payment from the
network for that period. Over the same
period, however, the total network fees (other
than processing fees) the issuer pays the
payment card network with respect to debit
card transactions also increase so that the
total amount of fees paid by the issuer to the
network continue to exceed incentive
payments by the network to the issuer. Under
these circumstances, the issuer does not
receive net compensation from the network
for electronic debit transactions or debit card
related activities.
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Section 235.7—Limitations on Payment Card
Restrictions
7(a)—Prohibition on Network Exclusivity
1. Scope of restriction. Section 235.7(a)
requires an issuer to configure each of its
debit cards so that each electronic debit
transaction performed with such card can be
processed on at least two unaffiliated
payment card networks. In particular, section
§ 235.7(a) requires this condition to be
satisfied for each geographic area, specific
merchant, particular type of merchant, and
particular type of transaction for which the
issuer’s debit card can be used to perform an
electronic debit transaction. As long as the
condition is satisfied for each such case,
section § 235.7(a) does not require the
condition to be satisfied for each method of
cardholder authentication (e.g., signature,
PIN, biometrics, any other method of
cardholder authentication that may be
developed in the future, or the lack of a
method of cardholder authentication). For
example, it is sufficient for an issuer to issue
a debit card that can perform signatureauthenticated transactions only over one
payment card network and PIN-authenticated
transactions only over another payment card
network, as long as the two payment card
networks are not affiliated and each network
can be used to process electronic debit
transactions for every geographic area,
specific merchant, particular type of
merchant, and particular type of transaction
for which the issuer’s debit card can be used
to perform an electronic debit transaction.
2. Issuer’s role. Section 235.7(a) does not
require an issuer to ensure that two or more
unaffiliated payment card networks will
actually be available to the merchant to
process every electronic debit transaction. To
comply with the requirement in § 235.7(a), it
is sufficient for an issuer to configure each
of its debit cards so that each electronic debit
transaction performed with such card can be
processed on at least two unaffiliated
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payment card networks, even if the networks
that are actually available to the merchant for
a particular transaction are limited by, for
example, the card acceptance technologies
that a merchant adopts, or the networks that
the merchant accepts.
3. Permitted networks.
i. Network volume capabilities. A payment
card network could be used to satisfy the
requirement that an issuer enable two
unaffiliated payment card networks for each
electronic debit transaction if the network
was either (a) capable of processing the
volume of electronic debit transactions that
it would reasonably expect to be routed to it
or (b) willing to expand its capabilities to
meet such expected transaction volume. If,
however, the network’s policy or practice is
to limit such expansion, it would not qualify
as one of the two unaffiliated payment card
networks.
ii. Reasonable volume expectations. One of
the steps a payment card network can take
to form a reasonable expectation of its
transaction volume is to consider factors
such as the number of cards expected to be
issued that are enabled by an issuer on the
network and expected card usage patterns.
iii. Examples of permitted arrangements.
For each geographic area (e.g., New York
State), specific merchant (e.g., a specific fast
food restaurant chain), particular type of
merchant (e.g., fast food restaurants), and
particular type of transaction (e.g., card-notpresent transaction) for which the issuer’s
debit card can be used to perform an
electronic debit transaction, an issuer must
enable at least two unaffiliated payment card
networks, but those payment card networks
do not necessarily have to be the same two
payment card networks for every transaction.
A. Geographic area: An issuer complies
with the rule only if, for each geographic area
in which the issuer’s debit card can be used
to perform an electronic debit transaction,
the issuer enables at least two unaffiliated
payment card networks. For example, an
issuer could comply with the rule by
enabling two unaffiliated payment card
networks that can each process transactions
in all 50 U.S. states. Alternatively, the issuer
could comply with the rule by enabling three
unaffiliated payment card networks, A, B,
and C, where network A can process
transactions in all 50 U.S. states, network B
can process transactions in the 48 contiguous
United States, and network C can process
transactions in Alaska and Hawaii.
B. Particular type of transaction: An issuer
complies with the rule only if, for each
particular type of transaction for which the
issuer’s debit card can be used to perform an
electronic debit transaction, the issuer
enables at least two unaffiliated payment
card networks. For example, an issuer could
comply with the rule by enabling two
unaffiliated payment card networks that can
each process both card-present and card-notpresent transactions. Alternatively, the issuer
could comply with the rule by enabling three
unaffiliated payment card networks, A, B,
and C, where network A can process both
card-present and card-not-present
transactions, network B can process cardpresent transactions, and network C can
process card-not-present transactions.
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4. Examples of prohibited network
restrictions on an issuer’s ability to contract
with other payment card networks. The
following are examples of prohibited network
restrictions on an issuer’s ability to contract
with other payment card networks:
i. Network rules or contract provisions
limiting or otherwise restricting the other
payment card networks that an issuer may
enable on a particular debit card, or network
rules or contract provisions that specify the
other networks that an issuer may enable on
a particular debit card.
ii. Network rules or guidelines that allow
only that payment card network’s (or its
affiliated networks’) brand, mark, or logo to
be displayed on a particular debit card, or
that otherwise limit the ability of brands,
marks, or logos of other payment card
networks to appear on the debit card.
5. Network logos or symbols on card not
required. Section 235.7(a) does not require
that a debit card display the brand, mark, or
logo of each payment card network over
which an electronic debit transaction may be
processed. For example, the rule does not
require a debit card that an issuer enables on
two or more unaffiliated payment card
networks to bear the brand, mark, or logo of
each such payment card network.
6. Voluntary exclusivity arrangements
prohibited. Section 235.7(a) requires that an
issuer enable at least two unaffiliated
payment card networks to process an
electronic debit transaction, even if the issuer
is not subject to any rule of, or contract or
other agreement with, a payment card
network requiring that all or a specified
minimum percentage of electronic debit
transactions be processed on the network or
its affiliated networks.
7. Affiliated payment card networks.
Section 235.7(a) does not prohibit an issuer
from enabling two affiliated payment card
networks among the networks on a particular
debit card, as long as at least two of the
networks that can be used to process each
electronic debit transaction are unaffiliated.
8. Application of rule regardless of form.
The network exclusivity provisions in
§ 235.7(a) apply to electronic debit
transactions performed with any debit card
as defined in § 235.2, regardless of the form
of such debit card. For example, the
requirement applies to electronic debit
transactions performed using a plastic card,
a supplemental device such as a fob,
information stored inside an e-wallet on a
mobile phone or other device, or any other
form of debit card, as defined in § 235.2, that
may be developed in the future.
7(b)—Prohibition on Routing Restrictions
1. Relationship to the network exclusivity
restrictions. An issuer or payment card
network is prohibited from inhibiting a
merchant’s ability to direct the routing of an
electronic debit transaction over any of the
payment card networks that the issuer has
enabled to process electronic debit
transactions performed with a particular
debit card. The rule does not require that an
issuer allow a merchant to route a transaction
over a payment card network that the issuer
did not enable to process transactions
performed with that debit card.
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2. Examples of prohibited merchant
restrictions. The following are examples of
issuer or network practices that would
inhibit a merchant’s ability to direct the
routing of an electronic debit transaction and
that are therefore prohibited under § 235.7(b):
i. Prohibiting a merchant from encouraging
or discouraging a cardholder’s use of a
particular method of cardholder
authentication, for example prohibiting
merchants from favoring a cardholder’s use
of one cardholder authentication method
over another, or from discouraging the
cardholder’s use of any given cardholder
authentication method, as further described
in comment 7(a)–1.
ii. Establishing network rules or
designating issuer priorities directing the
processing of an electronic debit transaction
on a specified payment card network or its
affiliated networks, or directing the
processing of the transaction away from a
specified payment card network or its
affiliates, except as (A) a default rule in the
event the merchant, or its acquirer or
processor, does not designate a routing
preference, or (B) if required by state law.
iii. Requiring a specific payment card
network to be used based on the form of debit
card presented by the cardholder to the
merchant (e.g., plastic card, payment code, or
any other form of debit card as defined in
§ 235.2).
3. Merchant payments not prohibited. A
payment card network does not restrict a
merchant’s ability to route transactions over
available payment card networks in violation
of § 235.7(b) by offering payments or other
incentives to encourage the merchant to route
electronic debit card transactions to the
network for processing.
4. Real-time routing decision not required.
A merchant need not make network routing
decisions on a transaction-by-transaction
basis. A merchant and its acquirer or
processor may agree to a pre-determined set
of routing choices that apply to all electronic
debit transactions that are processed by the
acquirer or processor on behalf of the
merchant.
5. No effect on network rules governing the
routing of subsequent transactions. Section
235.7 does not supersede a payment card
network rule that requires a chargeback or
return of an electronic debit transaction to be
processed on the same network that
processed the original transaction.
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Section 235.8—Reporting Requirements and
Record Retention
8(a)—Entities Required To Report
1. Two surveys. The Board conducts a
survey of covered issuers on a biennial basis
using FR 3064a (OMB No. 7100–0344) and a
survey of payment card networks on an
annual basis using FR 3064b (OMB No.
7100–0344). Each survey collects information
concerning electronic debit transactions
performed during the previous calendar year.
2. Change in status. An issuer that is a
covered issuer during the year in which the
Board conducts a survey of covered issuers
but was not a covered issuer during the
previous calendar year is exempt from the
reporting requirement in § 235.8.
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8(b)—[Reserved]
8(c)—[Reserved]
Section 235.9—Administrative Enforcement
[Reserved]
Appendix B to Part 235—Determination
of Base Component, Ad Valorem
Component, and Fraud-Prevention
Adjustment
(a) In general. For every two-year period
beginning with the period from July 1, 2025,
to June 30, 2027 (each an ‘‘applicable
period’’), the Board will determine the base
component and the ad valorem component as
set forth in § 235.3 and the fraud-prevention
adjustment as set forth in § 235.4 using the
approach described in this appendix B.
(b) Basis for determination. The Board will
determine the amounts described in
paragraph (a) of this appendix for an
applicable period using the data reported to
the Board by covered issuers pursuant to
§ 235.8 concerning transactions performed
during the calendar year that is two years
prior to the year in which the applicable
period begins.
(c) Base component—(1) Formula. The
base component for an applicable period is
the product of the transaction-weighted
average of per-transaction allowable costs
(excluding fraud losses) across covered
issuers, based on the data described in
paragraph (b) of this appendix, and 3.7,
rounded to the nearest tenth of one cent.
(2) Allowable costs (excluding fraud
losses). For purposes of paragraph (c)(1) of
this appendix, allowable costs (excluding
fraud losses) are the sum of costs of
authorization, clearance, and settlement, as
reported on line 3a of section II of FR 3064a
(OMB No. 7100–0344), and transactions
monitoring costs tied to authorization, as
reported on line 5a.1 of section II of FR 3064a
(OMB No. 7100–0344).
(3) Transaction-weighted average of pertransaction allowable costs (excluding fraud
losses) across covered issuers. For purposes
of paragraph (c)(1) of this appendix, the
Board determines the transaction-weighted
average of per-transaction allowable costs
(excluding fraud losses) across covered
issuers by:
(i) Summing allowable costs (excluding
fraud losses) across covered issuers that
reported allowable costs (excluding fraud
losses);
(ii) Dividing this sum by the sum of the
total number of electronic debit transactions,
as reported on line 1a of section II of FR
3064a (OMB No. 7100–0344), across covered
issuers that reported allowable costs
(excluding fraud losses); and
(iii) Rounding this result to the nearest
tenth of one cent.
(d) Ad valorem component—(1) Metric.
The ad valorem component for an applicable
period is, for a particular electronic debit
transaction, the median ratio of issuer fraud
losses to transaction value among covered
issuers, based on the data described in
paragraph (b) of this appendix, rounded to
the nearest quarter of one basis point,
multiplied by the value of the electronic
debit transaction.
PO 00000
Frm 00034
Fmt 4701
Sfmt 9990
(2) Ratio of issuer fraud losses to
transaction value. For purposes of paragraph
(d)(1) of this appendix, issuer fraud losses are
the value of fraud losses incurred by the
covered issuer, as reported on line 8b of
section II of FR 3064a (OMB No. 7100–0344).
The ratio of issuer fraud losses to transaction
value is issuer fraud losses divided by the
total value of electronic debit transactions
reported on line 1a of section II of FR 3064a
(OMB No. 7100–0344).
(3) Median ratio of issuer fraud losses to
transaction value among covered issuers. For
purposes of paragraph (d)(1) of this
appendix, the Board determines the median
ratio of issuer fraud losses to transaction
value among covered issuers by:
(i) For each covered issuer that reported
issuer fraud losses, determining the ratio of
issuer fraud losses to transaction value;
(ii) Sorting these ratios in ascending order;
and
(iii) Selecting the ratio in the middle (if the
number of ratios is odd) or calculating the
simple average of the two ratios in the
middle (if the number of ratios is even).
(e) Fraud-prevention adjustment—(1)
Metric. The fraud-prevention adjustment for
an applicable period is the median pertransaction fraud-prevention costs among
covered issuers, based on the data described
in paragraph (b) of this appendix, rounded to
the nearest tenth of one cent.
(2) Per-transaction fraud-prevention costs.
For purposes of paragraph (e)(1) of this
appendix, fraud-prevention costs are total
fraud-prevention and data-security costs, as
reported on line 5a of section II of FR 3064a
(OMB No. 7100–0344), minus transactions
monitoring costs tied to authorization, as
reported on line 5a.1 of section II of FR 3064a
(OMB No. 7100–0344). Per-transaction fraudprevention costs are fraud-prevention costs
divided by the total number of electronic
debit transactions reported on line 1a of
section II of FR 3064a (OMB No. 7100–0344).
(3) Median per-transaction fraudprevention costs among covered issuers. For
purposes of paragraph (e)(1) of this appendix,
the Board determines the median pertransaction fraud-prevention costs among
covered issuers by:
(i) For each covered issuer that reported
fraud-prevention costs, determining pertransaction fraud-prevention costs;
(ii) Sorting these values in ascending order;
and
(iii) Selecting the value in the middle (if
the number of values is odd) or calculating
the simple average of the two values in the
middle (if the number of values is even).
(f) Publication of applicable amounts. The
Board will publish in the Federal Register
the amounts described in paragraph (a) of
this appendix for an applicable period no
later than March 31 of the calendar year in
which the applicable period begins.
By order of the Board of Governors of the
Federal Reserve System.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2023–24034 Filed 11–13–23; 8:45 am]
BILLING CODE 6210–01–P
E:\FR\FM\14NOP2.SGM
14NOP2
]]>Agencies
[Federal Register Volume 88, Number 218 (Tuesday, November 14, 2023)]
[Proposed Rules]
[Pages 78100-78132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-24034]
[[Page 78099]]
Vol. 88
Tuesday,
No. 218
November 14, 2023
Part II
Federal Reserve System
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12 CFR Part 235
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Debit Card Interchange Fees and Routing; Proposed Rule
Federal Register / Vol. 88 , No. 218 / Tuesday, November 14, 2023 /
Proposed Rules
[[Page 78100]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 235
[Regulation II; Docket No. R-1818]
RIN 7100-AG67
Debit Card Interchange Fees and Routing
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Notice of proposed rulemaking.
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SUMMARY: Regulation II implements a provision of the Dodd-Frank Act
that requires the Board to establish standards for assessing whether
the amount of any interchange fee received by a debit card issuer is
reasonable and proportional to the cost incurred by the issuer with
respect to the transaction. Under the current rule, for a debit card
transaction that does not qualify for a statutory exemption, the
interchange fee can be no more than the sum of a base component of 21
cents, an ad valorem component of 5 basis points multiplied by the
value of the transaction, and a fraud-prevention adjustment of 1 cent
if the issuer meets certain fraud-prevention-standards. The Board
developed the current interchange fee cap in 2011 using data
voluntarily reported to the Board by large debit card issuers
concerning transactions performed in 2009. Since that time, data
collected by the Board every other year on a mandatory basis from large
debit card issuers show that certain costs incurred by these issuers
have declined significantly; however, the interchange fee cap has
remained the same. For this reason, the Board proposes to update all
three components of the interchange fee cap based on the latest data
reported to the Board by large debit card issuers. Further, the Board
proposes to update the interchange fee cap every other year going
forward by directly linking the interchange fee cap to data from the
Board's biennial survey of large debit card issuers. Initially, under
the proposal, the base component would be 14.4 cents, the ad valorem
component would be 4.0 basis points (multiplied by the value of the
transaction), and the fraud-prevention adjustment would be 1.3 cents
for debit card transactions performed from the effective date of the
final rule to June 30, 2025. The Board also proposes a set of technical
revisions to Regulation II.
DATES: Comments must be received on or before February 12, 2024.
ADDRESSES: You may submit comments, identified by Docket No. R-1818,
RIN 7100-AG67, by any of the following methods:
Agency Website: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
All public comments are available from the Board's website at
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, and will not be modified to remove confidential, contact or
any identifiable information. Public comments may also be viewed
electronically or in person in Room M-4365A, 2001 C St. NW, Washington,
DC 20551, between 9 a.m. and 5 p.m. during Federal business weekdays.
FOR FURTHER INFORMATION CONTACT: Benjamin Snodgrass, Senior Counsel
(202-263-4877) or Cody Gaffney, Senior Attorney (202-452-2674), Legal
Division; or Krzysztof Wozniak, Section Chief (202-452-3878) or Elena
Falcettoni, Senior Economist (202-452-2528), Division of Reserve Bank
Operations and Payment Systems. For users of TTY-TRS, please call 711
from any telephone, anywhere in the United States or (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Overview
A. Summary of Proposal
A section of the Dodd-Frank Wall Street Reform and Consumer
Protection Act known as the Durbin Amendment requires the Board to
establish standards for assessing whether the amount of any interchange
fee received by a debit card issuer is reasonable and proportional to
the cost incurred by the issuer with respect to the debit card
transaction.\1\ The Durbin Amendment also authorizes the Board to allow
for an adjustment to such interchange fee in an amount that is
reasonably necessary to make allowance for costs incurred by the debit
card issuer in preventing fraud in relation to debit card transactions
involving that issuer.
---------------------------------------------------------------------------
\1\ Public Law 110-203, section 1075, 124 Stat. 1376, 2068
(codified at 15 U.S.C. 1693o-2).
---------------------------------------------------------------------------
The Board implemented these and other provisions of the Durbin
Amendment in 2011 and 2012 when the Board adopted Regulation II (Debit
Card Interchange Fees and Routing).\2\ Under the current rule, each
interchange fee received by a debit card issuer for a debit card
transaction that does not qualify for a statutory exemption can be no
more than the sum of (i) 21 cents (the ``base component''), (ii) 5
basis points multiplied by the value of the transaction (the ``ad
valorem component''), and (iii) for a debit card issuer that meets
certain fraud-prevention standards, a ``fraud-prevention adjustment''
of 1 cent per transaction. Together, the base component and ad valorem
component comprise the ``interchange fee standards''; the base
component, ad valorem component, and fraud-prevention adjustment
comprise the ``interchange fee cap.''
---------------------------------------------------------------------------
\2\ 12 CFR part 235.
---------------------------------------------------------------------------
The Board developed the current interchange fee cap using data
reported to the Board by large debit card issuers on a voluntary survey
that the Board conducted during the original Regulation II rulemaking.
As such, the current base component, ad valorem component, and fraud-
prevention adjustment are based on the costs incurred by large debit
card issuers in connection with debit card transactions performed in
2009. Since that time, the Board has collected data from large debit
card issuers on a mandatory basis every other year, as required by the
Durbin Amendment.
When the Board established the interchange fee standards in current
Regulation II, the Board stated that it would, over time, adjust the
interchange fee standards based on reported costs, if appropriate.
Similarly, with respect to the fraud-prevention adjustment, the Board
stated that it would take into account data reported by large debit
card issuers in the future when considering any future revisions to the
fraud-prevention adjustment. The Board also noted that lower costs
should result in a lower interchange fee cap as issuers become more
efficient.
The data collected by the Board from large debit card issuers since
the original Regulation II rulemaking show that the costs incurred by
large debit card issuers in connection with debit card transactions
have changed significantly over time. In particular, the costs on which
the Board based the base component have nearly halved, the issuer fraud
losses on which the Board based the ad valorem component have fallen,
and the fraud-prevention costs on
[[Page 78101]]
which the Board based the fraud-prevention adjustment have risen,
according to key metrics of those costs.\3\ As a result, the Board
believes that the current interchange fee standards may no longer be
effective for assessing whether, for a debit card transaction subject
to the standards, the amount of any interchange fee received by a debit
card issuer is reasonable and proportional to the cost incurred by the
issuer with respect to the transaction. Further, the Board believes
that the current fraud-prevention adjustment may not reflect an amount
that is reasonably necessary to make allowance for costs incurred by
the debit card issuer in preventing fraud in relation to debit card
transactions involving that issuer.
---------------------------------------------------------------------------
\3\ As described in section III.A, infra, the costs on which the
Board based the base component include transaction-processing and
transaction-monitoring costs.
---------------------------------------------------------------------------
For these reasons, the Board proposes to update all three
components of the interchange fee cap based on the latest data reported
to the Board by large debit card issuers concerning transactions
performed in 2021. Under the proposal, the base component would
decrease from 21.0 cents to 14.4 cents, the ad valorem component would
decrease from 5.0 basis points (multiplied by the value of the
transaction) to 4.0 basis points (multiplied by the value of the
transaction), and the fraud-prevention adjustment would increase from
1.0 cents to 1.3 cents. The Board determined the proposed base
component using a new methodology that is informed by the cumulative
data reported to the Board every other year since the original
Regulation II rulemaking. This methodology targets full cost recovery
over time for a significant majority of transactions across large debit
card issuers through a formula that relates the base component to a key
metric of issuer costs. By contrast, the Board determined the proposed
ad valorem component and proposed fraud-prevention adjustment using
generally the same methodologies used in the original rulemaking.
In addition to updating the interchange fee cap for the first time
since the original rulemaking, the proposed revisions would codify in
Regulation II an approach for updating the three components of the
interchange fee cap every other year going forward based on the latest
data reported to the Board by large debit card issuers. By directly
linking the interchange fee cap to data collected by the Board from
large debit card issuers every other year, the proposed approach should
ensure that the interchange fee cap will reflect changes in the costs
incurred by debit card issuers. As a result, the Board believes that
the proposal would ensure that, to the extent practicable, (i) the
interchange fee standards will be effective going forward for assessing
whether, for a transaction subject to the interchange fee standards,
the amount of any interchange fee received by a debit card issuer is
reasonable and proportional to the cost incurred by the issuer with
respect to the transaction, and (ii) the fraud-prevention adjustment
will continue to reflect an amount that is reasonably necessary to make
allowance for costs incurred by the debit card issuer in preventing
fraud in relation to debit card transactions involving that issuer.
These future updates to the interchange fee cap would be implemented in
accordance with the proposed methodology and would be published without
inviting public comment.
The Board has reviewed its construction of the Durbin Amendment and
original analysis regarding the costs incurred by debit card issuers
that the Board may consider in establishing the interchange fee
standards, and believes that this prior analysis remains sound. As
such, the Board does not propose any changes to the costs considered
for purposes of determining the base component or the issuer fraud
losses considered for purposes of determining the ad valorem component.
The Board also does not propose to modify the fraud-prevention costs
considered for purposes of determining the fraud-prevention adjustment,
or the fraud-prevention standards that large debit card issuers must
meet to receive the fraud-prevention adjustment.
B. Outline of This Preamble
This preamble is divided into eight sections, including this
overview section I. Section II provides additional legal background for
the proposal, including a detailed description of the Durbin Amendment
and current Regulation II.
Section III discusses the proposed revisions to the interchange fee
standards in Sec. 235.3. The Board proposes to determine the base
component and ad valorem component every other year based on the latest
data reported to the Board by debit card issuers with consolidated
assets of $10 billion or more--referred to in this preamble as
``covered issuers''--on the Board's biennial Debit Card Issuer Survey.
The base component would be determined using a new methodology that is
informed by the cumulative data reported to the Board every other year
since the original Regulation II rulemaking. Specifically, the base
component would be the product of (i) the transaction-weighted average
of per-transaction allowable costs (excluding fraud losses) across
covered issuers based on the latest data reported to the Board, and
(ii) a fixed multiplier codified in Regulation II.\4\ The Board
proposes a fixed multiplier of 3.7, which targets full cost recovery
for 98.5 percent of covered issuer transactions over time based on the
cumulative data reported to the Board by covered issuers since the
initial Debit Card Issuer Survey.\5\ The ad valorem component would be
the median ratio of issuer fraud losses to transaction value among
covered issuers (multiplied by the value of the debit card
transaction), which is the same methodology the Board used to determine
the ad valorem component during the original Regulation II rulemaking.
---------------------------------------------------------------------------
\4\ As described in section III.A, infra, the costs on which the
Board based the base component include transaction-processing and
transaction-monitoring costs. These costs may also be referred to as
``allowable costs (excluding fraud losses)'' or ``base component
costs.''
\5\ In this preamble, the term ``covered issuer transactions''
refers to debit card transactions performed with debit cards issued
by covered issuers. By targeting full cost recovery for 98.5 percent
of covered issuer transactions, the Board expects that, over time,
the per-transaction allowable costs (excluding fraud losses) of
around 98.5 percent of covered issuer transactions will be less than
or equal to the base component. As discussed in section III.B,
infra, the proposed approach would not guarantee that covered
issuers will fully recover their allowable costs for the target
percentage of covered issuer transactions in any particular year.
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Initially, under the proposal, the base component would be 14.4
cents and the ad valorem component would be 4.0 basis points
(multiplied by the value of the transaction) for debit card
transactions performed from the effective date of the final rule to
June 30, 2025. Going forward, the Board would determine the base
component and the ad valorem component for debit card transactions
performed during the two-year period beginning July 1, 2025, based on
the data reported to the Board by covered issuers on the Board's next
Debit Card Issuer Survey, and would thereafter determine these amounts
for each succeeding two-year period based on data reported to the Board
on future Debit Card Issuer Surveys.
Section IV discusses the proposed revisions to the fraud-prevention
adjustment in Sec. 235.4. As with the interchange fee standards, the
Board proposes to determine the fraud-prevention adjustment every other
year based on the latest data reported to the Board by covered issuers
on the biennial
[[Page 78102]]
Debit Card Issuer Survey. The fraud-prevention adjustment would be the
median per-transaction fraud-prevention costs among covered issuers,
which is generally the same methodology the Board used to determine the
fraud-prevention adjustment in 2012.
Initially, under the proposal, the fraud-prevention adjustment
would be 1.3 cents for debit card transactions performed from the
effective date of the final rule to June 30, 2025. Going forward, the
Board would determine the fraud-prevention adjustment for debit card
transactions performed during the two-year period beginning July 1,
2025, based on the data reported to the Board by covered issuers on the
Board's next Debit Card Issuer Survey, and would thereafter determine
the fraud-prevention adjustment for each succeeding two-year period
based on data reported to the Board on future Debit Card Issuer
Surveys.
Section V discusses the proposed technical revisions to Regulation
II, which are generally intended to make Regulation II clearer. For
example, the Board proposes to add ``covered issuer'' as a defined term
in Regulation II and use this term throughout the regulation and the
Official Board Commentary on Regulation II to refer to debit card
issuers with consolidated assets of $10 billion or more.
Section VI discusses the proposed effective date for the revisions.
The Board proposes that the revisions would, if adopted, take effect on
the first day of the next calendar quarter that begins at least 60 days
after the final rule is published in the Federal Register.
Section VII sets forth the Board's general request for comment, as
well as specific questions for feedback.
Section VIII sets forth certain regulatory analyses that the Board
is required to complete under the Durbin Amendment and certain other
statutes, such as the Regulatory Flexibility Act and the Paperwork
Reduction Act.
II. Legal Background
A. Statutory Authority
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act) was enacted on July 21, 2010.\6\ Section 1075 of the
Dodd-Frank Act amended the Electronic Fund Transfer Act (EFTA) (15
U.S.C. 1693 et seq.) to add a new section 920 regarding interchange
fees for debit card transactions and rules for debit card and credit
card transactions.\7\
---------------------------------------------------------------------------
\6\ See Public Law 111-203, 124 Stat. 1376 (2010).
\7\ EFTA section 920 is codified at 15 U.S.C. 1693o-2. EFTA
section 920(c)(2) defines ``debit card'' to mean any card (including
a general-use prepaid card), or other payment code or device, issued
or approved for use through a payment card network to debit an asset
account, regardless of the purpose for which the account is
established, and regardless of whether authorization is based on
signature, PIN, or other means. Most of EFTA section 920's
requirements relate to debit card transactions--referred to in the
statute and in Regulation II as ``electronic debit transactions''--
which are defined in EFTA section 920(c)(5) as transactions in which
a person uses a debit card. This preamble uses the term ``debit card
transaction'' interchangeably with ``electronic debit transaction.''
Similarly, this preamble uses the term ``interchange fee''
interchangeably with the statutory term ``interchange transaction
fee.'' EFTA section 905(c)(8) defines ``interchange transaction
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. For an overview of
the debit card industry, see 76 FR 43393, 43395-96 (July 20, 2011).
---------------------------------------------------------------------------
EFTA section 920(a)(2) provides that the amount of any interchange
fee that an issuer may receive or charge with respect to a debit card
transaction shall be reasonable and proportional to the cost incurred
by the issuer with respect to the transaction.\8\ EFTA section
920(a)(3) requires the Board to establish standards for assessing
whether the amount of any interchange fee is reasonable and
proportional to the cost incurred by the issuer with respect to the
transaction. EFTA section 920(a)(4) sets forth various considerations
that the Board must take into account when establishing these
interchange fee standards. Specifically, the Board must consider the
functional similarity between debit card transactions and checking
transactions that are required within the Federal Reserve bank system
to clear at par. The Board must also distinguish between (i) the
incremental cost incurred by an issuer for the role of the issuer in
the authorization, clearance, or settlement of a particular debit card
transaction, which cost shall be considered by the Board; and (ii)
other costs incurred by an issuer which are not specific to a
particular debit card transaction, which costs shall not be considered
by the Board.
---------------------------------------------------------------------------
\8\ ``Issuer'' is defined in EFTA section 920(c)(9) to mean any
person who issues a debit card, or credit card, or the agent of such
person with respect to such card.
---------------------------------------------------------------------------
Under EFTA section 920(a)(5)(A), the Board may allow for an
adjustment to the interchange fee received or charged by an issuer
under the interchange fee standards if such adjustment is reasonably
necessary to make allowance for costs incurred by the issuer in
preventing fraud in relation to debit card transactions involving the
issuer, provided that the issuer complies with fraud-related standards
established by the Board. The Board's fraud-related standards must,
among other things, require issuers to take effective steps to reduce
the occurrence of, and costs from, fraud in relation to debit card
transactions, including through the development and implementation of
cost-effective fraud prevention technology.
Certain issuers and debit card transactions are exempt from the
interchange fee standards. EFTA section 920(a)(6) exempts any issuer
that, together with its affiliates, has assets of less than $10
billion.\9\ EFTA section 920(a)(7)(A)(i) exempts an interchange fee
charged or received with respect to a debit card transaction in which a
person uses a debit card or general-use prepaid card that has been
provided to a person pursuant to a Federal, State, or local government-
administered payment program, in which the person may only use the
debit card or general-use prepaid card to transfer or debit funds,
monetary value, or other assets that have been provided pursuant to
such program. EFTA section 920(a)(7)(A)(ii) exempts an interchange fee
charged or received with respect to a debit card transaction in which a
person uses certain general-use prepaid cards.\10\
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\9\ For purposes of this exemption, EFTA section 920(a)(6)
provides that the term ``issuer'' shall be limited to the person
holding the asset account that is debited through a debit card
transaction.
\10\ Specifically, EFTA section 920(a)(7)(A)(ii) exempts an
interchange fee charged or received with respect to a debit card
transaction in which a person uses a plastic card, payment code, or
device that is (i) linked to funds, monetary value, or assets
purchased or loaded on a prepaid basis; (ii) not issued or approved
for use to access or debit any account held by or for the benefit of
the cardholder (other than a subaccount or other method of recording
or tracking funds purchased or loaded on the card on a prepaid
basis); (iii) redeemable at multiple, unaffiliated merchants or
service providers, or automated teller machines; (iv) used to
transfer or debit funds, monetary value, or other assets; and (v)
reloadable and not marketed or labeled as a gift card or gift
certificate.
---------------------------------------------------------------------------
EFTA section 920(a)(3)(B) authorizes the Board to require any
issuer or payment card network to provide the Board with such
information as may be necessary to carry out the provisions of EFTA
section 920(a). This provision additionally requires the Board, in
issuing rules under EFTA section 920(a) and on at least a biannual
basis thereafter, to disclose such aggregate or summary information
concerning the costs incurred, and interchange fees charged or
received, by issuers or payment card networks in connection with the
authorization, clearance, or settlement of debit card transactions as
[[Page 78103]]
the Board considers appropriate and in the public interest.\11\
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\11\ EFTA section 920 contains various other provisions, but the
proposed revisions to Regulation II discussed in this preamble would
not substantively amend the provisions of Regulation II that
implement these other statutory provisions. Specifically, EFTA
section 920(a)(1) authorizes the Board to prescribe regulations to
prevent circumvention or evasion of EFTA section 920(a). EFTA
section 920(a)(8) confers upon the Board additional authority to
prescribe regulations concerning network fees. EFTA section 920(b)
requires the Board to prescribe regulations related to the routing
of debit card transactions.
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B. Regulation II
The Board adopted a final rule implementing the interchange fee
standards and an interim final rule implementing the fraud-prevention
adjustment in July 2011.\12\ In August 2012, the Board adopted a final
rule amending its interim final rule regarding the fraud-prevention
adjustment.\13\ These rules were codified as Regulation II.
---------------------------------------------------------------------------
\12\ Regulation II, Debit Card Interchange Fees and Routing,
codified at 12 CFR part 235. See 76 FR 43393 (July 20, 2011) (final
rule); 76 FR 43477 (July 20, 2011) (interim final rule).
\13\ See 77 FR 46258 (Aug. 3, 2012).
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Section 235.3(a) of Regulation II implements EFTA section 920(a)(2)
by providing that the amount of any interchange fee that an issuer may
receive or charge with respect to a debit card transaction shall be
reasonable and proportional to the cost incurred by the issuer with
respect to the transaction. Section 235.3(b) implements EFTA section
920(a)(3) by providing that an issuer complies with the requirements of
Sec. 235.3(a) only if each interchange fee received or charged by the
issuer for a debit card transaction is no more than the sum of (i) 21
cents and (ii) 5 basis points multiplied by the value of the
transaction.\14\ These amounts, together with any fraud-prevention
adjustment permitted under Sec. 235.4, comprise the interchange fee
cap.
---------------------------------------------------------------------------
\14\ The Official Board Commentary on Regulation II, found in
appendix A to part 235, refers to these amounts as the ``base
component'' and the ``ad valorem component,'' respectively.
---------------------------------------------------------------------------
Section 235.4 implements the fraud-prevention adjustment permitted
by EFTA section 920(a)(5). Specifically, Sec. 235.4(a) allows an
issuer that meets the fraud-prevention standards enumerated in Sec.
235.4(b) to receive or charge an amount of no more than 1 cent per
transaction in addition to any interchange fee it receives or charges
in accordance with Sec. 235.3. Section 235.4(b) provides that to be
eligible to receive or charge the fraud-prevention adjustment, an
issuer must develop, implement, and periodically review fraud-related
policies and procedures meeting certain requirements. Section 235.4(c)
provides that to be eligible to receive or charge a fraud-prevention
adjustment, an issuer must annually notify its payment card networks
that it complies with the fraud-prevention standards in Sec. 235.4(b).
Section 235.4(d) sets forth rules for when an issuer, or the
appropriate agency, determines that the issuer is not eligible to
receive or charge a fraud-prevention adjustment.\15\
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\15\ The appropriate agency for a particular entity is
determined pursuant to Sec. 235.9 and EFTA section 918 (15 U.S.C.
1693o). For example, the Board is the appropriate agency with
respect to member banks of the Federal Reserve System (other than
national banks), branches and agencies of foreign banks (other than
federal branches, federal Agencies, and insured state branches of
foreign banks), commercial lending companies owned or controlled by
foreign banks, and organizations operating under section 25 or 25A
of the Federal Reserve Act.
---------------------------------------------------------------------------
Section 235.5 implements the statutory exemptions from the
interchange fee standards. Section 235.5(a) generally provides that the
interchange fee standards do not apply to an interchange fee received
or charged by an issuer with respect to a debit card transaction if the
issuer, together with its affiliates, has assets of less than $10
billion as of the end of the calendar year preceding the date of the
transaction and holds the account that is debited. Section 235.5(b)
implements the statutory exemption for government-administered payment
programs. Section 235.5(c) implements the statutory exemption for
certain reloadable prepaid cards.
Section 235.8 implements the data collection provisions in EFTA
section 920(a)(3)(B). Specifically, Sec. 235.8(a) provides that each
issuer that is not otherwise exempt from the requirements of this part
under Sec. 235.5(a) and each payment card network shall file a report
with the Board.\16\ Section 235.8(b) provides that each entity required
to file a report with the Board shall submit data in a form prescribed
by the Board for that entity. Pursuant to this authority, the Board
collects information from debit card issuers with consolidated assets
of $10 billion or more every other year through the Debit Card Issuer
Survey.\17\ The Board also collects information from payment card
networks every year through the Payment Card Network Survey.\18\ The
Board has published a summary of findings from these two surveys on a
biennial basis since 2013, consistent with EFTA section
920(a)(3)(B).\19\ The Board's most recent biennial report was published
concurrently with this proposal.\20\
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\16\ The reference to ``the requirements of this part'' in Sec.
235.8(a) is erroneous, as debit card issuers that qualify for the
exemption in Sec. 235.5(a) are not exempt from the requirements of
Sec. 235.7 (network exclusivity and debit card transaction routing)
or Sec. 235.8(c) (record retention). As described in section V,
infra, the Board proposes a technical correction to fix this error.
\17\ See FR 3064a.
\18\ See FR 3064b.
\19\ See Board of Governors of the Federal Reserve System, 2011
Interchange Fee Revenue, Covered Issuers Costs, and Covered Issuer
and Merchant Fraud Losses Related to Debit Card Transactions (Mar.
5, 2013), https://www.federalreserve.gov/paymentsystems/files/debitfees_costs_2011.pdf.
\20\ The Board's reports may be found on the Board's website.
See Board of Governors of the Federal Reserve System, Regulation II
(Debit Card Interchange Fees and Routing): Reports and Data
Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm. Additionally, on an annual basis, the Board
publishes average interchange fees by network. See Board of
Governors of the Federal Reserve System, Regulation II (Debit Card
Interchange Fees and Routing): Average Debit Card Interchange Fee by
Payment Card Network, https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm.
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Appendix A to part 235 is the Official Board Commentary on
Regulation II. In general, the commentary provides background material
to explain the Board's intent in adopting a particular part of the
regulation and examples to aid in understanding how a particular
requirement is to work.\21\
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\21\ Other provisions of Regulation II implement provisions of
EFTA section 920 that are not directly relevant to the proposed
revisions discussed in this preamble. Specifically, Sec. 235.6
prohibits circumvention or evasion of the interchange fee
restrictions in Regulation II and prohibits an issuer from receiving
net compensation from a payment card network within a calendar year.
Section 235.7 sets forth rules related to network exclusivity and
the routing of debit card transactions. To address certain issues
related to the routing of card-not-present debit card transactions,
the Board recently revised Sec. 235.7 and the commentary thereto,
with an effective date of July 1, 2023. See 87 FR 61217 (Oct. 11,
2022).
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III. Proposed Revisions to the Interchange Fee Standards (Sec. 235.3)
A. Background
As described above, EFTA section 920(a)(3) directs the Board to
establish standards for assessing whether the amount of any interchange
fee is reasonable and proportional to the cost incurred by the issuer
with respect to the transaction. To fulfill this statutory mandate, the
Board (i) defined the costs incurred by debit card issuers that the
Board considers, consistent with the statute (referred to herein as
``allowable costs''), and (ii) established standards for assessing
interchange fees relative to allowable costs. A brief overview of how
the Board developed the interchange fee standards in current Sec.
235.3 follows.
1. Allowable Costs
EFTA section 920(a)(4)(B) requires the Board, in establishing
interchange fee standards, to distinguish between (i) the incremental
cost incurred by an issuer
[[Page 78104]]
for the role of the issuer in the authorization, clearance, or
settlement of a particular debit card transaction, which cost shall be
considered by the Board; and (ii) other costs incurred by an issuer
which are not specific to a particular debit card transaction, which
costs shall not be considered by the Board.\22\ When the Board adopted
current Sec. 235.3 in 2011, the Board identified a third category of
costs that the Board is permitted, but not required, to consider: costs
incurred by an issuer that are specific to a particular debit card
transaction but are not incremental costs related to a debit card
issuer's role in authorization, clearance, and settlement.\23\
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\22\ EFTA section 920(a)(4)(a) also requires the Board to
consider the functional similarity between debit card transactions
and checking transactions that are required within the Federal
Reserve bank system to clear at par. For a discussion of this
requirement, see section VIII.B, infra.
\23\ The Board observed in 2011 that EFTA does not define
``other costs incurred by an issuer which are not specific to a
particular electronic debit transaction,'' which the Board is
prohibited from considering. See 76 FR 43393, 43426 (July 20, 2011).
In 2010, the Board initially proposed to exclude costs that could
not be attributed to any identified debit card transaction (referred
to as ``fixed costs'' in the proposal), even if those costs were
specific to effecting debit card transactions as a whole. See 75 FR
81721, 81735-36 (Dec. 28, 2010). After considering public comments,
the Board at the final rule stage interpreted the category of
prohibited costs to include only those costs that are not incurred
in the course of effecting any debit card transaction. See 76 FR at
43426. Further, the Board noted that the statute is silent on those
costs that are not incremental costs related to a debit card
issuer's role in authorization, clearance, and settlement, but that
are specific to a particular debit card transaction. See id. The
Board determined that EFTA section 920(a)(4)(B) did not specifically
instruct the Board to consider this third category of costs but did
not prohibit their consideration. See id. The Board's interpretation
of the statute was upheld by the U.S. Court of Appeals for the
District of Columbia Circuit. See NACS v. Board of Governors of the
Federal Reserve System, 746 F.3d 474, 488-89 (D.C. Cir. 2014). See
also 80 FR 48684 (Aug. 14, 2015) (clarifying the treatment of
transaction-monitoring costs, as required by the D.C. Circuit).
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Using this framework, the Board defined the allowable costs that
the Board considered in establishing the interchange fee standards set
forth in Sec. 235.3. For reasons explained in the preamble
accompanying the 2011 final rule, allowable costs comprise (i)
transaction-processing costs, including fixed and variable
authorization, clearance, and settlement costs, network processing fees
(e.g., switch fees), and the costs of processing chargebacks and other
non-routine transactions; (ii) transaction-monitoring costs; and (iii)
issuer fraud losses.\24\ Allowable costs do not include other costs
incurred by debit card issuers in connection with their debit card
programs, such as corporate overhead and account-relationship costs,
general debit card program costs (e.g., card production and delivery
costs, marketing costs, and research and development costs), or costs
of non-sufficient funds handling, cardholder rewards, and cardholder
inquiries.\25\
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\24\ See 76 FR at 43429-31.
\25\ See 76 FR at 43427-29.
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The Board has reviewed its construction of the statute and prior
analysis regarding the allowable costs that the Board considered in
establishing the interchange fee standards, and believes that this
prior analysis remains sound. As such, the Board does not propose any
changes to the allowable costs considered for purposes of the
interchange fee standards.
As described below, the Board established the base component based
on transaction-processing and transaction-monitoring costs, but
separately assessed issuer fraud losses through the ad valorem
component. Transaction-processing and transaction-monitoring costs are
collectively referred to in this preamble as ``base component costs.''
2. Interchange Fee Standards
For reasons explained in the preamble accompanying the 2011 final
rule, the Board adopted a uniform, transaction-level standard that,
subject to any fraud-prevention adjustment that a covered issuer may be
permitted to receive or charge under Sec. 235.4, establishes the
maximum permissible interchange fee that a covered issuer may receive
for a debit card transaction subject to the interchange fee
standards.\26\ This maximum interchange fee is the sum of a base
component and an ad valorem component.
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\26\ See 76 FR at 43431-35.
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To determine the base component, the Board referred to the data
that the Board had collected shortly after the Dodd-Frank Act was
signed into law via a voluntary survey of covered issuers concerning
debit card transactions performed in the 2009 calendar year.\27\ Based
on these data, the Board computed the per-transaction base component
costs of each covered issuer that reported such costs by summing the
base component costs reported by the covered issuer and dividing this
sum by the total number of debit card transactions reported by the
covered issuer. The Board then arranged these per-transaction costs in
ascending order from lowest- to highest-cost covered issuer.\28\
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\27\ See Board of Governors of the Federal Reserve System, 2009
Debit Card Issuer Survey (Sep. 13, 2010), https://www.federalreserve.gov/paymentsystems/files/payment_card_network_survey_20100920.pdf. The survey respondents
included 66 covered issuers, representing about 57 percent of total
debit card transactions by volume and 60 percent of total debit card
transactions by value in 2009. However, because some covered issuers
did not respond to the voluntary survey, the proportion of total
debit card transactions performed in 2009 that are attributable to
covered issuers (including respondents and non-respondents) was
greater than 57 percent (by volume) and 60 percent (by value). The
Board discussed preliminary summary findings from this survey in its
2010 proposal to establish interchange fee standards. See 75 FR at
81724-26. The Board subsequently published a report summarizing the
data collected from the survey. See Board of Governors of the
Federal Reserve System, 2009 Interchange Fee Revenue, Covered Issuer
Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit
Card Transactions (June 2011), https://www.federalreserve.gov/paymentsystems/files/debitfees_costs.pdf.
\28\ See 76 FR at 43433.
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The Board observed that this distribution of per-transaction base
component costs across covered issuers was quite skewed. These costs
ranged from 3 cents to 66 cents per transaction, with a considerable
majority of covered issuers concentrated in the range of costs below 21
cents, and a scattered set of covered issuers having significantly
higher costs above 21 cents. Further, below 21 cents, the difference
between the per-transaction base component costs of adjacently ranked
covered issuers was small, but at around 21 cents, the distribution
showed a marked discontinuity, with base component costs varying more
significantly across these higher-cost covered issuers.
The Board concluded that establishing interchange fee standards to
accommodate these higher-cost covered issuers would not be reasonable
or proportional to the overall cost experience of the substantial
majority of covered issuers.\29\ For that reason, the Board adopted a
base component of 21 cents per transaction. Had that base component
been in effect in 2009, approximately 80 percent of covered issuers
that responded to the Board's voluntary survey would have fully
recovered their base component costs.\30\
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\29\ See id.
\30\ In other words, for approximately 80 percent of covered
issuers that responded to the Board's voluntary survey, the covered
issuer's base component costs in 2009 were less than or equal to the
product of 21 cents and the number of transactions involving that
issuer's debit cards in 2009. However, the Board did not indicate
that the Board was adopting any particular cost-recovery target
across covered issuers (i.e., that 80 percent of covered issuers
should fully recover their base component costs) or across covered
issuer transactions.
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The Board recognized that issuer fraud losses are distinct from the
other types of allowable costs in that the amount of a fraud loss
varies with the
[[Page 78105]]
amount of the transaction.\31\ For this reason, the Board determined
that these fraud losses were best assessed through a separate ad
valorem component. To determine the ad valorem component, the Board
computed the ratio of issuer fraud losses to transaction value for each
covered issuer that reported such costs in response to the voluntary
survey.\32\ Specifically, for each such issuer, the Board divided (i)
the issuer fraud losses by (ii) the total value of the issuer's debit
card transactions. The Board then sorted these ratios, expressed in
basis points, in ascending order from lowest to highest.
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\31\ See 76 FR at 43431.
\32\ In the preamble accompanying the 2011 final rule, the Board
used the term ``per-transaction fraud losses'' for this metric, but
the Board now believes that ``ratio of issuer fraud losses to
transaction value'' is a more accurate description.
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The resulting distribution showed that the ratio of issuer fraud
losses to transaction value varied considerably among covered issuers,
ranging from 0.9 to 19.6 basis points, but the distribution was not
skewed like that of per-transaction base component costs. For the
reasons explained in the preamble accompanying the 2011 final rule, the
Board adopted an ad valorem component of 5 basis points of the
transaction value, which corresponded to the median ratio of issuer
fraud losses to transaction value among covered issuers, rounded to the
nearest basis point, based on the Board's voluntary survey.\33\
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\33\ See 76 FR at 43434.
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The Board described the foregoing methodologies for determining the
base component and ad valorem component in the preamble accompanying
the 2011 final rule. The Board did not, however, codify these
methodologies in Sec. 235.3. Rather, Sec. 235.3(b) simply provides
that each interchange fee received or charged by a debit card issuer
for a debit card transaction shall be no more than the sum of 21 cents
and 5 basis points multiplied by the value of the transaction.
B. Rationale for Proposal
When the Board established the interchange fee standards in current
Sec. 235.3, the Board stated that it would regularly collect data on
the costs incurred by covered issuers in connection with debit card
transactions and, over time, would adjust the interchange fee standards
based on reported costs, if appropriate. The Board also noted that
lower costs should result in a lower interchange fee cap as issuers
become more efficient.\34\ To date, the Board has not proposed or
finalized any adjustments to the interchange fee standards in Sec.
235.3.\35\
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\34\ See 76 FR at 43432.
\35\ In December 2022, two trade associations representing
merchants submitted a rulemaking petition to the Board regarding the
interchange fee standards in Regulation II. Specifically, the
petitioners requested that the Board initiate a rulemaking to lower
the base component from 21 cents to 9.7 cents, and eliminate or
substantially reduce the ad valorem component and the fraud-
prevention adjustment. The Board views the rulemaking petition as an
additional consideration related to the proposal; however, the
Board's rationale for the proposal is discussed in this section
III.B.
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Consistent with EFTA section 920(a)(3)(B), the Board has surveyed
covered issuers on a mandatory basis every other year since the
reporting requirements in Sec. 235.8 of Regulation II were adopted.
Through these biennial surveys, the Board has collected data from
covered issuers concerning the costs incurred by those issuers in
connection with debit card transactions performed in calendar years
2011, 2013, 2015, 2017, 2019, and 2021. The Board has reviewed the
interchange fee standards in Sec. 235.3 in light of both the most
recently collected data from 2021 and the cumulative data collected
from covered issuers since the original Regulation II rulemaking. As a
result of this analysis, and as described below, the Board believes
that revisions to the current interchange fee standards are appropriate
at this time.
While the interchange fee standards have remained the same since
Sec. 235.3 was adopted, several data points show that the allowable
costs incurred by covered issuers have fallen significantly since the
original Regulation II rulemaking. In particular, the Board monitors
one especially important metric that approximates the base component
costs of the average covered issuer transaction: the transaction-
weighted average of per-transaction base component costs across covered
issuers.\36\ That metric was 3.9 cents in 2021, which represents a
decline of nearly 50 percent since 2009 (7.7 cents) and over 23 percent
since 2011 (5.1 cents), the first year for which the Board collected
data on a mandatory basis.
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\36\ The Board computes the transaction-weighted average of per-
transaction base component costs across covered issuers by (i)
summing base component costs across covered issuers that reported
these costs; and (ii) dividing this sum by the sum of the total
number of debit card transactions across covered issuers that
reported base component costs. The transaction-weighted average of
per-transaction base component costs across covered issuers can be
viewed as a broad measure of whether covered issuers collectively
are becoming more or less efficient at processing debit card
transactions. Specifically, this metric corresponds to the average
base component costs of a debit card transaction for covered issuers
as a whole. The Board believes that, for skewed distributions like
the distribution of per-transaction base component costs, the
transaction-weighted average is preferable to alterative metrics,
such as the unweighted average across covered issuers, or a given
percentile across covered issuers. In particular, the transaction-
weighted average is less affected than these alternative metrics by
outliers, including covered issuers with low transaction volumes but
per-transaction base component costs considerably greater than the
vast majority of covered issuers. Further, for skewed distributions
like the distribution of per-transaction base component costs, the
transaction-weighted average is preferable to the median because,
unlike that metric, its value depends on all covered issuers' per-
transaction base component costs, rather than only on whether such
values fall above or below the median. For example, a reduction in
the per-transaction base component costs of the less efficient 50
percent of covered issuers (e.g., due to the adoption of a new
transaction-processing technology by these issuers) would cause a
decline in the transaction-weighted average but may not affect the
median.
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The Board also monitors issuer fraud losses, on which the Board
based the ad valorem component. The median ratio of issuer fraud losses
to transaction value among covered issuers declined by around 15
percent from 2011 (4.7 basis points, or 5.0 basis points if rounded to
the nearest basis point) to 2021 (4.0 basis points).
Taken together, these declines in base component costs and issuer
fraud losses have resulted in a substantial increase in the percentage
of covered issuers that fully recovered their allowable costs from 2011
(61.1 percent) to 2021 (77.4 percent).\37\
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\37\ A covered issuer is considered to have fully recovered its
allowable costs if the covered issuer's allowable costs in a
particular year were less than or equal to the aggregate amount of
interchange fees permitted under the interchange fee cap for
transactions involving that issuer's debit cards in the particular
year. In contrast to the increase in the percentage of covered
issuers that fully recovered their allowable costs from 2011 to
2021, the percentage of covered issuer transactions for which
covered issuers fully recovered their allowable costs was the same
in 2021 as it was in 2011 (99.5 percent).
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As a result of the significant decline in the allowable costs
incurred by covered issuers since 2009, the Board believes that the
current interchange fee standards in Sec. 235.3 may no longer be
effective for assessing whether, for a debit card transaction subject
to the interchange fee standards, the amount of any interchange fee
received or charged by a debit card issuer is reasonable and
proportional to the cost incurred by the issuer with respect to the
transaction, as required by EFTA section 920(a)(2). As such, the Board
believes it is necessary to revise the interchange fee standards to
reflect the decline since 2009 in base component costs and the decline
over time in the ratio of issuer fraud losses to transaction value for
covered issuers.
Furthermore, the Board believes that, as much as practicable, the
base component and ad valorem component should be updated regularly and
[[Page 78106]]
predictably to reflect changes in the allowable costs incurred by
covered issuers as those changes occur. Such an approach would avoid
long periods during which the interchange fee standards may not be
effective for assessing whether, for a debit card transaction subject
to the interchange fee standards, the amount of any interchange fee
received or charged by a debit card issuer is reasonable and
proportional to the cost incurred by the issuer with respect to the
transaction. In addition, directly linking the interchange fee
standards to the data reported to the Board by covered issuers on the
Board's biennial survey would capture changes in allowable costs as
quickly as practicable. Further, the Board believes that the patterns
observed in the cumulative data collected by the Board since the
original rulemaking, described further below, are consistent over time
and thus support the establishment at this time of a repeatable process
that directly links the interchange fee standards to the data reported
on the Debit Card Issuer Survey. Finally, this approach would create
predictability for the debit card industry regarding how and when
updates to the interchange fee cap would occur.
For these reasons, and as described below, the Board proposes to
determine the base component and ad valorem component in Sec. 235.3
every other year based on the latest data reported to the Board by
covered issuers. The Board believes that, under this approach, the
interchange fee standards in Sec. 235.3 will be effective going
forward for assessing whether, for a debit card transaction subject to
the interchange fee standards, the amount of any interchange fee
received or charged by a debit card issuer is reasonable and
proportional to the cost incurred by the issuer with respect to the
transaction.\38\
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\38\ In lieu of directly linking the interchange fee standards
to data from the Board's biennial survey of covered issuers going
forward, the Board could consider adopting a one-time update to the
base component and ad valorem component in Sec. 235.3. Following
such an approach, the Board would continue to monitor changes in the
allowable costs incurred by covered issuers and would propose
further updates to the base component and ad valorem component in
the future, if appropriate. However, such ad hoc updates to the base
component and ad valorem component would not be predictable, and
they could result in periods during which the interchange fee
standards may not be effective for assessing whether, for a debit
card transaction subject to the interchange fee standards, the
amount of any interchange fee received or charged by a debit card
issuer is reasonable and proportional to the cost incurred by the
issuer with respect to the transaction.
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The Board also proposes a new methodology for determining the base
component. As described above, in 2011, the Board adopted a base
component of 21 cents per transaction. The Board selected 21 cents
because that value was the site of a clear discontinuity in the
distribution of per-transaction base component costs across covered
issuers, arranged from lowest- to highest-cost covered issuer, for
debit card transactions performed in 2009.\39\ The Board has reviewed
the distribution of per-transaction base component costs across covered
issuers, arranged from lowest- to highest-cost covered issuer, from
each biennial survey of covered issuers conducted since Regulation II
was adopted. In some survey years, the distribution contained no clear
discontinuity; in other survey years, there were multiple apparent
discontinuities. In addition, in some cases, the amount corresponding
to a particular discontinuity did not reflect the overall trend in the
transaction-weighted average of per-transaction base component costs
across covered issuers. For these reasons, the Board believes that the
original methodology that the Board used to determine the base
component by reference to a clear discontinuity in the distribution of
per-transaction base component costs across covered issuers, arranged
from lowest- to highest-cost covered issuer, is not appropriate for
determining the base component at this time and, going forward, would
not facilitate the regular and predictable updates to the interchange
fee standards that the Board proposes.
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\39\ As described above, the Board noted that, had the current
base component been in effect in 2009, approximately 80 percent of
covered issuers would have fully recovered their base component
costs through the base component. However, the Board did not
indicate that the Board was selecting a cost-recovery target of 80
percent of covered issuers (or any other cost-recovery target across
covered issuers or covered issuer transactions) and did not codify
in Regulation II an approach for updating the base component to
reflect any particular cost-recovery target.
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Instead, as described below, the Board proposes to determine the
base component as a function of the transaction-weighted average of
per-transaction base component costs across covered issuers. Under this
methodology, any change in the base component costs of the average
covered issuer transaction would result in a proportional change to the
base component. As such, this methodology will ensure that the maximum
interchange fee that a covered issuer may receive will be proportional
to the base component costs incurred by covered issuers with respect to
the average covered issuer transaction, consistent with the Durbin
Amendment. Combined with the Board's proposal to determine the base
component every other year based on the latest data reported to the
Board by covered issuers, this approach is designed to ensure that, to
the extent practicable, any interchange fee that a covered issuer
receives or charges will remain proportional to the costs incurred by
covered issuers with respect to the average debit card transaction over
time.\40\
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\40\ In 2011, the Board rejected a mathematical interpretation
of the word ``proportional'' that would have required a constant
proportion between allowable costs and interchange fees. See 76 FR
43393, 43423 (July 20, 2011). The Board continues to believe that
the statute requires only that the interchange fees must have a
relationship to allowable costs, as the Board stated in 2011. See
id. Determining the base component as a fixed multiple of the
transaction-weighted average of per-transaction base component costs
across covered issuers is thus consistent with the statute, and is
desirable because it will enable the Board, going forward, to
determine the base component based on the latest data reported to
the Board by covered issuers.
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More specifically, the Board proposes to determine the base
component as the product of a fixed multiplier and the transaction-
weighted average of per-transaction base component costs across covered
issuers. Under this formula, the fixed multiplier would be codified in
Regulation II and would remain constant. The fixed multiplier would
correspond to a target selected by the Board for a reasonable
percentage of covered issuer transactions for which covered issuers
should fully recover their base component costs over time, consistent
with the Durbin Amendment.
Consistent patterns that the Board has observed in the data
collected from covered issuers since 2009 related to per-transaction
base component costs make it possible to derive such a formula.
Specifically, while the transaction-weighted average of per-transaction
base component costs across covered issuers has declined significantly
since the original Regulation II rulemaking, the shape of the
distribution of per-transaction costs across covered issuer
transactions has not changed markedly between the data collections.\41\
Importantly, this particular shape can be well-characterized by a
probability
[[Page 78107]]
distribution with a key property: the value of per-transaction base
component costs at a target percentile across covered issuer
transactions is a multiple of the transaction-weighted average of per-
transaction base component costs across covered issuers.\42\ The
stability of the shape of the distribution over time means that the
Board can identify a fixed multiplier that, when multiplied by the
transaction-weighted average of per-transaction base component costs in
each year, should yield full cost recovery for the target percentage of
covered issuer transactions over time.\43\
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\41\ The Board generates the distribution of per-transaction
base component costs across covered issuer transactions as follows.
For each covered issuer that reported base component costs, the
Board first determines the per-transaction base component costs of
the covered issuer by (i) summing the base component costs reported
by the covered issuer and (ii) dividing this sum by the total number
of debit card transactions reported by the covered issuer. The Board
then assigns this result to each of the covered issuer's
transactions. Finally, the Board arranges the per-transaction base
component costs of all covered issuer transactions in ascending
order from lowest- to highest-cost covered issuer transaction.
\42\ In particular, the data on per-transaction base component
costs across covered issuer transactions, arranged from lowest- to
highest-cost covered issuer transaction, for each year closely
approximates the Weibull distribution. The Weibull distribution,
commonly used in social sciences and engineering, has the property
that the value of the distribution at a particular percentile is a
fixed multiple of the average value of the distribution. The Weibull
distribution captures a number of key features of the data on
covered issuer transactions, including the existence of a small
number of high-cost transactions associated with relatively low-
volume, high-cost covered issuers.
\43\ A particular Weibull distribution is described by two
parameters: (i) its scale, which determines the magnitude of the
values along the distribution; and (ii) its shape, which determines
the degree to which the distribution is skewed to one side. The
Board's analysis determined that the consistent patterns in the
distribution of per-transaction base component costs across covered
issuer transactions for each set of survey data collected since 2009
can be best captured using the Weibull distribution with (i) a scale
parameter that is proportional to the transaction-weighted average
of per-transaction base component costs across covered issuers for
each year, and (ii) a shape parameter that is stable over time. The
Board's analysis did not find a statistically significant
improvement in the fit of the Weibull distribution to the data when
the shape parameter is allowed to differ across years.
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The stability of the shape of the distribution observed in data
collected from covered issuers since 2009 suggests that there are
features inherent to the covered issuer segment of the debit card
market that persist over time. For this reason, the Board believes
that, in future data collections, the distribution of per-transaction
base component costs across covered issuer transactions will continue
to exhibit a similar shape. Thus, the fixed multiplier derived from the
cumulative data collected by the Board since 2009 should continue to
yield full cost recovery over time for the target percentage of covered
issuer transactions going forward.
Although the proposed fixed multiplier would correspond to a target
percentage of covered issuer transactions for which covered issuers
should fully recover their base component costs over time, the proposed
approach would not guarantee this precise level of cost recovery in any
particular year. Rather, in some years, covered issuers may fully
recover their base component costs for more than the target percentage
of covered issuer transactions; in other years, covered issuers may
fully recover their base component costs for less than the target
percentage of covered issuer transactions. Over time, however, the
Board expects the actual cost recovery of covered issuer transactions
to be close to the Board's cost-recovery target.\44\ The Board intends
to monitor over time the actual cost recovery of covered issuer
transactions relative to the Board's cost-recovery target, and in the
future may seek comment on potential adjustments to improve the
proposed methodology for determining the base component, if
appropriate. For example, adjustments to the proposed methodology may
be appropriate in the event of fundamental changes to the debit card
industry that significantly change the shape of the distribution of
per-transaction base component costs across covered issuer transactions
relative to the consistent patterns the Board has observed in the
cumulative data collected from covered issuers since 2009.
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\44\ The Board assesses how close actual cost recovery is to the
cost-recovery target for a particular fixed multiplier by
evaluating, for each year, the extent to which actual cost recovery
would have diverged from the target had the relevant base component
been in effect, and then considering the average deviation over time
resulting from these calculations. Specifically, the Board first
calculates the difference between the cost-recovery target and the
percentage of covered issuer transactions performed in 2009 for
which covered issuers would have fully recovered their base
component costs if, in 2009, the base component had been the product
of (i) the transaction-weighted average of per-transaction base
component costs across covered issuers in 2009, and (ii) the fixed
multiplier. Second, the Board performs the same calculation for
transactions performed in 2011. The Board then takes the simple
average of the differences calculated for each year (i.e., for 2009
and 2011). Third, the Board repeats this process for transactions
performed in 2013, 2015, 2017, 2019, and 2021, in each case taking
the average of the differences calculated for each year so far.
These averages represent the extent to which actual cost recovery
would have diverged over time from the target had the relevant base
components been in effect.
For the fixed multiplier that the Board proposes (i.e., 3.7, as
described below), using the measure of closeness described above,
the Board found that the actual cost-recovery rate drew nearer to
the target cost-recovery rate with each subsequent data collection
that was incorporated into the Board's analysis. In other words, the
simple average of the differences for 2009-13 transactions improved
on that for 2009-11 transactions, which improved on the difference
for 2009, and so on. This result suggests that, while for a
particular data collection the actual cost-recovery rate may diverge
from the target cost-recovery rate, over time actual cost recovery
is likely to be close to the cost-recovery target.
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To ensure that, for a debit card transaction subject to the
interchange fee standards, the amount of any interchange fee received
or charged by a debit card issuer is reasonable, the Board proposes a
cost-recovery target of 98.5 percent of covered issuer transactions,
which corresponds to a fixed multiplier of 3.7 based on the cumulative
data collected from covered issuers since 2009. The Board believes that
this cost-recovery target, and the base component that would result
from multiplying this fixed multiplier and the transaction-weighted
average of per-transaction base component costs, is reasonable because
it would allow covered issuers to fully recover their base component
costs over time for a significant majority of covered issuer
transactions. At the same time, this target acknowledges that full cost
recovery for the highest-cost covered issuer transactions would not be
reasonable.\45\
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\45\ In 2011, the Board stated that the term ``reasonable''
implies that, above some amount, an interchange fee is not
reasonable, and noted that common definitions of the term
``reasonable'' include ``fair, proper, or moderate'' and ``not
excessive.'' See 76 FR at 43423. The Board also noted that the Board
did not believe that it was consistent with the statutory purpose to
permit networks to set interchange fees in order to accommodate 100
percent of the average per-transaction costs of the highest-cost
issuers. See 76 FR at 43433.
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A useful measure of the difference between covered issuer
transactions above the target percentile (for which the Board believes
full cost recovery would be unreasonable) and covered issuer
transactions below the target percentile (for which the Board believes
full cost recovery would be reasonable) is the efficiency gap with
respect to transaction processing between covered issuers whose
transactions are above and below the target percentile. This efficiency
gap may be represented by the ratio of the transaction-weighted average
of per-transaction base component costs for covered issuers whose
transactions are above the target percentile to that for covered
issuers whose transactions are below the target percentile. The Board
computed this ratio for a range of potential cost-recovery targets
using each set of data collected from covered issuers since 2009.\46\
For the proposed cost-recovery target of 98.5 percent of covered issuer
transactions, the average value of this ratio across these data
collections is approximately 5.2, meaning that covered issuers whose
transactions are above the 98.5 percentile are, on average, more than
five times less efficient than covered issuers whose transactions are
below the 98.5
[[Page 78108]]
percentile. Accordingly, the Board believes that targeting full cost
recovery over time for 98.5 percent of covered issuers transactions is
reasonable.
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\46\ See section VII, infra, for the average value of this ratio
across these data collections for a range of potential cost-recovery
targets.
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Although the proposed new methodology for determining the base
component would ultimately rely on a simple formula (i.e., the
transaction-weighted average of per-transaction base component costs
across covered issuers multiplied by 3.7), the Board appreciates that
the underlying statistical analysis is complex. The Board considered
other methodologies for determining the base component. For example,
the Board considered setting the base component equal to the
transaction-weighted average of per-transaction base component costs
across covered issuers (i.e., effectively with a fixed multiplier of
1.0), but determined that this methodology would result in an
unreasonably low percentage of covered issuers fully recovering their
costs.\47\ The Board also considered determining the base component by
reference to a target percentile in (i) the distribution of per-
transaction base component costs, arranged from lowest- to highest-cost
covered issuer, or (ii) the distribution of per-transaction base
component costs across covered issuer transactions. In both cases,
however, the Board determined that these methodologies could result in
a base component that does not reflect changes over time in the
transaction-weighted average of per-transaction base component costs
across covered issuers due to the sensitivity of these alternative
methodologies to low-volume, high-cost covered issuers. Finally, the
Board considered adopting a tiered approach that would establish
different base components for high-volume, low-cost covered issuers and
low-volume, high-cost covered issuers. However, the Board determined
that such an approach would create numerous practical challenges for
both the Board and debit card industry participants and could
disincentivize covered issuers in the tier with the higher base
component from growing their debit card programs.\48\
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\47\ Specifically, setting the base component equal to the
transaction-weighted average of per-transaction base component costs
across covered issuers would have resulted in only around 15 percent
of covered issuers, on average across the biennial data collections,
fully recovering their base component costs. Such a methodology
would, however, permit covered issuers as a whole to recover their
aggregate base component costs.
\48\ For example, a tiered base component approach would require
the Board to demarcate different tiers of issuers, and the Board's
demarcations would likely need to be adjusted over time. In
addition, networks would need to track covered issuers by tier to
ensure that the interchange fees received by each covered issuer do
not exceed the interchange fee standards.
---------------------------------------------------------------------------
Whereas the Board proposes a new methodology to determine the base
component, the Board does not propose to revise the original
methodology that the Board used to determine the ad valorem component
(i.e., the median ratio of issuer fraud losses to transaction value
among covered issuers, multiplied by the value of the transaction).
Since the Board adopted the interchange fee standards in 2011, the
Board has observed an overall increase in fraud losses to all parties
related to covered issuer transactions, but the share of such fraud
losses absorbed by covered issuers (i.e., issuer fraud losses) has
declined during that time. Accordingly, as noted above, the median
ratio of issuer fraud losses to transaction value among covered issuers
has declined from 2011 to 2021, despite the overall increase in fraud
losses to all parties.\49\ The Board originally determined the ad
valorem component using only those fraud losses absorbed by covered
issuers, and analysis of the data collected by the Board since the
original Regulation II rulemaking shows that, despite these changes in
the fraud environment, the median ratio of issuer fraud losses to
transaction value among covered issuers remains a representative metric
of the cost of fraud incurred by covered issuers. Therefore, for the
reasons explained in the preamble accompanying the 2011 final rule, the
Board believes that the original methodology continues to be
appropriate for determining the ad valorem component.\50\
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\49\ For additional information regarding fraud losses with
respect to covered issuer transactions, see section VIII.C, infra.
\50\ See 76 FR at 43431 and 43434. The Board recognizes that
some aspects of the fraud environment have changed with, for
example, the introduction of increased security for in-person card
payments through the issuance of chip-based EMV cards and the growth
of ecommerce and remote fraud. As discussed in section VIII.C,
infra, covered issuers now absorb a smaller percentage of fraud
losses from covered issuer transactions than they did in 2009, with
both cardholders and merchants absorbing larger proportions of such
losses over time. Notwithstanding these changes, the Board believes
that its conclusions with respect to the ad valorem component remain
sound. Furthermore, because the methodology for determining the ad
valorem component is based on actual fraud losses absorbed by
covered issuers, any future decrease or increase in the median ratio
of issuer fraud losses to transaction value among covered issuers
would, pursuant to the Board's proposed methodology, result in a
corresponding future reduction or increase to the ad valorem
component.
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C. Description of Proposal
The Board proposes to determine, for every two-year period, the
base component and the ad valorem component using the latest data
reported to the Board by covered issuers on the Debit Card Issuer
Survey. Further, the Board proposes a new methodology for determining
the base component. Initially, under the proposed approach, the base
component would be 14.4 cents and the ad valorem component would be 4.0
basis points (multiplied by the value of the transaction) for debit
card transactions performed from the effective date of the final rule
to June 30, 2025. The Board does not propose to modify the allowable
costs considered for purposes of determining the base component and the
ad valorem component, or the original methodology used to determine the
ad valorem component.
Proposed Sec. 235.3(b)(1) would provide that the current base
component of 21.0 cents and the current ad valorem component of 5.0
basis points (multiplied by the value of the transaction) would
continue to apply for debit card transactions performed from October 1,
2011 (the original effective date of Sec. 235.3) until the calendar
day prior to the effective date of the final rule. Proposed Sec.
235.3(b)(2) would establish the base component and the ad valorem
component that would apply for debit card transactions performed from
the effective date of the final rule to June 30, 2025. Specifically,
for these transactions, the base component would be 14.4 cents, and the
ad valorem component would be 4.0 basis points (multiplied by the value
of the transaction). As described in section III.B, supra, the proposed
base component of 14.4 cents is the transaction-weighted average of
per-transaction allowable costs (excluding fraud losses) across covered
issuers based on the data reported on the 2021 Debit Card Issuer Survey
(3.9 cents) multiplied by the fixed multiplier of 3.7 and rounded to
the nearest tenth of one cent. The proposed ad valorem component of 4.0
basis points (multiplied by the value of the transaction) is the median
ratio of issuer fraud losses to transaction value among covered issuers
based on the data reported on the 2021 Debit Card Issuer Survey,
rounded to the nearest quarter of one basis point.\51\
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\51\ The Board proposes to round the ad valorem component to the
nearest quarter of one basis point to achieve a similar degree of
accuracy as for the base component, which the Board proposes to
round to the nearest tenth of one cent. Specifically, for a $50
debit card transaction subject to the interchange fee standards, a
change in the ad valorem component of one quarter of one basis point
would result in a change of around one tenth of one cent to the
maximum interchange fee permitted under the interchange fee
standards.
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[[Page 78109]]
The Board proposes a set of conforming revisions to comments
235.3(b)-2 and 235.3(b)-3 of the Official Commentary to make clear that
the base component and the ad valorem component for a particular
transaction depend on the date on which the transaction is performed.
Proposed new comment 235.3(b)-4 would provide that, for this purpose, a
debit card transaction is considered to be performed on the date on
which the transaction is settled on an interbank basis.
Proposed new paragraph (c) to Sec. 235.3 would set forth the basis
for determining the amounts in proposed Sec. 235.3(b). Specifically,
proposed Sec. 235.3(c) would provide that, for every two-year period,
beginning with the period from July 1, 2025, to June 30, 2027, the
Board will determine the base component and the ad valorem component
using the approach described in a new proposed appendix B to Regulation
II. Paragraph (a) to proposed appendix B would similarly state that the
Board will determine the base component and the ad valorem component
for each ``applicable period'' (i.e., every two-year period beginning
with the period from July 1, 2025, to June 30, 2027) using the approach
described in proposed appendix B.
Paragraph (b) of proposed appendix B would set forth the data that
the Board would use to determine the base component and ad valorem
component for each applicable period--namely, the latest data reported
to the Board by covered issuers on the Debit Card Issuer Survey.
Specifically, paragraph (b) would provide that the Board will determine
the base component and the ad valorem component for each applicable
period using the data reported to the Board by covered issuers pursuant
to Sec. 235.8 concerning transactions performed during the calendar
year that is two years prior to the year in which that applicable
period begins. For example, in the case of the applicable period
beginning July 1, 2025, the Board would use the data reported to the
Board by covered issuers on the Debit Card Issuer Survey concerning
debit card transactions performed in calendar year 2023, which the
Board will collect in 2024.
Paragraph (c)(1) of proposed appendix B would establish the formula
that the Board would use to determine the base component for each
applicable period. Specifically, for each applicable period, the base
component would be the product of the transaction-weighted average of
per-transaction allowable costs (excluding fraud losses) across covered
issuers and 3.7, rounded to the nearest tenth of one cent.\52\
Paragraph (c)(2) would define ``allowable costs (excluding fraud
losses)''--which is synonymous with the term ``base component costs''
used elsewhere in this preamble--as the sum of the costs of
authorization, clearance, and settlement, as reported on the Debit Card
Issuer Survey,\53\ and transaction-monitoring costs tied to
authorization, as reported on the Debit Card Issuer Survey.\54\
Paragraph (c)(3) would set forth how the Board calculates the
transaction-weighted average of per-transaction allowable costs
(excluding fraud losses) across issuers. Specifically, using the latest
data reported to the Board by covered issuers, the Board would (i) sum
allowable costs (excluding fraud losses) across covered issuers that
reported allowable costs (excluding fraud losses); (ii) divide this sum
by the sum of the total number of debit card transactions across
covered issuers that reported allowable costs (excluding fraud losses);
and (iii) round this result to the nearest tenth of one cent.\55\
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\52\ Section III.B, supra, describes the Board's rationale for
proposing 3.7 as the fixed multiplier for determining the base
component.
\53\ These costs are reported on line 3a of section II of the
Debit Card Issuer Survey as ``costs of authorization, clearance, and
settlement.'' See FR 3064a.
\54\ These costs are reported on line 5a.1 of section II of the
Debit Card Issuer Survey as ``transactions monitoring costs tied to
authorization.'' See id.
\55\ The total number of debit card transactions attributable to
a covered issuer is reported on line 1a of section II of the Debit
Card Issuer Survey as the volume of ``settled purchase transactions
(excluding pre-authorizations, denials, adjustments, returns, and
cash back amounts).'' See id.
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Paragraph (d)(1) of proposed appendix B would establish the metric
that the Board would use to determine the ad valorem component for each
applicable period. Specifically, for each applicable period, the ad
valorem component for a particular debit card transaction would be the
median ratio of issuer fraud losses to transaction value among covered
issuers, rounded to the nearest quarter of one basis point, multiplied
by the value of the debit card transaction. Paragraph (d)(2) would
define ``ratio of issuer fraud losses to transaction value'' as the
value of fraud losses incurred by the covered issuer, as reported on
the Debit Card Issuer Survey,\56\ divided by the total value of debit
card transactions, as reported on the Debit Card Issuer Survey.\57\
Paragraph (d)(3) would set forth how the Board calculates the median
ratio of issuer fraud losses to transaction value among covered
issuers. Specifically, using the latest data reported to the Board by
covered issuers, the Board would (i) determine the ratio of issuer
fraud losses to transaction value for each covered issuer that reported
issuer fraud losses, (ii) sort these ratios in ascending order, and
(iii) select the ratio in the middle (if the number of ratios is odd)
or calculate the simple average of the two ratios in the middle (if the
number of ratios is even).
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\56\ These costs are reported on line 8b of section II of the
Debit Card Issuer Survey as ``losses incurred by issuer'' (i.e.,
gross value of fraudulent transactions, less fraud-related
chargebacks to acquirers net of representments, and less losses
absorbed by cardholders). See id.
\57\ The total value of debit card transactions attributable to
a covered issuer is reported on line 1a of section II of the Debit
Card Issuer Survey as the value of ``settled purchase transactions
(excluding pre-authorizations, denials, adjustments, returns, and
cash back amounts).'' See id.
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Paragraph (f) of proposed appendix B would establish the timing of
the publication of the base component and ad valorem component for an
applicable period. Specifically, the Board would publish these amounts
in the Federal Register no later than March 31 of the calendar year in
which the applicable period begins. Because the Board would determine
these amounts by applying the approach described in proposed appendix B
and using the latest data reported to the Board by covered issuers, the
Board would not intend to seek public comment on future updates to
these amounts.\58\
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\58\ See, e.g., 5 U.S.C. 553(b)(3)(B) (exempting agencies from
notice and comment rulemaking when the agency for good cause finds
that such procedures are impracticable, unnecessary, or contrary to
the public interest). The Board believes that future determinations
of the base component and the ad valorem component should qualify
for the good cause exemption from notice and comment rulemaking
because such determinations would involve the ministerial
application of the approach described in proposed appendix B, and
the Board would not be exercising any discretion in connection with
such determinations. The Board would seek public comment on any
future substantive changes to the proposed approach.
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IV. Proposed Revisions to Fraud Prevention Adjustment (Sec. 235.4)
A. Background
As described above, under EFTA section 920(a)(5)(A), the Board may
allow for an adjustment to the interchange fee received or charged by
an issuer under the interchange fee standards if such adjustment is
reasonably necessary to make allowance for costs incurred by the issuer
in preventing fraud in relation to debit card transactions involving
the issuer, provided that the issuer complies with fraud-related
standards established by the Board. The Board's fraud-related standards
must (i) be designed to ensure that any fraud-prevention adjustment is
limited to the amount that is reasonably necessary to make allowance
for costs
[[Page 78110]]
incurred by the issuer in preventing fraud in relation to debit card
transactions involving the issuer and takes into account any fraud-
related reimbursements (including amounts from chargebacks) received
from consumers, merchants, or payment card networks in relation to
debit card transactions involving the issuer; and (ii) require issuers
to take effective steps to reduce the occurrence of, and costs from,
fraud in relation to debit card transactions, including through the
development and implementation of cost-effective fraud prevention
technology.\59\ EFTA section 920(a)(5)(B) requires the Board to
prescribe regulations to establish standards for making any such fraud-
prevention adjustment.\60\
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\59\ EFTA section 920(a)(5)(A)(ii). The Board does not propose
revisions to the current fraud-prevention standards in Sec.
235.4(b). For the reasons explained in the preamble accompanying the
2012 final rule, the Board adopted a non-prescriptive approach to
these standards. See 77 FR 46258, 46268-75 (Aug. 3, 2012). The
fraud-prevention standards require issuers to develop and implement
policies and procedures reasonably designed to take effective steps
to reduce the occurrence of, and costs to all parties from,
fraudulent debit card transactions, including through the
development and implementation of cost-effective fraud-prevention
technology. See Sec. 235.4(b)(1). Specifically, an issuer's
policies and procedures must address: (i) methods to identify and
prevent fraudulent debit card transactions; (ii) monitoring of the
volume and value of its fraudulent debit card transactions; (iii)
appropriate responses to suspicious debit card transactions in a
manner designed to limit the costs to all parties from and prevent
the occurrence of future fraudulent debit card transactions; (iv)
methods to secure debit card and cardholder data; and (v) such other
factors as the issuer considers appropriate. See Sec. 235.4(b)(2).
An issuer must review, at least annually, its fraud-prevention
policies and procedures, and their implementation, and update them
as necessary in light of: (i) their effectiveness in reducing the
occurrence of, and costs to all parties from, fraudulent debit card
transactions involving the issuer; (ii) their cost-effectiveness;
and (iii) changes in the types of fraud, methods used to commit
fraud, and available methods for detecting and preventing fraudulent
debit card transactions that the issuer identifies from (A) its own
experience or information, (B) information provided to the issuer by
its payment card networks, law enforcement agencies, and fraud-
monitoring groups in which the issuer participates, and (C)
applicable supervisory guidance. See Sec. 235.4(b)(3). In order to
charge or receive the fraud-prevention adjustment, an issuer must
annually notify its payment card networks that it complies with the
Board's fraud-prevention standards, and must notify its payment card
networks if it is no longer eligible to receive or charge the fraud-
prevention adjustment. See Sec. 235.4(c) and (d).
\60\ In issuing regulations to implement any fraud-prevention
adjustment, the Board must consider certain factors set forth in
EFTA section 920(a)(5)(B)(ii), which are discussed in section
VIII.C, infra.
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The Board adopted a fraud-prevention adjustment and fraud-
prevention standards in Sec. 235.4 of Regulation II.\61\ In adopting
the fraud-prevention adjustment, the Board (i) defined the fraud-
prevention costs that issuers incur and (ii) structured the fraud-
prevention adjustment to allow issuers to recover a portion of these
costs. A brief overview of how the Board developed the fraud-prevention
adjustment in current Sec. 235.4 follows.
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\61\ Section 235.4 was initially adopted via an interim final
rule in July 2011. See 76 FR 43477 (July 20, 2011). The Board
subsequently issued a final rule that made various amendments to the
interim final rule. See 77 FR 46258 (Aug. 3, 2012).
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1. Fraud-Prevention Costs
EFTA section 920 does not specify types of fraud-prevention costs
incurred by issuers that the Board may or may not consider in
determining the fraud-prevention adjustment. When the Board adopted
current Sec. 235.4, the Board explained that fraud prevention involves
a broad range of activities in which an issuer may engage before,
during, or after a debit card transaction.\62\ Accordingly, and for
reasons explained in the preamble accompanying the 2012 final rule, the
Board considered costs incurred by debit card issuers associated with a
variety of activities that contribute to preventing fraud, including
research and development of new fraud-prevention technologies, card
reissuance due to fraudulent activity, data security, card activation,
and merchant blocking. However, the Board did not consider transaction-
monitoring costs to be a fraud-prevention cost for purposes of
determining the fraud-prevention adjustment because the Board included
transaction-monitoring costs in allowable costs for purposes of the
interchange fee standards.\63\ The Board also did not consider costs
incurred to prevent fraud to a cardholder's transaction account through
means other than debit card transactions, or costs incurred to prevent
fraud in connection with other payment methods such as credit cards.
Additionally, fraud losses, lost revenue attributable to cardholders
waiting for replacement cards, fraud-loss insurance, and recovering
losses were not included in fraud-prevention costs.\64\
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\62\ 77 FR 46258, 46264 (Aug. 3, 2012).
\63\ See id.; see also 76 FR 43393, 43431 (July 20, 2011)
(noting that the types of fraud-prevention activities considered in
connection with the fraud-prevention adjustment are those activities
that prevent fraud with respect to debit card transactions at times
other than when the issuer is effecting the transaction); 80 FR
48684, 48685 (Aug. 14, 2015) (same).
\64\ 77 FR at 46264.
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2. Fraud-Prevention Adjustment
When the Board adopted the fraud-prevention adjustment as an
interim final rule in 2011, the Board noted that the statute does not
specify what amount, or range of amounts, is reasonably necessary to
make allowance for an issuer's fraud-prevention costs. The Board
concluded that an amount that makes allowance for an issuer's fraud-
prevention costs is one that gives consideration to those costs and
allows a reasonable recovery of those costs based on the considerations
set forth in EFTA section 920(a)(5)(B)(ii).\65\
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\65\ 76 FR at 43482. The Board rejected an interpretation that
would require a direct connection between the fraud-prevention
adjustment and actual issuer costs. The Board also did not interpret
the statute to require the fraud-prevention adjustment to permit
each (or any) issuer to fully recover its fraud-prevention costs.
See id.
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For the reasons explained in the preamble accompanying the 2012
final rule, the Board adopted a fraud-prevention adjustment of 1 cent
per transaction.\66\ This amount corresponded to the difference,
rounded to the nearest whole cent, between the median per-transaction
fraud-prevention costs aggregated with transaction-monitoring costs
among covered issuers (1.8 cents) and the median per-transaction
transaction-monitoring costs among covered issuers (0.7 cents), based
on the data collected on the Board's voluntary survey.\67\
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\66\ 77 FR at 46265-66.
\67\ 77 FR at 46263.
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The Board described the foregoing methodology for determining the
fraud-prevention adjustment in the preamble accompanying the 2012 final
rule. The Board did not, however, codify this methodology in Sec.
235.4. Rather, Sec. 235.4(a) simply provides that, subject to
compliance with the Board's fraud-prevention standards, an issuer may
receive or charge an amount of no more than 1.0 cent per transaction in
addition to any interchange fee it receives or charges in accordance
with Sec. 235.3.
B. Rationale for Proposal
When the Board adopted the fraud-prevention adjustment in current
Sec. 235.4, the Board stated that it would take into account data from
future Debit Card Issuer Surveys when considering any future revisions
to the fraud-prevention adjustment.\68\ Consistent with EFTA section
920(a)(3)(B), the Board has surveyed covered issuers on a mandatory
basis every other year since the reporting requirements in Sec. 235.8
of Regulation II were adopted. Through these biennial surveys, the
Board has collected data from covered issuers concerning the costs
incurred by covered issuers in connection with debit card transactions
performed in calendar years 2011, 2013, 2015, 2017, 2019, and
[[Page 78111]]
2021. These data show that fraud-prevention costs have risen since
2009. Specifically, the median per-transaction fraud-prevention costs
among covered issuers was 1.3 cents in 2021.\69\
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\68\ 77 FR at 46266.
\69\ The Board computes the median per-transaction fraud-
prevention among covered issuers by (i) for each covered issuer that
reported fraud-prevention costs, dividing the covered issuer's
fraud-prevention costs by the total number of debit card
transactions reported by the covered issuer; (ii) sorting these
values in ascending order; and (iii) selecting the value in the
middle (if the number of values is odd) or calculating the simple
average of the two values in the middle (if the number of values is
even).
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Given this development, the Board believes it is necessary to
revise the fraud-prevention adjustment to reflect the increase since
2009 in fraud-prevention costs. In addition--and for the reasons
explained in section III.B, supra, in connection with the interchange
fee standards--the Board believes that, as much as practicable, the
fraud-prevention adjustment should be updated regularly and predictably
to reflect changes in the fraud-prevention costs incurred by covered
issuers as those changes occur. Accordingly, the Board proposes to
determine the fraud-prevention adjustment in Sec. 235.4 every other
year based on the latest data reported to the Board by covered issuers.
The Board believes that, under this approach, the fraud-prevention
adjustment in Sec. 235.4 will continue over time to reflect an amount
that is reasonably necessary to make allowance for costs incurred by an
issuer in preventing fraud in relation to debit card transactions
involving that issuer.
The Board also proposes to modify the original methodology used to
determine the fraud-prevention adjustment. When the Board adopted
current Sec. 235.4, the Board's objective was to determine the fraud-
prevention adjustment as the median per-transaction fraud-prevention
costs among covered issuers. However, due to limitations in the data
reported to the Board by covered issuers on the Board's voluntary
survey, the Board did not directly calculate this metric, but rather
approximated it by calculating the difference between (i) the median
per-transaction fraud-prevention costs aggregated with transaction-
monitoring costs among covered issuers, and (ii) the median per-
transaction transaction-monitoring costs among covered issuers, rounded
to the nearest cent.\70\ However, these limitations no longer persist
in the data collected since the reporting requirements in Sec. 235.8
of Regulation II were adopted.\71\ As a result, the Board is now able
to directly calculate this metric. Therefore, as described below, the
Board proposes to determine the fraud-prevention adjustment as the
median per-transaction fraud-prevention costs among covered issuers,
rounded to the nearest tenth of one cent.
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\70\ Specifically, the Board's voluntary survey asked covered
issuers to report (i) their fraud-prevention costs aggregated with
transaction-monitoring costs, and also to break out, if possible,
(ii) their transaction-monitoring costs. Some covered issuers
reported the first figure but not the second. Instead of directly
calculating the median per-transaction fraud-prevention costs among
covered issuers--which would have required the Board to rely on a
smaller data set comprised only of those covered issuers that
reported both figures--the Board approximated this metric by
calculating the difference between (i) the median per-transaction
fraud-prevention costs aggregated with transaction-monitoring costs
among covered issuers that reported their fraud prevention costs
aggregated with transaction-monitoring costs, and (ii) the median
per-transaction transaction-monitoring costs among covered issuers
that broke out their transaction-monitoring costs.
\71\ Specifically, beginning with the first mandatory Debit Card
Issuer Survey, a more representative number of covered issuers have
reported their fraud-prevention costs disaggregated from their
transaction-monitoring costs.
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The Board believes that the original methodology, with the proposed
modification, continues to be an appropriate methodology for
determining the fraud-prevention adjustment, both for the reasons
explained in the preamble accompanying the 2012 final rule, and in
light of the factors set forth in EFTA section 920(a)(5)(B)(ii), which
are discussed in section VIII.C, infra.
C. Description of Proposal
The Board proposes to determine, for every two-year period, the
fraud-prevention adjustment based on the latest data reported to the
Board by covered issuers on the Debit Card Issuer Survey. Further, the
Board proposes to modify the original methodology used to determine the
fraud-prevention adjustment. The Board does not propose to modify the
fraud-prevention costs considered for purposes of determining the
fraud-prevention adjustment, or the fraud-prevention standards that
covered issuers must meet to receive the fraud-prevention adjustment.
Proposed Sec. 235.4(a)(1) would provide that the fraud-prevention
adjustment of 1.0 cents would continue to apply for debit card
transactions performed from October 1, 2011 (the original effective
date of Sec. 235.4) until the calendar day prior to the effective date
of the final rule. Proposed Sec. 235.4(a)(2) would establish the
fraud-prevention adjustment (1.3 cents) that would apply for debit card
transactions performed from the effective date of the final rule to
June 30, 2025. Proposed new comment 235.4(a)-1 would provide that, for
purposes of Sec. 235.4(a), a debit card transaction is considered to
be performed on the date on which the transaction is settled on an
interbank basis.
Proposed new paragraph (b) to Sec. 235.4 would set forth the basis
for determining the fraud-prevention adjustment in proposed Sec.
235.4(a). Specifically, proposed Sec. 235.4(b) would provide that, for
every two-year period, beginning with the period from July 1, 2025, to
June 30, 2027, the Board will determine the fraud-prevention adjustment
using the approach described in proposed appendix B to Regulation II.
Paragraph (a) to proposed appendix B similarly would state that the
Board will determine the fraud-prevention adjustment for each
``applicable period'' (i.e., every two-year period beginning with the
period from July 1, 2025, to June 30, 2027) using the approach
described in proposed appendix B.
Paragraph (b) of proposed appendix B would set forth the data that
the Board would use to determine the fraud-prevention adjustment for
each applicable period--namely, the latest data reported to the Board
by covered issuers on the Debit Card Issuer Survey. Specifically,
paragraph (b) would provide that the Board will determine the fraud-
prevention adjustment for each applicable period using the data
reported to the Board by covered issuers pursuant to Sec. 235.8
concerning transactions performed during the calendar year that is two
years prior to the year in which that applicable period begins. For
example, in the case of the applicable period beginning July 1, 2025,
the Board would use the data reported to the Board by covered issuers
on the Debit Card Issuer Survey concerning debit card transactions
performed in calendar year 2023, which the Board will collect in 2024.
Paragraph (e)(1) of proposed appendix B would establish the metric
that the Board would use to determine the fraud-prevention adjustment
for each applicable period. Specifically, for each applicable period,
the fraud-prevention adjustment would be the median per-transaction
fraud-prevention costs among covered issuers, rounded to the nearest
tenth of one cent. Paragraph (e)(2) would define ``per-transaction
fraud-prevention costs'' as fraud-prevention costs, as reported on the
Debit Card Issuer Survey,\72\ divided by
[[Page 78112]]
the total number of debit card transactions, as reported on the Debit
Card Issuer Survey.\73\ Paragraph (e)(3) would set forth how the Board
calculates the median per-transaction fraud-prevention costs among
covered issuers. Specifically, using the latest data reported to the
Board by covered issuers, the Board would (i) determine the per-
transaction fraud-prevention costs for each covered issuer that
reported fraud-prevention costs, (ii) sort these values in ascending
order, and (iii) select the value in the middle (if the number of
values is odd) or calculate the simple average of the two values in the
middle (if the number of values is even).
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\72\ Fraud-prevention costs are (i) ``total fraud-prevention and
data-security costs,'' as reported on line 5a of section II of the
Debit Card Issuer Survey, minus (ii) ``transactions monitoring costs
tied to authorization,'' as reported on line 5a.1 of section II of
the Debit Card Issuer Survey. See FR 3064a.
\73\ The total number of debit card transactions attributable to
a covered issuer is reported on line 1a of section II of the Debit
Card Issuer Survey as the volume of ``settled purchase transactions
(excluding pre-authorizations, denials, adjustments, returns, and
cash back amounts).'' See id.
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Paragraph (f) of proposed appendix B would set forth the timing of
the publication of the fraud-prevention adjustment for an applicable
period. Specifically, the Board would publish the fraud-prevention
adjustment in the Federal Register no later than March 31 of the
calendar year in which the applicable period begins. Because the Board
would determine the fraud-prevention adjustment by applying the
methodology described in proposed appendix B and using the latest data
reported to the Board by covered issuers, the Board would not intend to
seek public comment on future updates to the fraud-prevention
adjustment.\74\
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\74\ As with future determinations of the base component and the
ad valorem component, the Board believes that future determinations
of the fraud-prevention adjustment should qualify for the good cause
exemption from notice and comment rulemaking. See supra note 58.
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V. Other Proposed Revisions
In addition to the proposed revisions to the interchange fee
standards in Sec. 235.3 and the fraud-prevention adjustment in Sec.
235.4, the Board proposes a set of technical revisions to Regulation
II. In general, these proposed revisions are intended to make
Regulation II clearer. Additionally, some of the proposed revisions are
intended to ensure the text of the regulation directly incorporates the
Board's current construction of the rule.
First, to improve the readability of Regulation II, the Board
proposes to add ``covered issuer'' as a defined term in Sec. 235.2.
Under the proposal, ``covered issuer'' would mean, for a particular
calendar year, an issuer that, together with its affiliates, has assets
of $10 billion or more as of the end of the preceding calendar
year.\75\ Further, the Board proposes certain conforming revisions to
the regulation to reflect the addition of ``covered issuer'' as a
defined term. For example, the Board proposes to move current comment
235.5(a)-1, which describes which assets do and do not count toward the
$10 billion threshold, to the commentary under Sec. 235.2. In
addition, the Board proposes to incorporate the defined term ``covered
issuer'' where relevant in other sections of Regulation II,
particularly in Sec. 235.5(a) (the small issuer exemption) and Sec.
235.8(a) (reporting requirements) and the commentary thereto. The Board
does not intend the addition and incorporation of the defined term
``covered issuer'' to be a substantive change.
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\75\ The proposed definition is derived from current Sec.
235.5(a)(1)(ii).
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Second, the Board identified three sentences in the commentary to
current Sec. 235.2(k) (definition of ``issuer'') that relate to an
issuer's eligibility for the small issuer exemption in Sec. 235.5(a).
The Board proposes to move the substance of these sentences into the
commentary to Sec. 235.5(a). The Board does not intend this proposed
revision to modify the definition of ``issuer'' or alter any issuer's
eligibility for the small issuer exemption.
Third, the Board proposes minor revisions to add specificity to
Sec. 235.8 (reporting requirements and record retention) and the
commentary thereto. Specifically, the Board proposes to specify in
Sec. 235.8(a) that each covered issuer must file a report with the
Board on a biennial basis, and that each payment card network must file
a report with the Board on an annual basis, consistent with the Board's
survey practices since 2011. Further, the Board proposes to add new
comment 235.8(a)-1 to specify that the reports referred to in proposed
Sec. 235.8(a) are the Board's biennial Debit Card Issuer Survey and
annual Payment Card Network Survey, and that each survey collects
information concerning debit card transactions performed during the
previous calendar year. In addition, the Board proposes to add new
comment 235.8(a)-2 to specify that newly covered issuers are exempt
from the Debit Card Issuer Survey, consistent with the current
instructions to that survey.\76\ The Board believes that these proposed
revisions are helpful in light of the significance of the data
collected on the Debit Card Issuer Survey to the proposed approach for
determining the base component, the ad valorem component, and the
fraud-prevention adjustment.
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\76\ The General Instructions to the Debit Card Issuer Survey
currently provide that ``[i]f an issuer that is covered by the
interchange fee standards in Regulation II at the time of this data
collection was not also covered in [the previous calendar year], it
does not need to file a report . . . .'' See FR 3064a.
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Fourth, the Board proposes to remove Sec. 235.7(c), the commentary
to Sec. 235.7(c), and Sec. 235.10 of Regulation II. These sections of
the regulation specify the original effective date of Regulation II
(October 1, 2011) and give debit card issuers and networks additional
time to comply with the requirements in Sec. 235.7(a) for certain
types of debit cards, such as general-use prepaid cards and debit cards
that use point-of-sale transaction qualification or substantiation
systems for verifying the eligibility of purchased goods or services.
Both the original effective date of Regulation II and these extended
compliance dates have long since passed. As such, the Board believes
that these provisions of Regulation II are no longer necessary.\77\ In
addition, deleting these provisions would avoid the potential for
confusion regarding the effective date of any future revisions to the
requirements in Sec. 235.7(a).\78\
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\77\ For the same reason, the Board proposes to remove Sec.
235.5(a)(4), which temporarily modified the application of the small
issuer exemption due the COVID-19 pandemic. See 85 FR 77345 (Dec. 2,
2020). Because the last debit card transactions to which Sec.
235.5(a)(4) applied were performed on December 31, 2021, the Board
proposes to remove Sec. 235.5(a)(4) with an effective date of
January 1, 2027, which is after the five-year record retention
requirement prescribed in Sec. 235.8(c)(1) will have elapsed with
respect to these transactions. The effective date of the other
proposed revisions described in this preamble is discussed in
section VI, infra.
\78\ The Board does not anticipate any future revisions to Sec.
235.7(a) at this time. However, questions regarding the effective
date arose in connection with the Board's recent revisions to Sec.
235.7(a) and the commentary thereto. See 87 FR 61217 (Oct. 11,
2022).
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Fifth, the Board proposes minor revisions to Sec. 235.4 (in
addition to those described in section IV.C, supra) and the commentary
to Sec. 235.3(b) (in addition to those described in section III.C,
supra) to clarify the relationship between the interchange fee
standards in Sec. 235.3 and the fraud-prevention adjustment in Sec.
235.4. Specifically, the Board proposes to modify the first sentence of
Sec. 235.4(a) to clarify that the fraud-prevention adjustment is in
addition to any interchange fee an issuer receives or charges in
accordance with Sec. 235.3. Further, the Board proposes to add a
sentence in both comments 235.3(b)-1 and 235.3(b)-3 stating that, in
addition to the base component and ad valorem component, an issuer may
be permitted to receive a fraud-prevention adjustment under Sec.
235.4.
[[Page 78113]]
Although the Board does not believe that debit card industry
participants currently misunderstand the relationship between the
interchange fee standards in Sec. 235.3 and the fraud-prevention
adjustment in Sec. 235.4, the proposed revisions would eliminate any
doubt that the maximum permissible interchange fee amount that a
covered issuer may receive for a transaction subject to the interchange
fee standards is the sum of the base component, the ad valorem
component, and, if the covered issuer is eligible, the fraud-prevention
adjustment.
Finally, the Board proposes to remove the first clause of Sec.
235.5(a)(1), which cross-references Sec. 235.5(a)(3) (transition
period for newly covered issuers) and characterizes the latter
paragraph as an exception to the small issuer exemption in Sec.
235.5(a)(1). The Board believes that characterizing Sec. 235.5(a)(3)
as an exception to Sec. 235.5(a)(1) is potentially confusing, as Sec.
235.5(a)(3) adds to, rather than subtracts from, the relief provided in
Sec. 235.5(a)(1) by providing additional, temporary relief to newly
covered issuers that would not otherwise qualify for the relief
provided in Sec. 235.5(a)(1). The proposed revision would clarify the
relationship between these two paragraphs in Sec. 235.5(a) but is not
intended to alter any issuer's eligibility for the small issuer
exemption.
VI. Effective Date of Proposed Revisions
With one exception,\79\ the Board proposes that the revisions
would, if adopted, take effect on the first day of the next calendar
quarter that begins at least 60 days after the final rule is published
in the Federal Register.\80\ Such an implementation period would be
similar to the implementation period of the current interchange fee
standards, which the Board published on July 20, 2011, and became
effective on October 1, 2011.\81\
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\79\ Unlike the other proposed revisions described in this
preamble, the proposed deletion of Sec. 235.5(a)(4) would, if
adopted, take effect on January 1, 2027. See supra note 77.
\80\ Section 302 of the Riegle Community Development and
Regulatory Improvement Act, Public Law 103-325, requires that
amendments to regulations prescribed by a Federal banking agency
that impose additional requirements on insured depository
institutions must take effect on the first day of a calendar quarter
that begins on or after the date of publication in the Federal
Register. See 12 U.S.C. 4802.
\81\ The Board notes that, compared with the original rulemaking
in which the Board adopted current Sec. 235.3, the proposed
revisions would represent a significantly smaller reduction in the
amount of interchange fees that covered issuers may receive for
transactions subject to the interchange fee standards. In addition,
at the time of the original rulemaking, there was significant
uncertainty as to whether payment card networks would implement
different interchange fee schedules for transactions subject to and
exempt from the interchange fee cap. Since that time, all networks
have established different interchange fee schedules for
transactions subject to and exempt from the interchange fee cap.
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Once the proposed revisions are effective, and as described in
sections III.C and IV.C, supra, the proposed base component (14.4
cents), ad valorem component (4.0 basis points multiplied by the value
of the transaction), and fraud-prevention adjustment (1.3 cents) would
be in effect through June 30, 2025. On July 1, 2025, a new base
component, ad valorem component, and fraud-prevention adjustment would
take effect. The Board would determine these amounts using the approach
described in proposed appendix B based on the data reported to the
Board by covered issuers on the Debit Card Issuer Survey in 2024
(concerning debit card transactions performed in calendar year 2023),
and would publish these values in the Federal Register no later than
March 31, 2025.
VII. Request for Comment
The Board invites comment on all aspects of the proposed
revisions.\82\ In addition, the Board invites feedback on the following
specific questions related to the proposal:
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\82\ As noted in section III.A, supra, the Board has reviewed
its construction of the statute and prior analysis regarding the
allowable costs that the Board considered in establishing the
interchange fee standards, and believes that this prior analysis
remains sound. As such, the Board is not inviting comments on the
allowable costs considered for purposes of the interchange fee
standards.
\83\ The transaction-weighted average of per-transaction base
component costs across covered issuers, rounded to the nearest tenth
of one cent, for transactions performed in 2021 was 3.9 cents. For
purposes of comparison, the same average for transactions performed
in 2009 and 2011 was 7.7 cents and 5.1 cents, respectively. The base
component values listed are the product of 3.9 cents and the
relevant fixed multiplier.
\84\ As described in section III.B, supra, this efficiency gap
is represented by the ratio of the transaction-weighted average of
per-transaction base component costs for covered issuers whose
transactions are above the target percentile to that for covered
issuers whose transactions are below the target percentile.
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1. As stated in paragraph (a) of proposed appendix B to Regulation
II, the Board would determine the base component, ad valorem component,
and fraud-prevention adjustment for every two-year period, beginning
with the period from July 1, 2025, to June 30, 2027. Is the proposed
two-year cadence appropriate, or should the Board determine these
amounts more or less frequently?
2. As described in paragraph (c)(1) of proposed appendix B to
Regulation II, the Board would determine the base component as a fixed
multiple of the transaction-weighted average of per-transaction base
component costs (i.e., allowable costs (excluding fraud losses)) across
covered issuers. As described in section III.B, supra, the fixed
multiplier corresponds to the percentage of covered issuer transactions
for which the Board believes covered issuers should fully recover their
base component costs over time. Should the Board select an alternative
cost-recovery target from among the possibilities below, or another
cost-recovery target not included below? If so, why?
3.
----------------------------------------------------------------------------------------------------------------
Efficiency gap with Percentage of covered
Cost-recovery Decline in respect to transaction issuers that would have
target Base component base component processing between fully recovered their
(percentage of Fixed (based on 2021 relative to covered issuers whose base component costs in
covered issuer multiplier data) \83\ current (based transactions are above 2021 had the relevant
transactions) (cents) on 2021 data) and below the cost- base component been in
(%) (%) recovery target (based effect in 2021 (based
on 2021 data) \84\ on 2021 data) (%)
----------------------------------------------------------------------------------------------------------------
Current .............. 21.0 .............. ....................... 77
99.5 4.5 17.6 16 7.7 76
99.0 4.0 15.6 26 5.8 71
* 98.5 3.7 14.4 31 5.2 66
98.0 3.5 13.7 35 4.7 63
95.0 2.7 10.5 50 3.8 52
----------------------------------------------------------------------------------------------------------------
* Proposal.
[[Page 78114]]
4. As described in paragraph (d)(1) of proposed appendix B to
Regulation II, the Board would determine the ad valorem component, for
a particular debit card transaction, as the median ratio of issuer
fraud losses to transaction value among covered issuers, multiplied by
the value of the transaction. Should the Board adopt an alternative
methodology for determining the ad valorem component? If so, why?
5. As described in paragraph (e)(1) of proposed appendix B to
Regulation II, the Board would determine the fraud-prevention
adjustment as the median per-transaction fraud-prevention costs among
covered issuers. Should the Board adopt an alternative methodology for
determining the fraud-prevention adjustment? If so, why?
6. As described in paragraphs (c)(1), (d)(1), and (e)(1) of
proposed appendix B to Regulation II, respectively, the Board proposes
to round the base component to the nearest tenth of one cent, the ad
valorem component to the nearest quarter of one basis point, and the
fraud-prevention adjustment to the nearest tenth of one cent. Further,
as described in paragraph (c)(3) of proposed appendix B to Regulation
II, in determining the base component, the Board proposes to round the
transaction-weighted average of per-transaction allowable costs
(excluding fraud losses) across covered issuers to the nearest tenth of
one cent. Do these rounding conventions provide an appropriate degree
of precision? If not, what alternative rounding conventions should the
Board adopt?
7. As described in paragraphs (c) through (e) of proposed appendix
B to Regulation II, the Board would determine the base component, ad
valorem component, and fraud-prevention adjustment for an applicable
period using data reported on lines 1a, 3a, 5a, 5a.1, and 8b of the
Debit Card Issuer Survey (FR 3064a).
a. Are there any reporting challenges or data quality issues
associated with these line items of which the Board should be aware? If
so, how could the Board address these challenges or issues?
b. Should the Board amend Sec. 235.8 of Regulation II to specify
that a covered issuer is required to retain records supporting the data
that the covered issuer reports on the Debit Card Issuer Survey? Would
this record retention requirement be duplicative of any existing
recordkeeping requirements for covered issuers? If not, what would be
the estimated additional annual burden of this requirement, in terms of
hours and cost, for covered issuers?
8. As described in section VI, with one exception, the Board
proposes that the revisions would take effect on the first day of the
next calendar quarter that begins at least 60 days after the final rule
is published in the Federal Register. Would this proposed effective
date provide sufficient notice to covered issuers, payment card
networks, and other industry stakeholders to prepare for the initial
changes to the base component, ad valorem component, and fraud-
prevention adjustment?
9. As stated in paragraph (f) of proposed appendix B to Regulation
II, going forward, the Board would publish the base component, ad
valorem component, and fraud-prevention adjustment in the Federal
Register no later than March 31 for an applicable period beginning July
1. Would this timeline provide sufficient notice to covered issuers,
payment card networks, and other industry stakeholders to prepare for
changes to these amounts? Should the Board increase or decrease the
period between publication of these values and the beginning of the
next applicable period?
10. Proposed comments 235.3(b)-4 and 235.4(b)-1 would provide that,
for purposes of determining in which two-year period a debit card
transaction is considered to be performed, a debit card transaction is
considered to be performed on the date on which it is settled on an
interbank basis. Is this proposed convention sufficiently clear? For
example, should the Board specify which time zone is controlling for
purposes of determining the date on which a transaction is settled on
an interbank basis? Should the Board adopt an alternative standard,
such as considering a transaction to be performed on the date on which
the cardholder presents the debit card to the merchant for payment?
11. Would any of the proposed technical revisions described in
section V, which are generally intended to make Regulation II clearer,
create unintended consequences?
12. Does the Board's economic analysis of the proposal, set forth
in section VIII.A, appropriately describe the likely impact of the
proposal on various participants in the debit card market? Are there
additional impacts of the proposal that the Board has not considered?
VIII. Regulatory Analyses
A. EFTA Section 904(a) Analysis
1. Statutory Requirement
Section 904(a)(2) of the EFTA requires the Board, in prescribing
regulations to carry out the purposes of EFTA section 920, to prepare
an economic analysis that considers the costs and benefits to financial
institutions, consumers, and other users of electronic fund transfers.
The analysis must address the extent to which additional paperwork will
be required, the effect upon competition in the provision of electronic
fund transfer services among large and small financial institutions,
and the availability of such services to different classes of
consumers, particularly low-income consumers. EFTA section 904(a)(2)
also requires, to the extent practicable, the Board to demonstrate that
the consumer protections of the proposed regulations outweigh the
compliance costs imposed upon consumers and financial institutions. The
Board interprets these requirements as applying with respect to both
proposed and final rules implementing EFTA section 920.
In analyzing the potential effects of the proposal, the Board
considered predictions of economic theory, information regarding debit
card industry structure and practices, and issues raised during the
original Regulation II rulemaking. The analysis also incorporates the
experience of debit card industry participants since the current
interchange fee cap was adopted in 2011.
2. Cost/Benefit Analysis
(a) Effects on Merchants \85\
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\85\ The Board interprets ``other users of electronic fund
transfer services'' in EFTA section 904(a)(2) to refer primarily to
merchants.
---------------------------------------------------------------------------
The Board believes that the primary way in which the proposal would
impact merchants is by lowering their costs of accepting debit card
transactions. The proposal would generally decrease the interchange fee
paid by an acquirer (i.e., a merchant's depository institution) on an
average transaction performed using a debit card issued by a covered
issuer, which would in turn decrease a merchant's costs by decreasing
the merchant discount that the merchant pays to its acquirer for a
debit card transaction.\86\ Although the precise extent to which
acquirers would pass on savings from lower debit card interchange fees
to merchants may vary, competition between acquirers in the industry
should generally result in acquirers passing on savings from lower
[[Page 78115]]
interchange fees to their merchant customers.\87\
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\86\ Data collected by the Board show that, since adoption of
the current interchange fee cap, actual per-transaction interchange
fees for transactions subject to the interchange fee standards have
been close in value to the amount permitted under the interchange
fee cap. Thus, the Board expects that the proposed revisions to the
interchange fee cap will directly lower per-transaction interchange
fees for most transactions subject to the interchange fee standards.
\87\ The extent to which an acquirer passes on savings from
lower interchange fees to a merchant may depend on many factors,
including the merchant's type and size.
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Merchants that experience a decrease in the costs of accepting
debit card transactions may pass on some or all these savings to
consumers in the form of lower prices, foregone future price increases,
or improved products or services.\88\ The extent to which merchants
would pass on such savings to consumers may depend on many factors. For
example, merchants in more competitive markets would be likely to pass
on more of their cost savings to consumers compared with merchants
facing less competition.
---------------------------------------------------------------------------
\88\ In addition, merchants may use savings from lower costs of
accepting debit card transactions to enhance their operations, for
example, by adding staff, improving their facilities, or
implementing new technology.
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Measuring the extent to which merchants pass on cost savings to
consumers, including any decrease in the costs of accepting certain
forms of payment, is generally difficult.\89\ Efforts to measure the
extent to which merchants passed on to consumers any savings associated
with the decrease in the costs of accepting debit card transactions in
the period following the adoption of the current interchange fee cap in
2011 have yielded a wide range of results. For example, in response to
a survey conducted soon after the introduction of the interchange fee
cap, merchants did not consistently report making adjustments to their
prices in response to the interchange fee cap.\90\ By contrast, later
research efforts analyzing data from longer time periods found evidence
that merchants passed on to consumers a portion of their debit card
acceptance costs (e.g., by adjusting their prices) and that the degree
of pass-through depended on merchant size.\91\
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\89\ Potential challenges include (i) a lack of detailed price
and cost data at the merchant level, (ii) contemporaneous changes in
other costs for merchants, (iii) the small magnitude of cost
variation due to changes in interchange fees relative to total
price, and (iv) asymmetric price stickiness in the short term,
meaning that merchants are more likely to increase prices in
response to cost increases than to lower prices in response to cost
decreases. For an overview of research looking to measure merchant
cost pass-through, see Howard Chang, David S. Evans & Daniel D.
Garcia Swartz, The Effect of Regulatory Intervention in Two-Sided
Markets: An Assessment of Interchange-Fee Capping in Australia, 4
Review of Network Economics 328 (2005), https://doi.org/10.2202/1446-9022.1080.
\90\ See Wang, Zhu, Scarlett Schwartz, & Neil Mitchell, The
Impact of the Durbin Amendment on Merchants: A Survey Study, 100
Federal Reserve Bank of Richmond Economic Quarterly 183 (2014),
https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/economic_quarterly/2014/q3/pdf/wang.pdf.
\91\ See, e.g., Vladmir Mukharlyamov & Natasha Sarin, Price
Regulation in Two-Sided Markets: Empirical Evidence from Debit Cards
(last rev. Nov. 28, 2022) (unpublished manuscript), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3328579; Efraim
Berkovich & Zheli He, Rewarding the Rich: Cross Subsidies from
Interchange Fees (Hispanic Leadership Fund, May 3, 2022), https://hispanicleadershipfund.org/wp-content/uploads/2022/05/HLF_Report_RewardingTheRich-InterchangeFees_03May22.pdf.
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Finally, the decrease in costs of accepting debit card transactions
may incentivize some merchants that until now have not accepted debit
cards as a form of payment to begin doing so. In particular, while
debit card acceptance is already high for most in-person transactions,
the proposal may encourage greater adoption of debit cards in market
segments where acceptance may be lower, such as card-not-present (e.g.,
ecommerce) transactions. Another market segment for which merchants may
increase debit card acceptance are small-dollar purchases because, for
this market segment, the proposed decrease in the base component would
substantially reduce debit card acceptance costs as a proportion of the
transaction value. Faced with lower debit card acceptance costs, some
merchants may also look to provide incentives to their customers, or
otherwise steer them, to pay with debit cards over alternative payment
methods.
(b) Effects on Debit Card Issuers \92\
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\92\ The Board interprets ``financial institutions'' in EFTA
section 904(a)(2) to refer primarily to issuers of debit cards.
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The Board believes that the proposal would have a direct effect on
covered issuers but would not directly affect debit card issuers exempt
from the interchange fee cap (exempt issuers).
The primary way in which the proposal would affect covered issuers
would be by lowering their revenue from debit card transactions. In
particular, covered issuers' interchange fee revenue would decline as
the proposal would decrease the average interchange fee they collect on
debit card transactions subject to the interchange fee standards. This
reduction in covered issuers' total debit card interchange fee revenue
could be offset to some extent by the likely continued growth in total
debit card volume, with the offset potentially varying between
different issuers. Debit card popularity has grown substantially since
the current interchange fee cap was adopted; over this period, debit
cards have become the most commonly used noncash payment method in the
United States.\93\ As noted above, further reduction in interchange fee
levels may support continued growth in debit card volumes to the extent
that more merchants accept debit cards as a form of payment or
encourage their customers to use debit cards.
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\93\ Board of Governors of the Federal Reserve System, The
Federal Reserve Payments Study: 2022 Triennial Initial Data Release,
https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm.
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Faced with lower interchange revenue from debit card transactions,
covered issuers may offset some or all lost interchange fee revenue
through a combination of customer fee increases and issuer cost
reductions (e.g., improvements to transaction-processing
efficiency).\94\ Depending on a variety of factors, such adjustments
may make covered issuers' checking account and debit card programs less
attractive to consumers. In response to these adjustments, consumers
may switch to checking account or debit card programs offered by exempt
issuers, or to alternative payment methods such as credit cards and
digital payment methods, potentially leading to a further reduction in
covered issuers' revenues from debit cards.\95\
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\94\ An issuer seeking to reduce costs may reduce transaction-
processing costs and/or other types of costs. Under the proposed
approach, the former could result in a reduction to the interchange
fee cap once data collected by the Board show a reduction in the
transaction-weighted average of per-transaction transaction-
processing costs across covered issuers. Although another way in
which covered issuers could offset a loss in interchange fee revenue
could be through reductions in debit card reward programs, data
collected by the Board show that following the adoption of the
current interchange fee cap, covered issuers significantly limited
or eliminated such programs, suggesting that issuers may not be able
to reduce such programs much further. See generally Board of
Governors of the Federal Reserve System, Regulation II (Debit Card
Interchange Fees and Routing): Reports and Data Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm.
\95\ In addition, the reduction in covered issuers' interchange
fee revenue could theoretically lead some covered issuers,
particularly those serving niche market segments, such as high net-
worth individuals, to downsize or potentially discontinue their
debit card programs.
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The experience following the introduction of the current
interchange fee cap in 2011 provides information about how covered
issuers may adjust their debit card programs in response to the
proposal. Research shows that the adoption of the current interchange
fee cap resulted in covered issuers increasing customer fees on
checking accounts more than they otherwise would have, although these
increases offset the reduction in interchange fee revenue only
partially.\96\ Furthermore,
[[Page 78116]]
the continued growth in debit card popularity since the adoption of
Regulation II, and the lack of a pronounced shift by consumers from
covered issuers' to exempt issuers' debit card programs, suggest that
such fee increases and other adjustments to checking accounts and debit
card programs offered by covered issuers did not make them
substantially less attractive to consumers.\97\ Finally, the Board is
not aware of any evidence that the adoption of the current interchange
fee cap led any covered issuers to discontinue their debit card
programs.
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\96\ Benjamin S. Kay, Mark D. Manuszak & Cindy M. Vojtech,
Competition and Complementarities in Retail Banking: Evidence from
Debit Card Interchange Regulation, 34 Journal of Financial
Intermediation 91 (2018); Mark D. Manuszak & Krzysztof Wozniak, The
Impact of Price Controls in Two-Sided Markets: Evidence from US
Debit Card Interchange Fee Regulation, Finance and Economics
Discussion Series 2017-074, https://www.federal6reserve.gov/econres/feds/files/2017074pap.pdf; Vladmir Mukharlyamov & Natasha Sarin,
Price Regulation in Two-Sided Markets: Empirical Evidence from Debit
Cards (last rev. Nov. 28, 2022) (unpublished manuscript), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3328579.
\97\ See generally Board of Governors of the Federal Reserve
System, Regulation II (Debit Card Interchange Fees and Routing):
Reports and Data Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm.
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By contrast, the proposal would not directly or, the Board
believes, indirectly affect exempt issuers (i.e., those with
consolidated assets under $10 billion).\98\ The experience following
the introduction of the current interchange fee cap in 2011 provides
information about whether exempt issuers are likely to be affected by
the proposal. First, the adoption of the current interchange fee cap
and the statutory exemptions for certain issuers and debit card
transactions led all debit card networks to adopt pricing structures
with different interchange fees for covered and exempt issuers. Second,
data collected by the Board demonstrate that average per-transaction
interchange fees for exempt issuers across all payment card networks
did not decline after the current interchange fee cap was introduced in
2011 and have not declined since then.\99\ Average per-transaction
interchange fees for exempt issuers have remained at a level
substantially higher than average per-transaction interchange fees for
covered issuers, with the latest data collected by the Board
documenting that average per-transaction interchange fees for exempt
issuers increased in 2020 and 2021.\100\
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\98\ The Board collects and reports annual information from
payment card networks about their interchange fees for transactions
subject to and exempt from the interchange fee cap. See Board of
Governors of the Federal Reserve System, Regulation II (Debit Card
Interchange Fees and Routing): Average Debit Card Interchange Fee by
Payment Card Network, https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm. The Board also annually publishes
lists of covered and exempt institutions that issuers, payment card
networks, and other market participants can use to determine which
issuers qualify for the small issuer exemption. See Board of
Governors of the Federal Reserve System, Interchange Fee Standards:
Small Issuer Exemption, https://www.federalreserve.gov/paymentsystems/regii-interchange-fee-standards.htm.
\99\ See Board of Governors of the Federal Reserve System,
Regulation II (Debit Card Interchange Fees and Routing): Average
Debit Card Interchange Fee by Payment Card Network, https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm.
\100\ See id.
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(c) Effects on Consumers and Availability of Services to Different
Classes of Consumers
As discussed above in the context of effects on merchants and debit
card issuers, the proposal could affect consumers in two main ways. On
the one hand, consumers could benefit if merchants pass on savings
associated with the decrease in costs of accepting debit card
transactions in the form of lower prices, forgone future price
increases, or improvements in product or service quality. On the other
hand, consumers could be negatively affected if covered issuers
increase fees on debit cards or checking accounts, or make other
adjustments that make these products less attractive to consumers.
The net effect on consumers, both individually and in the
aggregate, will depend on which of these two effects predominates,
which would in turn depend on many factors and is thus difficult to
predict. As noted above, merchants in more competitive markets would
likely pass on a larger portion of their cost savings to consumers. In
a similar way, in response to declines in interchange fee revenue,
covered issuers in more competitive markets would be less likely to
increase fees or make other changes that negatively affect consumers.
Covered issuers that face strong competition from exempt issuers may be
less likely to raise fees, as doing so could increase the probability
that customers switch to these competing institutions.
In addition, the effect of the proposal could differ between
particular classes of consumers in several ways. First, if the proposal
results in merchants further increasing debit card acceptance (e.g.,
for card-not-present transactions), consumers' ability to make such
payments could increase, generating benefits to consumers without
access to alternative non-cash payment methods, such as credit cards.
Second, if the proposal results in covered issuers increasing fees,
banking services could become less accessible to lower-income consumers
who may be more sensitive to such fees.\101\
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\101\ However, the Board notes that the unbanked rate in the
United States has been steadily declining over time, including after
the introduction of the current interchange fee cap in 2011.
According to the data collected by the Federal Deposit Insurance
Corporation, the rate of unbanked in the population fell from 8.2
percent in 2011 to an all-time low of 4.5 percent in 2021. See
Federal Deposit Insurance Corporation, 2021 FDIC National Survey of
Unbanked and Underbanked Households, https://www.fdic.gov/analysis/household-survey/2021report.pdf.
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(d) Additional Paperwork
The proposal would not substantively alter the reporting and
recordkeeping requirements that Sec. 235.8 of Regulation II imposes on
covered issuers and networks, and would not alter the recordkeeping
requirement for exempt issuers.\102\ Regulation II does not impose any
reporting or recordkeeping requirements on consumers or merchants.
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\102\ However, the Board requests comment on whether Sec. 235.8
of Regulation II should be amended to specify that a covered issuer
is required to retain records supporting the data that the covered
issuer reports on the Debit Card Issuer Survey. See section VII,
supra (Question 6(b)).
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(e) Effects Upon Competition in the Provision of Electronic Banking
Services 103
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\103\ Although EFTA section 904(a)(2) requires the Board to
consider the effects upon competition in the provision of electronic
banking services among large and small financial institutions, the
Board is considering the impact of the final rule on competition
generally, including competition between large and small financial
institutions.
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The proposal could affect competition between covered and exempt
issuers by reducing the average per-transaction debit card interchange
fee received by covered issuers without affecting the amount received
by exempt issuers. As noted above, the competitive effect of any
adjustments made by covered issuers to their fee structures in response
to the reduction in interchange fee revenue would depend on the degree
of substitution between exempt and covered issuers. Research suggests
that competition between smaller and larger depository institutions is
weaker than competition between large depository institutions or
competition between small depository institutions, likely because these
institutions serve different customer bases.\104\ In addition,
[[Page 78117]]
data collected by the Board indicates that the proportion of debit card
transactions attributable to covered and exempt issuers did not
significantly change before and after the adoption of the current
interchange fee cap.\105\ In light of this evidence, the Board does not
expect the proposal to have a significant impact on competitive
dynamics between the two groups of issuers. The Board further does not
believe that the proposal would affect competition between debit card
networks.
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\104\ See, e.g., Robert M. Adams, Kenneth P. Brevoort &
Elizabeth K. Kiser, Who Competes with Whom? The Case of Depository
Institutions, 55 Journal of Industrial Economics 141 (2007); Andrew
M. Cohen & Michael J. Mazzeo, Market Structure and Competition Among
Retail Depository Institutions, 89 Review of Economics and
Statistics 60 (2007); Timothy H. Hannan & Robin A. Prager, The
Profitability of Small Single-Market Banks in an Era of Multi-Market
Banking, 33 Journal of Banking and Finance 263 (2009).
\105\ See generally Board of Governors of the Federal Reserve
System, Regulation II (Debit Card Interchange Fees and Routing):
Reports and Data Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm.
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(f) Consumer Protection and Compliance Costs 106
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\106\ To the extent that the interchange fee standards and
fraud-prevention adjustment constitute consumer protections, the
Board believes that the aim of those protections is broadly to
benefit consumers, rather than to address specific consumer rights.
As such, the Board has, to the extent practicable, considered
broadly whether the overall benefits of the proposed revisions to
consumers outweigh other costs imposed on consumers or financial
institutions.
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Based on the analysis above, the Board cannot, at this time,
determine whether the potential benefits of the proposal to consumers
exceed the possible costs imposed on consumers and financial
institutions. As described above, the proposal may yield benefits for
consumers, but the magnitude of these benefits will depend on the
behavior of various participants in the debit card industry. The
proposal may also impose costs on consumers and financial institutions,
but the net effect on any individual or entity will depend on its
particular circumstances. Because the overall effects of the proposal
on consumers and on financial institutions are dependent on a variety
of factors, the Board cannot determine at this time whether the
potential benefits of the proposal to consumers exceed the possible
costs imposed on consumers and financial institution.
B. Statutory Considerations for Proposed Revisions to the Interchange
Fee Standards
In prescribing regulations to establish interchange fee standards,
EFTA section 920(a)(4) requires the Board to consider the functional
similarity between debit card transactions and checking transactions
that are required within the Federal Reserve bank system to clear at
par.\107\
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\107\ The same provision of the statute additionally requires
the Board to (i) distinguish between certain types of costs incurred
by debit card issuers and (ii) consult with certain other agencies.
The allowable costs that the Board considered in establishing the
interchange fee standards are discussed in section III.A, supra. The
interagency consultation requirement is discussed in section VIII.D,
infra.
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The Board considered the functional similarity between debit card
transactions and checking transactions when the Board adopted
Regulation II, and this analysis informed certain decisions the Board
made when the Board established the interchange fee standards.\108\ The
similarities noted by the Board included the fact that both types of
transactions result in a debit to an asset account; both involve
electronic processing and deposit; both involve processing fees paid by
merchants to banks and other intermediaries; and both have similar
settlement timeframes. The differences noted by the Board included the
closed nature of debit card systems compared to the open check clearing
and collection system (and limitations on routing a debit card
transaction based on the set of networks the issuer has enabled or that
the merchant accepts); the payment authorization that is an integral
part of debit card transactions (but not check transactions), which
generally guarantees that the transaction will not be returned for
insufficient funds or certain other reasons (e.g., a closed account);
processing and collection costs incurred by the issuer (analogous to
the payor's bank) for debit card transactions but not for check
transactions; par clearance in the check system; payee deposit and
availability; the amount of time in which a payor may reverse a
transaction (which is much longer in the case of a debit card
transaction compared to a check); and the increasing popularity of
debit card payments (and declining use of check).
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\108\ See 76 FR 43393, 43399 (July 20, 2011). For example,
similarities and differences between debit card transactions and
check transactions were factors in the Board's decision to include
or exclude from allowable costs a number of types of costs incurred
by debit card issuers. See 76 FR at 43428 (July 20, 2011).
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The Board has reviewed its analysis from 2011 regarding the
functional similarity between debit card transactions and checking
transactions and believes that the factual predicates underlying that
analysis remain unchanged. For that reason, the Board continues to
believe that its prior analysis remains sound.
C. Statutory Considerations for Proposed Revisions to the Fraud
Prevention Adjustment 109
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\109\ All data used in this section have been sourced from the
Board's Debit Card Issuer Surveys and Payment Card Network Surveys.
Reports and data tables published by the Board, as well as notes
regarding the figures cited in this section, may be found on the
Board's website. See Board of Governors of the Federal Reserve
System, Regulation II (Debit Card Interchange Fees and Routing):
Reports and Data Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm.
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1. Statutory Requirement
EFTA section 920(a)(5)(B)(ii) requires the Board, in prescribing
regulations for any fraud-prevention adjustment, to consider (i) the
nature, type, and occurrence of fraud in debit card transactions; (ii)
the extent to which the occurrence of fraud depends on whether
authorization in a debit card transaction is based on signature,
personal identification number (PIN), or other means; (iii) the
available and economical means by which fraud on debit card
transactions may be reduced; (iv) the fraud-prevention and data-
security costs expended by each party involved in debit card
transactions (including consumers, persons who accept debit cards as a
form of payment, financial institutions, retailers, and payment card
networks); (v) the costs of fraudulent transactions absorbed by each
party involved in such transactions (including consumers, persons who
accept debit cards as a form of payment, financial institutions,
retailers, and payment card networks); (vi) the extent to which
interchange fees have in the past reduced or increased incentives for
parties involved in debit card transactions to reduce fraud on such
transactions; and (vii) such other factors as the Board considers
appropriate.\110\ The Board has considered the factors set forth in
EFTA section 920(a)(5)(B)(ii) in light of the latest data from covered
issuers from 2021 and the cumulative data collected from covered
issuers since the original Regulation II rulemaking.
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\110\ EFTA section 920(a)(5)(B)(ii) does not specify precisely
how the Board should evaluate each of these factors.
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When the Board adopted the current fraud-prevention adjustment of
1.0 cent, the Board focused on one factor in particular: the fraud-
prevention costs expended by various parties involved in debit card
transactions.\111\ As discussed below, the Board believes that all
parties continue to incur fraud-prevention costs and that the Board's
proposed methodology for determining the fraud-prevention adjustment
appropriately considers those costs.
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\111\ See 77 FR 46258, 46265 (Aug. 3, 2012). The Board also
considered the costs of losses absorbed by different parties to
fraudulent transactions when it developed the fraud-prevention
standards, which the Board does not propose to revise. See 77 FR at
46270. The Board additionally considered certain other factors in
connection with the overall structure of the fraud-prevention
adjustment, such as the incentives created by the adjustment. See 76
FR 43477, 43483 (July 20, 2011).
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[[Page 78118]]
Notably, as described below, data reported by covered issuers since
the adoption of Regulation II show that the incidence, types, and
relative rates of absorption of fraud losses have changed. As noted in
section III.B, supra, in connection with the Board's proposed revisions
to the ad valorem component, the Board has observed an overall increase
in fraud losses to all parties related to covered issuer transactions,
but the share of such fraud losses absorbed by covered issuers has
declined. Changes in the median ratio of issuer fraud losses to
transaction value among covered issuers would be reflected in the
Board's proposed revisions to the ad valorem component.
2. Factors
(a) Nature, Type, and Occurrence of Fraud
With respect to covered issuer transactions, fraud losses to all
parties as a share of transaction value increased from 9.0 basis points
in 2009 to 17.5 basis points in 2021, and have displayed an upward
trend since 2011 (the first year for which the Debit Card Issuer Survey
was mandatory). In 2021, the most commonly reported and highest-value
fraud types for covered issuer transactions were card-not-present
fraud, lost and stolen card fraud, and counterfeit fraud. Card-not-
present fraud, at 8.6 basis points of transaction value, accounted for
almost half of overall fraud in 2021. Lost and stolen card fraud
accounted for 4.6 basis points of transaction value, and counterfeit
card fraud accounted for 3.4 basis points of transaction value. In
2009, counterfeit card fraud, card-not-present fraud, and lost and
stolen card fraud accounted for 4.3 basis points, 1.8 basis points, and
1.5 basis points, respectively, as a share of transaction value.
(b) Extent to Which the Occurrence of Fraud Depends on Authentication
Mechanism
Overall fraud incidence for covered issuer transactions
approximately doubled from 2009 to 2021, and dual-message
(traditionally mainly signature-authenticated) debit card transactions
exhibited a considerably higher fraud incidence than single-message
(traditionally mainly PIN-authenticated) debit card transactions, as
has been the case since 2009. In 2021, 0.11 percent of covered issuer
transactions were reported as fraudulent. Covered issuers reported as
fraudulent 0.13 percent of dual-message transactions and 0.02 percent
of single-message transactions. Across all covered issuer transactions,
the average loss for dual-message transactions was 8.6 cents per
transaction and represented 17.5 basis points of transaction value. For
single-message transactions, the average loss was 1.9 cents per
transaction and represented 4.2 basis points of transaction value. In
2009, 0.04 percent of covered issuer transactions were reported as
fraudulent. The average loss for dual-message transactions was 4.7
cents per transaction and represented 12.7 basis points of transaction
value. The average loss for single-message transactions was 1.3 cent
per transaction and represented approximately 3.2 basis points of
transaction value.
The differential in fraud losses between single- and dual-message
transactions can be explained in part by differences in the use of
single- and dual-message networks for card-not-present transactions. As
noted above, card-not-present fraud accounted for almost half of
overall fraud on covered issuer transactions in 2021, and single
message networks continue to be used relatively rarely for card-not-
present transactions. In 2021, the percentage of card-not-present
transactions out of the total number and value of all debit card
transactions processed over single-message networks, at 6.1 and 6.7
percent, respectively, continued to be significantly lower than the
analogous percentages for dual-message networks, at 44.2 and 60.7
percent, respectively.
(c) Available and Economical Means by Which Fraud May Be Reduced
In response to the Board's voluntary survey of covered issuers
concerning transactions performed in 2009, covered issuers identified
several categories of activities used to detect, prevent, and mitigate
fraudulent debit card transactions, including transaction monitoring;
merchant blocking; card activation and authentication systems; PIN
customization; system and application security measures, such as
firewalls and virus protection software; and ongoing research and
development focused on making fraud-prevention activities more
effective.\112\ Since that time, the Board identified tokenization as
an important emerging fraud-prevention technique, and added it to the
list of fraud-prevention activities starting from the 2019 Debit Card
Issuer Survey.\113\
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\112\ See 77 FR 46258, 46261 (Aug. 3, 2012).
\113\ See 84 FR 65815 (Nov. 29, 2019).
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(d) Fraud-Prevention Costs Expended by Parties Involved in Debit Card
Transactions
When the Board adopted current Sec. 235.4 in 2012, the Board
reviewed fraud-prevention costs expended by parties involved in debit
card transactions.\114\ The Board continues to believe that all parties
involved in debit card transactions incur fraud-prevention costs. For
example, some consumers routinely monitor their accounts for
unauthorized debit card purchases, but the opportunity cost of
consumers' time to monitor their account is difficult to put into
monetary terms. Merchants and acquirers incur costs for fraud-
prevention tools, such as terminals that enable merchants to use
various card- and cardholder-authentication mechanisms, address
verification, geolocation services, and data-encryption technologies.
Merchants may purchase services from third parties and may also develop
their own fraud-prevention tools. In addition, merchants may also take
steps and incur costs to secure data and comply with Payment Card
Industry Data Security Standards (PCI-DSS) and other fraud-prevention
standards.
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\114\ See 77 FR at 46261-62.
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As discussed in section IV of this preamble, supra, the Board has
collected data from covered issuers concerning the costs incurred by
covered issuers in connection with debit card transactions performed in
calendar years 2011, 2013, 2015, 2017, 2019, and 2021. These data show
that fraud-prevention costs incurred by covered issuers have risen
since 2009, such that the median per-transaction fraud-prevention costs
among covered issuers was 1.3 cents in 2021.
(e) Costs of Fraudulent Transactions Absorbed by Different Parties
Involved in Fraudulent Transactions
Most fraud losses associated with covered issuer transactions in
2021 were borne by covered issuers and merchants. In 2009, covered
issuers, merchants, and cardholders bore 61.2 percent, 38.3 percent,
and 0.5 percent of these fraud losses, respectively. In 2021, covered
issuers, merchants, and cardholders bore 33.5 percent, 47.0 percent,
and 19.5 percent of fraud losses, respectively. This shift reflects a
number of factors. First, card-not-present transactions grew from 9.8
percent of covered issuer transactions in 2009 to 32.1 percent of
covered issuer transactions in 2021. Second, card-not-present fraud
accounted for almost half of overall fraud in 2021, and merchants bear
a greater share of fraud losses for this type of transactions (almost
two-thirds of card-not-present fraud in 2021). Third, merchants
absorbed an increasing share of fraud losses across almost all
transaction categories and fraud types in
[[Page 78119]]
2021, relative to 2009. For example, merchants' share of fraud losses
has also increased over time for single-message transactions, from
around 4 percent in 2009 to 31.9 percent in 2021.
(f) Extent to Which Interchange Transaction Fees Have in the Past
Affected Fraud-Prevention Incentives
In 2012, the Board noted that issuers have a strong incentive to
protect cardholders and reduce fraud independently of interchange fees,
and that competition among issuers for cardholders suggested that
protecting cardholders from fraud is good business practice for
issuers. At the time, merchants commented that, historically, higher
interchange fee revenue for signature debit relative to PIN debit may
have encouraged issuers to promote the use of signature debit over PIN
debit, even though signature debit had substantially higher rates of
fraud.\115\
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\115\ 77 FR at 46262.
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The Board continues to believe that covered issuers have an
incentive to protect cardholders and reduce fraud, despite a reduction
in the proportion of fraud losses borne by covered issuers and an
increase in the proportion born by cardholders. Covered issuers
continue to bear more than a quarter of all fraud losses, which means
that their efforts to reduce fraud rates translate directly into lower
fraud losses. Moreover, competition with other debit card issuers
continues to provide downward pressure on the proportion of fraud
losses that an issuer passes on to its cardholders, as passing on more
fraud losses to cardholders increases the likelihood that they switch
to competing issuers. Notwithstanding the adoption of the interchange
fee standards and the fraud-prevention adjustment, the median per-
transaction fraud-prevention costs among covered issuers has risen
since 2009, to 1.3 cents per transaction in 2021.
Furthermore, data collected by the Board show that interchange fees
on most transactions subject to the interchange fee cap are at or close
to the cap, including for different authentication methods, which
suggests that covered issuers have no incentives to promote the use of
networks or authentication mechanisms that have higher rates of fraud.
D. Interagency Consultation
In addition to the economic analysis provided above, EFTA section
904(a)(2) requires the Board to consult with the other agencies that
have enforcement authority under the EFTA on any rulemakings related to
EFTA section 920.\116\ Separately, EFTA section 920(a)(4)(C) requires
the Board to consult with certain other agencies in prescribing
regulations under EFTA section 920(a)(3)(A).\117\ The Board consulted
with each of the relevant agencies prior to issuing this proposal.
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\116\ These agencies include the Office of the Comptroller of
the Currency (OCC), the Federal Deposit Insurance Corporation
(FDIC), the National Credit Union Administration (NCUA), the
Department of Transportation, the Securities and Exchange
Commission, the Consumer Financial Protection Bureau (CFPB), and the
Federal Trade Commission. See EFTA section 918.
\117\ These agencies include the OCC, FDIC, Office of Thrift
Supervision, NCUA, Small Business Administration (SBA), and CFPB.
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E. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
requires an agency to consider the impact of its rules on small
entities. In connection with a proposed rule, the RFA generally
requires an agency to prepare an Initial Regulatory Flexibility
Analysis (IRFA) describing the impact of the rule on small entities,
unless the head of the agency certifies that the proposal will not have
a significant economic impact on a substantial number of small entities
and publishes such certification along with a statement providing the
factual basis for such certification in the Federal Register. An IRFA
must contain (i) a description of the reasons why action by the agency
is being considered; (ii) a succinct statement of the objectives of,
and legal basis for, the proposal; (iii) a description of, and, where
feasible, an estimate of the number of small entities to which the
proposal will apply; (iv) a description of the projected reporting,
recordkeeping, and other compliance requirements of the proposal,
including an estimate of the classes of small entities that will be
subject to the requirement and the type of professional skills
necessary for preparation of the report or record; (v) an
identification, to the extent practicable, of all relevant Federal
rules that may duplicate, overlap with, or conflict with the proposal;
and (vi) a description of any significant alternatives to the proposal
that accomplish its stated objectives.
The Board is providing an IRFA with respect to the proposal. The
Board invites comment on all aspects of this IRFA.
1. Reasons Action Is Being Considered
The Board proposes revisions to the interchange fee standards in
Sec. 235.3 and the fraud-prevention adjustment in Sec. 235.4 of
Regulation II.\118\ Under the proposal, the Board would determine, for
every two-year period, the base component, ad valorem component, and
fraud-prevention adjustment based on the latest data reported to the
Board by covered issuers on the Debit Card Survey using the methodology
described in proposed appendix B. Initially, the base component and the
ad valorem component would decrease to 14.4 cents and 4.0 basis points
(multiplied by the value of the transaction), respectively, while the
fraud-prevention adjustment would increase to 1.3 cents, for debit card
transactions performed from the effective date of the final rule to
June 30, 2025.
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\118\ As described in section V, supra, the Board additionally
proposes a set of technical revisions to Regulation II. Because
these proposed revisions are not intended to be substantive changes,
the Board's IRFA does not address these aspects of the proposal.
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As described in section III.B, supra, one key rationale for the
proposal is the significant decline in the average cost of a debit card
transaction, as measured by the transaction-weighted average of per-
transaction base component costs across covered issuers, since the
Board first adopted Sec. 235.3. In addition, in lieu of an ad hoc
approach to updating the interchange fee cap components, the Board
believes that, as much as practicable, these components should be
updated regularly and predictably to reflect changes in the allowable
costs and fraud-prevention costs incurred by covered issuers as those
changes occur.
2. Objectives of and Legal Basis for the Proposal
Consistent with EFTA section 920(a)(3), the proposed revisions to
Sec. 235.3 are intended to ensure that the interchange fee standards
will be effective going forward for assessing whether, for a debit card
transaction subject to the interchange fee standards, the amount of any
interchange fee received or charged by a debit card issuer is
reasonable and proportional to the cost incurred by the issuer with
respect to the transaction. Consistent with EFTA section 920(a)(5), the
proposed revisions to Sec. 235.4 are intended to ensure that eligible
covered issuers receive an adjustment to any interchange fee permitted
under Sec. 235.3 in an amount that is reasonably necessary to make
allowance for the costs incurred by the covered issuer in preventing
fraud in relation to debit card transactions involving that issuer.
3. Description and Estimate of the Number of Small Entities
The proposed revisions to Sec. 235.3 and Sec. 235.4 apply to
debit card issuers subject to the interchange fee standards
[[Page 78120]]
(i.e., covered issuers). Pursuant to EFTA section 920(a)(6) and Sec.
235.5(a), a debit card issuer that, together with its affiliates, has
assets of less than $10 billion as of the end of the calendar year
preceding the date of the debit card transaction is exempt from the
interchange fee standards, provided that such issuer holds the account
that is debited.
The Board generally uses the industry-specific size standards
adopted by the SBA for purposes of estimating the number of small
entities to which a proposal would apply.\119\ The SBA has adopted size
standards that provide that card-issuing institutions with average
assets of less than $850 million over the preceding year (based on the
institution's four quarterly financial statements) are considered small
entities.\120\ Because all such issuers would qualify for the exemption
from the interchange fee standards in Sec. 235.5(a) provided that they
hold the account that is debited, the proposed revisions would not
apply to any small entities.
---------------------------------------------------------------------------
\119\ See 13 CFR 121.210. Consistent with the SBA's General
Principles of Affiliation, the Board generally includes the assets
of all domestic and foreign affiliates toward the applicable size
threshold when determining whether to classify a particular entity
as a small entity. See 13 CFR 121.103.
\120\ See 13 CFR 121.201 (sector 522210). Although this size
standard applies to credit card-issuing institutions, the Board
believes that the same size standard should apply to debit card-
issuing institutions.
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4. Description of Compliance Requirements
The proposal would not substantively alter the reporting or
recordkeeping requirements that apply to debit card issuers and payment
card networks in Sec. 235.8 of Regulation II.\121\ Rather, the
proposed revisions would adjust the amount of any interchange fee that
a covered issuer may receive or charge with respect to a debit card
transaction subject to the interchange fee standards. Because
interchange fees are collected by networks from acquirers and paid to
issuers, a covered issuer should not need to make any changes to its
systems to ensure that the amount of any interchange fee does not
exceed the amount permitted under Regulation II.
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\121\ However, the Board requests comment on whether Sec. 235.8
of Regulation II should be amended to specify that a covered issuer
is required to retain records supporting the data that the covered
issuer reports on the Debit Card Issuer Survey. See section VII,
supra (Question 6(b)).
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5. Duplicative, Overlapping, and Conflicting Rules
The Board is not aware of any federal rules that may duplicate,
overlap with, or conflict with the proposal.
6. Significant Alternatives Considered
As described in section III.B, supra, the Board considered several
alternative methodologies for determining the base component. In
addition, the Board considered a variety of different cost-recovery
targets from which the fixed multiplier for determining the base
component under the proposed formula is derived. However, due to the
statutory exemption from the interchange fee standards for debit card
issuers with consolidated assets under $10 billion that hold the
account that is debited, the Board does not believe that any of the
alternatives considered by the Board would have affected the economic
impact of the proposal on small entities.
F. Paperwork Reduction Act
Regulation II contains ``collections of information'' within the
meaning of the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501-
3521). In accordance with the requirements of the PRA, the Board may
not conduct or sponsor, and a respondent is not required to respond to,
an information collection unless it displays a currently valid Office
of Management and Budget (OMB) control number. The Board reviewed the
proposal under the authority delegated to the Board by OMB.
Sections 235.8(a) and (b) of Regulation II (12 CFR 235.8(a) and
(b)) currently require the reporting of information to the Board, and
this reporting requirement is conducted in the form of two surveys
collected by the Board: the Debit Card Issuer Survey (FR 3064a; OMB No.
7100-0344) and Payment Card Network Survey (FR 3064b; OMB No. 7100-
0344). The proposal would amend section 235.8(a) of Regulation II to
reflect the reporting frequency of the FR 3064a and FR 3064b surveys.
No revisions to these surveys are being proposed at this time, but the
Board is proposing to extend the FR 3064a and FR 3064b for three years.
However, the Board requests comment on whether Sec. 235.8 of
Regulation II should be amended to specify that a covered issuer is
required to retain records supporting the data that the covered issuer
reports on the Debit Card Issuer Survey. See section VII.6, supra
(Question 6(b)). The Board may revise Sec. 235.8 of Regulation II
based on comments received in response to this question.
Comments are invited on the following:
(a) Whether the collections of information are necessary for the
proper performance of the Board's functions, including whether the
information has practical utility;
(b) The accuracy of the Board's estimates of the burden of the
information collections, including the validity of the methodology and
assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
Comments on aspects of this document that may affect reporting,
recordkeeping, or disclosure requirements and burden estimates should
be sent to the addresses listed in the ADDRESSES section. A copy of the
comments may also be submitted to the OMB desk officer for the
Agencies: By mail to U.S. Office of Management and Budget, 725 17th
Street NW, #10235, Washington, DC 20503 or by facsimile to (202) 395-
5806, Attention, Federal Banking Agency Desk Officer.
Proposed Extension, Without Revision, of the Following Information
Collection
(1) Collection title: Interchange Transaction Fees Survey.
Collection identifier: FR 3064.
OMB control number: 7100-0344.
General description of report: This information collection
comprises the following reports:
Debit Card Issuer Survey (FR 3064a) collects data from issuers of
debit cards (including general-use prepaid cards) that, together with
their affiliates, have assets of $10 billion or more, including
information regarding the volume and value of debit card transactions;
chargebacks and returns; costs of authorization, clearance, and
settlement of debit card transactions; other costs incurred in
connection with particular debit card transactions; fraud prevention
costs and fraud losses; and interchange fee revenue.
Payment Card Network Survey (FR 3064b) collects data from payment
card networks, including the volume and value of debit card
transactions; interchange fees; network fees; and payments and
incentives paid by
[[Page 78121]]
networks to acquirers, merchants, and issuers.
The data from the FR 3064a and FR 3064b are used to fulfill a
statutory requirement that the Board disclose certain information
regarding debit card transactions on a biennial basis. In addition, the
Board uses data from the Payment Card Network Survey (FR 3064b) to
publicly report on an annual basis the extent to which networks have
established separate interchange fees for exempt and covered issuers.
Frequency: Annual and biennial.
Affected public: Businesses or other for-profit.
Respondents: Debit card issuers and payment card networks.
Estimated number of respondents:
FR 3064a--534.
FR 3064b--15.
Estimated average hours per response:
FR 3064a--160.
FR 3064b--75.
Estimated annual burden hours:
FR 3064a--85,440.
FR 3064b--1,125.
G. Solicitation of Comments on the Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board has sought to present the proposal in a
simple and straightforward manner and invites comment on the use of
plain language and whether any part of the proposal could be more
clearly stated.
H. Providing Accountability Through Transparency Act of 2023
The Providing Accountability Through Transparency Act of 2023 (5
U.S.C. 553(b)(4)) requires that a notice of proposed rulemaking include
the internet address of a summary of not more than 100 words in length
of the proposed rule, in plain language, that shall be posted on the
internet website under section 206(d) of the E-Government Act of 2002
(44 U.S.C. 3501 note).
In summary, the Board requests comment on a proposal to update the
debit card interchange fee cap, which the Board established in 2011,
based on the latest data reported to the Board concerning the costs
incurred by large debit card issuers. The Board also requests comment
on a proposal to establish an approach for updating the interchange fee
cap every other year going forward.
The proposal and such a summary can be found at https://www.regulations.gov and https://www.federalreserve.gov/supervisionreg/reglisting.htm.
List of Subjects in 12 CFR Part 235
Banks, banking, Debit card routing, Electronic debit transactions,
Interchange transaction fees.
Authority and Issuance
For the reasons set forth in the preamble, the Board is proposing
to revise Regulation II, 12 CFR part 235, as follows:
PART 235--DEBIT CARD INTERCHANGE FEES AND ROUTING (REGULATION II)
Sec.
235.1 Authority and purpose.
235.2 Definitions.
235.3 Reasonable and proportional interchange transaction fees.
235.4 Fraud-prevention adjustment.
235.5 Exemptions.
235.6 Prohibition on circumvention, evasion, and net compensation.
235.7 Limitations on payment card restrictions.
235.8 Reporting requirements and record retention.
235.9 Administrative enforcement.
Appendix A to Part 235--Official Board Commentary on Regulation II
Appendix B to Part 235--Determination of Base Component, Ad Valorem
Component, and Fraud-Prevention Adjustment
Authority: 15 U.S.C. 1693o-2.
Sec. 235.1 Authority and purpose.
(a) Authority. This part is issued by the Board of Governors of the
Federal Reserve System (Board) under section 920 of the Electronic Fund
Transfer Act (EFTA) (15 U.S.C. 1693o-2, as added by section 1075 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law
111-203, 124 Stat. 1376 (2010)).
(b) Purpose. This part implements the provisions of section 920 of
the EFTA, including standards for reasonable and proportional
interchange transaction fees for electronic debit transactions,
standards for receiving a fraud-prevention adjustment to interchange
transaction fees, exemptions from the interchange transaction fee
limitations, prohibitions on evasion and circumvention, prohibitions on
payment card network exclusivity arrangements and routing restrictions
for debit card transactions, and reporting requirements for debit card
issuers and payment card networks.
Sec. 235.2 Definitions.
For purposes of this part:
(a) Account:
(1) Means transaction, savings, or other asset account (other than
an occasional or incidental credit balance in a credit plan)
established for any purpose and that is located in the United States;
and
(2) Does not include an account held under a bona fide trust
agreement that is excluded by section 903(2) of the Electronic Fund
Transfer Act and rules prescribed thereunder.
(b) Acquirer means a person that contracts directly or indirectly
with a merchant to provide settlement for the merchant's electronic
debit transactions over a payment card network. An acquirer does not
include a person that acts only as a processor for the services it
provides to the merchant.
(c) Affiliate means any company that controls, is controlled by, or
is under common control with another company.
(d) Cardholder means the person to whom a debit card is issued.
(e) Control of a company means:
(1) Ownership, control, or power to vote 25 percent or more of the
outstanding shares of any class of voting security of the company,
directly or indirectly, or acting through one or more other persons;
(2) Control in any manner over the election of a majority of the
directors, trustees, or general partners (or individuals exercising
similar functions) of the company; or
(3) The power to exercise, directly or indirectly, a controlling
influence over the management or policies of the company, as the Board
determines.
(f) Covered issuer means, for a particular calendar year, an issuer
that, together with its affiliates, has assets of $10 billion or more
as of the end of the preceding calendar year.
(g) Debit card:
(1) Means any card, or other payment code or device, issued or
approved for use through a payment card network to debit an account,
regardless of whether authorization is based on signature, personal
identification number (PIN), or other means, and regardless of whether
the issuer holds the account, and
(2) Includes any general-use prepaid card; and
(3) Does not include:
(i) Any card, or other payment code or device, that is redeemable
upon presentation at only a single merchant or an affiliated group of
merchants for goods or services; or
(ii) A check, draft, or similar paper instrument, or an electronic
representation thereof.
(h) Designated automated teller machine (ATM) network means either:
(1) All ATMs identified in the name of the issuer; or
[[Page 78122]]
(2) Any network of ATMs identified by the issuer that provides
reasonable and convenient access to the issuer's customers.
(i) Electronic debit transaction:
(1) Means the use of a debit card by a person as a form of payment
in the United States to initiate a debit to an account, and
(2) Does not include transactions initiated at an ATM, including
cash withdrawals and balance transfers initiated at an ATM.
(j) General-use prepaid card means a card, or other payment code or
device, that is--
(1) Issued on a prepaid basis in a specified amount, whether or not
that amount may be increased or reloaded, in exchange for payment; and
(2) Redeemable upon presentation at multiple, unaffiliated
merchants for goods or services.
(k) Interchange transaction fee means any fee established, charged,
or received by a payment card network and paid by a merchant or an
acquirer for the purpose of compensating an issuer for its involvement
in an electronic debit transaction.
(l) Issuer means any person that authorizes the use of a debit card
to perform an electronic debit transaction.
(m) Merchant means any person that accepts debit cards as payment.
(n) Payment card network means an entity that:
(1) Directly or indirectly provides the proprietary services,
infrastructure, and software that route information and data to an
issuer from an acquirer to conduct the authorization, clearance, and
settlement of electronic debit transactions; and
(2) A merchant uses in order to accept as a form of payment a brand
of debit card or other device that may be used to carry out electronic
debit transactions.
(o) Person means a natural person or an organization, including a
corporation, government agency, estate, trust, partnership,
proprietorship, cooperative, or association.
(p) Processor means a person that processes or routes electronic
debit transactions for issuers, acquirers, or merchants.
(q) Route means to direct and send information and data to an
unaffiliated entity or to an affiliated entity acting on behalf of an
unaffiliated entity.
(r) United States means the States, territories, and possessions of
the United States, the District of Columbia, the Commonwealth of Puerto
Rico, or any political subdivision of any of the foregoing.
Sec. 235.3 Reasonable and proportional interchange transaction fees.
(a) In general. The amount of any interchange transaction fee that
an issuer may receive or charge with respect to an electronic debit
transaction shall be reasonable and proportional to the cost incurred
by the issuer with respect to the electronic debit transaction.
(b) Reasonable and proportional fees. An issuer complies with the
requirements of paragraph (a) of this section only if each interchange
transaction fee received or charged by the issuer for an electronic
debit transaction is no more than the sum of--
(1) For an electronic debit transaction performed from October 1,
2011, to [one calendar day prior to effective date of final rule], a
base component of 21.0 cents, and an ad valorem component of 5.0 basis
points multiplied by the value of the transaction; and
(2) For an electronic debit transaction performed from [effective
date of final rule], to June 30, 2025, a base component of 14.4 cents,
and an ad valorem component of 4.0 basis points multiplied by the value
of the transaction.
(c) Determination of base component and ad valorem component. For
every two-year period, beginning with the period from July 1, 2025, to
June 30, 2027, the Board will determine the base component and the ad
valorem component using the approach described in appendix B to this
part.
Sec. 235.4 Fraud-prevention adjustment.
(a) In general. In addition to any interchange transaction fee an
issuer receives or charges in accordance with Sec. 235.3, and subject
to paragraph (c) of this section, an issuer may receive or charge an
amount of no more than--
(1) For an electronic debit transaction performed from October 1,
2011, to [one calendar day prior to effective date of final rule], a
fraud-prevention adjustment of 1.0 cent; and
(2) For an electronic debit transaction performed from [effective
date of final rule], to June 30, 2025, a fraud-prevention adjustment of
1.3 cents.
(b) Determination of fraud-prevention adjustment. For every two-
year period, beginning with the period from July 1, 2025, to June 30,
2027, the Board will determine the fraud-prevention adjustment using
the approach described in appendix B to this part.
(c) Issuer standards. (1) To be eligible to receive or charge the
fraud-prevention adjustment in paragraph (a) of this section, an issuer
must develop and implement policies and procedures reasonably designed
to take effective steps to reduce the occurrence of, and costs to all
parties from, fraudulent electronic debit transactions, including
through the development and implementation of cost-effective fraud-
prevention technology.
(2) An issuer's policies and procedures must address--
(i) Methods to identify and prevent fraudulent electronic debit
transactions;
(ii) Monitoring of the volume and value of its fraudulent
electronic debit transactions;
(iii) Appropriate responses to suspicious electronic debit
transactions in a manner designed to limit the costs to all parties
from and prevent the occurrence of future fraudulent electronic debit
transactions;
(iv) Methods to secure debit card and cardholder data; and
(v) Such other factors as the issuer considers appropriate.
(3) An issuer must review, at least annually, its fraud-prevention
policies and procedures, and their implementation and update them as
necessary in light of--
(i) Their effectiveness in reducing the occurrence of, and cost to
all parties from, fraudulent electronic debit transactions involving
the issuer;
(ii) Their cost-effectiveness; and
(iii) Changes in the types of fraud, methods used to commit fraud,
and available methods for detecting and preventing fraudulent
electronic debit transactions that the issuer identifies from--
(A) Its own experience or information;
(B) Information provided to the issuer by its payment card
networks, law enforcement agencies, and fraud-monitoring groups in
which the issuer participates; and
(C) Applicable supervisory guidance.
(d) Notification. To be eligible to receive or charge a fraud-
prevention adjustment, an issuer must annually notify its payment card
networks that it complies with the standards in paragraph (c) of this
section.
(e) Change in status. An issuer is not eligible to receive or
charge a fraud-prevention adjustment if the issuer is substantially
non-compliant with the standards set forth in paragraph (c) of this
section, as determined by the issuer or the appropriate agency under
Sec. 235.9. Such an issuer must notify its payment card networks that
it is no longer eligible to receive or charge a fraud-prevention
adjustment no later than 10 days after determining or receiving
notification from the appropriate agency under Sec. 235.9 that the
issuer is substantially non-compliant with the standards set forth in
paragraph (c) of this section. The issuer must stop
[[Page 78123]]
receiving and charging the fraud-prevention adjustment no later than 30
days after notifying its payment card networks.
Sec. 235.5 Exemptions.
(a) Exemption for small issuers--(1) In general. Sections 235.3,
235.4, and 235.6 do not apply to an interchange transaction fee
received or charged by an issuer that--
(i) Holds the account that is debited; and
(ii) Is not a covered issuer when the electronic debit transaction
is performed.
(2) Determination of issuer asset size. A person may rely on lists
published by the Board to determine whether an issuer is a covered
issuer for a particular calendar year.
(3) Change in status. If an issuer qualifies for the exemption in
paragraph (a)(1) of this section in a particular calendar year, but, as
of the end of that calendar year the issuer, together with its
affiliates, has assets of $10 billion or more, the issuer must begin
complying with Sec. Sec. 235.3, 235.4, and 235.6 no later than July 1
of the succeeding calendar year.
(b) Exemption for government-administered programs. Except as
provided in paragraph (d) of this section, Sec. Sec. 235.3, 235.4, and
235.6 do not apply to an interchange transaction fee received or
charged by an issuer with respect to an electronic debit transaction
if--
(1) The electronic debit transaction is made using a debit card
that has been provided to a person pursuant to a Federal, State, or
local government-administered payment program; and
(2) The cardholder may use the debit card only to transfer or debit
funds, monetary value, or other assets that have been provided pursuant
to such program.
(c) Exemption for certain reloadable prepaid cards--(1) In general.
Except as provided in paragraph (d) of this section, Sec. Sec. 235.3,
235.4, and 235.6 do not apply to an interchange transaction fee
received or charged by an issuer with respect to an electronic debit
transaction using a general-use prepaid card that is--
(i) Not issued or approved for use to access or debit any account
held by or for the benefit of the cardholder (other than a subaccount
or other method of recording or tracking funds purchased or loaded on
the card on a prepaid basis);
(ii) Reloadable and not marketed or labeled as a gift card or gift
certificate; and
(iii) The only means of access to the underlying funds, except when
all remaining funds are provided to the cardholder in a single
transaction.
(2) Temporary cards. For purposes of this paragraph (c), the term
``reloadable'' includes a temporary non-reloadable card issued solely
in connection with a reloadable general-use prepaid card.
(d) Exception. The exemptions in paragraphs (b) and (c) of this
section do not apply to any interchange transaction fee received or
charged by an issuer on or after July 21, 2012, with respect to an
electronic debit transaction if any of the following fees may be
charged to a cardholder with respect to the card:
(1) A fee or charge for an overdraft, including a shortage of funds
or a transaction processed for an amount exceeding the account balance,
unless the fee or charge is imposed for transferring funds from another
asset account to cover a shortfall in the account accessed by the card;
or
(2) A fee imposed by the issuer for the first withdrawal per
calendar month from an ATM that is part of the issuer's designated ATM
network.
Sec. 235.6 Prohibition on circumvention, evasion, and net
compensation.
(a) Prohibition of circumvention or evasion. No person shall
circumvent or evade the interchange transaction fee restrictions in
Sec. Sec. 235.3 and 235.4.
(b) Prohibition of net compensation. An issuer may not receive net
compensation from a payment card network with respect to electronic
debit transactions or debit card-related activities within a calendar
year. Net compensation occurs when the total amount of payments or
incentives received by an issuer from a payment card network with
respect to electronic debit transactions or debit card-related
activities, other than interchange transaction fees passed through to
the issuer by the network, during a calendar year exceeds the total
amount of all fees paid by the issuer to the network with respect to
electronic debit transactions or debit card-related activities during
that calendar year. Payments and incentives paid by a network to an
issuer, and fees paid by an issuer to a network, with respect to
electronic debit transactions or debit card related activities are not
limited to volume-based or transaction-specific payments, incentives,
or fees, but also include other payments, incentives or fees related to
an issuer's provision of debit card services.
Sec. 235.7 Limitations on payment card restrictions.
(a) Prohibition on network exclusivity--(1) In general. An issuer
or payment card network shall not directly or through any agent,
processor, or licensed member of a payment card network, by contract,
requirement, condition, penalty, or otherwise, restrict the number of
payment card networks on which an electronic debit transaction may be
processed to less than two unaffiliated networks.
(2) Permitted arrangements. An issuer satisfies the requirements of
paragraph (a)(1) of this section only if the issuer enables at least
two unaffiliated payment card networks to process an electronic debit
transaction--
(i) Where such networks in combination do not, by their respective
rules or policies or by contract with or other restriction imposed by
the issuer, result in the operation of only one network or only
multiple affiliated networks for a geographic area, specific merchant,
particular type of merchant, or particular type of transaction, and
(ii) Where each of these networks has taken steps reasonably
designed to be able to process the electronic debit transactions that
it would reasonably expect will be routed to it, based on expected
transaction volume.
(3) Prohibited exclusivity arrangements by networks. For purposes
of paragraph (a)(1) of this section, a payment card network may not
restrict or otherwise limit an issuer's ability to contract with any
other payment card network that may process an electronic debit
transaction involving the issuer's debit cards.
(4) Subsequent affiliation. If unaffiliated payment card networks
become affiliated as a result of a merger or acquisition such that an
issuer is no longer in compliance with paragraph (a) of this section,
the issuer must add an unaffiliated payment card network through which
electronic debit transactions on the relevant debit card may be
processed no later than six months after the date on which the
previously unaffiliated payment card networks consummate the
affiliation.
(b) Prohibition on routing restrictions. An issuer or payment card
network shall not, directly or through any agent, processor, or
licensed member of the network, by contract, requirement, condition,
penalty, or otherwise, inhibit the ability of any person that accepts
or honors debit cards for payments to direct the routing of electronic
debit transactions for processing over any payment card network that
may process such transactions.
[[Page 78124]]
Sec. 235.8 Reporting requirements and record retention.
(a) Entities required to report. Each covered issuer shall file a
report with the Board on a biennial basis in accordance with this
section. Each payment card network shall file a report with the Board
on an annual basis in accordance with this section.
(b) Report. Each entity required to file a report with the Board
shall submit data in a form prescribed by the Board for that entity.
Data required to be reported may include, but may not be limited to,
data regarding costs incurred with respect to an electronic debit
transaction, interchange transaction fees, network fees, fraud-
prevention costs, fraud losses, and transaction value, volume, and
type.
(c) Record retention. (1) An issuer subject to this part shall
retain evidence of compliance with the requirements imposed by this
part for a period of not less than five years after the end of the
calendar year in which the electronic debit transaction occurred.
(2) Any person subject to this part having actual notice that it is
the subject of an investigation or an enforcement proceeding by its
enforcement agency shall retain the records that pertain to the
investigation, action, or proceeding until final disposition of the
matter unless an earlier time is allowed by court or agency order.
Sec. 235.9 Administrative enforcement.
(a) Appropriate agency. (1) Compliance with the requirements of
this part shall be enforced under--
(i) Section 8 of the Federal Deposit Insurance Act, by the
appropriate Federal banking agency, as defined in section 3(q) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(q)), with respect to--
(A) National banks, Federal savings associations, and Federal
branches and Federal agencies of foreign banks;
(B) Member banks of the Federal Reserve System (other than national
banks), branches and agencies of foreign banks (other than federal
branches, federal Agencies, and insured state branches of foreign
banks), commercial lending companies owned or controlled by foreign
banks, and organizations operating under section 25 or 25A of the
Federal Reserve Act;
(C) Banks and state savings associations insured by the Federal
Deposit Insurance Corporation (other than members of the Federal
Reserve System), and insured state branches of foreign banks;
(ii) The Federal Credit Union Act (12 U.S.C. 1751 et seq.), by the
Administrator of the National Credit Union Administration (National
Credit Union Administration Board) with respect to any Federal credit
union;
(iii) The Federal Aviation Act of 1958 (49 U.S.C. 40101 et seq.),
by the Secretary of Transportation, with respect to any air carrier or
foreign air carrier subject to that Act; and
(iv) The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.),
by the Securities and Exchange Commission, with respect to any broker
or dealer subject to that Act.
(2) The terms used in paragraph (a)(1) of this section that are not
defined in this part or otherwise defined in section 3(s) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the
meaning given to them in section 1(b) of the International Banking Act
of 1978 (12 U.S.C. 3101).
(b) Additional powers. (1) For the purpose of the exercise by any
agency referred to in paragraphs (a)(1)(i) through (iv) of this section
of its power under any statute referred to in those paragraphs, a
violation of this part is deemed to be a violation of a requirement
imposed under that statute.
(2) In addition to its powers under any provision of law
specifically referred to in paragraphs (a)(1)(i) through (iv) of this
section, each of the agencies referred to in those paragraphs may
exercise, for the purpose of enforcing compliance under this part, any
other authority conferred on it by law.
(c) Enforcement authority of Federal Trade Commission. Except to
the extent that enforcement of the requirements imposed under this
title is specifically granted to another government agency under
paragraphs (a)(1)(i) through (iv) of this section, and subject to
subtitle B of the Consumer Financial Protection Act of 2010, the
Federal Trade Commission has the authority to enforce such
requirements. For the purpose of the exercise by the Federal Trade
Commission of its functions and powers under the Federal Trade
Commission Act, a violation of this part shall be deemed a violation of
a requirement imposed under the Federal Trade Commission Act. All of
the functions and powers of the Federal Trade Commission under the
Federal Trade Commission Act are available to the Federal Trade
Commission to enforce compliance by any person subject to the
jurisdiction of the Federal Trade Commission with the requirements of
this part, regardless of whether that person is engaged in commerce or
meets any other jurisdictional tests under the Federal Trade Commission
Act.
Appendix A to Part 235--Official Board Commentary on Regulation II
Introduction
The following commentary to Regulation II (12 CFR part 235)
provides background material to explain the Board's intent in
adopting a particular part of the regulation. The commentary also
provides examples to aid in understanding how a particular
requirement is to work.
Section 235.2--Definitions
2(a)--Account
1. Types of accounts. The term ``account'' includes accounts
held by any person, including consumer accounts (i.e., those
established primarily for personal, family or household purposes)
and business accounts. Therefore, the limitations on interchange
transaction fees and the prohibitions on network exclusivity
arrangements and routing restrictions apply to all electronic debit
transactions, regardless of whether the transaction involves a debit
card issued primarily for personal, family, or household purposes or
for business purposes. For example, an issuer of a business-purpose
debit card is subject to the restrictions on interchange transaction
fees and is also prohibited from restricting the number of payment
card networks on which an electronic debit transaction may be
processed under Sec. 235.7.
2. Bona fide trusts. This part does not define the term bona
fide trust agreement; therefore, institutions must look to state or
other applicable law for interpretation. An account held under a
custodial agreement that qualifies as a trust under the Internal
Revenue Code, such as an individual retirement account, is
considered to be held under a trust agreement for purposes of this
part.
3. Account located in the United States. This part applies only
to electronic debit transactions that are initiated to debit (or
credit, for example, in the case of returned goods or cancelled
services) an account located in the United States. If a cardholder
uses a debit card to debit an account held outside the United
States, then the electronic debit transaction is not subject to this
part.
2(b)--Acquirer
1. In general. The term ``acquirer'' includes only the
institution that contracts, directly or indirectly, with a merchant
to provide settlement for the merchant's electronic debit
transactions over a payment card network (referred to as acquiring
the merchant's electronic debit transactions). In some acquiring
relationships, an institution provides processing services to the
merchant and is a licensed member of the payment card network, but
does not settle the transactions with the merchant (by crediting the
merchant's account) or with the issuer. These institutions are not
``acquirers'' because they do not provide credit to the merchant for
the transactions or settle the merchant's transactions with the
issuer. These institutions are considered processors and in some
circumstances may be considered payment card networks for purposes
of this part (See Sec. Sec. 235.2(n), 235.2(p), and commentary
thereto).
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2(c)--Affiliate
1. Types of entities. The term ``affiliate'' includes any bank
and nonbank affiliates located in the United States or a foreign
country.
2. Other affiliates. For commentary on whether merchants are
affiliated, see comment 2(g)-7.
2(d)--Cardholder
1. Scope. In the case of debit cards that access funds in
transaction, savings, or other similar asset accounts, ``the person
to whom a card is issued'' generally will be the named person or
persons holding the account. If the account is a business account,
multiple employees (or other persons associated with the business)
may have debit cards that can access the account. Each employee that
has a debit card that can access the account is a cardholder. In the
case of a prepaid card, the cardholder generally is either the
purchaser of the card or a person to whom the purchaser gave the
card, such as a gift recipient.
2(e)--Control [Reserved]
2(f)--Covered Issuer
1. Asset size determination. An issuer would qualify as a
covered issuer in a particular calendar year if its total worldwide
banking and nonbanking assets, including assets of affiliates, other
than trust assets under management, are at least $10 billion, as of
December 31 of the preceding calendar year.
2(g)--Debit Card
1. Card, or other payment code or device. The term ``debit
card'' as defined in Sec. 235.2(g) applies to any card, or other
payment code or device, even if it is not issued in a physical form.
Debit cards include, for example, an account number or code that can
be used to access funds in an account to make internet purchases.
Similarly, the term ``debit card'' includes a device with a chip or
other embedded mechanism, such as a mobile phone or sticker
containing a contactless chip that links the device to funds stored
in an account, and enables an account to be debited. The term
``debit card,'' however, does not include a one-time password or
other code if such password or code is used for the purposes of
authenticating the cardholder and is used in addition to another
card, or other payment code or device, rather than as the payment
code or device.
2. Deferred debit cards. The term ``debit card'' includes a
card, or other payment code or device, that is used in connection
with deferred debit card arrangements in which transactions are not
immediately posted to and funds are not debited from the underlying
transaction, savings, or other asset account upon settlement of the
transaction. Instead, the funds in the account typically are held
and made unavailable for other transactions for a period of time
specified in the issuer-cardholder agreement. After the expiration
of the time period, the cardholder's account is debited for the
value of all transactions made using the card that have been
submitted to the issuer for settlement during that time period. For
example, under some deferred debit card arrangements, the issuer may
debit the consumer's account for all debit card transactions that
occurred during a particular month at the end of the month.
Regardless of the time period between the transaction and account
posting, a card, or other payment code or device, that is used in
connection with a deferred debit arrangement is considered a debit
card for purposes of the requirements of this part.
3. Decoupled debit cards. Decoupled debit cards are issued by an
entity other than the financial institution holding the cardholder's
account. In a decoupled debit arrangement, transactions that are
authorized by the card issuer settle against the cardholder's
account held by an entity other than the issuer, generally via a
subsequent ACH debit to that account. The term ``debit card''
includes any card, or other payment code or device, issued or
approved for use through a payment card network to debit an account,
regardless of whether the issuer holds the account. Therefore,
decoupled debit cards are debit cards for purposes of this part.
4. Hybrid cards.
i. Some cards, or other payment codes or devices, may have both
credit- and debit-like features (``hybrid cards''). For example,
these cards may enable a cardholder to access a line of credit, but
select certain transactions for immediate repayment (i.e., prior to
the end of a billing cycle) via a debit to the cardholder's account,
as the term is defined in Sec. 235.2(a), held either with the
issuer or at another institution. If a card permits a cardholder to
initiate transactions that debit an account or funds underlying a
prepaid card, the card is considered a debit card for purposes of
this part. Not all transactions initiated by such a hybrid card,
however, are electronic debit transactions. Rather, only those
transactions that debit an account as defined in this part or funds
underlying a prepaid card are electronic debit transactions. If the
transaction posts to a line of credit, then the transaction is a
credit transaction.
ii. If an issuer conditions the availability of a credit or
charge card that permits pre-authorized repayment of some or all
transactions on the cardholder maintaining an account at the issuer,
such a card is considered a debit card for purposes of this part.
5. Virtual wallets. A virtual wallet is a device (e.g., a mobile
phone) that stores several different payment codes or devices
(``virtual cards'') that access different accounts, funds underlying
the card, or lines of credit. At the point of sale, the cardholder
may select from the virtual wallet the virtual card he or she wishes
to use for payment. The virtual card that the cardholder uses for
payment is considered a debit card under this part if the virtual
card that initiates a transaction meets the definition of debit
card, notwithstanding the fact that other cards in the wallet may
not be debit cards.
6. General-use prepaid card. The term ``debit card'' includes
general-use prepaid cards. See Sec. 235.2(j) and related commentary
for information on general-use prepaid cards.
7. Store cards. The term ``debit card'' does not include prepaid
cards that may be used at a single merchant or affiliated merchants.
Two or more merchants are affiliated if they are related by either
common ownership or by common corporate control. For purposes of the
``debit card'' definition, franchisees are considered to be under
common corporate control if they are subject to a common set of
corporate policies or practices under the terms of their franchise
licenses.
8. Checks, drafts, and similar instruments. The term ``debit
card'' does not include a check, draft, or similar paper instrument
or a transaction in which the check is used as a source of
information to initiate an electronic payment. For example, if an
account holder provides a check to buy goods or services and the
merchant takes the account number and routing number information
from the MICR line at the bottom of a check to initiate an ACH debit
transfer from the cardholder's account, the check is not a debit
card, and such a transaction is not considered an electronic debit
transaction. Likewise, the term ``debit card'' does not include an
electronic representation of a check, draft, or similar paper
instrument.
9. ACH transactions. The term ``debit card'' does not include an
account number when it is used by a person to initiate an ACH
transaction that debits that person's account. For example, if an
account holder buys goods or services over the internet using an
account number and routing number to initiate an ACH debit, the
account number is not a debit card, and such a transaction is not
considered an electronic debit transaction. However, the use of a
card to purchase goods or services that debits the cardholder's
account that is settled by means of a subsequent ACH debit initiated
by the card issuer to the cardholder's account, as in the case of a
decoupled debit card arrangement, involves the use of a debit card
for purposes of this part.
2(h)--Designated Automated Teller Machine (ATM) Network
1. Reasonable and convenient access clarified. Under Sec.
235.2(h)(2), a designated ATM network includes any network of ATMs
identified by the issuer that provides reasonable and convenient
access to the issuer's cardholders. Whether a network provides
reasonable and convenient access depends on the facts and
circumstances, including the distance between ATMs in the designated
network and each cardholder's last known home or work address, or if
a home or work address is not known, where the card was first
issued.
2(i)--Electronic Debit Transaction
1. Debit an account. The term ``electronic debit transaction''
includes the use of a card to debit an account. The account debited
could be, for example, the cardholder's asset account or the account
that holds the funds used to settle prepaid card transactions.
2. Form of payment. The term ``electronic debit transaction''
includes the use of a card as a form of payment that may be made in
exchange for goods or services, as a charitable contribution, to
satisfy an obligation (e.g., tax liability), or for other purposes.
3. Subsequent transactions. The term ``electronic debit
transaction'' includes both
[[Page 78126]]
the cardholder's use of a debit card for the initial payment and any
subsequent use by the cardholder of the debit card in connection
with the initial payment. For example, the term ``electronic debit
transaction'' includes using the debit card to return merchandise or
cancel a service that then results in a debit to the merchant's
account and a credit to the cardholder's account.
4. Cash withdrawal at the point of sale. The term ``electronic
debit transaction'' includes a transaction in which a cardholder
uses the debit card both to make a purchase and to withdraw cash
(known as a ``cash-back transaction'').
5. Geographic limitation. This regulation applies only to
electronic debit transactions that are initiated at a merchant
located in the United States. If a cardholder uses a debit card at a
merchant located outside the United States to debit an account held
in the United States, the electronic debit transaction is not
subject to this part.
2(j)--General-Use Prepaid Card
1. Redeemable upon presentation at multiple, unaffiliated
merchants. A prepaid card is redeemable upon presentation at
multiple, unaffiliated merchants if such merchants agree to honor
the card.
2. Selective authorization cards. Selective authorization cards,
(e.g., mall cards) are generally intended to be used or redeemed for
goods or services at participating retailers within a shopping mall
or other limited geographic area. Selective authorization cards are
considered general-use prepaid cards, regardless of whether they
carry the mark, logo, or brand of a payment card network, if they
are redeemable at multiple, unaffiliated merchants.
2(k)--Interchange Transaction Fee
1. In general. Generally, the payment card network is the entity
that establishes and charges the interchange transaction fee to the
acquirers or merchants. The acquirers then pay to the issuers any
interchange transaction fee established and charged by the network.
Acquirers typically pass the interchange transaction fee through to
merchant-customers.
2. Compensating an issuer. The term ``interchange transaction
fee'' is limited to those fees that a payment card network
establishes, charges, or receives to compensate the issuer for its
role in the electronic debit transaction. By contrast, payment card
networks generally charge issuers and acquirers fees for services
the network performs. Such fees are not interchange transaction fees
because the payment card network is charging and receiving the fee
as compensation for services it provides.
3. Established, charged, or received. Interchange transaction
fees are not limited to those fees for which a payment card network
sets the value. A fee that compensates an issuer is an interchange
transaction fee if the fee is set by the issuer but charged to
acquirers by virtue of the network determining each participant's
net settlement position.
2(l)--Issuer
1. In general. A person issues a debit card by authorizing the
use of debit card by a cardholder to perform electronic debit
transactions. That person may provide the card directly to the
cardholder or indirectly by using a third party (such as a
processor, or a telephone network or manufacturer) to provide the
card, or other payment code or device, to the cardholder. The
following examples illustrate the entity that is the issuer under
various card program arrangements.
2. Traditional debit card arrangements. In a traditional debit
card arrangement, the bank or other entity holds the cardholder's
funds and authorizes the cardholder to use the debit card to access
those funds through electronic debit transactions, and the
cardholder receives the card directly or indirectly (e.g., through
an agent) from the bank or other entity that holds the funds (except
for decoupled debit cards, discussed below). In this system, the
bank or entity holding the cardholder's funds is the issuer.
3. BIN-sponsor arrangements. Payment card networks assign Bank
Identification Numbers (BINs) to member-institutions for purposes of
issuing cards, authorizing, clearing, settling, and other processes.
In exchange for a fee or other financial consideration, some members
of payment card networks permit other entities to issue debit cards
using the member's BIN. The entity permitting the use of its BIN is
referred to as the ``BIN sponsor'' and the entity that uses the BIN
to issue cards is often referred to as the ``affiliate member.'' BIN
sponsor arrangements can follow at least two different models:
i. Sponsored debit card model. In some cases, a community bank
or credit union may provide debit cards to its account holders
through a BIN sponsor arrangement with a member institution. In
general, the bank or credit union will authorize its account holders
to use debit cards to perform electronic debit transactions that
access funds in accounts at the bank or credit union. The bank or
credit union's name typically will appear on the debit card. The
bank or credit union may directly or indirectly provide the cards to
cardholders. Under these circumstances, the bank or credit union is
the issuer for purposes of this part. Although the bank or credit
union may distribute cards through the BIN sponsors, the BIN sponsor
does not enter into the agreement with the cardholder that
authorizes the cardholder to use the card to perform electronic
debit transactions that access funds in the account at the bank or
credit union, and therefore the BIN sponsor is not the issuer.
ii. Prepaid card model. A member institution may also serve as
the BIN sponsor for a prepaid card program. Under these
arrangements, a program manager distributes prepaid cards to the
cardholders and the BIN-sponsoring institution generally holds the
funds for the prepaid card program in an omnibus or pooled account.
Either the BIN sponsor or the prepaid card program manager may keep
track of the underlying funds for each individual prepaid card
through subaccounts. While the cardholder may receive the card
directly from the program manager or at a retailer, the BIN sponsor
authorizes the cardholder to use the card to perform electronic
debit transactions that access the funds in the pooled account and
the cardholder's relationship generally is with the BIN sponsor.
Accordingly, under these circumstances, the BIN sponsor, or the bank
holding the pooled account, is the issuer.
4. Decoupled debit cards. In the case of decoupled debit cards,
an entity other than the bank holding the cardholder's account
enters into a relationship with the cardholder authorizing the use
of the card to perform electronic debit transactions. The entity
authorizing the use of the card to perform electronic debit
transaction typically arranges for the card to be provided directly
or indirectly to the cardholder and has a direct relationship with
the cardholder with respect to the card. The bank holding the
cardholder's account has agreed generally to permit ACH debits to
the account, but has not authorized the use of the debit card to
access the funds through electronic debit transactions. Under these
circumstances, the entity authorizing the use of the debit card, and
not the account-holding institution, is considered the issuer.
2(m)--Merchant [Reserved]
2(n)--Payment Card Network
1. In general. An entity is a considered a payment card network
with respect to an electronic debit transaction for purposes of this
rule if it routes information and data to the issuer from the
acquirer to conduct authorization, clearance, and settlement of the
electronic debit transaction. By contrast, if an entity receives
transaction information and data from a merchant and authorizes and
settles the transaction without routing the information and data to
another entity (i.e., the issuer or the issuer's processor) for
authorization, clearance, or settlement, that entity is not
considered a payment card network with respect to the electronic
debit transaction.
2. Three-party systems. In the case of a three-party system,
electronic debit transactions are processed by an entity that acts
as system operator and issuer, and may also act as the acquirer. The
entity acting as system operator and issuer that receives the
transaction information from the merchant or acquirer also holds the
cardholder's funds. Therefore, rather than directing the transaction
information to a separate issuer, the entity authorizes and settles
the transaction based on the information received from the merchant.
As these entities do not connect (or ``network'') multiple issuers
and do not route information to conduct the transaction, they are
not ``payment card networks'' with respect to these transactions. 3.
Processors as payment card networks. A processor is considered a
payment card network if, in addition to acting as processor for an
acquirer and issuer, the processor routes transaction information
and data received from a merchant or the merchant's acquirer to an
issuer. For example, if a merchant uses a processor in order to
accept any, some, or all brands of debit cards and the processor
routes transaction information and data to the issuer
[[Page 78127]]
or issuer's processor, the merchant's processor is considered a
payment card network with respect to the electronic debit
transaction. If the processor establishes, charges, or receives a
fee for the purpose of compensating an issuer, that fee is
considered an interchange transaction fee for purposes of this part.
4. Automated clearing house (ACH) operators. An ACH operator is
not considered a payment card network for purposes of this part.
While an ACH operator processes transactions that debit an account
and provides for interbank clearing and settlement of such
transactions, a person does not use the ACH system to accept as a
form of payment a brand of debit card.
5. ATM networks. An ATM network is not considered a payment card
network for purposes of this part. While ATM networks process
transactions that debit an account and provide for interbank
clearing and settlement of such transactions, a cash withdrawal from
an ATM is not a payment because there is no exchange of money for
goods or services, or payment made as a charitable contribution, to
satisfy an obligation (e.g., tax liability), or for other purposes.
2(o)--Person [Reserved]
2(p)--Processor
1. Distinction from acquirers. A processor may perform all
transaction-processing functions for a merchant or acquirer, but if
it does not acquire (that is, settle with the merchant for the
transactions), it is not an acquirer. The entity that acquires
electronic debit transactions is the entity that is responsible to
other parties to the electronic debit transaction for the amount of
the transaction.
2. Issuers. A processor may perform services related to
authorization, clearance, and settlement of transactions for an
issuer without being considered to be an issuer for purposes of this
part.
2(q)--Route
1. An entity routes information if it both directs and sends the
information to an unaffiliated entity (or affiliated entity acting
on behalf of the unaffiliated entity). This other entity may be a
payment card network or processor (if the entity directing and
sending the information is a merchant or an acquirer) or an issuer
or processor (if the entity directing and sending the information is
a payment card network).
2(r)--United States [Reserved]
Section 235.3--Reasonable and Proportional Interchange Transaction Fees
3(a)--[Reserved]
3(b)--Reasonable and Proportional Fees
1. Two components. The standard for the maximum permissible
interchange transaction fee that an issuer may receive consists of
two components: a base component that does not vary with a
transaction's value and an ad valorem component. The amount of any
interchange transaction fee received or charged by an issuer may not
exceed the sum of these components. In addition, an issuer may be
permitted to receive or charge a fraud-prevention adjustment under
Sec. 235.4 of this part. 2. Variation in interchange fees. An
issuer is permitted to charge or receive, and a network is permitted
to establish, interchange transaction fees that vary based on, for
example, the transaction value or the type of transaction or
merchant, provided the amount of any interchange transaction fee for
any transaction does not exceed the sum of the base component and
the ad valorem component.
3. Examples. For a $50 electronic debit transaction performed on
June 30, 2023, the maximum permissible interchange transaction fee
is 23.5 cents (21.0 cents plus 5.0 basis points multiplied by $50).
For a $50 electronic debit transaction performed on July 1, 2023,
the maximum permissible interchange transaction fee is 16.4 cents
(14.4 cents plus 4.0 basis points multiplied by $50). In addition,
an issuer may be permitted to receive a fraud-prevention adjustment
under Sec. 235.4 of this part.
4. Performance of an electronic debit transaction. For purposes
of Sec. 235.3(b), an electronic debit transaction is considered to
be performed on the date on which such transaction is settled on an
interbank basis. For example, an electronic debit transaction that
is authorized and cleared on June 30, 2023, but is settled on an
interbank basis on July 1, 2023, is considered to be performed on
July 1, 2023.
3(c)--[Reserved]
Section 235.4--Fraud-Prevention Adjustment
4(a)--Fraud-Prevention Adjustment Amount
1. Performance of an electronic debit transaction. For purposes
of Sec. 235.4(a), an electronic debit transaction is considered to
be performed on the date on which such transaction is settled on an
interbank basis. For example, an electronic debit transaction that
is authorized and cleared on June 30, 2023, but is settled on an
interbank basis on July 1, 2023, is considered to be performed on
July 1, 2023.
4(b)--[Reserved]
4(c)(1)--Issuer Standards
1. An issuer's policies and procedures should address fraud
related to debit card use by unauthorized persons. Examples of use
by unauthorized persons include, but are not limited to, the
following:
i. A thief steals a cardholder's wallet and uses the debit card
to purchase goods, without the authority of the cardholder.
ii. A cardholder makes a purchase at a merchant. Subsequently,
the merchant's employee uses information from the debit card to
initiate a subsequent transaction, without the authority of the
cardholder.
iii. A hacker steals cardholder account information from the
issuer or a merchant processor and uses the stolen information to
make unauthorized card-not-present purchases or to create a
counterfeit card to make unauthorized card-present purchases.
2. An issuer's policies and procedures must be designed to
reduce fraud, where cost effective, across all types of electronic
debit transactions in which its cardholders engage. Therefore, an
issuer should consider whether its policies and procedures are
effective for each method used to authenticate the card (e.g., a
chip or a code embedded in the magnetic stripe) and the cardholder
(e.g., a signature or a PIN), and for different sales channels
(e.g., card-present and card-not-present).
3. An issuer's policies and procedures must be designed to take
effective steps to reduce both the occurrence of and costs to all
parties from fraudulent electronic debit transactions. An issuer
should take steps reasonably designed to reduce the number and value
of its fraudulent electronic debit transactions relative to its non-
fraudulent electronic debit transactions. These steps should reduce
the costs from fraudulent transactions to all parties, not merely
the issuer. For example, an issuer should take steps to reduce the
number and value of its fraudulent electronic debit transactions
relative to its non-fraudulent transactions whether or not it bears
the fraud losses as a result of regulations or network rules.
4. For any given issuer, the number and value of fraudulent
electronic debit transactions relative to non-fraudulent
transactions may vary materially from year to year. Therefore, in
certain circumstances, an issuer's policies and procedures may be
effective notwithstanding a relative increase in the transactions
that are fraudulent in a particular year. However, continuing
increases in the share of fraudulent transactions would warrant
further scrutiny.
5. In determining which fraud-prevention technologies to
implement or retain, an issuer must consider the cost-effectiveness
of the technology, that is, the expected cost of the technology
relative to its expected effectiveness in controlling fraud. In
evaluating the cost of a particular technology, an issuer should
consider whether and to what extent other parties will incur costs
to implement the technology, even though an issuer may not have
complete information about the costs that may be incurred by other
parties, such as the cost of new merchant terminals. In evaluating
the costs, an issuer should consider both initial implementation
costs and ongoing costs of using the fraud-prevention method.
6. An issuer need not develop fraud-prevention technologies
itself to satisfy the standards in Sec. 235.4(c). An issuer may
implement fraud-prevention technologies that have been developed by
a third party that the issuer has determined are appropriate under
its own policies and procedures.
4(c)(2)--Elements of Fraud-Prevention Policies and Procedures
1. In general. An issuer may tailor its policies and procedures
to address its particular debit card program, including the size of
the program, the types of transactions in which its cardholders
commonly engage, fraud types and methods experienced by the issuer,
and the cost of implementing new fraud-prevention methods in light
of the expected fraud reduction.
[[Page 78128]]
4(c)(2)(i)--Methods To Identify and Prevent Fraudulent Debit Card
Transactions
1. In general. Examples of policies and procedures reasonably
designed to identify and prevent fraudulent electronic debit
transactions include the following:
i. Practices to help determine whether a card is authentic and
whether the user is authorized to use the card at the time of a
transaction. For example, an issuer may specify the use of
particular authentication technologies or methods, such as dynamic
data, to better authenticate a card and cardholder at the time of
the transaction, to the extent doing so does not inhibit the ability
of a merchant to direct the routing of electronic debit transactions
for processing over any payment card network that may process such
transactions. (See Sec. 235.7 and commentary thereto.)
ii. An automated mechanism to assess the risk that a particular
electronic debit transaction is fraudulent during the authorization
process (i.e., before the issuer approves or declines an
authorization request). For example, an issuer may use neural
networks to identify transactions that present increased risk of
fraud. As a result of this analysis, the issuer may decide to
decline to authorize these transactions. An issuer may not be able
to determine whether a given transaction in isolation is fraudulent
at the time of authorization, and therefore may have implemented
policies and procedures that monitor sets of transactions initiated
with a cardholder's debit card. For example, an issuer could compare
a set of transactions initiated with the card to a customer's
typical transactions in order to determine whether a transaction is
likely to be fraudulent. Similarly, an issuer could compare a set of
transactions initiated with a debit card and common fraud patterns
in order to determine whether a transaction or future transaction is
likely to be fraudulent.
iii. Practices to support reporting of lost and stolen cards or
suspected incidences of fraud by cardholders or other parties to a
transaction. As an example, an issuer may promote customer awareness
by providing text alerts of transactions in order to detect
fraudulent transactions in a timely manner. An issuer may also
report debit cards suspected of being fraudulent to their networks
for inclusion in a database of potentially compromised cards.
4(c)(2)(ii)--Monitoring of the Issuer's Volume and Value of
Fraudulent Electronic Debit Transactions
1. Tracking its fraudulent electronic debit transactions over
time enables an issuer to assess whether its policies and procedures
are effective. Accordingly, an issuer must include policies and
procedures designed to monitor trends in the number and value of its
fraudulent electronic debit transactions. An effective monitoring
program would include tracking issuer losses from fraudulent
electronic debit transactions, fraud-related chargebacks to
acquirers, losses passed on to cardholders, and any other
reimbursements from other parties. Other reimbursements could
include payments made to issuers as a result of fines assessed to
merchants for noncompliance with Payment Card Industry (PCI) Data
Security Standards or other industry standards. An issuer should
also establish procedures to track fraud-related information
necessary to perform its reviews under Sec. 235.4(c)(3) and to
retain and report information as required under Sec. 235.8.
4(c)(2)(iii)--Appropriate Responses to Suspicious Electronic Debit
Transactions
1. An issuer may identify transactions that it suspects to be
fraudulent after it has authorized or settled the transaction. For
example, a cardholder may inform the issuer that the cardholder did
not initiate a transaction or transactions, or the issuer may learn
of a fraudulent transaction or possibly compromised debit cards from
the network, the acquirer, or other parties. An issuer must
implement policies and procedures designed to provide an appropriate
response once an issuer has identified suspicious transactions to
reduce the occurrence of future fraudulent electronic debit
transactions and the costs associated with such transactions. The
appropriate response may differ depending on the facts and
circumstances, including the issuer's assessment of the risk of
future fraudulent electronic debit transactions. For example, in
some circumstances, it may be sufficient for an issuer to monitor
more closely the account with the suspicious transactions. In other
circumstances, it may be necessary to contact the cardholder to
verify a transaction, reissue a card, or close an account. An
appropriate response may also require coordination with industry
organizations, law enforcement agencies, and other parties, such as
payment card networks, merchants, and issuer or merchant processors.
4(c)(2)(iv)--Methods To Secure Debit Card and Cardholder Data
1. An issuer must implement policies and procedures designed to
secure debit card and cardholder data. These policies and procedures
should apply to data that are transmitted by the issuer (or its
service provider) during transaction processing, that are stored by
the issuer (or its service provider), and that are carried on media
(e.g., laptops, transportable data storage devices) by employees or
agents of the issuer. This standard may be incorporated into an
issuer's information security program, as required by Section 501(b)
of the Gramm-Leach-Bliley Act.
4(c)(3)--Review of and Updates to Policies and Procedures
1. i. An issuer's assessment of the effectiveness of its
policies and procedures should consider whether they are reasonably
designed to reduce the number and value of fraudulent electronic
debit transactions relative to non-fraudulent electronic debit
transactions and are cost effective. (See comment 4(c)(1)-3 and
comment 4(c)(1)-5).
ii. An issuer must also assess its policies and procedures in
light of changes in fraud types (e.g., the use of counterfeit cards,
lost or stolen cards) and methods (e.g., common purchase patterns
indicating possible fraudulent behavior), as well as changes in the
available methods of detecting and preventing fraudulent electronic
debit transactions (e.g., transaction monitoring, authentication
methods) as part of its periodic review of its policies and
procedures. An issuer's review of its policies and procedures must
consider information from the issuer's own experience and that the
issuer otherwise identified itself; information from payment card
networks, law enforcement agencies, and fraud-monitoring groups in
which the issuer participates; and supervisory guidance. For
example, an issuer should consider warnings and alerts it receives
from payment card networks regarding compromised cards and data
breaches.
2. An issuer should review its policies and procedures and their
implementation more frequently than annually if the issuer
determines that more frequent review is appropriate based on
information obtained from monitoring its fraudulent electronic debit
transactions, changes in the types or methods of fraud, or available
methods of detecting and preventing fraudulent electronic debit
transactions. (See Sec. 235.4(c)(1)(ii) and commentary thereto.)
3. In light of an issuer's review of its policies and
procedures, and their implementation, the issuer may determine that
updates to its policies and procedures, and their implementation,
are necessary. Merely determining that updates are necessary does
not render an issuer ineligible to receive or charge the fraud-
prevention adjustment. To remain eligible to receive or charge a
fraud-prevention adjustment, however, an issuer should develop and
implement such updates as soon as reasonably practicable, in light
of the facts and circumstances.
4(d)--Notification
1. Payment card networks that plan to allow issuers to receive
or charge a fraud-prevention adjustment can develop processes for
identifying issuers eligible for this adjustment. Each issuer that
wants to be eligible to receive or charge a fraud-prevention
adjustment must notify annually the payment card networks in which
it participates of its compliance through the networks' processes.
Section 235.5--Exemptions for Certain Electronic Debit Transactions
1. Eligibility for multiple exemptions. An electronic debit
transaction may qualify for one or more exemptions. For example, a
debit card that has been provided to a person pursuant to a Federal,
State, or local government-administered payment program may be
issued by an issuer that is not a covered issuer. In this case, an
electronic debit transaction made using that card may qualify for
the exemption under Sec. 235.5(a) for small issuers or for the
exemption under Sec. 235.5(b) for government-administered payment
programs. A payment card network establishing interchange fees for
transactions that qualify for more than one exemption need only
satisfy itself that the issuer's transactions qualify for at least
one of the exemptions in order to exempt the electronic debit
transaction from the interchange fee restrictions.
2. Certification process. Payment card networks that plan to
allow issuers to receive
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higher interchange fees than permitted under Sec. Sec. 235.3 and
235.4 pursuant to one of the exemptions in Sec. 235.5 could develop
their own processes for identifying issuers and products eligible
for such exemptions. Section 235.5(a)(2) permits payment card
networks to rely on lists published by the Board to help determine
eligibility for the small issuer exemption set forth in Sec.
235.5(a)(1).
5(a)--Exemption for Small Issuers
1. Account that is debited. An issuer that is not a covered
issuer is exempt under Sec. 235.5(a) only if the issuer holds the
account that is debited. For example, in the case of the sponsored
debit card model described in comment 235.2(l)-3(i), if the bank or
credit union is not a covered issuer, then that bank or credit union
is exempt from the interchange fee restrictions because the issuer
holds the account that is debited. However, in the case of the
decoupled debit card described in comment 235.2(l)-4, the issuer of
a decoupled debit card is not exempt under Sec. 235.5(a),
regardless of asset size, because it does not hold the account that
is debited.
2. Change in status. If an exempt issuer becomes a covered
issuer based on its and its affiliates assets at the end of a
calendar year, that issuer must begin complying with the interchange
fee standards (Sec. 235.3), the fraud-prevention adjustment
standards (to the extent the issuer wishes to receive a fraud-
prevention adjustment) (Sec. 235.4), and the provisions prohibiting
circumvention, evasion, and net compensation (Sec. 235.6) no later
than July 1.
5(b)--Exemption for Government-Administered Payment Programs
1. Government-administered payment program. A program is
considered government-administered regardless of whether a Federal,
State, or local government agency operates the program or outsources
some or all functions to third parties so long as the program is
operated on behalf of the government agency. In addition, a program
may be government-administered even if a Federal, State, or local
government agency is not the source of funds for the program it
administers. For example, child support programs are government-
administered programs even though a Federal, State, or local
government agency is not the source of funds. A tribal government is
considered a local government for purposes of this exemption.
5(c)--Exemption for Certain Reloadable Prepaid Cards
1. Subaccount clarified. A subaccount is an account within an
account, opened in the name of an agent, nominee, or custodian for
the benefit of two or more cardholders, where the transactions and
balances of individual cardholders are tracked in such subaccounts.
An account that is opened solely in the name of a single cardholder
is not a subaccount.
2. Reloadable. A general-use prepaid card is ``reloadable'' if
the terms and conditions of the agreement permit funds to be added
to the general-use prepaid card at any time after the initial
purchase or issuance. A general-use prepaid card is not
``reloadable'' merely because the issuer or processor is technically
able to add functionality that would otherwise enable the general-
use prepaid card to be reloaded.
3. Marketed or labeled as a gift card or gift certificate.
i. Electronic debit transactions made using a reloadable
general-use prepaid card are not exempt from the interchange fee
restrictions if the card is marketed or labeled as a gift card or
gift certificate. The term ``marketed or labeled as a gift card or
gift certificate'' means directly or indirectly offering,
advertising or otherwise suggesting the potential use of a general-
use prepaid card as a gift for another person. Whether the exclusion
applies generally does not depend on the type of entity that makes
the promotional message. For example, a card may be marketed or
labeled as a gift card or gift certificate if anyone (other than the
purchaser of the card), including the issuer, the retailer, the
program manager that may distribute the card, or the payment network
on which a card is used, promotes the use of the card as a gift card
or gift certificate. A general-use prepaid card is marketed or
labeled as a gift card or gift certificate even if it is only
occasionally marketed as a gift card or gift certificate. For
example, a network-branded general purpose reloadable card would be
marketed or labeled as a gift card or gift certificate if the issuer
principally advertises the card as a less costly alternative to a
bank account but promotes the card in a television, radio,
newspaper, or internet advertisement, or on signage as ``the perfect
gift'' during the holiday season.
ii. The mere mention of the availability of gift cards or gift
certificates in an advertisement or on a sign that also indicates
the availability of exempted general-use prepaid cards does not by
itself cause the general-use prepaid card to be marketed as a gift
card or a gift certificate. For example, the posting of a sign in a
store that refers to the availability of gift cards does not by
itself constitute the marketing of otherwise exempted general-use
prepaid cards that may also be sold in the store along with gift
cards or gift certificates, provided that a person acting reasonably
under the circumstances would not be led to believe that the sign
applies to all cards sold in the store. (See, however, comment 5(c)-
4.ii.)
4. Examples of marketed or labeled as a gift card or gift
certificate.
i. The following are examples of marketed or labeled as a gift
card or gift certificate:
A. Using the word ``gift'' or ``present'' on a card or
accompanying material, including documentation, packaging and
promotional displays;
B. Representing or suggesting that a card can be given to
another person, for example, as a ``token of appreciation'' or a
``stocking stuffer,'' or displaying a congratulatory message on the
card or accompanying material;
C. Incorporating gift-giving or celebratory imagery or motifs,
such as a bow, ribbon, wrapped present, candle, or a holiday or
congratulatory message, on a card, accompanying documentation, or
promotional material;
ii. The term does not include the following:
A. Representing that a card can be used as a substitute for a
checking, savings, or deposit account;
B. Representing that a card can be used to pay for a consumer's
health-related expenses--for example, a card tied to a health
savings account;
C. Representing that a card can be used as a substitute for
travelers checks or cash;
D. Representing that a card can be used as a budgetary tool, for
example, by teenagers, or to cover emergency expenses.
5. Reasonable policies and procedures to avoid marketing as a
gift card. The exemption for a general-use prepaid card that is
reloadable and not marketed or labeled as a gift card or gift
certificate in Sec. 235.5(c) applies if a reloadable general-use
prepaid card is not marketed or labeled as a gift card or gift
certificate and if persons involved in the distribution or sale of
the card, including issuers, program managers, and retailers,
maintain policies and procedures reasonably designed to avoid such
marketing. Such policies and procedures may include contractual
provisions prohibiting a reloadable general-use prepaid card from
being marketed or labeled as a gift card or gift certificate,
merchandising guidelines or plans regarding how the product must be
displayed in a retail outlet, and controls to regularly monitor or
otherwise verify that the general-use prepaid card is not being
marketed as a gift card. Whether a general-use prepaid card has been
marketed as a gift card or gift certificate will depend on the facts
and circumstances, including whether a reasonable person would be
led to believe that the general-use prepaid card is a gift card or
gift certificate. The following examples illustrate the application
of Sec. 235.5(c):
i. An issuer or program manager of prepaid cards agrees to sell
general-purpose reloadable cards through a retailer. The contract
between the issuer or program manager and the retailer establishes
the terms and conditions under which the cards may be sold and
marketed at the retailer. The terms and conditions prohibit the
general-purpose reloadable cards from being marketed as a gift card
or gift certificate, and require policies and procedures to
regularly monitor or otherwise verify that the cards are not being
marketed as such. The issuer or program manager sets up one
promotional display at the retailer for gift cards and another
physically separated display for exempted products under Sec.
235.5(c), including general-purpose reloadable cards, such that a
reasonable person would not believe that the exempted cards are gift
cards. The exemption in Sec. 235.5(c) applies because policies and
procedures reasonably designed to avoid the marketing of the
general-purpose reloadable cards as gift cards or gift certificates
are maintained, even if a retail clerk inadvertently stocks or a
consumer inadvertently places a general-purpose reloadable card on
the gift card display.
ii. Same facts as in comment 5(c)-5.i, except that the issuer or
program manager sets up a single promotional display at the retailer
on which a variety of prepaid cards are sold, including store gift
cards and general-purpose reloadable cards. A sign stating ``Gift
Cards'' appears prominently at
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the top of the display. The exemption in Sec. 235.5(c) does not
apply with respect to the general-purpose reloadable cards because
policies and procedures reasonably designed to avoid the marketing
of exempted cards as gift cards or gift certificates are not
maintained.
iii. Same facts as in comment 5(c)-5.i, except that the issuer
or program manager sets up a single promotional multi-sided display
at the retailer on which a variety of prepaid card products,
including store gift cards and general-purpose reloadable cards are
sold. Gift cards are segregated from exempted cards, with gift cards
on one side of the display and exempted cards on a different side of
a display. Signs of equal prominence at the top of each side of the
display clearly differentiate between gift cards and the other types
of prepaid cards that are available for sale. The retailer does not
use any more conspicuous signage suggesting the general availability
of gift cards, such as a large sign stating ``Gift Cards'' at the
top of the display or located near the display. The exemption in
Sec. 235.5(c) applies because policies and procedures reasonably
designed to avoid the marketing of the general-purpose reloadable
cards as gift cards or gift certificates are maintained, even if a
retail clerk inadvertently stocks or a consumer inadvertently places
a general-purpose reloadable card on the gift card display.
iv. Same facts as in comment 5(c)-5.i, except that the retailer
sells a variety of prepaid card products, including store gift cards
and general-purpose reloadable cards, arranged side-by-side in the
same checkout lane. The retailer does not affirmatively indicate or
represent that gift cards are available, such as by displaying any
signage or other indicia at the checkout lane suggesting the general
availability of gift cards. The exemption in Sec. 235.5(c) applies
because policies and procedures reasonably designed to avoid
marketing the general-purpose reloadable cards as gift cards or gift
certificates are maintained.
6. On-line sales of prepaid cards. Some websites may prominently
advertise or promote the availability of gift cards or gift
certificates in a manner that suggests to a consumer that the
website exclusively sells gift cards or gift certificates. For
example, a website may display a banner advertisement or a graphic
on the home page that prominently states ``Gift Cards,'' ``Gift
Giving,'' or similar language without mention of other available
products, or use a web address that includes only a reference to
gift cards or gift certificates in the address. In such a case, a
consumer acting reasonably under the circumstances could be led to
believe that all prepaid products sold on the website are gift cards
or gift certificates. Under these facts, the website has marketed
all such products as gift cards or gift certificates, and the
exemption in Sec. 235.5(c) does not apply to any products sold on
the website.
7. Temporary non-reloadable cards issued in connection with a
general-use reloadable card. Certain general-purpose prepaid cards
that are typically marketed as an account substitute initially may
be sold or issued in the form of a temporary non-reloadable card.
After the card is purchased, the cardholder is typically required to
call the issuer to register the card and to provide identifying
information in order to obtain a reloadable replacement card. In
most cases, the temporary non-reloadable card can be used for
purchases until the replacement reloadable card arrives and is
activated by the cardholder. Because the temporary non-reloadable
card may only be obtained in connection with the reloadable card,
the exemption in Sec. 235.5(c) applies so long as the card is not
marketed as a gift card or gift certificate.
5(d)--Exception
1. Additional ATM access. Some debit cards may be used to
withdraw cash from ATMs that are not part of the issuer's designated
ATM network. An electronic debit card transaction may still qualify
for the exemption under Sec. Sec. 235.5(b) or (c) with a respect to
a card for which a fee may be imposed for a withdrawal from an ATM
that is outside of the issuer's designated ATM network as long as
the card complies with the condition set forth in Sec. 235.5(d)(2)
for withdrawals within the issuer's designated ATM network. The
condition with respect to ATM fees does not apply to cards that do
not provide ATM access.
Section 235.6--Prohibition on Circumvention, Evasion, and Net
Compensation
6(a)--Prohibition of Circumvention or Evasion
1. Finding of circumvention or evasion. A finding of evasion or
circumvention will depend on all relevant facts and circumstances.
Although net compensation may be one form of circumvention or
evasion prohibited under Sec. 235.6(a), it is not the only form.
2. Examples of circumstances that may constitute circumvention
or evasion. The following examples do not constitute per se
circumvention or evasion, but may warrant additional supervisory
scrutiny to determine whether the totality of the facts and
circumstances constitute circumvention or evasion:
i. A payment card network decreases network processing fees paid
by issuers for electronic debit transactions by 50 percent and
increases the network processing fees charged to merchants or
acquirers with respect to electronic debit transactions by a similar
amount. Because the requirements of this subpart do not restrict or
otherwise establish the amount of fees that a network may charge for
its services, the increase in network fees charged to merchants or
acquirers and decrease in fees charged to issuers is not a per se
circumvention or evasion of the interchange transaction fee
standards, but may warrant additional supervisory scrutiny to
determine whether the facts and circumstances constitute
circumvention or evasion.
ii. An issuer replaces its debit cards with prepaid cards that
are exempt from the interchange limits of Sec. Sec. 235.3 and
235.4. The exempt prepaid cards are linked to its customers'
transaction accounts and funds are swept from the transaction
accounts to the prepaid accounts as needed to cover transactions
made. Again, this arrangement is not per se circumvention or
evasion, but may warrant additional supervisory scrutiny to
determine whether the facts and circumstances constitute
circumvention or evasion.
6(b)--Prohibition of Net Compensation
1. Net compensation. Net compensation to an issuer through the
use of network fees is prohibited.
2. Consideration of payments or incentives provided by the
network in net compensation determination.
i. For purposes of the net compensation determination, payments
or incentives paid by a payment card network to an issuer with
respect to electronic debit transactions or debit card related
activities could include, but are not limited to, marketing
incentives; payments or rebates for meeting or exceeding a specific
transaction volume, percentage share, or dollar amount of
transactions processed; or other payments for debit card related
activities. For example, signing bonuses paid by a network to an
issuer for the issuer's debit card portfolio would also be included
in the total amount of payments or incentives received by an issuer
from a payment card network with respect to electronic debit
transactions. A signing bonus for an entire card portfolio,
including credit cards, may be allocated to the issuer's debit card
business based on the proportion of the cards or transactions that
are debit cards or electronic debit transactions, as appropriate to
the situation, for purposes of the net compensation determination.
ii. Incentives paid by the network with respect to multiple-year
contracts may be allocated over the life of the contract.
iii. For purposes of the net compensation determination,
payments or incentives paid by a payment card network with respect
to electronic debit transactions or debit card-related activities do
not include interchange transaction fees that are passed through to
the issuer by the network, or discounts or rebates provided by the
network or an affiliate of the network for issuer-processor
services. In addition, funds received by an issuer from a payment
card network as a result of chargebacks, fines paid by merchants or
acquirers for violations of network rules, or settlements or
recoveries from merchants or acquirers to offset the costs of
fraudulent transactions or a data security breach do not constitute
incentives or payments made by a payment card network.
3. Consideration of fees paid by an issuer in net compensation
determination.
i. For purposes of the net compensation determination, fees paid
by an issuer to a payment card network with respect to electronic
debit transactions or debit card related activities include, but are
not limited to, membership or licensing fees, network administration
fees, and fees for optional network services, such as risk
management services.
ii. For purposes of the net compensation determination, fees
paid by an issuer to a payment card network with respect to
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electronic debit transactions or debit card-related activities do
not include network processing fees (such as switch fees and network
connectivity fees) or fees paid to an issuer processor affiliated
with the network for authorizing, clearing, or settling an
electronic debit transaction.
4. Example of circumstances not involving net compensation to
the issuer. The following example illustrates circumstances that
would not indicate net compensation by the payment card network to
the issuer:
i. Because of an increase in debit card transactions that are
processed through a payment card network during a calendar year, an
issuer receives an additional volume-based incentive payment from
the network for that period. Over the same period, however, the
total network fees (other than processing fees) the issuer pays the
payment card network with respect to debit card transactions also
increase so that the total amount of fees paid by the issuer to the
network continue to exceed incentive payments by the network to the
issuer. Under these circumstances, the issuer does not receive net
compensation from the network for electronic debit transactions or
debit card related activities.
Section 235.7--Limitations on Payment Card Restrictions
7(a)--Prohibition on Network Exclusivity
1. Scope of restriction. Section 235.7(a) requires an issuer to
configure each of its debit cards so that each electronic debit
transaction performed with such card can be processed on at least
two unaffiliated payment card networks. In particular, section Sec.
235.7(a) requires this condition to be satisfied for each geographic
area, specific merchant, particular type of merchant, and particular
type of transaction for which the issuer's debit card can be used to
perform an electronic debit transaction. As long as the condition is
satisfied for each such case, section Sec. 235.7(a) does not
require the condition to be satisfied for each method of cardholder
authentication (e.g., signature, PIN, biometrics, any other method
of cardholder authentication that may be developed in the future, or
the lack of a method of cardholder authentication). For example, it
is sufficient for an issuer to issue a debit card that can perform
signature-authenticated transactions only over one payment card
network and PIN-authenticated transactions only over another payment
card network, as long as the two payment card networks are not
affiliated and each network can be used to process electronic debit
transactions for every geographic area, specific merchant,
particular type of merchant, and particular type of transaction for
which the issuer's debit card can be used to perform an electronic
debit transaction.
2. Issuer's role. Section 235.7(a) does not require an issuer to
ensure that two or more unaffiliated payment card networks will
actually be available to the merchant to process every electronic
debit transaction. To comply with the requirement in Sec. 235.7(a),
it is sufficient for an issuer to configure each of its debit cards
so that each electronic debit transaction performed with such card
can be processed on at least two unaffiliated payment card networks,
even if the networks that are actually available to the merchant for
a particular transaction are limited by, for example, the card
acceptance technologies that a merchant adopts, or the networks that
the merchant accepts.
3. Permitted networks.
i. Network volume capabilities. A payment card network could be
used to satisfy the requirement that an issuer enable two
unaffiliated payment card networks for each electronic debit
transaction if the network was either (a) capable of processing the
volume of electronic debit transactions that it would reasonably
expect to be routed to it or (b) willing to expand its capabilities
to meet such expected transaction volume. If, however, the network's
policy or practice is to limit such expansion, it would not qualify
as one of the two unaffiliated payment card networks.
ii. Reasonable volume expectations. One of the steps a payment
card network can take to form a reasonable expectation of its
transaction volume is to consider factors such as the number of
cards expected to be issued that are enabled by an issuer on the
network and expected card usage patterns.
iii. Examples of permitted arrangements. For each geographic
area (e.g., New York State), specific merchant (e.g., a specific
fast food restaurant chain), particular type of merchant (e.g., fast
food restaurants), and particular type of transaction (e.g., card-
not-present transaction) for which the issuer's debit card can be
used to perform an electronic debit transaction, an issuer must
enable at least two unaffiliated payment card networks, but those
payment card networks do not necessarily have to be the same two
payment card networks for every transaction.
A. Geographic area: An issuer complies with the rule only if,
for each geographic area in which the issuer's debit card can be
used to perform an electronic debit transaction, the issuer enables
at least two unaffiliated payment card networks. For example, an
issuer could comply with the rule by enabling two unaffiliated
payment card networks that can each process transactions in all 50
U.S. states. Alternatively, the issuer could comply with the rule by
enabling three unaffiliated payment card networks, A, B, and C,
where network A can process transactions in all 50 U.S. states,
network B can process transactions in the 48 contiguous United
States, and network C can process transactions in Alaska and Hawaii.
B. Particular type of transaction: An issuer complies with the
rule only if, for each particular type of transaction for which the
issuer's debit card can be used to perform an electronic debit
transaction, the issuer enables at least two unaffiliated payment
card networks. For example, an issuer could comply with the rule by
enabling two unaffiliated payment card networks that can each
process both card-present and card-not-present transactions.
Alternatively, the issuer could comply with the rule by enabling
three unaffiliated payment card networks, A, B, and C, where network
A can process both card-present and card-not-present transactions,
network B can process card-present transactions, and network C can
process card-not-present transactions.
4. Examples of prohibited network restrictions on an issuer's
ability to contract with other payment card networks. The following
are examples of prohibited network restrictions on an issuer's
ability to contract with other payment card networks:
i. Network rules or contract provisions limiting or otherwise
restricting the other payment card networks that an issuer may
enable on a particular debit card, or network rules or contract
provisions that specify the other networks that an issuer may enable
on a particular debit card.
ii. Network rules or guidelines that allow only that payment
card network's (or its affiliated networks') brand, mark, or logo to
be displayed on a particular debit card, or that otherwise limit the
ability of brands, marks, or logos of other payment card networks to
appear on the debit card.
5. Network logos or symbols on card not required. Section
235.7(a) does not require that a debit card display the brand, mark,
or logo of each payment card network over which an electronic debit
transaction may be processed. For example, the rule does not require
a debit card that an issuer enables on two or more unaffiliated
payment card networks to bear the brand, mark, or logo of each such
payment card network.
6. Voluntary exclusivity arrangements prohibited. Section
235.7(a) requires that an issuer enable at least two unaffiliated
payment card networks to process an electronic debit transaction,
even if the issuer is not subject to any rule of, or contract or
other agreement with, a payment card network requiring that all or a
specified minimum percentage of electronic debit transactions be
processed on the network or its affiliated networks.
7. Affiliated payment card networks. Section 235.7(a) does not
prohibit an issuer from enabling two affiliated payment card
networks among the networks on a particular debit card, as long as
at least two of the networks that can be used to process each
electronic debit transaction are unaffiliated.
8. Application of rule regardless of form. The network
exclusivity provisions in Sec. 235.7(a) apply to electronic debit
transactions performed with any debit card as defined in Sec.
235.2, regardless of the form of such debit card. For example, the
requirement applies to electronic debit transactions performed using
a plastic card, a supplemental device such as a fob, information
stored inside an e-wallet on a mobile phone or other device, or any
other form of debit card, as defined in Sec. 235.2, that may be
developed in the future.
7(b)--Prohibition on Routing Restrictions
1. Relationship to the network exclusivity restrictions. An
issuer or payment card network is prohibited from inhibiting a
merchant's ability to direct the routing of an electronic debit
transaction over any of the payment card networks that the issuer
has enabled to process electronic debit transactions performed with
a particular debit card. The rule does not require that an issuer
allow a merchant to route a transaction over a payment card network
that the issuer did not enable to process transactions performed
with that debit card.
[[Page 78132]]
2. Examples of prohibited merchant restrictions. The following
are examples of issuer or network practices that would inhibit a
merchant's ability to direct the routing of an electronic debit
transaction and that are therefore prohibited under Sec. 235.7(b):
i. Prohibiting a merchant from encouraging or discouraging a
cardholder's use of a particular method of cardholder
authentication, for example prohibiting merchants from favoring a
cardholder's use of one cardholder authentication method over
another, or from discouraging the cardholder's use of any given
cardholder authentication method, as further described in comment
7(a)-1.
ii. Establishing network rules or designating issuer priorities
directing the processing of an electronic debit transaction on a
specified payment card network or its affiliated networks, or
directing the processing of the transaction away from a specified
payment card network or its affiliates, except as (A) a default rule
in the event the merchant, or its acquirer or processor, does not
designate a routing preference, or (B) if required by state law.
iii. Requiring a specific payment card network to be used based
on the form of debit card presented by the cardholder to the
merchant (e.g., plastic card, payment code, or any other form of
debit card as defined in Sec. 235.2).
3. Merchant payments not prohibited. A payment card network does
not restrict a merchant's ability to route transactions over
available payment card networks in violation of Sec. 235.7(b) by
offering payments or other incentives to encourage the merchant to
route electronic debit card transactions to the network for
processing.
4. Real-time routing decision not required. A merchant need not
make network routing decisions on a transaction-by-transaction
basis. A merchant and its acquirer or processor may agree to a pre-
determined set of routing choices that apply to all electronic debit
transactions that are processed by the acquirer or processor on
behalf of the merchant.
5. No effect on network rules governing the routing of
subsequent transactions. Section 235.7 does not supersede a payment
card network rule that requires a chargeback or return of an
electronic debit transaction to be processed on the same network
that processed the original transaction.
Section 235.8--Reporting Requirements and Record Retention
8(a)--Entities Required To Report
1. Two surveys. The Board conducts a survey of covered issuers
on a biennial basis using FR 3064a (OMB No. 7100-0344) and a survey
of payment card networks on an annual basis using FR 3064b (OMB No.
7100-0344). Each survey collects information concerning electronic
debit transactions performed during the previous calendar year.
2. Change in status. An issuer that is a covered issuer during
the year in which the Board conducts a survey of covered issuers but
was not a covered issuer during the previous calendar year is exempt
from the reporting requirement in Sec. 235.8.
8(b)--[Reserved]
8(c)--[Reserved]
Section 235.9--Administrative Enforcement
[Reserved]
Appendix B to Part 235--Determination of Base Component, Ad Valorem
Component, and Fraud-Prevention Adjustment
(a) In general. For every two-year period beginning with the
period from July 1, 2025, to June 30, 2027 (each an ``applicable
period''), the Board will determine the base component and the ad
valorem component as set forth in Sec. 235.3 and the fraud-
prevention adjustment as set forth in Sec. 235.4 using the approach
described in this appendix B.
(b) Basis for determination. The Board will determine the
amounts described in paragraph (a) of this appendix for an
applicable period using the data reported to the Board by covered
issuers pursuant to Sec. 235.8 concerning transactions performed
during the calendar year that is two years prior to the year in
which the applicable period begins.
(c) Base component--(1) Formula. The base component for an
applicable period is the product of the transaction-weighted average
of per-transaction allowable costs (excluding fraud losses) across
covered issuers, based on the data described in paragraph (b) of
this appendix, and 3.7, rounded to the nearest tenth of one cent.
(2) Allowable costs (excluding fraud losses). For purposes of
paragraph (c)(1) of this appendix, allowable costs (excluding fraud
losses) are the sum of costs of authorization, clearance, and
settlement, as reported on line 3a of section II of FR 3064a (OMB
No. 7100-0344), and transactions monitoring costs tied to
authorization, as reported on line 5a.1 of section II of FR 3064a
(OMB No. 7100-0344).
(3) Transaction-weighted average of per-transaction allowable
costs (excluding fraud losses) across covered issuers. For purposes
of paragraph (c)(1) of this appendix, the Board determines the
transaction-weighted average of per-transaction allowable costs
(excluding fraud losses) across covered issuers by:
(i) Summing allowable costs (excluding fraud losses) across
covered issuers that reported allowable costs (excluding fraud
losses);
(ii) Dividing this sum by the sum of the total number of
electronic debit transactions, as reported on line 1a of section II
of FR 3064a (OMB No. 7100-0344), across covered issuers that
reported allowable costs (excluding fraud losses); and
(iii) Rounding this result to the nearest tenth of one cent.
(d) Ad valorem component--(1) Metric. The ad valorem component
for an applicable period is, for a particular electronic debit
transaction, the median ratio of issuer fraud losses to transaction
value among covered issuers, based on the data described in
paragraph (b) of this appendix, rounded to the nearest quarter of
one basis point, multiplied by the value of the electronic debit
transaction.
(2) Ratio of issuer fraud losses to transaction value. For
purposes of paragraph (d)(1) of this appendix, issuer fraud losses
are the value of fraud losses incurred by the covered issuer, as
reported on line 8b of section II of FR 3064a (OMB No. 7100-0344).
The ratio of issuer fraud losses to transaction value is issuer
fraud losses divided by the total value of electronic debit
transactions reported on line 1a of section II of FR 3064a (OMB No.
7100-0344).
(3) Median ratio of issuer fraud losses to transaction value
among covered issuers. For purposes of paragraph (d)(1) of this
appendix, the Board determines the median ratio of issuer fraud
losses to transaction value among covered issuers by:
(i) For each covered issuer that reported issuer fraud losses,
determining the ratio of issuer fraud losses to transaction value;
(ii) Sorting these ratios in ascending order; and
(iii) Selecting the ratio in the middle (if the number of ratios
is odd) or calculating the simple average of the two ratios in the
middle (if the number of ratios is even).
(e) Fraud-prevention adjustment--(1) Metric. The fraud-
prevention adjustment for an applicable period is the median per-
transaction fraud-prevention costs among covered issuers, based on
the data described in paragraph (b) of this appendix, rounded to the
nearest tenth of one cent.
(2) Per-transaction fraud-prevention costs. For purposes of
paragraph (e)(1) of this appendix, fraud-prevention costs are total
fraud-prevention and data-security costs, as reported on line 5a of
section II of FR 3064a (OMB No. 7100-0344), minus transactions
monitoring costs tied to authorization, as reported on line 5a.1 of
section II of FR 3064a (OMB No. 7100-0344). Per-transaction fraud-
prevention costs are fraud-prevention costs divided by the total
number of electronic debit transactions reported on line 1a of
section II of FR 3064a (OMB No. 7100-0344).
(3) Median per-transaction fraud-prevention costs among covered
issuers. For purposes of paragraph (e)(1) of this appendix, the
Board determines the median per-transaction fraud-prevention costs
among covered issuers by:
(i) For each covered issuer that reported fraud-prevention
costs, determining per-transaction fraud-prevention costs;
(ii) Sorting these values in ascending order; and
(iii) Selecting the value in the middle (if the number of values
is odd) or calculating the simple average of the two values in the
middle (if the number of values is even).
(f) Publication of applicable amounts. The Board will publish in
the Federal Register the amounts described in paragraph (a) of this
appendix for an applicable period no later than March 31 of the
calendar year in which the applicable period begins.
By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2023-24034 Filed 11-13-23; 8:45 am]
BILLING CODE 6210-01-P
