On June 29, 2011, the Federal Reserve Board approved its final interchange rules, entitled Regulation II, “Debit Card Interchange Fees and Routing,” setting the maximum permissible interchange fee that an issuer may receive for an electronic debit transactions made with debit cards and general use prepaid cards, codes, and other account access devices.

Under the final rules, issuers are permitted to charge a base fee of 21 cents plus 5 basis points (.05%) multiplied by the full value of the transaction, to cover fraud losses.  In addition, a 1 cent per transaction fraud prevention adjustment was also proposed, for those issuers who meet eligibility requirements (such as having fraud prevention and data security policies and procedures in place, which must be updated and certified on an annual basis.)  The fraud prevention adjustment rules are new, and are open for comment through September 30, 2011.

Under the new rules, a covered $50 debit or prepaid transaction would have a total possible interchange fee of  = 23.5¢ [21¢ + 2.5¢ ($50 x .05  /100) + 1¢], and a $500 transaction would have a total possible interchange fee of  = 47¢  [21 ¢ + 25¢ ($500 x.05 /100) + 1¢].   While this is a significant improvement over the original suggested cap of 12¢, it still represents a substantial decrease in interchange revenues for both prepaid and debit card issuers.

Among the more controversial aspects of the Final Rules were:

  • The decision not to require payment networks to implement a two-tier system that would ensure that exempt entities, such as banks with less than $10 billion in assets, will receive the benefits of their exemptions.   Instead, the Board will be surveying and publishing average interchange rates for exempt and non-exempt banks, in order to monitor the effectiveness of the small bank exemption.
  • The decision to exclude “three-party systems” in which the same entity is the Issuer and the Acquirer for the debit or prepaid card. Also excluded are ATM and ACH payment transactions.
  • The full exemption for all products using a bona fide trust arrangement that meets Internal Revenue Code requirements –  which benefits many HSA/HRA card issuers.
  • The additional requirement for exempt reloadable general-use prepaid cards to be the sole means for the cardholder to access the funds.  Thus, while an exempt reloadable prepaid card may be loaded via ACH, the cardholder cannot use ACH or convenience checks to make payments from the prepaid card account – without the issuer losing the exemption.
  • The requirement that the payment networks develop policies and procedures to determine which entities are eligible for exemptions.
  • The decision to include within the scope of the regulations both business and personal accounts, as well as prepaid cards that rely on “selective authorization” such as University cards and Mall cards.

The Board also approved rules governing routing and exclusivity, requiring issuers to offer two unaffiliated networks for routing debit transactions on each debit or prepaid product. The cards must have either one signature network and unaffiliated one PIN network, or a two unaffiliated PIN networks or two unaffiliated signature networks.

The new Interchange Rules go into effect on October 1st, 2011, as opposed to July 21 as originally dictated by the Durbin Amendment.  Most of the Routing Rules go into effection on April 1, 2012, although some provisions (relating to prepaid cards and HSA/HRA cards go into effect on April 1, 2013.