WASHINGTON -- The Federal Reserve Board on Wednesday issued a final rule establishing standards for debit-card interchange or "swipe" fees and prohibiting network exclusivity arrangements and routing restrictions. It voted to set the cap on the fees at 21 cents--more than expected and much higher than the 12-cent cap it had proposed earlier.
Merchants reacted with serious concern and anger to the Fed's decision, which made significant concessions to big banks and deviated from the proposed rule and the intent of the law, said the Merchants Payments Coalition (MPC), which "[image-nocss] is exploring all available legal options to address the irresponsible mistakes made in writing this rule," it said.
"The Fed's rule is an irresponsible abdication of its legal duty to implement the law as written in favor of doing the bidding of the nation's largest banks," said Lyle Beckwith, senior vice president of government relations at the National Association of Convenience Stores (NACS), a coalition member.
"Final rules should look like proposed rules. This should have been a clear victory for consumers. We are left to believe that the credibility of the [Fed] is in question because it's obvious that political pressure from the big banks has impacted the outcome of the final rules," said NACS chairman Jeff Miller, who is president of Norfolk, Va.-based Miller Oil Co. "A cap of 21 cents per transaction is better than the current average of 44 cents per transaction, but it is more than 400% more than the 4 cents per transaction that the a Fed-sponsored survey of banks found to be the real cost of processing a debit transaction."Click on the video below orclick here to watch the June 29 Fed meeting (the meeting officially begins at approximately the 11:15 mark; use the scroll bar to move forward to that point).
Mallory Duncan, MPC chairman, added, "The Federal Reserve very clearly did not follow through on the intent of the law. This rule is unacceptable to Main street merchants and consumers, who were counting on the Fed to issue a fair rule that followed Congress' law. Unfortunately, this rule does not meet those qualifications."
In its proposed rule issued last December, the Federal Reserve found that the average PIN debit swipe fee cost 23 cents per transaction--and that the average cost for a bank to process a transaction was 4 cents.
"Today's action actually increases costs on the most secure PIN debit transactions and is irresponsible and certainly not reasonable," said Jennifer Hatcher, senior vice president of government and public affairs at the Food Marketing Institute (FMI).
The Retail Industry Leaders Association (RILA) criticized the Fed's ruling as failing to honor the intent of the bipartisan reforms passed by Congress. "The rule, which guides implementation of the debit swipe-fee reforms, is a startling departure from rules that the [Fed] proposed in December and will ultimately prevent the intended relief from reaching merchants and consumers," the group said.
"The announcement ... is a disappointment to merchants and consumers who face unfair and excessive fees imposed by big banks and credit-card companies," said RILA president Sandy Kennedy. "The [Fed's] about-face suggests it abandoned the facts that the board embraced in the December proposed rules, instead ceding to the wishes of the big banks and credit-card companies."
The Fed "has badly damaged its credibility. The merchant community will explore its options to implement the debit interchange relief that Congress intended," Kennedy added.
The rule, Regulation II (Debit Card Interchange Fees & Routing), is required by the Dodd-Frank Wall Street Reform & Consumer Protection Act.
Debit-card interchange fees are established by payment card networks and ultimately paid by merchants to debit-card issuers for each electronic debit transaction. As required by the statute, the final rule establishes standards for assessing whether debit-card swipe fees received by debit-card issuers are "reasonable and proportional" to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and five basis points multiplied by the value of the transaction.
This provision regarding debit-card swipe fees is effective on October 1, 2011.
The Fed also approved on Wednesday an interim final rule that allows for an upward adjustment of no more than 1 cent to an issuer's debit-card swipe fee if the issuer develops and implements policies and procedures reasonably designed to achieve the fraud-prevention standards set out in the interim final rule. If an issuer meets these standards and wishes to receive the adjustment, it must certify its eligibility to receive the adjustment to the payment card networks in which it participates. Comments on the interim final rule are due by September 30, 2011.
The fraud-prevention adjustment is effective on October 1, 2011, concurrent with the debit-card swipe fee limits. The Fed will re-evaluate this adjustment in light of feedback received during this comment period.
When combined with the maximum permissible swipe fee under the interchange fee standards, a covered issuer eligible for the fraud-prevention adjustment could receive an interchange fee of up to approximately 24 cents for the average debit-card transaction, which is valued at $38.
In accordance with the statute, issuers that, together with their affiliates, have assets of less than $10 billion are exempt from the debit-card swipe fee standards. To assist payment card networks in determining which of the issuers are subject to the debit card interchange fee standards, the Fed plans to publish by mid-July and annually thereafter lists of institutions that are above and below the small-issuer exemption asset threshold. Also, the Fed plans to annually survey the networks and publish a list of the average interchange transaction fees each network provides to its covered and exempt issuers. This information should enable issuers, including small issuers, to more readily compare the interchange revenue they would receive from each network.
The final rule prohibits all issuers and networks from restricting the number of networks over which electronic debit transactions may be processed to less than two unaffiliated networks. The effective date for the network exclusivity prohibition is April 1, 2012, with respect to issuers, and October 1, 2011, with respect to payment card networks. Issuers of certain health-related and other benefit cards and general-use prepaid cards have a delayed effective date of April 1, 2013, or later in certain circumstances.
Issuers and networks are also prohibited from inhibiting a merchant's ability to direct the routing of the electronic debit transaction over any network that the issuer has enabled to process them. The merchant routing provisions are effective on October 1, 2011.
Meanwhile, as merchants, banks and issuers awaited the Fed's decision, the 8th Circuit District Court of Appeals denied financial institution TCF's request for an injunction against the Durbin amendment, said UnfairCreditCardFees.com. In its decision, the court found that TCF was unable to prove a cornerstone of its argument and show that the Fed's proposed 12-cent swipe fee cap was below the cost of processing a transaction.
Click hereto read the full text of the final rule.
(Andclick here for previous CSP Daily News swipe-fee reform coverage.)
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.