Fed Proposes Troubling Interchange Fee Rule

Posted by Marissa Anema Friday, December 17, 2010 12:45:56 PM

WASHINGTON - The Fed on Thursday issued for public comment its proposed rules addressing interchange fees.

The proposal, which was required by the recently enacted Dodd-Frank financial regulatory reform package, will allow the Fed to set interchange fees. Card issuers with under $10 billion in assets would be exempt from the proposed rule changes. This exemption covers most, but not all, credit unions. Government administered debit cards would be exempt from interchange rules as well.

The Fed has offered dueling frameworks for assessing the interchange fees. One framework would provide issuers with a safe harbor of 7 cents per transaction, and sets a maximum interchange fee cap of 12 cents per transaction. An alternative framework would simply cap the maximum interchange fee at 12 cents per transaction. These safe harbors and/or caps would be reevaluated by the Fed every two years.

The Fed included costs related to switching and data processing, but did not include fraud prevention costs in its interchange rate determination. The Fed did, however, examine fraud costs. The proposal also does not require payment networks to establish a two-tiered system.

Card issuers would be permitted to use interchange fee revenues to recover costs related to transaction authorization, clearance, and settlement via interchange fees. However, income from the interchange fees would not be used to cover costs related to debit card production or distribution, general deposit accounts, overhead, and cardholder rewards programs.

During the meeting, Fed officials said that they could not predict how the new interchange rules would impact the finances of consumers or the competitive landscape for card issuers.

Fed officials said it was "unlikely" that the Fed would release its final rule by the statutory implementation date of April 21. The proposal will remain out for public comment until February 22.

CUNA has estimated that up to 67% of credit unions would lose money on their debit card programs if the interchange regulations reduced interchange-related revenues by 40%. CUNA President/CEO Bill Cheney on Thursday expressed strong concern about the interchange proposal's potential cost to credit unions and their members.

CUNA has already done a considerable amount of work on the issue through its Interchange Working Group. With the release of this proposal, it will work closely with leagues, credit unions, and outside consultants to coordinate a strategy that will include formal comments to the Fed, weighing in with other important policymakers, and consideration of potential legal action. 

The Fed's media advisory is available at: http://www.federalreserve.gov/newsevents/press/bcreg/20101216a.htm


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