Durbin Amendment & Fed Rules Q&A

Here’s a good and thorough list of questions and answers on the Durbin amendment and Fed’s proposed rules from BAMS.

1.What is the official name of the reform act?
Section 1075, which contains the Durbin Amendment (sometimes referred to as a provision or act), is but one section in the comprehensive financial services overhaul law called the Dodd-Frank Wall Street Reform and Consumer Protection Act.
2.Why is it called the Durbin Amendment?
Senator Richard Durbin offered an amendment to the Senate version of the financial regulatory overhaul bill. His amendment, which received support from nearly two-thirds of the Senate, was later modified and included in the final Wall Street Reform Act that President Obama signed into law on July 21, 2010.
3.Which agencies are responsible for writing and enforcing the regulations associated with the Durbin Amendment?
The Federal Reserve Board has sole authority to write the implementing regulations mandated in Section 1075 of the Wall Street Reform Act, which include the following:

  1. Regulations to establish the debit interchange fee parameters
  2. Regulations on fraud standards that may be incorporated into calculating the debit interchange rates
  3. Regulations on network fees
  4. Regulations that prohibit exclusive network arrangements for debit processing
  5. Regulations that allow merchants to direct the routing of payment transactions

The Federal Reserve Board will also be the enforcement agency for these regulations.

4.Are any parts of the legislation effective now?
When the Act was signed into law on July 21, 2010 two rules were made effective immediately.

  1. Limitations on restrictions on setting transaction minimums or maximums.
  • All Merchants will be allowed to set a minimum transaction amount for the acceptance of credit cards provided:
    • The value does not to exceed $10 (The Federal Reserve Board can increase the amount)
    • The value does not differentiate between issuers or card networks.
  • Any federal agency or institution of higher education will be allowed to set a maximum transaction amount on the acceptance of credit cards provided:
    • The value does not differentiate between issuers or card networks.
  1. Limitation on restrictions on offering discounts for use of a form of payment.

    A payment card network shall not inhibit the ability of a merchant to provide a discount or in-kind incentive for payment by the use of cash, check, debit card, or credit card provided:

  • The discount or in-kind incentive does not differentiate on the basis of the issuer or payment card network, and is offered to all buyers, and disclosed clearly.
5.How did the Federal Reserve Board address debit interchange rates in the proposed regulations? Is there a distinction between signature debit interchange rates and PIN debit interchange rates?
The Federal Reserve Board has proposed two alternatives for calculating debit interchange rates, but both would cap debit interchange rates at $0.12 per transaction. No distinction was made for PIN debit interchange rates versus signature debit interchange rates.

  • Proposed
    Alternative 1
    : Issuers would be permitted to charge an interchange fee of 7 cents per transaction and may charge an interchange fee in excess of 7 cents as necessary to recover their average variable costs for authorization, clearance and settlement, but in no event may the interchange fee exceed 12 cents per transaction.
  • Proposed Alternative 2: Issuers would be permitted to receive or charge a debit interchange rate at a level not to exceed $0.12 per transaction.
6.Did the proposed regulations address exclusive network arrangements as contemplated in Section 1075?
Yes, the Federal Reserve Board’s draft regulations seek comments on two alternatives for meeting the network exclusivity provisions in Section 1075:

  • Proposed
    Alternative 1: Require all debit card issuing financial institutions to enable two unaffiliated networks on their cards without regard to the authorization method (for example, one signature network and one PIN network—but the two networks cannot be affiliated).
  • Proposed Alternative 2: Require debit card issuers to enable more than one unaffiliated network for each authorization method (for example, two unaffiliated signature networks and two unaffiliated PIN networks) on their debit cards.
7.Were there any regulations written that cover fraud—what regulations address fraud?
The Wall Street Reform Act allows the Federal Reserve Board to make adjustments to debit interchange rates based on fraud prevention costs incurred by an issuer. However, the law also indicates that in order for an interchange adjustment to occur, it must be “reasonably necessary” and the issuer must be in compliance with the fraud-related standards to be established by the Federal Reserve Board.

In its proposed regulations, the Federal Reserve Board did not include a specific amount by which to adjust interchange rates for fraud prevention standards. The Federal Reserve Board has, instead, included questions for public feedback and may issue a separate notice of proposed rulemaking in 2011 specifically on fraud prevention standards.

8.The Federal Reserve Board released their proposed regulations on December 16, 2010. Will the public have the opportunity to comment on the regulations? If so, how long is the comment period?
On December 16, 2010, the Federal Reserve Board released proposed regulations covering debit interchange rates, debit networks and merchant routing and acceptance of debit transactions. Any member of the public can comment on the proposed regulations, and they have until February 22, 2011 to submit comments. Public comments can be viewed on the Boards’ website at: www.federalreserve.gov/generalinfo/foia/index.cfm?doc_id=R%2D1404&doc_ver=1&ShowAll=Yes
9.How might public comment affect the proposed regulations?
The Federal Reserve Board will analyze the responses to its proposed regulations, and based on public input could issue final regulations which may vary slightly, moderately or significantly from what was proposed.
10.When would the new regulations take effect?
There are different components of the Durbin Act that have different effective dates. See question 5 for rules effective now. Additional rules are due from the Federal Reserve Board as follows:

April 21, 2011—Final rule for Interchange Fee Standards

July 21, 2011—Final rule for Network Exclusivity and Routing

11.How is Bank of America Merchant Services getting its information from the Federal Reserve Board? What activities are you involved in?
Bank of America Merchant Services regularly monitors and analyzes federal regulations.
In addition, we take advantage of the various public comment periods to communicate with federal regulators, including the Federal Reserve Board. We also respond to inquiries from federal regulators as appropriate.
12.To whom does Durbin provision in the Wall Street Reform Act apply? Are there any exceptions?
The Durbin provision in the Wall Street Reform Act applies to debit networks, debit card issuers and merchants. For example, the new law requires the Federal Reserve Board to establish parameters around PIN and signature debit interchange rates, and allows merchants to set a minimum amount for credit card acceptance, while also allowing merchants to establish discounts or incentives to steer their customers to alternative payment methods.

The Durbin provision includes some specific exceptions from the debit interchange rate setting provisions, including the following:

  • issuers with assets of less than $10 billion (including with affiliates) are exempt from debit interchange rate regulation;
  • Government electronic benefit transfer cards are exempt from debit interchange rate regulation;
  • General purpose reloadable open-loop prepaid cards are exempt from debit interchange regulation, provided that, beginning July 21, 2011 they are not subject to overdraft fees or the first in-network ATM fee per month.
13.Are banks with less than $10B exempt from all regulation?
The Wall Street Reform Act provides an exemption from debit interchange regulation for financial institutions (and their affiliates) that have less than $10 billion in assets. However, all other provisions, including network exclusivity, apply to all financial institutions regardless of size.
14.What does the Durbin provision mean for merchants?
The Wall Street Reform Act will allow merchants to control the routing of debit card transactions (previously, issuers and networks had control over routing), and imposes restrictions on exclusive arrangements between a debit network and an issuer. In addition, the law currently allows merchants to set a minimum amount for credit card acceptance, and to establish discounts or incentives within certain limits to incent their customers to pay with an alternative payment method.
15.Is Bank of America Merchant Services prepared to handle the changes that Durbin will require?
As the number one-rated electronic payments company in the industry1, Bank of America Merchant Services is in a unique position in the payments industry and will be prepared for the changing regulatory environment.

1Based on sales volume and transactions. Per The Nilson Report, March 2010, Issue 945.

16.How will Bank of America Merchant Services help its clients address changes due to the new law?
Bank of America Merchant Services will continue to update our clients on the general impacts of the Durbin Amendment. You may also want to monitor the Federal Reserve Board’s website at: www.federalreserve.gov.
17.Will issuers be required to have multiple network options for merchants on each card?
The Federal Reserve Board’s proposed regulations present two alternatives for addressing the network exclusivity provision in Section 1075, as mentioned earlier. It is unclear at this point in time which alternative the Federal Reserve Board will mandate for card issuers. However, the Federal Reserve Board has until July 2011 to finalize its regulations around network exclusivity.
18.Do you have any idea when we should expect to see regulatory changes from the card organizations to support these new laws?
Until the Federal Reserve Board finalizes its regulations, we cannot speculate on actions or the timeframe the payment card brands will require to implement changes.
19.When will information be released on the maximum amounts that government agencies and higher education can set on credit card acceptance?
At this time, it does not appear that the government will provide any more information about this issue. The law prohibits payment card networks from inhibiting any federal governmental entities or institutions of higher learning from establishing maximum credit card transaction amounts. Each of these entities will likely need to be contacted to understand whether they plan to implement their own maximum credit card usage amounts.
20.Is there any guidance on the minimum amount a merchant can set for credit card transactions?
The law prohibits payment card networks from inhibiting a merchant from establishing a minimum amount for credit card acceptance. By law, that minimum credit card acceptance amount cannot exceed $10, and if used by a merchant, must be established to all credit cards regardless of card issuer or card brand. In addition, the Federal Reserve Board has been given the authority to periodically increase the minimum credit card transaction amount as it deems necessary.
21.Regarding the setting of a maximum transaction amount, will that apply to State agencies, or only agencies at the federal level?
The law does not apply to State agencies, only Federal agencies.
22.Are federal and educational institutions the only organizations that can set maximums? Auto dealerships have been doing for a while. Please elaborate.
Yes. The Wall Street Reform Act specifically allows federal governmental entities and institutions of higher education to set maximums. It does not stipulate any other entity that can set maximum amounts for credit card usage.
23.What are the rules around communications to the consumer of discounts and incentives available based on card type?
Merchants must clearly and conspicuously post their incentive policy and must provide the discounts to all customers.
24.Can you give an example of an incentive where there is no discrimination?
If a merchant wants to provide an incentive for a consumer to pay with cash, check or debit, the merchant must clearly and conspicuously disclose the discount to consumers, the merchant must offer the discount to all consumers, and the merchant cannot discriminate based on card brand or card issuer.

For example, if you were to offer a 5% discount for customers who pay with debit, you would have to clearly and conspicuously disclose the discount, offer the discount to all customers, offer the discount regardless of the debit card brand, and offer the discount regardless of the debit card issuer.

25.Can merchants assess a surcharge for card payments?
The Wall Street Reform Act does not allow for merchants to impose surcharges for card payments. It only allows for discounts, based on the previously mentioned criteria.
26.Are credit card rates also being regulated?
Credit card interchange regulation was not included in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Federal regulators cannot impose regulations on credit card interchange rates without authority (e.g. new law) from Congress and the President.
27.Can you give an example of a network fee that an issuer receives (versus the card brands) outside of interchange?
An example of a network fee received by an issuer could be in the form of a rebate.
28.Do the restrictions apply to private label cards?
The law primarily applies to debit cards. However, the law’s provision relating to minimums and maximums for credit cards appears to apply to all credit cards, including private label.
29.How will the Federal Reserve Board ensure merchants and processors can identify exempt cards?
It will be up to the Federal Reserve Board’s regulations to outline a strategy to ensure compliance.
30.I read about a settlement between the U.S. Department of Justice and VISA® and MasterCard® that prohibits the networks from imposing antidiscrimination requirements on merchants that accept network-branded cards. How is that settlement different from Durbin?
The Department of Justice’s proposed settlement with VISA and MasterCard does not address debit interchange rates as the Durbin provision does, and it does not specify minimum transaction amounts for payment with a credit card, as the Durbin provision does (Section 1075 of the Wall Street Reform Act – Durbin – allows merchants to set up to a $10 minimum threshold amount for credit card payments.). The proposed Department of Justice settlement primarily addresses credit card practices deemed to be discriminatory and requires the global card brands to generally allow merchants to incent customers to use other credit card brands and types of payment mechanisms.


2 Comments

  • Michael Weiss

    Interesting information, however I’m puzzled as to why you are still promoting Pin/Pinless debit as a way to reduce debit card fees. Part of the durbin amendment states that there will no longer be a price difference between signature debit and pin debit. We have opted out of implementing a pinless debit solution because of this.

    • anandkgoel

      Durbin will impact PIN steering and PINless debit transactions. However, financial institutions will assets less than $10 billion are exempt from the interchange caps. Last month, Visa announced that they would maintain two interchange tiers – the current structure for smaller banks and the capped debit fees for larger banks (read more here – http://www.cutimes.com/Issues/2011/January-19-2011/Pages/Visa-to-Support-Dual-Schedule.aspx?page=3). Our preliminary analysis shows that 30% of the debit transactions come from cards issued by smaller banks. So PIN steering and PINless debit will still be important to large merchants.

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