Today the Federal Reserve Board issued final rules of the Durbin Amendment, part of the Dodd-Frank Act signed into law in July 2010 by President Obama. The Durbin Amendment gave authority to the Federal Reserve to regulate debit (signature, PIN, and PINless) interchange fees and transaction routing.
The Fed presented draft rules on December 16, 2010, where they had two alternative approaches to capping debit interchange fees and two alternative approaches to transaction routing. After considering over 11,000 comments from consumers, lawmakers, academics, and industry personnel over the last six months, the Fed presented the following rules. Here are the salient points and dates. Click here to read the full text of the final rules or a shorter memo of the final rules.
- Debit Interchange Pricing
- Transaction Routing
The two alternatives proposed in December essentially capped debit interchange fees at $0.12 per transaction. Merchants were elated and banks were distraught. The final rule sets out a three-part formula for calculating debit interchange fees – a cap of $0.21 plus 5 basis points (0.05%) of the transaction’s value to cover losses from fraud plus $0.01 to cover costs of investments in fraud-prevention measures. In order to charge the extra penny, banks must meet certain Fed standards. So a $40 debit transaction will at most cost $0.24, down 45% from the previous average cost of $0.44. Note that merchants with higher average tickets will realize greater savings and merchants with lower average tickets will realize smaller savings, if any.
This new pricing becomes effective October 1, 2011.
Lastly, banks with assets less than $10 billion are exempt from these caps. Based on the announcement from Visa earlier this year and MasterCard likely following suit, there will be 2-tier debit interchange rates. Merchants will continue to pay existing debit interchange for cards issued by exempt banks and merchants will pay the new lower debit interchange for debit cards issued by larger financial institutions. Based on our preliminary analysis, we estimate that roughly 20%-30% of all debit transactions will come from exempt debit card issuers.
Here are the two alternatives that were proposed in December – approach one required at least two unaffiliated networks per debit card, and approach two required at least two unaffiliated networks per debit card for each type of cardholder authorization method (e.g. signature and PIN). Today, the Fed adopted the first alternative – issuers must put two unaffiliated networks on each card. The two unaffiliated networks could be one signature network and one PIN network, or two PIN networks, or two signature networks. Most likely, issuers will adopt one signature and one PIN network.
The transaction routing provision becomes effective April 1, 2012. This provision for non-reloadable prepaid cards and healthcare issuers becomes effective April 1, 2013.
Many questions will remain unanswered until the card networks release new debit interchange pricing schedules in the next three months. For instance, many merchants want to know…
- Is there a debit pricing differential between card present and card not present? If so, what?
- Is there a debit pricing differential between PIN, PINless, and signature debit? If so, what?
- Small ticket merchants (think vending machines or parking meters) have debit interchange rates that are significantly less than the new cap of $0.21 plus 5 basis points. Will their interchange fee increase or remain the same?
We will continue to monitor the developments in the marketplace and provide our clients and readers updates as they become available. E-mail us with questions at email@example.com.
A final note – the Durbin Amendment also allowed merchants to set credit card minimums at $10 and allowed merchants to offer discounts for different types of payments. These two provisions became effective July 21, 2010.