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Fed Adopts Improved Debit Interchange Rule

Posted on 6/29/2011

The Federal Reserve approved a final debit-card interchange rule that caps an issuer's base fee at 21 cents per transaction and allows an additional 5-basis-point charge per transaction to help cover fraud losses.

The Fed also issued an interim final rule that allows a fraud-prevention adjustment of 1 cent per transaction based on an issuer adopting effective fraud prevention policies and procedures.

The Fed also adopted requirements for issuers to include two unaffiliated networks for routing debit transactions -- one signature-based, one PIN-based. The effective date for the final and interim final rules on the pricing and routing restrictions is Oct. 1.

For an average $40 transaction, the new combined rate of 24 cents -- including the fraud-loss surcharge -- enables issuers to recover twice as much as they would have been allowed under the Fed's original 12-cent price-cap proposal.

Because the 5-basis-point adjustment for fraud losses will fluctuate with the size of the transaction, the interchange level will also fluctuate. The new pricing, however, is still about a 45 percent reduction from current market rates and will hurt revenue at all banks, including community banks.

Though the Fed noted that it has limited ability to enforce the statutory exemption for issuers with under $10 billion in assets, the agency's staff recommended that the board take steps to reinforce the exemption. The steps include publishing annual lists of institutions that fall above and below the $10 billion threshold to help payment card networks determine which issuers are subject to the caps.

They also include producing an annual survey of the average interchange transaction fee each network provides to covered and exempt issuers. Such reports will allow issuers to compare revenue they would receive from each network and allow others to monitor the effects of the law, the Fed's staff memo said.

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