Compliance Guide to Small Entities
Regulation II: Debit Card Interchange Fees and Routing
12 CFR 235
What does section 920 of the Electronic Fund Transfer Act require?
Section 920 of the Electronic Fund Transfer Act (EFTA) was added by Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It contains several provisions related to debit cards and electronic debit transactions. First, it requires that the amount of any interchange fee that an issuer of debit cards receives or charges with respect to an electronic debit transaction be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Section 920 directs the Board to establish standards for assessing whether the amount of any interchange fee is reasonable and proportional to the cost incurred by the issuer.2 This portion of section 920 limiting the interchange fee that an issuer may receive from or charge to a merchant does not apply to interchange fees of debit card issuers with total assets below $10 billion.
Section 920 of the EFTA also directs the Board to prohibit issuers and payment card networks from restricting the number of payment card networks over which an electronic debit transaction may be processed to one network (or two affiliated networks). In addition, it directs the Board to prohibit issuers and networks from inhibiting the ability of a merchant to direct the routing of an electronic debit transaction to any network that may process the transaction. These two provisions do not contain exceptions for small issuers of debit cards.
Regulation II implements the provisions of section 920 of the EFTA that govern debit card interchange fees and network routing and exclusivity limitations.
Section 920 of the EFTA also addresses discounts at the point of sale and transaction minimums. Specifically, section 920 prohibits networks from inhibiting the ability of merchants to provide discounts or in-kind incentives for payments by cash, check, debit card, or credit card. Networks, however, may prohibit discounts and incentives to the extent that the discounts differentiate among issuers or networks. Section 920 also prohibits networks from inhibiting the ability of merchants to set credit card minimums below $10 that do not differentiate among issuers or networks.3 These provisions of section 920 are self-executing and have not been addressed in Regulation II.
What does the rule require for issuers subject to the interchange fee standard?
The debit card interchange fee limitations in section 920 of the EFTA and in Regulation II do not apply to issuers with less than $10 billion in assets (discussed further below). Section 920 requires that the amount of any interchange fee that an issuer receives or charges with respect to an electronic debit transaction be reasonable and proportional to the cost incurred by the issuer with respect to the electronic debit transaction. Regulation II provides that an issuer complies with this requirement if the amount of the base level of each interchange fee received or charged by the issuer does not exceed 21 cents plus a variable factor equal to 5 basis points multiplied by the value of the transaction.
In addition to the base interchange fee level, an issuer subject to the interchange fee standards may receive or charge up to 1 cent per transaction provided the issuer meets the fraud-prevention standards described in Regulation II. Those standards require issuers to develop and implement policies and procedures reasonably designed to identify and prevent fraudulent electronic debit transactions, monitor the incidence of fraudulent transactions and losses from fraud, respond appropriately to suspicious electronic debit transactions, and secure debit card and cardholder data. An issuer that receives the fraud-prevention adjustment must review its policies and procedures annually and update them as appropriate.
The rule prohibits an issuer that is subject to the interchange fee standards from circumventing or evading the interchange fee restrictions. A finding of circumvention or evasion will depend on all relevant facts and circumstances. The rule addresses one type of circumvention directly. The rule prohibits an issuer from receiving "net compensation" from a payment card network with respect to electronic debit transactions or debit card-related activities within a calendar year. Net compensation occurs when the total amount of payments or incentives received by an issuer from a payment card network with respect to electronic debit transactions exceeds the total amount of all fees paid by the issuer to the network with respect to electronic debit transactions or debit-card-related activities.
Regulation II requires issuers that are subject to the interchange fee standards to retain evidence of compliance with the regulation's requirements for not less than 5 years from the end of the calendar year in which the electronic debit transaction occurred. In order to allow the Board to monitor compliance with the requirements of section 920, the rule contemplates that issuers and networks will be required to report to the Board certain information regarding the costs of debit card transactions and the level of debit card interchange fees. This information may include, but is not limited to, information regarding transaction costs, interchange fees received, network fees, fraud-prevention costs, fraud losses, and transaction value, volume, and type.
Which issuers are not subject to the interchange fee standards?
The interchange fee standards do not apply to interchange fees charged or received by an issuer that, together with affiliates, has total assets of less than $10 billion and that holds the account being debited. For this purpose, total assets are measured at the end of the calendar year preceding the date of the transaction.4 The Board will publish annually lists of institutions with consolidated assets of less than $10 billion and those with consolidated assets of $10 billion or more. For purposes of determining whether an issuer is exempt, networks may rely on the lists published by the Board. These lists are available at http://www.federalreserve.gov/paymentsystems/debitfees.htm. Networks may require an issuer that is not on either list to certify whether it has consolidated assets of less than $10 billion.5
Payment card networks are not required by section 920 to establish higher interchange fees for exempt issuers (i.e., establish a two-tier fee structure) though section 920 and Regulation II permit networks to collect higher interchange fees for exempt small issuers. In order to assist small issuers in identifying which networks have implemented two-tier fee structures, the Board will publish annually a list of the average interchange fee each network provides to its covered issuers and exempt issuers.
Which fees are not subject to the Board's standards?
In addition to the exemption discussed above for small issuers, section 920 and Regulation II do not apply in certain other situations, regardless of the asset size of the issuer. The interchange fee standards in Regulation II do not apply if the fee meets any one of the following conditions--
- The fee is not an interchange fee. An interchange fee is any fee established, charged, or received by a payment card network and paid by a merchant or an acquirer for the purpose of compensating an issuer for its role in an electronic debit transaction. For example, fees charged by issuers to consumers or fees charged by networks to merchants where the network does not pay or credit that fee to an issuer are not covered by section 920 or Regulation II.
- The fee is not charged or received with respect to a transaction using a debit card to initiate a debit to an account ("electronic debit transaction"). A debit card is any card, or other payment code or device, issued or approved for use through a payment card network to debit an account. For example, fees charged for checks, credit cards, or automated clearing house (ACH) transactions are not covered by section 920 or Regulation II.
- The fee is related to a transaction where either the merchant or the account being debited is outside the United States. Thus, fees charged in connection with transactions wherein either the merchant or the account being debited is located in a foreign country are not covered by section 920 or Regulation II. Regulation II defines "United States" as the States, territories, and possessions of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any political subdivision of any of the foregoing.
- The fee is charged or received with respect to an electronic debit transaction initiated using a card provided pursuant to a Federal, State, or local government-administered payment program and the cardholder may use the card only to transfer or debit funds provided pursuant to such program. For example, fees on cards used for electronic benefit transfer or reimbursement systems in connection with government food assistance programs are not subject to section 920 or Regulation II.
The fee is charged or received with respect to an electronic debit transaction initiated using a general-use prepaid card that is--
- Issued on a prepaid basis in a specified amount;
- Redeemable upon presentation at multiple, unaffiliated merchants for goods or services;
- Not issued or approved to access an account held by or for the benefit of the cardholder (other than a subaccount or other method of recording or tracking funds purchased or loaded on the card on a prepaid basis);
- Reloadable, and not marketed or labeled as a gift card; and
- The only means of access to the underlying funds, except when all remaining funds are provided to the cardholder in a single transaction.
When do the interchange fee standards take effect?
Issuers that receive interchange fees subject to the standards must comply with the standards beginning October 1, 2011.
How many payment card networks must be enabled on each debit card?
Section 920 and Regulation II prohibit any issuer or payment card network from directly or indirectly restricting the number of payment card networks on which an electronic debit transaction may be processed to less than two unaffiliated networks (i.e., prohibits network exclusivity arrangements). To comply with the rule, an issuer must enable at least two unaffiliated payment card networks on each debit card. In addition to plastic cards, the other payment codes or devices, such as the card number or a key fob, that are issued or approved for use through a payment card network to debit an account must be enabled to process transactions over at least two unaffiliated payment card networks.
A payment card network may not restrict an issuer's ability to contract with any payment card network that may process the issuer's electronic debit transactions.
Which issuers must enable at least two unaffiliated networks on each debit card?
All debit card issuers (regardless of asset size) must enable at least two unaffiliated networks on each debit card.
What types of payment card networks may an issuer enable to satisfy the two-unaffiliated-networks requirement?
An issuer may satisfy the non-exclusivity requirements by enabling any two networks so long as the networks are unaffiliated and have reasonable capacity. For example, an issuer may enable a signature-based network and an unaffiliated PIN-based network on a debit card. Similarly, an issuer may enable two unaffiliated PIN networks (and no signature-based network). An issuer also may enable a signature network and an affiliated PIN network, provided the issuer also enables another unaffiliated PIN or signature network on the card. ATM-only networks do not count toward the number of unaffiliated networks enabled on the card.
To satisfy the requirement of two unaffiliated payment card networks, each of the two unaffiliated payment card networksó
- Must have taken steps reasonably designed to enable the network to process the electronic debit transactions that the network would reasonably expect will be routed to it; and
- Must not, by rule or policy, restrict the operation of the network to a limited geographic area, specific merchant, or particular type of merchant or transaction.
How does an issuer know whether a payment card network is eligible to be one of the unaffiliated networks on a debit card?
An issuer should contact its payment card network (or the payment card network it wishes to enable on its card) to determine whether the payment card network has rules or policies to restrict operation of the network to a limited geographic area, specific merchant, or particular type of merchant or transaction and whether the payment card network has taken steps reasonably designed to enable the network to process the electronic debit transactions that the network would reasonably expect will be routed to it.
When must an issuer comply with the prohibition on network exclusivity?
In general, issuers must enable at least two unaffiliated payment card networks on each debit card by April 1, 2012. Payment card networks may not prohibit an issuer from enabling two unaffiliated networks on each debit card beginning October 1, 2011.
For certain types of debit cards, issuers are not required to enable two unaffiliated networks on each debit card until later dates.
- Debit cards that use transaction qualification or substantiation systems, such as certain health or other benefit cards, must comply by April 1, 2013.
- Non-reloadable general-use prepaid cards sold on or after April 1, 2013, must comply when sold.
- Non-reloadable general-use prepaid cards sold prior to April 1, 2013, are not subject to the network exclusivity provision.
- Reloadable general-use prepaid cards sold on or after April 1, 2013, must comply by May 1, 2013.
Reloadable general-use prepaid cards sold prior to April 1, 2013, need not comply with the network exclusivity provisions unless and until they are reloaded.
- If reloaded prior to April 1, 2013, the card must comply by May 1, 2013.
- If reloaded on or after April 1, 2013, the card must comply within 30 days of the reloading.
May payment card networks or card issuers place limitations on debit card transaction routing by merchants?
No. Regulation II prohibits an issuer or payment card network from directly or indirectly inhibiting the ability of merchants to direct the routing of electronic debit transactions for processing over any payment card network of the merchant's choosing that may process such transactions. This does not require the issuer to enable more than two payment networks on each debit card, as explained above.
When must issuers and networks stop inhibiting merchant routing choice?
Issuers and networks must not inhibit merchant routing choice beginning October 1, 2011.
Is there more guidance on the provisions of Regulation II?
In addition to the rule text, Appendix A to the rule sets forth official Board commentary to certain provisions of the rule.
Whom should you contact if you have further questions?
The requirements of this rule will be enforced by your Federal functional regulator. For example, the National Credit Union Administration is responsible for enforcing the rule with respect to federally insured credit unions; the Office of the Comptroller of the Currency is responsible with respect to national banks and federal thrifts; the Federal Reserve Board is responsible with respect to state member banks; and the Federal Deposit Insurance Corporation is responsible with respect to state nonmember banks and state-chartered thrifts. The Federal Trade Commission is responsible for enforcement with respect to other entities not covered by the above regulators. Specific questions with respect to implementation of the rule should be addressed to your Federal functional regulator. General questions regarding section 920 and Regulation II may be addressed to the Federal Reserve Board.
1. This guide was prepared by the Board of Governors of the Federal Reserve System as a "small entity compliance guide" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended (5 U.S.C. 601 note). The guide summarizes and explains the rule, but is not a substitute for the rule itself. Only the rule itself can provide complete and definitive information regarding its requirements. Return to text
3. Section 920 also prohibits networks from inhibiting the ability of any Federal agency or institution of higher education to set maximum dollar values for the acceptance of credit cards, to the extent that such maximum values do not differentiate among issuers or networks. Return to text
4. A small issuer that was exempt from the interchange fee standard in a particular calendar year but loses the exemption because its consolidated assets are $10 billion or more by the end of the year must comply with the interchange fee standard no later than July 1 of the next calendar year. For example, an issuer with total assets (including assets of all affiliates) of less than $10 billion as of December 31, 2010, is exempt from the interchange fee limits for transactions that occur in calendar year 2011. If, as of December 31, 2011, that issuer loses the exemption because its total assets (including assets of affiliates) exceeds $10 billion as of that date, the issuer must conform its debit interchange fees to the requirements of Regulation II no later than July 1, 2012. Return to text