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Federal Reserve Board of Governors

Regulation II (Debit Card Interchange Fees and Routing)

Federal Reserve Board of Governors

Frequently Asked Questions -- Regulation II

Frequently Asked Questions About Regulation II (Debit Card Interchange Fees and Routing)

Staff of the Board of Governors of the Federal Reserve System has developed the following Frequently Asked Questions (FAQs) to assist entities in complying with the Board's Regulation II. These FAQs are not official interpretations of the Board of Governors. These FAQs illustrate how select provisions of the regulation apply to specific situations an entity may confront. However, they do not necessarily address all provisions that may apply to any given situation. Staff may supplement or revise these FAQs as necessary or appropriate in light of further questions and experience.

§235.2 Definitions

235.2(i) General-use prepaid card

Q1. For a card to be considered issued "in exchange for payment," must the issuer charge a fee in addition to the amount of funds loaded onto the card?
A1. No. A card is issued "in exchange for payment" if a cardholder or other person provides funds to load on the card. The issuer or program manager need not charge an additional fee for issuance of the card to meet the "in exchange for payment" standard. (Added September 14, 2011)

Q2. Is a card considered a "general-use prepaid card" if the cardholder is not charged a fee for the card and receives the card prior to funds being loaded on the card?
A2. Yes. A "general-use prepaid card" includes a card that is provided to the cardholder without underlying funds and for which the issuer authorizes use of funds that are subsequently loaded on the card. (Added October 24, 2011)

Q3. For a card to be considered a general-use prepaid card, must the cardholder be the person that pays for or loads funds onto the card?
A3. No. A general-use prepaid card includes a card that is issued in exchange for payment made by a person other than the cardholder. (Added September 14, 2011)

Q4. Is a card considered a "general-use prepaid card" if the card may be used to redeem multiple promotional offers loaded onto the card that are provided by multiple unaffiliated merchants but where each particular offer loaded onto the card is redeemable only at a particular merchant?
A4. No. The definition of "general-use prepaid card" in § 235.2(i) of Regulation II requires the card to be redeemable upon presentation at multiple, unaffiliated merchants for goods or services. A card that may be used to redeem multiple promotional offers but where each particular offer is redeemable only at a single merchant or group of affiliated merchants is not considered a "general-use prepaid card." (Added October 24, 2011)

§ 235.3 Interchange Fee Standards

Q1. For purposes of § 235.3, what fees paid by a merchant or acquirer may be passed from a network to an issuer as an "interchange transaction fee"?
A1. As defined in § 235.2(j), an "interchange transaction fee" is a fee paid by a merchant or acquirer for the purpose of compensating an issuer for its involvement in an electronic debit transaction. For purposes of the definition, the issuer that is compensated through an interchange transaction fee is the issuer of the card used in the electronic debit transaction for which the fee is charged. Any fee charged by a payment card network with respect to an electronic debit transaction other than an interchange transaction fee is a network fee (EFTA Section 920(c), 15 U.S.C. 1693o-2(c)). Such network fees that are passed on to an issuer must be included in the calculation of net compensation for purposes of the net compensation prohibition in § 235.6(b) of Regulation II. (Added October 24, 2011)

§235.5 Exemptions

235.5(a) Small Issuer Exemption

Q1. If an issuer with consolidated assets of $10 billion or more as of the end of the preceding calendar year acquires an issuer with consolidated assets of less than $10 billion as of the end of the preceding calendar year, by when must the acquiring issuer comply with the interchange fee standards for transactions initiated using cards issued by the previously exempt issuer?
A1. Board staff would not recommend that the Board take any administrative action against institutions it supervises for noncompliance so long as the non-exempt issuer complies with the interchange fee standards with respect to the previously exempt cards as soon as reasonably practicable, but generally no later than 30 days after the date the non-exempt issuer acquires the previously exempt issuer. Section 235.5(a) exempts from the interchange fee standards issuers that hold the account being debited and have consolidated assets of less than $10 billion as of the end of the calendar year preceding the date of the electronic debit transaction for which the interchange fee is charged or received. Where an exempt issuer ceases to be a legal entity after acquisition, the acquiring entity becomes the issuer of the previously exempt debit cards. (Added October 24, 2011)

235.5(b) Government-Administered Payment Program Exemption

Q1. Is a card provided by a university in order to distribute Federal or state financial aid funds to a student considered to be issued "pursuant to a government-administered payment program"?
A1. Not necessarily. A payment program is not a "government-administered payment program" merely because the entity distributing the card receives funding from a government agency. A Federal or state financial aid program, however, would be considered "government-administered" for purposes of § 235.5(b)'s exemption from the interchange fee standards if the Federal or state agency making payments to beneficiaries has agreed to permit another entity (e.g., a college or university) to distribute payments to beneficiaries on behalf of the government or government agency. (Added October 24, 2011)

235.5(c) General-Use Prepaid Card Exemption

Q1. Are there any restrictions on the methods that may be used to load and reload funds onto a card in order for the card to be eligible for the general-use reloadable prepaid card exemption?
A1. The criteria for the general-use prepaid card exemption do not restrict the methods that cardholders or other persons may use to load or reload funds onto a card. General-use prepaid cards are eligible for the exemption from interchange fee standards regardless of whether funds may be loaded onto the card using ACH, check, cash, or other methods. However, some funds-loading arrangements may warrant additional supervisory scrutiny to determine whether circumvention or evasion is occurring. One example is where prepaid cards are linked to an issuer's customers' transaction accounts such that funds may be swept from the transaction accounts to the prepaid accounts as needed to cover transactions. See paragraph 6(a)-2.ii of the commentary to Regulation II. (Added September 14, 2011)

Q2. Section 235.5(c) provides that a general-use prepaid card is exempt from the interchange fee standards if, among other things, the card is "the only means of access to the underlying funds, except when all remaining funds are provided to the cardholder in a single transaction." Would a general-use prepaid card qualify for the exemption if a cardholder is able to use information from the card to make a payment on a merchant's website?
A2. Yes. A general-use prepaid card is eligible for the general-use prepaid card exemption in § 235.5(c) if a cardholder is able to use the card number to initiate a debit to funds underlying the prepaid card to pay a merchant or other payee (such as a bill-pay provider) on the merchant's or other payee's website, provided the card meets the other criteria for the exemption. For example, the cardholder may enter the card number on the merchant's or other payee's website to initiate a one-time payment or to authorize the merchant or other payee to initiate recurring payments using the prepaid card. (But see Q7 of this section).  (Revised May 30, 2013)

Q3. Would a general-use prepaid card qualify for the exemption in § 235.5(c) if the cardholder is able to authorize the issuer to pay third parties with funds underlying the card through the issuer's online card or account management system?
A3. No. If a cardholder is able to use the issuer's (or issuer's agent's) online card or account management system to authorize the issuer to pay a merchant or other payee from the cardholder's account or subaccount, then the card is not the only means of access to the underlying funds. For example, if a cardholder is able to pay a creditor by authorizing the issuer or issuer's agent to make electronic fund transfers out of an account, the card is not the only means of access to the underlying funds. (Added September 14, 2011)

Q4. If a payroll card issuer provides the cardholder means other than the card to access the employee's pay in the payroll account, is the payroll card still considered the only means of access to the underlying funds under § 235.5(c)(iii)?
A4. Section 235.5(c)(1)(iii) provides that a prepaid card is eligible for the exemption even if a means of access other than the card is used to provide all remaining funds to the cardholder in a single transaction. For example, if a cardholder receives the entire amount underlying a payroll card as cash or using a convenience check made out to the cardholder, that payroll card could still qualify for the exemption so long as it meets the other requirements in § 235.5(c)(1). A payroll card would not qualify for the exemption, however, if the cardholder is permitted to write checks on funds in the payroll account to payees other than the cardholder or use other non-card means to make payments to third parties. In addition, some states require employers to provide employees with the full amount of their wages without any fees each pay period. A payroll card is eligible for the exemption in § 235.5(c) if an employer provides an employee with a non-card means to access his or her wages in the payroll card account each pay period in order to satisfy state law requirements applicable to the employer, provided the payroll card meets the other criteria for the exemption. Moreover, prepaid cards linked to an issuer's customers' transaction accounts such that funds may be swept from the transaction accounts to the prepaid accounts may warrant additional supervisory scrutiny to determine whether circumvention or evasion is occurring. See paragraph 6(a)-2.ii of the commentary to Regulation II. (Added September 14, 2011)

Q5. Cards are sometimes used to access funds in a health care flexible spending account or other similar benefit account. Typically, use of the funds in these accounts is limited to certain types of transactions and the purpose for which the funds are used is legally required to be substantiated by the plan administrator. In some cases, substantiation may occur directly through the card without the cardholder submitting separate documents and no other means of access to the funds exists other than through the card. In other cases, the cardholder may have access to the funds through both the card and by submitting a claim to the plan administrator. Does a card qualify for the exemption under § 235.5(c) if the cardholder may access funds from the account by submitting a claim to the plan administrator?
A5. No. If a cardholder is able to access funds in a benefit account by means other than a card and such alternate, non-card means of access are not required to be provided to the cardholder under federal or state law or regulation, the card is not the only means of access to the funds in the account, notwithstanding the fact that federal or state law may restrict the purposes for which the cardholder may access funds in the account. However, if a cardholder is able to access funds in a benefit account only through use of the card, the card may qualify for the exemption even if the cardholder must submit separate documents to the plan administrator in order to substantiate that the funds were used for legally permissible transactions. (Added September 14, 2011)

Q6. Does a general-use prepaid card qualify for the exemption under § 235.5(c) if the issuer offers the cardholder the ability to obtain cash through the offices of a money transmitter service business by calling the issuer to authorize access, which then transfers money to the money transmitter service business?
A6. Such a card could qualify for the exemption under certain conditions. A general-use prepaid card would be the only means of access to funds underlying the card where the cardholder is able to initiate transfers out of the account to a money transmitter service business by contacting the issuer (or issuer's agent) via telephone and providing a card number for purposes of identifying the cardholder's account or subaccount, provided that only the cardholder may receive the transferred funds and the cardholder may receive the funds only as cash. (Added October 24, 2011)

Q7. Does a general-use prepaid card qualify for the exemption under § 235.5(c) if the issuer provides an account number and routing number to the cardholder for purposes of loading or facilitating loading funds onto the card through the ACH or otherwise? Does a general-use prepaid card qualify for the exemption if the cardholder may use the account number and routing number to authorize debits by non-card means, such as ACH debits, that access funds underlying the prepaid card?
A7. An issuer may provide a cardholder with an account number (which may or may not be different from the number on the card) and a routing number so that the cardholder may load funds (or authorize the loading of funds) by an ACH credit transaction or otherwise (e.g., a direct deposit from an employer or government agency), without the card becoming ineligible for the exemption under § 235.5(c). For such a general-use prepaid card to remain eligible for the exemption in § 235.5(c), an issuer must take steps to ensure that the cardholder does not use the account number or routing number to access or authorize access to the funds underlying the prepaid card through an ACH transaction or other non-card means. The issuer may, for example, conspicuously disclose to the cardholder that such use is prohibited. If the issuer becomes aware that the cardholder is violating this prohibition, however, the issuer must take further action to prevent the cardholder from using an account number and routing number to access, or authorize access to, funds through a debit transaction through non-card means (e.g., an ACH debit transaction) in order for the card remain eligible for the exemption under § 235.5(c). (Added March 13, 2013)

Q8. Does a general-use prepaid card qualify for the exemption under § 235.5(c) if a cardholder may present the card at a branch of the issuer to withdraw cash from the funds underlying the card?
A8. Yes. A general-use prepaid card is eligible for the general-use prepaid card exemption in § 235.5(c) if a cardholder is able to present the card at a branch of the issuer and withdraw cash from the funds underlying the card, provided the cardholder is the person receiving the cash. This is true whether the issuer sends the transaction information through the card network or effectuates the transaction without using the card network. (Added March 13, 2013)

Q9. If the issuer of a general-use prepaid card may settle the prepaid card transactions with the cardholder by initiating a debit transaction, such as an ACH debit, to another account of the cardholder, does the card qualify for the exemption in § 235.5(c)?
A9. No. If an issuer of a general-use prepaid card may settle transactions (either wholly or in part) with the cardholder by initiating debit transactions to another account (as defined in § 235.2(a)) of the cardholder instead of using prepaid funds underlying the card, the card is issued or approved for use to access an account held by or for the benefit of the cardholder and does not qualify for the exemption in § 235.5(c). (Added March 13, 2013)

Q10. If the issuer of a general-use prepaid card may, under standing instructions from the cardholder, reload funds onto the card by initiating a debit transaction, such as an ACH debit, to another account of the cardholder, does the card qualify for the exemption in § 235.5(c)?
A10. No. If an issuer is able to reload a prepaid card by initiating debit transactions to another account (as defined in § 235.2(a)) of the cardholder under standing instructions from the cardholder (e.g., if the prepaid card balance falls below a specified amount), the card is issued or approved for use to access an account held by or for the benefit of the cardholder and does not qualify for the exemption in § 235.5(c). (Added March 13, 2013)

235.5(d) Exceptions to Exemptions from the Interchange Fee Standards

Q1. Beginning on July 21, 2012, if an ATM fee or an overdraft fee is charged inadvertently to a cardholder of one card in a prepaid card program, will all cards in that program lose their exemption?
A1. Not necessarily. Section 235.5(d) provides that, beginning July 21, 2012, debit card transactions initiated using a general-use prepaid card that otherwise qualifies for the exemption under § 235.5(c) from the interchange fee standards will no longer be exempt if certain fees may be charged to a cardholder with respect to the debit card used to initiate the transaction. Accordingly, if an issuer develops and implements a policy reasonably designed to prevent charging to cardholders the fees prohibited under § 235.5(d) and implements that policy using procedures reasonably designed to ensure compliance, neither the card for which the fee was charged nor the other cards in the program will lose their exemption from the fee standards merely because an issuer inadvertently charged a prohibited fee to a cardholder. (Added October 24, 2011)

§ 235.6 Prohibition on circumvention, evasion, and net compensation

235.6(b) Prohibition on net compensation

Q1. Section 235.6(b) 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. To determine whether an issuer has received net compensation, must an issuer count the entire amount of a payment or incentive received from a network or made to a network at the time that the payment is received or made? Or, may an issuer count payments as they are earned by the network or issuer?
A1. An issuer may use any reasonable consistently-applied method of allocating and accounting for payments and incentives received from a payment card network and fees paid by the issuer to the network. For example, an issuer may account for compensation when the compensation is earned (i.e., on an accrual basis) rather than when the compensation is paid (i.e., on a cash basis). (Added September 14, 2011)

Q2. The final rule becomes effective on October 1, 2011. How should an issuer allocate payments and incentives for purposes of determining whether the issuer received net compensation in calendar year 2011?
A2. The prohibition on net compensation applies only to those payments and incentives received, and fees paid, on or after October 1, 2011. If an issuer receives an incentive payment in December 2011 for that issuer's debit card-related activities during all of calendar 2011, the issuer may choose a reasonable method for allocating the incentive payment between the first 9 months of 2011 and the last 3 months of 2011. (Added September 14, 2011)

Q3. Does compensation from contracts entered into prior to October 1, 2011, count for purposes of the prohibition on net compensation?
A3. Payments (including incentive payments and rebates) made by a payment card network or issuer on or after October 1, 2011, are included in the net compensation test, even if the payments are made pursuant to contracts entered into prior to October 1, 2011. Issuers and networks may have to renegotiate contracts if obligations under these contracts would result in the issuer receiving net compensation from the network under § 235.6(b). (Added September 14, 2011)

Q4. If a contract is longer than one year or covers non-debit card-related activities, what methods are permissible for allocating payments and incentives for purposes of determining whether an issuer has received net compensation?
A4. An issuer may use any reasonable method for allocating payments and incentives if the payments and incentives are for multi-year contracts or multi-product contracts. The reasonableness of a particular method will depend on the particular structure of the payments and incentives. For example, in some circumstances, it may be reasonable for an issuer to allocate the total payments and incentives in a multi-year contract to a calendar year pro rata based on the number of years in the contract; in other circumstances, it may be reasonable to use another basis for allocation. For a multi-product incentive payment contract, it may be reasonable for an issuer to allocate payments and incentives to debit card-related activities based on the proportion of the cards or transactions covered by the contract that are debit cards or electronic debit transactions. See paragraphs 6(b)-2.i and ii in the commentary to Regulation II. (Added September 14, 2011)

Q5. If a payment card network rebates some or all of an issuer's switch fees or other network processing fees (e.g., because an issuer reached a certain transaction volume), is the rebate for the switch fee or other processing fee excluded for purposes of determining whether the issuer has received net compensation?
A5. In general, rebates (including those for network processing fees) received by an issuer from a payment card network are included as compensation for purposes of determining whether the issuer has received net compensation, regardless of the purpose for which the rebate is received. If, however, the network or network's affiliate provides optional issuer-processor services performed on behalf of the issuer, and the network or network's affiliate provides a rebate on fees for those services, that rebate is not included for purposes of determining whether the issuer has received net compensation. See paragraph 6(b)-2 in the commentary to Regulation II. (Added September 14, 2011)

Q6. May a payment card network offset fees for optional services provided to issuers related to electronic debit transactions or debit card-related activities with payments and incentives paid to the issuer related to electronic debit transactions or debit card-related activities, so that, for example, no fee actually is charged to issuers for the services?
A6. A payment card network may use any method of charging its issuers for optional network services and distributing payments and incentives that is reasonable given the facts and circumstances. For example, a payment card network may charge an issuer for optional network services and subsequently provide an incentive payment to the issuer. Alternatively, a payment card network may offset the fees owed by the issuer for the optional service against any incentive payments owed to the issuer prior to charging the issuer. A payment card network's pricing of optional services should be reasonable and should not be a means to circumvent the prohibition on net compensation. (Added September 14, 2011)

Q7. Do payments made by a network to an issuer to compensate an issuer for banking services provided by the issuer to the network count for purposes of determining whether an issuer has received net compensation?
A7. No. If an issuer acts as the network's bank, payments made by a payment card network to an issuer for banking services (e.g., transaction account services) provided to the network are not considered compensation for purposes of determining whether an issuer has received net compensation from a payment card network. Such payments relate to the issuer's role as the network's bank rather than to debit card-related services provided by the issuer. (Added September 14, 2011)

Q8. Are payments from a network to an issuer for products or services the issuer provides to the network included under the net compensation test?
A8. Not necessarily. Except as otherwise provided in the rule and commentary, if a network purchases from an issuer a product or service, such as an issuer's analysis of transaction patterns across multiple issuers, payment for those goods or services are not subject to the prohibition on net compensation in § 235.6(b) merely because the product or service is connected to debit cards in general. The issuer's pricing of its services should be reasonable and should not be a means to circumvent the interchange fee standards. (See also § 235.6(b) Q7 with respect to banking services provided by issuers to networks.) By contrast, network payments, such as fees or other incentives or bonuses that are specific to the issuer's debit card transactions or debit card activities (such as marketing the network's brand of debit cards or converting the issuer's card base to the network's brand) are subject to the prohibition on net compensation. See comment 6(b)-2.i. (Added October 24, 2011)

Q9. Does the net compensation test cover incentives and other payments related to exempt debit card transactions?
A9. No. The prohibition against net compensation does not apply to issuers or electronic debit transactions that qualify for an exemption under § 235.5 from the interchange fee standards. See comment 6-1. An issuer may use any reasonable method for allocating the payments between exempt and non-exempt transactions. (Added October 24, 2011)

§ 235.7 Network Exclusivity and Routing Provisions

Q1. Does a debit card comply with the provisions in § 235.7 if the card is enabled for processing transactions over two unaffiliated card networks but, once the card is swiped, the transaction is required to be authenticated using a specific authentication technology available only through one network enabled on the card?
A1. No. Section 235.7(b) prohibits an issuer or a network from inhibiting the ability of any person that accepts or honors debit cards for payments to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions. If an electronic debit transaction initiated using a debit card enabled for certain authentication technology (e.g., a chip) must, once the card is swiped at the point of sale, be processed over a specific payment card network, that debit card does not comply with the prohibition on merchant routing restrictions under § 235.7(b) if the merchant is unable to direct the cardholder to authenticate the transaction so that it may be processed over at least one other unaffiliated network enabled on the card. (Added October 24, 2011)

Q2. Must an issuer of a general-use prepaid card that is enabled for processing transactions over a PIN network and an unaffiliated signature network provide or have the cardholder select a PIN at the time the prepaid card is purchased for the card to comply with § 235.7(a)?
A2. An issuer complies with § 235.7(a)'s prohibition on network exclusivity only if card transactions can be processed over both unaffiliated networks enabled on the card.  If a PIN network enabled on the card requires a cardholder to use a PIN for transactions, transactions can be processed over that PIN network only if the cardholder has a PIN to use for card transactions.  Where an issuer intends to meet the requirements of § 235.7(a) by enabling a PIN network on the card, the issuer complies by providing a PIN to the cardholder or having the cardholder select a PIN before or at the time a merchant first prompts the cardholder to enter a PIN.  The following examples illustrate how an issuer may comply with § 235.7(a) but are not intended to be exhaustive.  An issuer may comply by activating the card at the time of purchase and providing a PIN or having the cardholder select a PIN at that time, or by activating the card by telephone subsequent to purchase and providing a PIN or having the cardholder select a PIN at the time of activation.  An issuer also may comply by activating the card at the time of purchase and having the cardholder select a PIN the first time a merchant prompts the cardholder to enter a PIN prior to completing the transaction.  If an issuer mails a prepaid card to a cardholder, the issuer may separately mail a PIN if the PIN would normally be received by the cardholder within 2 business days of the card. (Revised May 30, 2013)

Last update: May 31, 2013