Comments on Interchange Rules: Sentiment Favors Banks

federal reserve debit interchange rulesThe comment period on the rules proposed by the Federal Reserve Board that would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions expires on February 22, 2011. As of today, 67 comments have been submitted regarding the proposed rules. Based on a review of a number of those comments, the overall sentiment appears to be in opposition to the rules in their current form.

On December 17, 2010, the Federal Reserve Board issued proposed rules that would establish standards for determining whether a debit card interchange fee received by a debit card issuer is reasonable and proportional to the cost incurred by the issuer for the transaction. These standards would apply to issuers that, together with their affiliates, have assets of $10 billion or more. Certain government-administered payment programs and reloadable general-use prepaid cards would be exempt from the interchange fee limitations.

The Federal Reserve Board solicited comments on two alternative interchange fee standards that would apply to all covered issuers: one based on each issuer’s costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap (initially set at 12 cents per transaction). Under both alternatives, circumvention or evasion of the interchange fee limitations would be prohibited. The Board also is requesting comment on possible frameworks for an adjustment to the interchange fees to reflect certain issuer costs associated with fraud prevention.

Based on a small sampling of the comments published to date (all available here), it seems that the general consensus is that the rules, in their entirety, require further consideration. Many of the comments ignore the Federal Reserve’s request for specific comments on the two alternative interchange standards and, instead, request further consideration.

Several of the comments, including one by Congressmen Bacchus and Hensarling suggest that additional time and study should be used before adopting any rules, stating:

Specifically, we are concerned about the feasibility of the required 9 month deadline for the Fed to issue its final rules regarding these fees as stipulated under Section 1075 of the Dodd-Frank Wall Street eform and Consumer Protection Act. Given the broad scope of this required rulemaking and the enormity of its potential impact on consumers and merchants alike, we doubt that such an extremely short timeframe will be sufficient to produce thorough and thoughtful final rules that consider the myriad perspectives of all affected parties. Ultimately, hastily written rules may end up doing more harm than good to consumers and have negative effects on competition in the marketplace.

Others, such as the Credit Union National Association (CUNA) do address the two alternatives, but suggest that neither alternative is workable. The CUNA went on to explain that:

Credit unions do not want to charge their members more fees. However, the result of the loss of interchange fee income for small issuers and the costs of having to belong to more payment
networks will have a horrendous impact on credit unions that offer debit cards and their ability to build net worth. Because of statutory requirements, credit unions can only build net worth (capital)
from retained earnings. Any significant reduction in interchange income will require higher fees paid by consumers. Thus, consumers will be left paying for the bonanza to merchants – which is not
what Congress intended.

Many more comments are likely to be submitted over the next 6 weeks as the deadline for comments approaches. Will the sentiment against the rules continue?

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