The regulation of debit card interchange fees in the U.S. took a step closer to reality this week with the Senate’s passage of Senator Durbin’s “Interchange Fee Amendment” as part of the “Restoring American Financial Stability Act of 2010”. Regulation of interchange is a hotly contested topic, and the amendment is sure to meet with opposition in the House from the financial services industry in general and Visa (NYSE: V) and MasterCard (NYSE: MA). But does the Interchange Fee Amendment actually help the prepaid debit card industry?
The Interchange Fee Amendment
The interchange fee amendment to the “Restoring American Financial Stability Act of 2010”, sponsored by Senator Durbin passed the Senate on a vote of 64-33 on May 13, 2010, surprising many in the financial services industry. (Investors in Visa and MasterCard sent those stocks down sharply in trading today). Senator Durbin’s statement on the Amendment is available here.
The amendment gives the Federal Reserve the authority to regulate debit interchange fees. The amendment requires that such fees be reasonable and proportional to the costs of the issuer or the payment network. A copy of the amendment is available here.
Here’s the meat of the amendment:
SEC. 920. REASONABLE FEES AND RULES FOR PAYMENT CARD TRANSACTIONS.
(a) REASONABLE INTERCHANGE TRANSACTION FEES FOR ELECTRONIC DEBIT TRANSACTIONS.
(1) REGULATORY AUTHORITY.The Board shall have authority to establish rules, pursuant to section 553 of title 5, United States Code, regarding any interchange transaction fee that an issuer or payment card network may charge with respect to an electronic debit transaction.
(2) REASONABLE FEES.The amount of any interchange transaction fee that an issuer or payment card network may charge with respect to an electronic debit transaction shall be reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction.
(3) RULEMAKING REQUIRED.The Board shall issue final rules, not later than 9 months after the date of enactment of the Consumer Financial Protection Act of 2010, to establish standards for assessing whether
the amount of any interchange transaction fee described in paragraph (2) is reasonable and proportional to the actual cost incurred by the issuer or payment card.
Applicability to Prepaid Debit Cards
The text of the amendment makes it clear that certain prepaid debit cards would be subject to any interchange regulation by the Federal Reserve, as the term “debit card” (for purposes of the proposed regulation), is given the following meaning:
(1) DEBIT CARD.-The term “debit card”-
(A) means any card, or other payment code or device, issued or approved for use through a payment card network to debit an asset account for the purpose of transferring money between accounts or obtaining goods or services, whether authorization is based on signature, PIN, or other means;
(B) includes general use prepaid cards, as that term is defined in section 915(a)(2)(A) (15 U.S.C. 1693l-1(a)(2)(A)); and
(C) does not include paper checks.
However, some prepaid cards (most particularly general purpose reloadable prepaid cards and certain government benefits cards) are exempt from the interchange regs.
(A) IN GENERAL.This subsection shall not apply to an interchange transaction fee charged or received with respect to an electronic debit transaction in which a person uses …
(ii) a plastic card, payment code, or device that is
(I) linked to funds, monetary value, or assets which are purchased or loaded on a prepaid basis;
(II) not issued or approved for use to access or debit any account held by or for the benefit of the card holder (other than a subaccount or other method of recording or tracking funds purchased or loaded on the card on a prepaid basis);
(III) redeemable at multiple, naffiliated merchants or service providers, or automated teller machines;
(IV) used to transfer or debit unds, monetary value, or other assets; and
(V) reloadable and not marketed or labeled as a gift card or gift certificate.
Possible Benefit to Prepaid Debit Issuers?
If the amendment were passed, it is likely that reduced interchange for debit card transactions will cause issuers and networks to increase fees in other ways (e.g., by increasing ATM access fees, etc.). But what if many prepaid debit card issuers were not subject to any regulations eventually passed by the Federal Reserve? Those issuers may enjoy lower operating costs as a result of not being required to comply with the regulations. Those lower (or flat) operating costs could be passed on to their cardholders. For example, prepaid cards may maintain their existing ATM fee structures to maintain customers. Lower costs, or less regulation, may mean that prepaid card issuers have more freedom to innovate than big banks, and may also mean that prepaid cards become more attractive to consumers (as a result of lower fees) than account-linked debit products from large (regulated) issuers.
Its possible that many prepaid issuers will not be subject to the interchange regulations that might be passed by the Federal Reserve, as the Interchange Fee Amendment passed by the Senate specifically exempts “Small Issuers” from regulation. The text from the amendment states:
(5) EXEMPTION FOR SMALL ISSUERS.-This subsection shall not apply to issuers that, together with affiliates, have assets of less than $10,000,000,000, and the Board shall exempt such issuers from rules issued [by the Federal Reserve] under paragraph (3).
Many prepaid debit card issuers fall below that asset threshold. For example, MetaBank, the issuer of dozens of prepaid cards, has assets of approximately $916,477,000 according to the FDIC. Other prepaid debit issuers, such as The Bancorp Bank, and Palm Desert National Bank will also be exempt from regulation, as they have assets of approximately $2,040,750,000 and $294,699,000 respectively (per this month’s FDIC summary financial reports on each institution.
Its unclear what impact the Interchange Amendment will have on prepaid card issuers (or whether the Interchange Amendment will ever pass the House). Its also unclear whether the amendment will benefit or hurt prepaid card issuers. However, it is clear that many prepaid debit card issuers would be exempt from regulations based on the current version of the amendment.
Will being exempt translate into lower costs for prepaid card issuers?