United States: Proposed Rule on Interchange Rate Provisions of Durbin Amendment

On December 16, 2010, the Federal Reserve issued a proposed rule under Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1075, popularly known as the Durbin Amendment, requires debit-card interchange fees to be "reasonable and proportional" to the cost of the transaction and is widely considered to be a major victory for merchants. The Federal Reserve seeks comment on two alternative standards for determining whether a fee is "reasonable and proportional". It is important to note that these proposed alternatives only apply to debit-card transactions and not to credit-card transactions or certain prepaid cards.

The first of the two proposed alternatives would be based on card issuer costs for authorizing, clearing and settling a transaction. This alternative would include a safe harbor (initially 7 cents per transaction) for issuers that elect not to calculate their costs and a cap (initially 12 cents per transaction). The intent of the safe harbor is to encourage banks to reduce their costs to below the 7 cents per transaction level. The second alternative would be a simple cap of 12 cents per transaction. The proposed alternatives, if finalized, are expected to significantly reduce banks' debit-card interchange revenues, which in turn would significantly reduce the transaction costs for other parties in the payment process, such as merchants.

The Fed's proposed rule also allows for adjustment to the interchange fees for costs related to fraud-prevention measures and proposes two possible approaches to adjusting for fraud prevention costs. One approach is to identify new technologies reducing debit-card fraud and to use the costs of the new technologies to set the fraud-adjustment amount. The second approach would be to set standards that need to be met for eligibility for a fraud-prevention adjustment, which would then reimburse the issuer for some portion of the costs of current security and fraud prevention activities and the costs of researching and developing new ones.

Comments on the proposal are due by February 22, 2011. The rule must be finalized by April 21, 2011 and will take effect on July 21, 2011.

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