Fed Proposes Debit Interchange Fee Cap

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WASHINGTON – The Federal Reserve this afternoon proposed rules aimed at lowering interchange fees on debit transactions that could cap fees at 12 cents per transaction, about what the current median cost of authorization, clearance and settlement is.

Setting the cap at the current cost, said the Fed, would give debit card issuers new incentives to lower their costs below the current average, allowing them to keep the difference.

Issuers with higher costs would be allowed to recover their average costs for authorization, clearance and settlement-- up to a limit. Setting a limit, said the Fed, would ensure that no issuer is able to receive an interchange fee at an unreasonably high level.

The Fed’s proposal issued for a public comment period, would also bar the major networks, Visa and MasterCard, from restricting the networks over which a debit transaction may be routed, a practice known as “network exclusivity.” This would allow card issuers to shop for the lowest cost network, including potential new ones, to route their transactions, and discourage networks from setting high processing fees.

The Fed also asked for comment on whether it should use fraud prevention costs it estimating the legitimate costs for processing debit transactions.

The Fed’s proposal comes as new studies show that debit cards have become the most frequently used non-cash payments, exceeding credit cards and checks. Debit card fees, which amount to as much as a third of the $60 billion in credit and debit card interchange paid last year, are a rapidly growing market, with credit unions having earned as much as $2 billion in debit fees alone last year.

The Fed’s proposal, to be known as Reg I.I., was required under provisions under the Dodd-Frank Wall Street Reform and Consumer Protection Act and seeks to lower debit card interchange fees charged to retailers and passed on to consumers. The Fed’s proposal only applies to card issuers over $10 billion in assets, eliminating all but three credit unions, but are expected to be implemented system-wide, thereby affecting all credit unions and bank card issuers.

The final rules are supposed to take effect on July 21, 2011.

In developing its proposal, the Fed surveyed debit card issuers, payment card networks and merchant acquirers in September on costs, fees, fraud loss and fraud prevention.

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