New Fed Debit Rule Does Not Resolve Fraud Debate

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WASHINGTON – Contrary to expectations, the Federal Reserve Board’s draft report on debit interchange did not resolve the debate on the cost of fraud in card payments.

Many in the industry predicted the report would say how much of the cost of interchange banks could justify as necessary in the fight against fraud. Even though the Fed proposed an interchange rate, it made clear that fraud has not been fully addressed in its proposal, noted American Banker, an affiliate of Credit Union Journal.

In the report, released Dec. 16, the Fed set two categories that would give bankers room to adjust the interchange they charge for fraud. The first would be for deploying specific forms of security technology. The second, a more vague allowance, would let banks recover costs related to fraud prevention and debit cards. Here, the Fed referred to a “more general standard,” such as taking steps “reasonably necessary to maintain an effective fraud-prevention program but not prescribe specific technologies that must be employed as part of the program.”

American Banker reported that buried in the draft report is a fairly in-depth account of what the Fed says it thinks are the true costs of fraud. For example, it says issuers “reported that total signature and PIN debit card fraud losses to all parties averaged 13.1 and 3.5 basis points, respectively.” The report goes on to say that issuers and merchants bore 55% and 45% of signature debit fraud losses, respectively.

However, in a board of governors meeting held Dec. 16, the governors acknowledged that they would not have a final ruling on fraud costs until after the comment period, and most likely they would have to rule separately on fraud, after the final rule on debit interchange is issued in April.

The Fed set a safe harbor floor on interchange of 7 cents per transaction; the total amount of interchange could rise to as high as 12 cents when accounting for various costs related to running the payments network.


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