Proposal to amend the interchange fee cap and methodology
Regulatory Insights
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October 2023
The Federal Reserve Board (FRB) issues proposed amendments to the interchange fee cap in Regulation II (Debit Interchange Fees and Routing).
The interchange fee cap was originally introduced under the Dodd-Frank Act and is implemented by Regulation II. Under Regulation II, interchange fees received by a debit card issuer for a debit card transaction (except for those that qualify for a statutory exemption) can be no more than the sum of three components: i) the “base” component, ii) the “ad valorem” component, and iii) the “fraud prevention adjustment.” Together, these three components comprise the “interchange fee cap.”
The FRB proposes amendments, outlined below, based on the latest data reported to FRB by large debit card issuers as part of the FRB’s biennial Debit Card Issuer Survey, which covers transactions in 2021; the amendments are intended to reflect changes in allowable costs incurred by “covered issuers” (as defined below) since Regulation II was first implemented in 2011.
Application and Scope. The proposed revisions would apply to debit card issuers that, together with affiliates, have assets of $10 billion or more as of the end of the preceding calendar year (i.e., "covered issuers").
Covered issuers are currently subject to the interchange fee cap, and the proposed amendments are intended to ensure that, for applicable transactions, the amount of any interchange fee received or charged is “reasonable and proportional” to the cost incurred by the issuer with respect to the transaction.
Proposed Amendments to the Interchange Fee Standards. The proposed amendments to the interchange fee standards (comprised of the base and ad valorem components) would include:
Proposed Amendments to the Fraud Prevention Adjustment. The proposed amendments to the fraud prevention adjustment would include:
Other Proposed Amendments. Several other proposed amendments are intended to improve the clarity and specificity of Regulation II and clarify the relationship between the interchange fee standards and the fraud prevention adjustment. These proposed revisions would:
Effective Date. If adopted as proposed, the amendments would become effective on the first day of the next calendar quarter that begins at least 60 days after the final rule is published in the Federal Register.
The initial changes to the base component, ad valorem component, and fraud prevention adjustment (as proposed) would apply to debit card transactions performed from the effective date of the final rule to June 30, 2025.
Comment Period. FRB is seeking public comments on the proposed revisions, with a submission deadline of ninety (90) days after publication in the Federal Register.
Debit Interchange Fee Cap: FRB Reg II Proposed Amendments
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