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Secure Transactions News

Fed issues the Final Rule on Durbin amendment

Thursday 7 July 2011
  • debit interchange cap – US$ 0.21 (EUR 0.14) plus 5 basis points (for both signature debit and PIN debit),
  • fraud prevention adjustment – US$ 0.01 (EUR 0,007), interim rule,
  • routing restrictions and network exclusivity – Alternative A, or two unaffiliated debit network (see below),
  • Card Present vs. Card Not Present – no distinction.

Relevant dates:

  • September 30, 2011 – public comments on interim rule are due,
  • October 01, 2011 – effective date for debit interchange cap, fraud prevention adjustment,
  • April 01, 2012 – effective date for network non-exclusivity for most debit card issuers,
  • April 01, 2013 – effective date for network non-exclusivity for non-reloadable, or gift cards, and health benefit prepaid card issuers.

The Final Rule adopts a modified version of the second alternative of pricing proposals. Issuers may charge up to US$ 0.21 (EUR 0.14) per transaction, plus 0.05% of the transaction value, compared to the US$ 0.12 (EUR 0.08) cap proposed in earlier consultations. On an average US$ 40 (EUR 28) transaction, this represents a 48% cut in revenue, which is less than 75% cut originally proposed (cf. SIW #11-20).

David S. Evans, Market Platform Dynamics’ founder, claims that large retailers would have gotten a windfall, or “money they would have kept and not passed on to consumers”, of between US$ 17.7 billion (EUR 12.2 billion) and US$ 20.4 billion (EUR 14 billion) over the first 2 years of the rate reductions. As the Final Rule raised the cap, that’s been slashed to US$ 11.4 billion (EUR 7.8 billion).

As far as routing provisions are concerned, the Final Rule adopts the Alternative A. Under this alternative, an issuer or payment card network may not restrict the number of payment card networks over which an electronic debit transaction may be carried to fewer than two unaffiliated networks. Thus, the ruling introduces more competition in PIN-debit routing, prohibiting interference in merchant network choices.

As of fraud prevention adjustment, the Final Rule recommends a standard cap of US$ 0.01 (EUR 0.007) per transaction to account for fraud prevention and seeks comment on whether that cap should be adjusted. However, issuers can only take advantage of this adjustment if they develop and implement fraud procedures designed to meet the standards for an effective fraud-prevention program set forth in the Final Rule.

As concerns three-party networks, the Final Rule excludes three-party networks from its definition of “payment card networks.” A typical three-party system is a system where the network itself acts as both issuer and acquirer, thus the three parties involved in a transaction are the cardholder, the merchant, and the network. And the so-called four-party system is the model used for most debit card transactions: the cardholder, the issuer, the merchant, and the acquirer or merchant acquirer.

The Final Rule also excludes from the definition of “card, other payment code or device” any such tool only used to initiate general ledger transactions not issued or approved for use through a payment card network.

Meanwhile, the Final Rule exempts banks and credit unions with assets of less than US$ 10 billion (EUR 6.9 billion) from the interchange fee regulations.

The deadline for implementation of the final rule is October 1, 2011.