Operation Comment
Federal Reserve Board Interchange Proposal 
 
The Federal Reserve Board (Fed) has issued a proposed rule regarding the regulation of debit interchange fee income, as mandated by the Dodd-Frank Act.  While the Fed has made some efforts to address a few credit union issues, the new proposal raises many serious concerns.  The proposal does reference an exemption for small issuers of $10 billion or less in assets from the interchange fee rate setting but does not include provisions to enforce the exemption.  As a result of the lack of enforcement for the exemption, small issuers may be subject to the fees that will be required for large issuers under the proposal.  Also, credit unions with more than $10 billion in assets will be subject to the rate setting aspects of the proposal (there are three credit unions with more than $10 billion in assets).

The Fed is proposing two possible alternatives with respect to interchange fee rate setting that would apply to credit unions with more than $10 billion in assets but could de facto apply to all credit unions issuing debit cards if the establishment and maintenance of a two-tiered structure cannot be assured: (1) “Alternative 1,” under which an issuer could only recover the greater of 7 cents per transaction (the “safe harbor”) or its actual costs of the electronic authorization and settlement of the transaction up to a maximum 12 cents; or (2) “Alternative 2,” which would allow interchange fees that vary with the value of the transaction up to a 12 cents per transaction cap.

The proposal also does not exempt small institutions from aspects of the rule regulating network exclusivity and routing.  No debit card issuers, including credit unions, are exempt for the parts of the proposal that prohibit exclusive networks and allow merchants to choose how a transaction is processed.  With respect to network exclusivity and routing, the Fed proposes to adopt either: (A) “Alternative A,” which would only require a credit union to issue debit cards that could be processed by two unaffiliated networks, such as one PIN network and one unaffiliated network using signature authorization (or two unaffiliated PIN networks, or two unaffiliated signature networks); or (B) “Alternative B,” which would require a credit union to issue debit cards that could be processed on at least two unaffiliated PIN networks and also on at least two unaffiliated signature networks.

Please contact the Federal Reserve with your concerns.