As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama on July 21, 2010, the Durbin amendment grants increased authority to the Board of Governors of the Federal Reserve System (“Board”) to regulate electronic debit transactions and provides new guidance on several payment card network practices.
The first part of the amendment was promoted as a consumer benefit initiative aimed at lowering consumer transaction costs in connection with debit card purchases. Pursuant to this purpose, the Board is required to issue regulations defining permissible interchange transaction fees. Specifically, the regulations must provide a framework for assessing whether fees are reasonable and proportional to the actual cost incurred by the issuer with respect to the transaction. An interchange transaction fee is a fee charged by a payment card network for the purpose of compensating an issuer for its involvement in an electronic debit transaction.
In formulating these regulations, the Board must consider the incremental costs incurred by an issuer in processing a particular transaction, and may consider any costs resulting from fraud prevention measures. Therefore, the Board’s regulations may permit payment card networks to charge different fees for different transactions, so long as the fee is based on the cost to the issuer. The Board must also consider the functional similarity between electronic debit transactions and checking transactions that are required to clear “at par.” Depending on the Board’s interpretation of this language, the regulations may eliminate interchange fees all together.
There are several exemptions from these regulations, including (1) any issuer that, together with its affiliates, has assets of less than $10 billion and (2) cards issued pursuant to a government administered payment program and certain reloadable prepaid cards. The regulations must be issued within nine months of the enactment of the Dodd-Frank Act, so more information and details on the effect of this provision will be available in mid-2011.
The second part of the Durbin amendment addresses certain payment card network practices that were previously unregulated. To begin with, issuers are prohibited from entering into exclusivity agreements with payment card networks. Additionally, neither an issuer nor a payment card network can restrict a merchant’s ability to route debit transactions over any payment card network that processes such transactions.
Moreover, this section permits merchants to offer discounts or in-kind incentives for payment by the use of cash, checks, debit or credit cards, so long as such discounts do not differentiate on the basis of the issuer or the payment card network. Merchants are also empowered to establish minimum amounts for payment by credit card. Such minimums cannot differentiate on the basis of the issuer or the payment card network and cannot be in excess of $10 (adjusted annually). This part of the amendment provides flexibility for merchants and other payment processors in choosing payment card networks and favored forms of payment. It also legitimizes the practice of setting credit card payment minimums, protecting merchants from excessive network fees.
In whole, it is difficult to assess the complete effect of the Durbin amendment on the payment processing industry because important regulations are still forthcoming. The amendment does however strengthen regulation of electronic debit interchange fees and address certain outstanding payment card network practices.