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Vol. 76

Wednesday,

No. 139

July 20, 2011

Part II

Federal Reserve System

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12 CFR Part 235
Debit Card Interchange Fees and Routing; Final Rule

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Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations
Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:

FEDERAL RESERVE SYSTEM
12 CFR Part 235
[Regulation II; Docket No. R–1404]
RIN 7100 AD 63

Debit Card Interchange Fees and
Routing
Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
AGENCY:

The Board is publishing a
final rule, Regulation II, Debit Card
Interchange Fees and Routing. This rule
implements the provisions of Section
920 of the Electronic Fund Transfer Act,
including standards for reasonable and
proportional interchange transaction
fees for electronic debit transactions,
exemptions from the interchange
transaction fee limitations, prohibitions
on evasion and circumvention,
prohibitions on payment card network
exclusivity arrangements and routing
restrictions for debit card transactions,
and reporting requirements for debit
card issuers and payment card
networks. An interim final rule, with a
request for comment, on standards for
receiving a fraud-prevention adjustment
to interchange transaction fees is
published separately in the Federal
Register.
DATES: Effective date: The final rule is
effective October 1, 2011.
Compliance dates: For § 235.7(a) the
general compliance date is April 1,
2012, except as follows: Payment card
networks must comply with
§§ 235.7(a)(1) and (a)(3) on October 1,
2011. Issuers must comply with
§ 235.7(a) on April 1, 2013, with respect
to debit cards that use transaction
qualification or substantiation systems
and general-use prepaid cards sold on or
after April 1, 2013. Issuers must comply
with § 235.7(a) with respect to
reloadable general-use prepaid cards
sold and reloaded prior to April 1, 2013
by May 1, 2013. Issuers must comply
with § 235.7(a) with respect to
reloadable general-use prepaid cards
sold prior to April 1, 2013 and reloaded
after April 1, 2013 within 30 days of the
reloading.
FOR FURTHER INFORMATION CONTACT:
Dena Milligan, Attorney (202/452–
3900), Legal Division, David Mills,
Manager and Economist (202/530–
6265), Division of Reserve Bank
Operations & Payment Systems, or Mark
Manuszak, Senior Economist (202/721–
4509), Division of Research & Statistics;
for users of Telecommunications Device
for the Deaf (TDD) only, contact (202/
263–4869); Board of Governors of the

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SUMMARY:

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I. Section 1075 of the Dodd-Frank Act
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (the
‘‘Dodd-Frank Act’’) was enacted on July
21, 2010.1 Section 1075 of the DoddFrank Act amends the Electronic Fund
Transfer Act (‘‘EFTA’’) (15 U.S.C. 1693
et seq.) by adding a new section 920
regarding interchange transaction fees
and rules for payment card
transactions.2
EFTA Section 920(a)(2) provides that,
effective July 21, 2011, the amount of
any interchange transaction fee that an
issuer receives or charges with respect
to an electronic debit transaction must
be reasonable and proportional to the
cost incurred by the issuer with respect
to the transaction.3 Section 920(a)(3)
requires the Board to establish standards
for assessing whether an interchange
transaction fee is reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction.
Under EFTA Section 920(a)(5), the
Board may allow for an adjustment to an
interchange transaction fee that is
reasonably necessary to make allowance
for costs incurred by the issuer in
preventing fraud in relation to
electronic debit transactions, provided
the issuer complies with standards
established by the Board relating to
fraud prevention. Section 920(a)(8) also
authorizes the Board to prescribe
regulations in order to prevent
circumvention or evasion of the
restrictions on interchange transaction
fees, and specifically authorizes the
Board to prescribe regulations regarding
any network fee to ensure that such a
fee is not used to directly or indirectly
compensate an issuer with respect to an
electronic debit transaction and is not
used to circumvent or evade the
restrictions on interchange transaction
fees.
EFTA Sections 920(a)(6) and (a)(7)
exempt certain issuers and cards from
the restrictions on interchange
transaction fees described above. The
restrictions on interchange transaction
fees do not apply to issuers that,
together with affiliates, have assets of
L. 111–203, 124 Stat. 1376 (2010).
Section 920 is codified as 15 U.S.C.
1693o-2. As discussed in more detail below, EFTA
Section 920(c)(8) defines ‘‘an interchange
transaction fee’’ (or ‘‘interchange fee’’) as any fee
established, charged, or received by a payment card
network for the purpose of compensating an issuer
for its involvement in an electronic debit
transaction.
3 Electronic debit transaction (or ‘‘debit card
transaction’’) is defined in EFTA Section 920(c)(5)
as a transaction in which a person uses a debit card.

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less than $10 billion. The restrictions
also do not apply to electronic debit
transactions made using two types of
debit cards—debit cards provided
pursuant to certain governmentadministered payment programs and
certain reloadable, general-use prepaid
cards not marketed or labeled as a gift
card or gift certificate. Section 920(a)
provides, however, that beginning July
21, 2012, these two types of debit cards
will not be exempt if the cardholder
may be charged either an overdraft fee
or a fee for the first withdrawal each
month from automated teller machines
(‘‘ATMs’’) in the issuer’s designated
ATM network.
In addition to rules regarding
restrictions on interchange transaction
fees, EFTA Section 920(b) requires the
Board to prescribe rules related to the
routing of debit card transactions. First,
Section 920(b)(1) requires the Board to
prescribe rules that prohibit issuers and
payment card networks (‘‘networks’’)
from restricting the number of networks
on which an electronic debit transaction
may be processed to one such network
or two or more affiliated networks.
Second, that section requires the Board
to prescribe rules prohibiting issuers
and networks from inhibiting the ability
of any person that accepts debit cards
from directing the routing of electronic
debit transactions over any network that
may process such transactions.
Section 920(a) requires the Board to
establish interchange fee standards no
later than April 21, 2011, and that
section becomes effective on July 21,
2011. Section 920(b) requires the Board
to issue rules that prohibit network
exclusivity arrangements and debit card
transaction routing restrictions no later
than July 21, 2011, but does not
establish an effective date for these
provisions.
On December 28, 2010, the Board
requested public comment on a
proposed rule for implementing these
provisions of the Dodd-Frank Act. As
explained below, the Board received
comments from more than 11,500
commenters regarding this proposal,
including comments from issuers,
payment card networks, merchants,
consumers, consumer advocates, trade
associations, and members of Congress.
Prior to publishing its proposed rule,
the Board also conducted a survey of
issuers covered by EFTA Section 920
and of payment card networks to gather
information regarding electronic debit
transactions and related costs. Based on
its review of the comments, the
statutory provisions, the data available
to the Board regarding costs, its
understanding of the debit payment
system, and other relevant information,

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Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations
and for the reasons explained below, the
Board has adopted this final rule. A
companion interim final rule providing
for a fraud-prevention adjustment to the
interchange fee standards was also
adopted, with a request for comment on
the interim final rule.4
II. The Debit Card Industry
A. Overview of the Debit Card Industry

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When introduced in the late 1960s
and early 1970s, debit cards provided a
new way for consumers to access funds
in their deposit accounts,
supplementing more traditional means
such as checks and in-person
withdrawals at bank branches.5
Although initially debit cards were used
to withdraw cash or perform other
banking activities at ATMs, the system
evolved to support payments made by
consumers for the purchase of goods or
services at merchants. Cardholders are
also able to use their debit cards to get
cash back at certain point-of-sale
locations as part of the purchase
transaction. Debit cards are generally
issued by depository institutions to their
deposit account holders.
Debit cards now play a prominent role
in the U.S. payments system. Debit card
payments have grown more than any
other form of electronic payment over
the past decade, increasing to 37.9
billion transactions in 2009.6 Debit
cards are used in 35 percent of noncash
payment transactions, and have eclipsed
checks as the most frequently used
noncash payment method. Almost half
of total third-party debits to deposit
accounts are made using debit cards,
compared to approximately 30 percent
made by checks.7 8 Debit cards are
4 See companion interim final rule published
separately in the Federal Register.
5 Check use has been declining since the mid1990s as checks (and most likely some cash
payments) are being replaced by electronic
payments (e.g., debit card payments, credit card
payments, and automated clearing house (ACH)
payments).
6 The numbers in this discussion are derived from
the 2010 Federal Reserve Payments Study, available
at http://www.frbservices.org/files/communications/
pdf/press/2010_payments_study.pdf. Accordingly,
these figures may vary from those discussed in
connection with the Board’s survey of covered
issuers and payment card networks.
7 Third-party debits are those debits initiated to
pay parties other than the cardholder. These thirdparty debit numbers are derived from the 2010
Federal Reserve Payments Study. The Study
reported that a total of 108.9 billion noncash
payments were made in 2009, 35 percent of which
were debit card payments. For purposes of
determining the proportion of noncash payments
that were third-party debits to accounts, ATM cash
withdrawals and prepaid card transactions are
excluded from the calculation.
8 Board staff projects that debit card transactions
will total about 50 billion in 2011.

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accepted at about 8 million merchant
locations in the United States.
A more recent innovation in cardbased payments is the introduction of
prepaid cards. Prepaid cards may or
may not be reloadable and may be
accepted broadly or restricted to
purchases at particular merchants or for
specific types of products. Prepaid card
transaction volume is still low in
comparison to other forms of electronic
payments, such as debit cards, but is
increasing rapidly. In particular,
prepaid cards were used for 6 billion
transactions in 2009, valued at $140
billion, with average annual growth
rates of prepaid transaction volume and
value of more than 20 percent between
2006 and 2009.9
In general, there are two types of debit
card authentication methods on which
current systems are based: PIN (personal
identification number) and signature.10
The infrastructure for PIN debit
networks differs from that for signature
debit networks. PIN debit networks,
which evolved from the ATM networks,
are single-message systems in which
authorization and clearing information
is carried in a single message. Signature
debit networks, which leverage the
credit card network infrastructure, are
dual-message systems, in which
authorization information is carried in
one message and clearing information is
carried in a separate message.
The authentication methods available
for a given transaction generally depend
on features of the consumer’s card, the
transaction, and the merchant’s
acceptance policy. According to the
Board’s survey of covered card issuers,
more than 70 percent of debit cards
outstanding (including prepaid cards)
support both PIN- and signature-based
transactions (88 percent, excluding
9 These prepaid numbers are based on the 2010
Federal Reserve Payments Study, which gathered
information on both general-use and private-label
prepaid cards. According to that study, of the
reported 6.0 billion prepaid card transactions in
2009, 1.3 billion were general-use prepaid card
transactions, valued at $40 billion, and 4.7 billion
were private-label prepaid card and electronic
benefit transfer (‘‘EBT’’) card transactions, valued at
$90 billion. Combined, in 2009, debit and prepaid
cards accounted for 43.9 billion transactions or 40
percent of noncash payment transactions. Debit and
prepaid card transaction volume of 37.6 billion
reported by networks in the Board’s interchange
survey differed from the transaction volume of 39.2
billion (excluding private-label prepaid and EBT
card transactions) reported in the Federal Reserve
Payments Study because some networks reported
different volumes in the two surveys.
10 Increasingly, however, cardholders authorize
‘‘signature’’ debit transactions without a signature
and, sometimes, may authorize a ‘‘PIN’’ debit
transaction without a PIN. PIN-based and signaturebased debit also may be referred to as ‘‘PIN debit’’
and ‘‘signature debit.’’

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prepaid cards).11 In the current
environment, however, certain
transactions, such as transactions for
hotel stays or car rentals, where the
exact amount of the transaction is not
known at the time of authorization,
cannot readily be accommodated on
PIN-based, single-message systems. In
addition, PIN debit transactions
generally are not currently accepted for
Internet, telephone, and mail
transactions. Overall, information
collected by the Board indicates that
roughly one-quarter of the merchant
locations in the United States that
accept debit cards have the capability to
accept PIN-based debit transactions.
Further, as discussed below in
connection with § 235.2(m), new types
of debit card transactions are emerging
that are not ‘‘PIN-based’’ or ‘‘signaturebased’’ as those terms traditionally have
been used and use new cardholder
authentication methods.
Debit card transactions typically are
processed over one of two types of
systems, often referred to as three-party
and four-party systems.12 The so-called
four-party system is the model used for
most debit card transactions; the four
parties are the cardholder, the entity
that issued the payment card to the
cardholder (the issuer), the merchant,
and the merchant’s bank (the acquirer or
merchant acquirer).13 The network
receives transaction information and
data from the acquiring side of the
market, routes the information to the
issuer of the card (authorization and
clearing), and determines each side’s
daily net settlement positions for
interbank monetary transfers.14
In a three-party system, one entity
acts as issuer and system operator, and
often as acquirer as well. Thus, the three
parties involved in a transaction are the
cardholder, the merchant, and the
system operator. The three-party model
is used for some prepaid card
transactions, but currently is not used
for other debit card transactions in
which the cardholder is debiting his or
her bank account.
In a typical four-party system
transaction, the cardholder initiates a
purchase by providing his or her card or
card information to a merchant. In the
case of PIN debit, the cardholder also
11 ‘‘Covered issuers’’ are those issuers that,
together with affiliates, have assets of $10 billion or
more.
12 Industry participants sometimes refer to fourparty systems as ‘‘open loop’’ systems and threeparty systems as ‘‘closed loop’’ systems.
13 Throughout this rule, the term ‘‘bank’’ may be
used to refer to any depository institution.
14 The term ‘‘four-party system’’ is something of
a misnomer because the network is, in fact, a fifth
party involved in a transaction.

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enters a PIN. An electronic
authorization request for a specific
dollar amount, along with the
cardholder’s account information, is
sent from the merchant to the acquirer
to the network, which sends the request
to the appropriate card-issuing
institution.15 The issuer verifies, among
other things, that the cardholder’s
account has sufficient funds to cover the
transaction amount and that the card
was not reported as lost or stolen. A
message approving or declining the
transaction is returned to the merchant
via the reverse path, usually within
seconds of the authorization request.
The clearing of a debit card
transaction is effected through the
authorization message (for PIN debit
systems) or a subsequent message (for
signature debit systems). The issuer
posts the debits to the cardholder’s
account based on these clearing
messages. Based on all clearing
messages received in one day, the
network calculates and communicates
to each issuer and acquirer its net debit
or credit position for settlement. The
interbank settlement generally is
effected through a settlement account at
a commercial bank, or through ACH
transfers. The acquirer credits the
merchant’s account for the value of its
transactions, less the merchant
discount, as discussed below. The
timing of this crediting is determined by
the merchant-acquirer agreement and/or
ACH operator rules. In some
circumstances, an acquirer that is also
the issuer with respect to a particular
transaction may authorize and settle
that transaction internally.
Various fees are associated with debit
card transactions. The interchange fee is
set by the relevant network and paid by
the acquirer to the issuer; the network
accounts for the interchange fee in
determining each issuer’s and acquirer’s
net settlement position. Switch fees are
charged by the network to acquirers and
issuers to compensate the network for
its role in processing the transaction.16
The acquirer charges the merchant a
merchant discount—the difference
between the face value of a transaction
and the amount the acquirer transfers to
the merchant—that includes the
interchange fee, network switch fees
charged to the acquirer, other acquirer
costs, and an acquirer markup. The
interchange fee typically comprises a
15 Specialized payment processors may carry out
some functions between the merchant and the
network or between the network and the issuer.
16 A variety of other network fees, such as
membership fees and licensing fees, may be
collected by the network from the issuer or
acquirer.

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large fraction of the merchant discount
for a card transaction.17
When first introduced, some PIN
debit networks structured interchange
fees in a manner similar to ATM
interchange fees.18 For ATM
transactions, the cardholder’s bank
generally pays the ATM operator an
interchange fee to compensate the ATM
operator for the costs of deploying and
maintaining the ATM and providing the
service. Similarly, some PIN debit
networks initially structured
interchange fees to flow from the
cardholder’s bank to the merchant’s
bank to compensate merchants for the
costs of installing PIN terminals and
making necessary system changes to
accept PIN debit at the point of sale. In
the mid-1990s, these PIN debit networks
began to shift the direction in which
PIN debit interchange fees flowed. By
the end of the decade, interchange fees
for all PIN debit transactions in the
United States were paid by acquirers to
card issuers.19
During the 1990s, most PIN debit
networks employed fixed pertransaction interchange fees. Beginning
around 2000, many PIN debit networks
incorporated an ad valorem (i.e.,
percentage of the value of a transaction)
component to their interchange fees,
with a cap on the total amount of the fee
for each transaction. In addition, PIN
debit networks expanded the number of
interchange fee categories in their fee
schedules. For example, many networks
created categories based on merchant
type (e.g., supermarkets) and began to
segregate merchants into different
categories based on transaction volume
(e.g., transaction tiers). Over the course
of the 2000s, most PIN debit networks
raised the levels of the fixed and ad
valorem components of fees, in addition
to raising the caps on overall fees. By
2010, some networks had removed per17 Merchant discounts generally follow two
forms: interchange-plus pricing and blended. If an
acquirer is charging an interchange-plus merchant
discount, the acquirer passes through the exact
amount of the interchange fee for each transaction.
If an acquirer is charging a blended merchant
discount, the acquirer charges the same discount
regardless of the interchange fee that applies to each
transaction.
18 In the late 1970s, bank consortiums formed
numerous regional electronic funds transfer
(‘‘EFT’’) networks to enable their customers to
withdraw funds from ATMs owned by a variety of
different banks. The EFT networks were first used
to handle PIN debit purchases at retailers in the
early 1980s. It was not until the mid-1990s,
however, that PIN debit became a popular method
of payment for consumers to purchase goods and
services at retail stores.
19 Debit Card Directory (1995–1999). See also,
Fumiko Hayashi, Richard Sullivan, & Stuart E.
Weiner, ‘‘A Guide to the ATM and Debit Card
Industry’’ (Federal Reserve Bank of Kansas City
2003).

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transaction caps on many interchange
fees.
In general, interchange fees for
signature debit networks, like those of
credit card networks, combine an ad
valorem component with a fixed fee
component. Unlike some PIN debit
networks, interchange fees for signature
debit networks generally do not include
a per-transaction cap. Beginning in the
early 1990s, signature debit networks
also began creating separate categories
for merchants in certain market
segments (e.g., supermarkets and cardnot-present transactions) to gain
increased acceptance in those
markets.20 Until 2003, interchange fee
levels for signature debit transactions
were generally similar to those for credit
card transactions and significantly
higher than those for PIN debit card
transactions. However, PIN debit fees
began to increase in the early 2000s, as
noted above, while signature debit fees
declined in late 2003 and early 2004.21
More recently, both PIN and signature
debit fees have increased, although PIN
debit fees have increased at a faster
pace.
In addition to setting the structure
and level of interchange fees and other
fees to support network operations, each
card network specifies operating rules
that govern the relationships between
network participants. Although network
rules generally apply to issuers and
acquirers, merchants and processors
also may be required to comply with a
network’s rules or risk losing access to
that network. Network operating rules
cover a broad range of activities,
including merchant card acceptance
practices, technological specifications
for cards and terminals, risk
management, and determination of
transaction routing when multiple
networks are available for a given
transaction.
B. Summary Information About
Interchange Fees and Transaction Costs
In September 2010, the Board
surveyed issuers that would be subject
to the interchange fee standards and
payment card networks to gather
information to assist the Board in
developing its proposed rule.22
20 Card-not-present transactions occur when the
card is not physically presented to the merchant at
the time of authorization. Examples include
Internet, phone, and mail-order purchases.
21 This decline followed the settlement of
litigation surrounding signature debit cards. See In
re: Visa Check/MasterMoney Antitrust Litigation,
192 F.R.D. 68 (E.D.N.Y. 2000).
22 The Board also surveyed the nine largest
merchant acquirers, all of which responded to the
survey and provided information on the number
and volume of debit card transactions that they
processed, the number of merchants that accepted

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Preliminary summary information was
provided in the Board’s proposal.23 An
updated and more detailed summary of
this information is provided in ‘‘2009
Interchange Revenue, Covered Issuer
Costs, and Covered Issuer and Merchant
Fraud Losses Related to Debit Card
Transactions.’’ 24 What follows is a brief
high-level summary of the survey data
responses on interchange fees, issuer
costs, and merchant and issuer fraud
losses. The data results represent only
covered issuers and networks that
responded to the survey.25
Card use. Payment card networks
reported a total of approximately 37.6
billion debit (including prepaid) card
purchase transactions in 2009, with an
aggregate value of more than $1.4
trillion. Signature-based transactions
accounted for 22.5 billion or 60 percent
of all purchase transactions, and $837
billion or 59 percent of transaction
value. PIN-based debit transactions
totaled 13.9 billion or 37 percent of
purchase transactions, and $555 billion
or 39 percent of transaction value.
General-use prepaid card transactions
represented 1.2 billion or 3 percent of
purchase transactions and $38 billion or
3 percent of purchase transaction value.
The average value of all purchase
transactions was $38.03, with the
average values of signature debit, PIN
debit, and prepaid card transactions
being $37.15, $40.03, and $31.47,
respectively.
Interchange fees. Networks reported
that debit card interchange fees totaled
$16.2 billion in 2009. Of this
interchange-fee revenue, $12.5 billion
was for signature debit transactions,
$3.2 billion was for PIN debit
transactions, and $0.5 billion was for
prepaid card transactions. The average
interchange fee for all debit card
transactions was 44 cents per
transaction, or 1.15 percent of the
average transaction amount. The average
interchange fee for signature debit
transactions was 56 cents, or 1.53
percent of the average transaction
amount. The average interchange fee for
PIN debit transactions was significantly
lower, at 23 cents per transaction, or
0.58 percent of the average transaction
amount. Prepaid card interchange fees
averaged 40 cents per transaction, or
various types of debit cards, fraud losses, fraud
prevention activities and costs, and exclusivity
arrangements and routing procedures.
23 75 FR 81724–26, 81740–42 (Dec. 28, 2010).
24 http://www.federalreserve.gov/
paymentsystems/files/debitfees_costs.pdf.
25 Most respondents did not provide information
for every data element requested in the surveys. As
discussed further below under § 235.3, when
determining the interchange fee standard, the Board
considered only data from issuers that provided
information for each included cost.

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1.28 percent of the average transaction
amount.26
Issuer processing costs. The Board’s
survey requested covered issuers to
report their total transaction processing
costs, including fixed and variable costs
and network processing fees associated
with authorization, interbank clearing
and settlement, and cardholder account
posting for routine purchase
transactions and non-routine
transactions, such as chargebacks and
errors. The median per-transaction total
processing cost across issuers for all
types of debit card transactions was 11
cents per transaction. The 80th
percentile of per-transaction total
processing cost across issuers for all
types of debit card transactions was 19
cents.27
Issuer fraud-prevention and datasecurity costs. The median issuer cost
for all debit card-related fraudprevention activities (excluding datasecurity costs, which were reported
separately) was approximately 1.7 cents
and the 80th percentile was 3.1 cents.
The most commonly reported fraudprevention activity was transaction
monitoring. The median issuer cost for
transaction monitoring was 0.7 cents,
and the 80th percentile was 1.2 cents.
The remaining costs related to a variety
of fraud-prevention activities, including
research and development, card
activation systems, PIN customization,
merchant blocking, and card
authentication systems; the pertransaction cost of each individual
activity was small, typically less than
one-tenth of a cent. The median total
data-security cost reported by issuers
was approximately 0.1 cents and the
80th percentile was 0.4 cents.
Network Fees and Incentives. The
payment card networks reported various
network fees that they charge to issuers
and acquirers. Total network fees
exceeded $4.1 billion. Networks charged
issuers more than $2.3 billion in fees
and charged acquirers over $1.8 billion
in fees. Almost 76 percent of the total
fees paid, or $3.1 billion, were charged
by signature debit networks. More than
$3.4 billion, or 82 percent of total fees
paid, were assessed on a per-transaction
26 Some of these numbers differ from those
published in the Federal Register notice of
proposed Regulation II (75 FR 81725 (Dec. 28,
2010)) because several networks subsequently
submitted corrections to previously provided data.
In one instance, a network corrected the number of
prepaid transactions and PIN debit transactions.
27 For signature debit transactions, the median
issuer per-transaction cost was 13 cents and the
80th percentile was 21 cents. For PIN debit
transactions, the median and 80th percentile issuer
per-transaction costs were 8 cents and 14 cents,
respectively. For prepaid card transactions, they
were 61 cents and $1.52, respectively.

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basis. Networks paid issuers almost
$700 million and acquirers more than
$300 million in discounts and
incentives. Of the total incentives or
discounts paid by networks, 81 percent
were paid by signature networks.
Fraud losses. The Board estimates that
industry-wide fraud losses to all parties
of a debit card transaction were
approximately $1.34 billion in 2009.
About $1.11 billion of these losses arose
from signature debit card transactions,
about $181 million arose from PIN debit
card transactions, and almost $18
million arose from prepaid card
transactions.28 Across all transaction
types, the median number of purchase
transactions that were fraudulent was
about 3 of every 10,000 transactions.
The medians for signature, PIN, and
prepaid debit card were 4, less than 1,
and 1 of every 10,000 transactions,
respectively. The median loss per
purchase transaction incurred by both
issuers and merchants was about 3
cents.29 The median fraud loss as a
percent of purchase transaction value
was about 9 basis points. For issuers
alone, the median loss per purchase
transaction was about 2 cents, and the
median fraud loss as a percent of
purchase transaction value was
approximately 5 basis points.30
Across all types of transactions, 62
percent of reported fraud losses were
borne by issuers and 38 percent were
borne by merchants. The distribution of
fraud losses between issuers and
merchants differs significantly based on
28 Revisions in the data plus the inclusion of
prepaid card fraud have led to changes to some of
the industry-wide fraud loss estimates that were
included in the proposal. 75 FR 81740–41 (Dec. 28,
2010). The higher losses for signature debit card
transactions result from both a higher rate of fraud
and higher transaction volume for signature debit
card transactions. The sum of debit card program
fraud losses will not equal the industry-wide fraud
losses due to different sample sizes and rounding.
29 Issuers charge back transactions to acquirers
that, in turn, typically pass on the chargeback value
to the merchant.
30 For signature debit, the median loss per
purchase transaction to both issuers and merchants
was 5 cents, and the median fraud loss as a
percentage of purchase transaction value was about
12 basis points. This corresponds to a median fraud
loss per purchase transaction to issuers of 3 cents
and a median fraud loss as a percentage of purchase
transaction value of 7 basis points. For PIN debit,
the median loss per purchase transaction to both
issuers and merchants was 1 cent and the median
fraud loss as a percentage of purchase transaction
value was about 3 basis points. This corresponds to
a median fraud loss per purchase transaction to
issuers of 1 cent and a median fraud loss as a
percentage of purchase transaction value of 2 basis
points. For prepaid, the median loss per purchase
transaction to both issuers and merchants was 1
cent, and the median fraud loss as a percentage of
purchase transaction value was 3 basis points. This
corresponds to a median fraud loss per purchase
transaction to issuers of 1 cent and a median fraud
loss as a percentage of purchase transaction value
of 2 basis points.

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the cardholder authentication method
used in a debit card transaction. Issuers
reported that nearly all the fraud losses
associated with PIN debit transactions
(96 percent) were borne by issuers. By
contrast, reported fraud losses for
signature debit and prepaid card
transactions were distributed more
evenly between issuers and merchants.
Specifically, issuers and merchants bore
59 percent and 41 percent of signature
debit fraud losses, respectively. Issuers
and merchants bore 67 percent and 33
percent of prepaid fraud losses,
respectively.
Other debit card program costs. The
issuer survey collected information on
other costs related to debit card
programs, including costs associated
with card production and delivery,
cardholder inquiries, rewards and other
incentives, research and development,
nonsufficient funds handling, and
compliance. For each issuer that
reported these costs, the costs were
averaged over the total number of debit
card transactions processed by the
issuer. The median per transaction cost
of production and delivery of cards was
2 cents, cardholder inquiries 3 cents,
rewards and other incentives 2 cents,
research and development 1 cent,
nonsufficient funds handling 1 cent,
and compliance less than 0.5 cents.

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C. Comparison to Checking
Transactions
1. Summary of Proposal and Comments
EFTA Section 920(a)(4)(A) requires
the Board to consider, in prescribing
standards governing debit interchange
fees, the functional similarity between
electronic debit transactions and
checking transactions that are required
to clear at par within the Federal
Reserve System. As part of its proposal,
the Board described both the similarities
and differences between electronic debit
transactions and checking transactions.
The similarities noted by the Board
included the fact that both types of
transactions result in a debit to an asset
account; both involve electronic
processing and, increasingly, deposit;
both involve processing fees paid by
merchants to banks and other
intermediaries; and both have similar
settlement timeframes. The differences
noted by the Board included the closed
nature of debit card systems compared
to the open check clearing and
collection system; the payment
authorization that is an integral part of
electronic debit card transactions (but
not check transactions), which
guarantees that the transaction will not
be returned for insufficient funds or
certain other reasons (e.g., a closed

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account); processing and collection
costs incurred by the issuer (analogous
to the payor’s bank) for electronic debit
transactions but not for check; par
clearance in the check system; restricted
routing choice in the debit card
environment; and the ability to reverse
electronic debit transactions within the
normal processing system.31
The Board considered the functional
similarity between electronic debit
transactions and checks in determining
which allowable costs to include under
its proposal. In part based on this
comparison, the Board proposed to
include only those costs that are
incurred with respect to a particular
transaction that are related to
authorization, clearance, and settlement
of the transaction. The Board noted that
a payor’s bank in a check transaction
(analogous to the issuer in a debit card
transaction) would not recoup such
costs from the payee’s bank (analogous
to the merchant acquirer in a debit card
transaction), but that these were costs
that EFTA Section 920(a) specifically
directed the Board to consider in setting
standards governing interchange
transaction fees.
The Board received several comments
from issuers, networks, and merchants
on the functional similarities and
differences between electronic debit
transactions and check transactions, as
well as comments on how the Board
should take those similarities and
differences into consideration.
Merchants and their trade groups
suggested that the starting point for the
comparison to checks should be the cost
savings that issuers receive from
processing a debit card transaction
rather than a check.
By contrast, numerous issuers and
networks asserted that the Board’s
interchange fee standards should reflect
not only the similarities between checks
and debit cards, but also the differences
between checks and debit cards. As a
result, these commenters believed that
the comparison to checks would expand
the scope of allowable costs. Several
issuers and networks argued that, by
tying the amount of an interchange fee
to the cost of an electronic debit
transaction, Congress recognized that
the debit card pricing system should be
different from the check pricing system.
These commenters argued that the
Board should consider all costs that
issuers incur for electronic debit
transactions, regardless of whether the
payor’s bank would be able to recoup
31 See 75 FR 81734 (Dec. 28, 2010) for a more
detailed comparison between checks and electronic
debit transactions in the Board’s proposal.

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similar costs from the payee’s bank in a
check transaction.
Many issuers and networks suggested
that the Board’s interchange fee
standards should account for the
benefits merchants receive from
accepting debit cards instead of checks.
The benefits of debit cards to merchants
that were cited include the payment
guarantee; the avoidance of fees and
other costs of handling checks; 32 faster
availability of funds; faster check-out at
the point-of-sale; increased sales value
and volume; the ability to engage in
certain types of transactions where
checks are not practical (e.g., Internet);
and resolution of disputes through
network rules and mediation rather than
through the legal system.33
Some issuer and network commenters
suggested that the Board also consider
the benefits to consumers of using debit
cards instead of checks. Such benefits
cited by the commenters included wide
acceptance of debit cards by merchants,
ease of use, and speed of transactions.
More generally, some commenters noted
that the increase in debit card use and
decline in check use are indicative of
greater value from debit cards to all
parties. One network stated that
interchange fee revenue has given
issuers an incentive to innovate,
allowing them to provide to merchants
a product that is superior to checks.
One difference between electronic
debit transactions and check
transactions that commenters
highlighted is the payment guarantee for
electronic debit transactions. Numerous
issuers and networks stated that, unlike
checks, debit card transactions are
guaranteed by issuers against
insufficient funds in an account. These
commenters stated that a comparable
service for checks costs merchants 1.5
percent of the transaction value.
Accordingly, several commenters
argued that the Board should compare
merchants’ debit card acceptance costs
to the cost of accepting a guaranteed
check. Some commenters contended
that failure to compensate issuers for the
payment guarantee could decrease its
availability.
The Board has considered the
comments received and has revised its
analysis of the comparison of check and
electronic debit transactions, as set out
below.
32 Cited costs of checks included per-item and
batch deposit fees, check return fees, re-clearance
fees, and an optional guarantee service.
33 Some commenters argued that the benefits of
debit cards over checks are also benefits of debit
cards over cash.

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2. Comparison of Check and Electronic
Debit Transactions

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Typical check transaction.34 Checks
can be collected, presented, returned,
and settled through an interbank system
or through an intrabank system, in the
case of checks deposited and drawn on
the same bank (i.e., ‘‘on-us’’ checks). A
typical check transaction is initiated by
the payor (such as a consumer) writing
a check drawn on the bank maintaining
the payor’s account to the order of a
payee (such as a merchant). The payee
receives as a payment the signed check
and deposits the check with its bank for
collection. The payee’s bank has several
choices in directing the presentment of
the check to the payor’s bank for
payment. The payee’s bank may (i)
present the check for payment directly
to the payor’s bank, (ii) use a check
clearing house, or (iii) use the services
of an intermediate collecting bank, such
as a Federal Reserve Bank or another
correspondent bank.35 Upon
presentment, the payor’s bank settles
with the presenting bank (either the
payee’s bank or an intermediate
collecting bank) for the amount of the
check and debits the amount of the
check from the account of the payor. In
some cases, the payee’s bank may also
be the payor’s bank, in which case the
bank settles the check internally.
Functional similarities. There are a
number of similarities between check
and debit card payments. Both are
payment instructions that result in a
debit to the payor’s account. Debit card
payments are processed electronically,
which is increasingly true for checks as
well. For both check and debit card
payments, merchants pay fees to banks,
processors, or intermediaries to process
the payments. Interbank settlement
times are roughly similar for both
payment types, with payments typically
settling between banks on the same day,
or one day after, the transaction is
cleared. Settlement to the payee’s
account typically occurs within one or
two days after the payee deposits the
check or submits the debit card
transaction to its bank.
Dissimilarities. As noted by many
commenters, there are also important
functional differences between the
34 See the discussion above providing an
overview of the debit card industry for a description
of the typical electronic debit transaction.
35 Check clearing houses generally provide a
facility or mechanism for banks to exchange checks
for collection and return. The services provided by
check clearing houses vary. Some merely provide
the capability to exchange checks. Others provide
the capability to exchange between banks in
electronic form. A check clearing house generally
also facilitates settlement of the checks exchanged
through it.

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check and debit card payment systems.
Some commenters argued that the debit
card authorization, clearance, and
settlement infrastructure has no direct
corollary in the check system, and
therefore, the comparison between
check and debit card payment systems
is inappropriate. The Board notes that
EFTA Section 920(a)(4)(A) requires the
Board to consider the functional
similarities between checking
transactions and electronic debit
transactions. The Board recognizes that
there are also important differences
between the two types of transactions,
including those discussed below.
Closed network versus open system.
Debit card systems are ‘‘closed’’ systems
(relative to check systems) in that both
issuing and acquiring banks must join a
network in order to accept and make
payments. To accept debit cards, a
merchant must select an acquirer and
make decisions as to the network(s) in
which it will participate. Issuers and
acquirers that are members of a network
must establish a relationship with that
network and agree to abide by that
network’s rules. These network rules
include network-defined chargeback
and liability allocation rules, networkdefined processing and dispute
handling requirements, and network fee
schedules.36
The merchant’s choice with regard to
routing a debit card transaction is
limited to the set of networks whose
cards the merchant accepts and that are
also enabled to process a transaction on
the customer’s card. Until the effective
date of Regulation II, merchant
transaction routing may be further
limited if the card issuer or a network
has designated network routing
preferences on cards that are enabled on
multiple networks. These issuer or
network routing preferences may result
in a transaction being routed to a
network that imposes a higher fee on the
acquirer (and hence the merchant) than
if the payment were processed on
another available network.
By contrast, the check system is an
open system in which, as a practical
matter, a merchant simply needs a
banking relationship through which it
can collect checks in order to be able to
accept check payments from its
customers. The payee’s bank (i.e., the
merchant’s bank) need not join a
network in order to collect a check. The
rules governing checks are established
by generally uniform state laws (e.g., the
Uniform Commercial Code), the
36 In addition to the network rules, the EFTA
establishes the basic rights, liabilities, and
responsibilities of consumers who use electronic
fund transfer services and of financial institutions
that offer these services.

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Expedited Funds Availability Act, and
the Board’s Regulation CC (12 CFR part
229). These laws and rules provide a
common legal framework for all check
system participants. The participants,
however, may vary certain parts of those
rules, such as by arranging to accept or
send electronic images in place of the
paper checks.
The routing of checks for collection is
not limited in the same way as the
routing of electronic debit transactions.
A payee’s bank is free to use its least
costly option for collecting a check.
Intermediary collecting banks generally
compete on the basis of price and funds
availability. Typically price and
availability vary within an intermediate
collecting bank’s service menu
depending on the level of processing the
collecting bank is required to do (e.g.,
whether the payee’s bank sends checks
in paper form or via electronic image)
and depending on the time of day the
checks are received. If participants agree
to send electronic images instead of the
paper checks, the sending bank must
have an agreement with the bank to
which it is sending the image.
Payment authorization and
guarantee. Payment authorization is an
integral part of the processing of a
transaction on a debit card network. As
part of the payment authorization
process, at the start of a transaction, a
card issuer determines, among other
things, whether the card is valid and
whether there are sufficient funds to
cover the payment. Several commenters
(predominantly issuers and their trade
associations) emphasized that part of
the approval includes a ‘‘payment
guarantee,’’ which refers to the issuers’
agreement to fund a transaction
authorized by the issuer regardless of
whether customer funds are actually
available at the time of the settlement of
the transaction, subject to certain
predefined chargeback rights. These
commenters argued that the cost of this
‘‘guarantee’’ is a settlement or
authorization cost incurred by issuers
when they pay acquirers funds to settle
the transaction and the cardholder has
insufficient funds in the account to
cover the transaction. Many merchant
commenters, as well as issuers, stated
that a debit card payment is provisional
because the transaction may be charged
back in certain circumstances, such as
when it is later discovered that the
transaction was not properly authorized
by the customer.
By contrast, payment authorization is
not an inherent part of the check
collection process, and therefore the
acceptance of a check by a merchant for
payment does not include any
automatic ‘‘guarantee’’ that the check

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will be honored and the payment will
be made. Merchants, however, can
purchase check verification and
guarantee services from various thirdparty service providers. These service
providers offer varying levels of check
guarantee and verification services that
are structured in various ways. In a
check ‘‘guarantee’’ service, a check
guarantee provider may verify whether
currently outstanding returned checks
are associated with that payor or the
checking account, as well as verify
open/closed account status and valid/
invalid routing and account numbers,
although the service generally cannot
verify the amount of funds in the
payor’s account.37 If a check meets all
of the guarantee service’s criteria (such
as no known outstanding bad checks
drawn by the customer), the service
authorizes acceptance by the merchant
and accepts the risk of loss on the
check.38 If a check is subsequently
returned unpaid, the merchant will be
reimbursed by the check guarantee
provider for the value of the returned
check.
The merchant pays a fee for the check
guarantee service. Based on available
information, the Board understands that
a check guarantee provider typically
charges the merchant a percentage of the
face value of all checks that are
accepted, in addition to various other
service charges. The fee structures vary
by the service provider and also can
vary by merchant type and perceived
risk, but one commenter asserted that
check guarantee services typically
charge between 1.0 percent and 1.5
percent of the face amount of the check
and a 25 cent per-check fee, as well as
a monthly customer service fee.39
Another service offered is a check
‘‘verification’’ product, which does not
include a guarantee. A check
verification service may use database
searches similar to a check guarantee
service to approve or decline any given
check transaction.40 The check
37 Based on information available to the Board, a
check guarantee service requires extra steps at the
time of a transaction and is not integrated into
check processing the same way that the
authorization and guarantee is integrated into the
debit card transaction. Each check is entered into
the system by inputting the check’s MICR
information on either a manual or automated basis.
The merchant also enters customer identification
information, such as the driver’s license number.
The guarantor then sends a return message to the
merchant.
38 The service provider may have exceptions to its
guarantee and these exceptions may vary across
service providers.
39 See, e.g., Comment letter from American
Bankers Association, p. 7.
40 Some check verification services also provide
the merchant with a reason for a decline, so the
merchant can make a more informed decision as to

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verification service, however, leaves the
risk of an unpaid check with the
merchant.
Various fees are charged for check
verification services, and the fee
structure and levels can vary by service
provider and merchant. Based on
information available to the Board,
check verification services may charge a
per transaction fee of about 25 cents
with a $20 monthly minimum and may
charge a monthly service fee.41 Unlike
the check guarantee services, the check
verification services do not appear to
also charge a fee based on the amount
of the check.
Payment of processing and collection
costs. In the check system, payments
clear at par. When a presenting bank
(either the payee’s bank or an
intermediary collecting bank) presents a
check to the payor’s bank, the payor’s
bank pays, and the presenting bank
receives, the face value of the check (i.e.,
‘‘par clearing’’). The presenting bank
typically does not pay a fee to the
payor’s bank in order to receive
settlement for the check. In addition, the
payor’s bank does not pay fees to the
presenting bank to receive check
presentment unless the payor’s bank has
agreed to pay a fee to receive
presentment electronically.42 The
payee’s bank and any subsequent
collecting bank incur costs to collect the
check. A payor’s bank incurs costs to be
able to accept presentment of the check,
to determine whether or not to pay the
check, and to remit funds for settlement.
One commenter indicated that these
costs exceeded debit card processing
costs. The payor’s bank recoups some or
all of these costs through fees it charges
to its customers or the interest it earns
on the customer’s balances.
By contrast, in the debit card system,
the merchant does not receive the full
face value of the debit transaction. The
merchant pays fees to its acquirer in the
form of a discount on the value of each
transaction for the services rendered in
processing the transaction. The acquirer,
in turn, pays an interchange fee to the
issuing bank on each debit transaction,
which is deducted from the amount of
the debit card transaction in the daily
net settlement calculations. The
acquirer and issuer both pay fees to the
network to process electronic debit
transactions. As discussed in more
detail below, the issuer incurs costs to
whether to accept the check on a customer-bycustomer basis. See http://www.ncms-inc.com/
check-verification.aspx.
41 See http://www.nobouncedchecks.com/SCANcheck.html
42 If both the presenting bank and the payor’s
bank have voluntarily joined a check clearing
house, they may pay fees to the clearing house.

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authorize, clear, and settle debit card
transactions, as well as other costs
related to debit card programs.
Likewise, the acquirer incurs costs to
send authorization and clearing
messages, as well as for interbank
settlement and crediting the merchant’s
account.
Payee deposit and availability. A
debit card transaction is initiated in an
electronic format and sent electronically
to the acquiring bank; the proceeds are
then deposited in the merchant’s bank
account electronically and made
available to the merchant in accordance
with the agreement between the
merchant and its acquirer.
With respect to paper checks, the
check must be physically accepted by
the merchant, and deposited in its bank
and then sent through the check
clearing process to the payor’s bank.
The proceeds of a typical check
generally must be made available to the
payee within one or two business days
of deposit.43 Banks may, and sometimes
do, make check deposits available for
withdrawal faster than the law requires.
Some merchants may take advantage
of ‘‘remote deposit capture’’ services
from their bank wherein a paper check
is scanned to create an electronic image
that is sent to the merchant’s bank
electronically for deposit.44 Remote
deposit capture can decrease processing
costs and improve customers’ access to
their deposits.45 One commenter stated,
however, that although some merchants
may use remote deposit capture, many
do not for a variety of reasons, including
inconvenience, lack of eligibility, and
cost.46 Depository institutions charge a
variety of fees for remote deposit
capture, which may vary by depository
institution and customer, but typically
include a monthly service fee, a peritem fee, equipment lease/purchase fee,
and various other fees. Some banks
charge a monthly service fee and a fee
for leasing the check scanner, although
a customer may purchase a scanner.47 A
43 See

Regulation CC, 12 CFR part 229.
deposit capture was made practicable
by the Check Clearing for the 21st Century Act
(Check 21 Act), codified at 12 U.S.C. 5001 note.
45 FFIEC, Risk Management of Remote Deposit
Capture (Jan. 14, 2009). Certain risks, however, may
be elevated with respect to remote deposit capture
when compared to paper checks. For example,
duplicate deposits, check alteration, and forged or
missing indorsements may be more difficult to
detect in remote deposit capture. Id. p.5.
46 The elevated fraud risk may cause some banks
to offer remote deposit capture only to creditworthy
corporate customers with appropriate back office
and control environments.
47 FDIC Supervisory Insights (Summer 2009),
available at http://www.fdic.gov/regulations/
examinations/supervisory/insights/sisum09/
primer.html
44 Remote

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bank also may charge a per-item fee and
a client set-up fee.48
Ability to reverse transactions. In the
check system, there is a limited amount
of time during which the payor’s bank
may return a check to the payee’s bank.
Specifically, the payor’s bank must
initiate the return by its ‘‘midnight
deadline,’’ which is midnight of the
banking day after the check was
presented to the payor’s bank for
payment.49 After the midnight deadline
passes, the payor’s bank can no longer
return the payment through the check
payment system, although it may have
legal remedies, such as warranty claims,
outside the check collection system.50
Such legal remedies may be available,
for example, if a payor notifies its bank
that the check was altered or that the
indorsements on the check were forged
and does so reasonably promptly if the
payor’s bank provides statements to the
payor.51
The debit card system provides a
much longer time within which a
transaction may be reversed through the
payment card network, as opposed to
warranty claims outside the payments
system. Typically, the time period for
initiating resolution of a disputed
transaction through the network is
around 60 days, but may be longer.52
Payment card network rules permit
certain disputed transactions to be
resolved through the payment card
network. Specifically, if a transaction
was not authorized or is incorrect,
payment card network rules generally
provide that, depending on the facts and
circumstances, (1) the transaction is
guaranteed and the amount of the
transaction must be absorbed as a fraud
loss by the issuer; or (2) the transaction
can be charged back to the merchant
that accepted the electronic debit
transaction.53
Acceptance by merchants and
consumers. The use of debit cards by
consumers is increasing, while the use
of checks is decreasing.54 The increase
48 See, e.g., http://www.firstbankak.com/home/bs/
remotedepositcapture/rdc_faq#15.
49 UCC 4–104(a)(10) (definition of ‘‘midnight
deadline’’).
50 UCC 4–301 and 4–302. The payor’s bank may
have a warranty claim for a forged indorsement or
a material alteration, but, except in limited
circumstances, would not have a claim based on
insufficient funds or forged drawer’s signature.
51 UCC 4–406.
52 The Board’s Regulation E (implementing other
provisions of the EFTA) states that a consumer has
60 days to dispute the transaction as unauthorized
or incorrect from the date that the consumer’s
depository institution posts an electronic debit
transaction to the consumer’s account and sends a
statement to the consumer. 12 CFR 205.11(b).
53 Morrison & Foerster comment letter, p.10.
54 Between 2006 and 2009, check transactions
decreased by an average of 7.1% annually and debit

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of electronic payments and the decline
of checks can be attributed to
technological and financial innovations
that influence the payment choices of
consumers and businesses. Commenters
(predominantly issuers, networks, and
consumers) provided other reasons for
these trends, such as ease and speed of
the debit card transaction and the fact
that customers do not need to leave a
physical copy of their names and
addresses with the merchant after a
debit card transaction, as they would
with checks. Many issuer and network
commenters asserted that merchants
also are increasingly accepting debit
cards because debit cards increase the
amount of money consumers spend at
the point of sale.
In addition, debit transactions are
used in many situations that do not
readily lend themselves to the use of
checks, such as purchases made over
the Internet or telephone, online
recurring payments, vending machine
transactions, self-service checkout
purchases, and purchases at automated
gas pumps. Also, foreign checks are not
nearly as widely accepted by U.S.
merchants as are debit cards issued by
institutions in foreign countries.
Consumers generally may use their
debit cards at locations beyond their
local area, regardless of the location of
the card issuer.
As required by EFTA Section
920(a)(4)(A), the Board has taken the
similarities between the functionality of
electronic debit transactions and check
transactions into account in establishing
the standards for interchange fees under
Section 920(a). The functional
similarities between these two types of
transactions can be understood only by
considering the differences between
them as well. Accordingly, the Board
has also, in fulfilling the mandate in
Section 920(a)(4)(A) and in the exercise
of its discretion under Section 920(a),
considered the differences between
these two types of transactions in
establishing standards for assessing
whether interchange fees are reasonable
and proportional to cost, as discussed
below in the interchange fee standards
section.
III. Summary of Proposal and
Comments
A. Summary of Proposal
The Board requested comment on two
alternative standards for determining
whether the amount of an interchange
transaction fee is reasonable and
proportional to the cost incurred by the
card transactions increased by an average of 14.8%
annually. See The 2010 Federal Reserve Payments
Study.

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issuer with respect to the transaction.
Under Alternative 1, an issuer could
comply with the standard for
interchange fees by calculating its
allowable costs and ensuring that,
unless it accepts the safe harbor as
described below, it did not receive
through any network any interchange
fee in excess of the issuer’s allowable
costs. An issuer’s allowable costs would
be those costs that both are attributable
to the issuer’s role in authorization,
clearance, and settlement of the
transaction and vary with the number of
transactions sent to an issuer within a
calendar year (variable costs). The
issuer’s allowable costs incurred with
respect to each transaction would be the
sum of the allowable costs of all
electronic debit transactions over a
calendar year divided by the number of
electronic debit transactions on which
the issuer received or charged an
interchange transaction fee in that year.
The issuer-specific determination in
Alternative 1 would be subject to a cap
of 12 cents per transaction, regardless of
the issuer’s allowable cost calculation.
Alternative 1 also would permit an
issuer to comply with the regulatory
standard for interchange fees by
receiving or charging interchange fees
that do not exceed the safe harbor
amount of 7 cents per transaction, in
which case the issuer would not need to
determine its allowable costs.
Under Alternative 2, an issuer would
comply with the standard for
interchange fees as long as it does not
receive or charge a fee above the cap,
which would be set at an initial level of
12 cents per transaction. Each payment
card network would have to set
interchange fees such that issuers do not
receive or charge any interchange fee in
excess of the cap amount.
The Board requested comment on two
general approaches to the fraudprevention adjustment framework and
asked several questions related to the
two alternatives. One approach focused
on implementation of major innovations
that would likely result in substantial
reductions in total, industry-wide fraud
losses. The second approach focused on
reasonably necessary steps for an issuer
to maintain an effective fraudprevention program, but would not
prescribe specific technologies that
must be employed as part of the
program. The Board did not propose a
specific amount as an adjustment to the
amount of an interchange fee for an
issuer’s fraud-prevention costs.
As provided in EFTA Section 920, the
Board proposed to exempt from the
interchange fee restrictions issuers that,
together with affiliates, have assets of
less than $10 billion, and electronic

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debit transactions made using either
debit cards issued under certain
government-administered programs or
certain reloadable prepaid cards.
In order to prevent circumvention or
evasion of the limits on the amount of
interchange fee that issuers may receive
or charge with respect to electronic
debit transactions, the Board proposed
to prohibit an issuer from receiving net
compensation from a network for debit
card transactions, excluding interchange
transaction fees. For example, the total
amount of compensation provided by
the network to the issuer, such as pertransaction rebates, incentives, or
payments, could not exceed the total
amount of fees paid by the issuer to the
network.
The Board requested comment on two
alternative approaches to implementing
the statute’s required rules that prohibit
network exclusivity. Under Alternative
A, an issuer or payment card network
may not restrict the number of payment
card networks over which an electronic
debit transaction may be processed to
fewer than two unaffiliated networks.
Under this alternative, it would be
sufficient for an issuer to issue a debit
card that can be processed over one
signature-based network and one PINbased network, provided the networks
are not affiliated. Under Alternative B,
an issuer or payment card network may
not restrict the number of payment card
networks over which an electronic debit
transaction may be processed to fewer
than two unaffiliated networks for each
method of authentication the cardholder
may select. Under this alternative, an
issuer that used both signature- and
PIN-based authentication would have to
enable its debit cards with two
unaffiliated signature networks and two
unaffiliated PIN networks.
The Board proposed to prohibit
issuers and payment card networks from
restricting the ability of a merchant to
direct the routing of electronic debit
transactions over any of the networks
that an issuer has enabled to process the
electronic debit transactions. For
example, issuers and payment card
networks may not set routing priorities
that override a merchant’s routing
choice. The merchant’s choice,
however, would be limited to those
networks enabled on a debit card. In
keeping with EFTA Section 920, no
exemption was provided from the
network exclusivity and routing
provisions for small issuers or for debit
cards issued pursuant to certain
government-administered programs or
certain reloadable general-use prepaid
cards.

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B. Summary of Comments
The Board received comments on the
proposed rule from approximately
11,570 commenters. Of these
commenters, approximately 7,080 were
depository institutions or represented
depository institutions (including trade
groups, outside counsel, and
consultants), approximately 3,020 were
merchants or represented merchants
(including trade groups, outside
counsel, and consultants), 9 were
payment card networks, 23 were
payment processors, approximately
1,340 were individual consumers or
represented consumer groups, 35 were
members of Congress or represented
government agencies, and 54 were other
interested parties. Approximately 8,300
of the commenters submitted one of 17
form letters, and one letter was
submitted on behalf of over 1,600
merchant commenters.
1. Overview of Comments Received
Merchants, their trade groups, and
some consumers supported the Board’s
proposal and argued that the proposal
would lower the current interchange
fees (the savings of which could be
passed on to consumers as lower retail
prices), increase transparency in the
system, and increase competition by
prohibiting exclusivity arrangements
and enabling merchant-routing choice.
By contrast, issuers, their trade groups,
payment card networks, and some
consumers opposed the proposal for a
range of reasons, including concern that
it would decrease revenue to issuing
banks; result in increased cardholder
fees or decreased availability of debit
card services; reduce benefits to
merchants when compared to other
forms of payment; not provide a
workable exemption for small issuers;
and stifle innovation in the payment
system, among other things.
Interchange fee standards. As
between proposed Alternative 1 and
proposed Alternative 2, merchants
supported the more issuer-specific
Alternative 1, arguing that issuerspecific fees would be a proxy for fees
in a competitive issuer market place and
that many covered issuers had pertransaction authorization, clearance,
and settlement costs significantly below
the proposed 12-cent cap. Likewise,
merchants supported lowering the cap,
some suggesting 4 cents (i.e., the average
per-transaction allowable costs across
all transactions and issuers). Merchants
argued that the proposed cap would
allow some issuers to receive an
interchange fee significantly higher than
the proposed allowable costs of
authorization, clearance, and settlement.

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Merchants overwhelmingly supported
the Board’s proposal to limit allowable
costs to the variable costs of
authorization, clearance, and settlement.
Issuers and networks urged the Board
to adopt a more flexible approach to the
standards by prescribing guidelines
rather than a cap. Issuers typically
favored the stand-alone cap in
Alternative 2 over Alternative 1. Issuers
suggested raising the safe harbor up to
a level that permits a ‘‘substantial
majority’’ of issuers to avail themselves
of it. Issuers and networks supported
raising the cap and safe harbor by
expanding the allowable cost base to
include such costs as the payment
guarantee costs, fraud losses, network
processing fees, customer service costs,
the costs of rewards, fixed costs, and a
return on investment.
Fraud-prevention adjustment.
Although there was not agreement on
which approach to pursue, commenters
generally agreed that the Board should
not mandate use of specific
technologies. Merchants generally
favored the paradigm-shifting
approach.55 By contrast, issuers of all
sizes and payment card networks
preferred the non-prescriptive approach
that would allow issuers to have the
flexibility to tailor their fraudprevention activities to address most
effectively the risks they faced and
changing fraud patterns. Among
commenters, there was a general
consensus that the fraud-prevention
adjustment should be effective at the
same time as the interchange fee
standard—either on July 21, 2011, or at
a later date as suggested by some
commenters. This issue is addressed in
the companion notice adopting an
interim final rule providing a fraudprevention adjustment.56
Exemptions. Many issuers were
concerned that the exemptions, and in
particular the small-issuer exemption,
would not be effective because all
networks might not institute a two-tier
fee structure or might not be able to
implement such a structure by July 21,
2011. Additionally, issuers argued that,
even if networks institute a two-tier fee
structure, market forces and merchant
routing choice would place downward
pressure on interchange fees over time.
Some issuers suggested the Board
require that networks implement a twotier fee structure. Other commenters
suggested the Board initially monitor
55 Merchants proposed a framework where an
issuer receives an adjustment only if both the
merchant and issuer use an eligible low-fraud
technology (i.e., one that reduces fraud losses below
PIN debit levels).
56 See companion interim final rule published
separately in the Federal Register.

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implementation of two-tier fee
structures (perhaps by requiring
networks to report to the Board on
whether and how they have
implemented an interchange fee
differential).
Additionally, some issuers and
prepaid industry commenters supported
exempting Health Savings Account
(HSA), Flexible Spending Account
(FSA), Health Reimbursement Account
(HRA), and Qualified Transportation
Benefit (QT) cards from the interchange
fee standard because they believe
Congress did not intend to cover such
cards. By contrast, some merchant
groups argued that HSA, FSA, HRA, or
QT cards do not qualify for the
exemption for reloadable prepaid cards
because such cards typically are not
reloadable and the funds are held in
employer accounts for the benefit of the
employee or held by the cardholder him
or herself.
Circumvention and evasion. Issuers
generally agreed that circumvention or
evasion should be determined on a caseby-case basis based on the facts and
circumstances. Issuers believed that the
proposed net compensation approach
was overly broad because it considered
compensation for ‘‘debit card-related
activities,’’ rather than merely debit card
transactions. Merchants, however,
supported the consideration of
compensation for non-debit card
programs when the compensation is tied
to debit card activities and chargebacks.
Merchants also urged the Board to
prevent forms of circumvention or
evasion other than net compensation,
such as increasing merchant network
fees concurrently with decreases in
issuer network fees and issuers’
adjusting their products to avoid the
final rule’s interchange fee limits.
Network exclusivity and routing
provisions. Issuer and network
commenters preferred the proposal to
require two unaffiliated networks for
processing without regard to the method
of authentication (Alternative A)
because the commenters believed that
Alternative A was most consistent with
the statutory language. These
commenters also argued that Alternative
B, which would require at least two
processing alternatives for each
authentication method, would impose
significant operational burdens with
little consumer benefit. In particular,
issuers and networks asserted that
Alternative B, when coupled with
merchant routing choice, would cause
consumer confusion and/or decrease
consumer benefits. Moreover, these
commenters asserted that Alternative B
could stifle innovation, as networks and
issuers would have less incentive to

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develop new authentication
technologies, which they would have to
ensure could be implemented on at least
two networks.
Merchants preferred Alternative B
because they believed that Alternative B
is consistent with the statute and would
provide the most routing choice and the
most market discipline on interchange
and network fees. They noted that,
under Alternative A, once the consumer
has chosen the method of
authentication, the merchant may not
have a choice over which network to
route the transaction. Merchants also
believed that Alternative B would
promote competition for signature debit,
whether from PIN networks or other
new entrants.
Several commenters suggested that
the Board invoke EFTA Section 904(c)
to exempt small issuers and prepaid
cards from the network exclusivity and
routing rules. Several prepaid issuers
and a processor commented that, if a
prepaid card is not enabled for both
signature and PIN, such cards should
not be required to have two signature
networks, which would require
substantial operational restructuring by
various debit card participants to
accomplish. Several issuers and prepaid
industry group commenters stated that
because of restricted functionality of
HSA, FSA, HRA, and QT cards, such
cards cannot be used on a PIN network
without significant cost and operational
changes, partly because satisfying
certain Internal Revenue Service (IRS)
requirements is currently possible only
over signature networks. Additionally,
commenters noted that enabling two
signature networks may not be
operationally practical at this time.
Scope. The Board received comments
on the application of the proposed rule
to three-party systems, ATM
transactions, and emerging payment
technologies. The majority of
commenters recognized that three-party
systems do not charge explicit
interchange fees (rather, they charge a
merchant discount), but were concerned
that exempting three-party systems from
the interchange fee standards would
create an uneven playing field. Even
commenters favoring coverage of threeparty systems recognized, however, the
circuitous routing that would result
from subjecting these systems to the
network exclusivity and routing
provisions. A three-party system urged
the Board to exempt such systems from
the exclusivity and routing provisions.
With respect to ATM transactions,
almost all comments received on the
issue agreed that interchange fees on
ATM transactions should not be covered
because they flow from the issuer to the

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ATM operator. Although representatives
of ATM operators supported applying
the network exclusivity and routing
rules to ATM transactions, issuers and
networks opposed applying the network
exclusivity and routing rules to ATM
transactions because of different
economic incentives for ATM
transactions.
Issuer, network, and merchant
commenters generally supported
including emerging payments
technologies under both the interchange
fee standards and network exclusivity
and routing rules so as to not create an
unfair benefit for emerging payments
networks. Some networks and issuers
were concerned that applying the
interchange fee restrictions and network
exclusivity and routing provisions to
emerging payment systems and means
of authentication would stifle
innovation, leading to reduced
competition in the payments market.
Other commenters suggested exempting
emerging payment systems either during
their pilot stage or for a specified period
after they begin processing transactions.
Other commenters were concerned that
some ‘‘emerging payments systems’’
were not truly emerging, and therefore
exempting them would create an
uneven playing field.
2. Other General Comments
The Board received numerous
comments that related to the proposed
rule and EFTA Section 920 more
generally. Numerous commenters
opposed any government regulation of
interchange fees (and prices generally)
and stated that the free market should
determine interchange fee levels. Some
of these commenters argued that price
and quality competition in the debit
card market currently is strong, as well
as transparent. These commenters
believed that the government should
impose price controls only where a
market is monopolized or is otherwise
demonstrably not functioning properly.
Many of these commenters stressed the
potential negative or unintended
consequences of government price
controls. Many commenters were
further concerned that government price
controls would prevent lower-cost
providers from entering the market.
Numerous commenters requested that
the Board either take more time to
consider the issue or not adopt
interchange fee restrictions. These
commenters thought that further study
and debate were needed because of the
lack of study and debate by Congress
prior to passing EFTA Section 920.
Several commenters stated that the
Board should have conducted hearings,
debates, and impact analyses prior to

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proposing a rule, and encouraged the
Board to further study the issue rather
than adopting a final rule. One
commenter did not believe the statute
provided the Board with sufficiently
intelligible standards to promulgate
rules; rather, the commenter argued that
several policy judgments remained for
Congress to make. Other commenters
did not believe that government
intervention was required at this time.
Rather, a few commenters believed that
market competition from alternative
payment forms (e.g., mobile) would put
downward pressure on interchange fees.
Another commenter did not believe any
interchange fee regulation would be
necessary if there were no networkimposed restraints on merchantcustomer interactions.57
3. Consultation with Other Agencies
EFTA Section 920(a)(4)(C) directs the
Board to consult, as appropriate, with
the Comptroller of the Currency, the
Board of Directors of the Federal
Deposit Insurance Corporation, the
Director of the Office of Thrift
Supervision, the National Credit Union
Administration Board, the
Administrator of Small Business
Administration, and the Director of the
Bureau of Consumer Financial
Protection in the development of the
interchange fee standards. Board staff
consulted with the staff of these
agencies throughout the rulemaking
process on all aspects of the proposed
rule including the interchange fee
standards, the role of supervisors in
determining compliance with these
standards, the small-issuer exemption,
the potential effects on consumers (both
banked and unbanked) and merchants
(both small and large), the two proposed
approaches to a fraud-prevention
adjustment, possible means of
circumvention and evasion of the
interchange fee standards (through
network fees, compensation, change in
account structure, or otherwise), and the
possible impact of the prohibitions
against network exclusivity
arrangements and routing restrictions.
Many of these agencies submitted
formal comment letters, raising many of
the same issues addressed by other
commenters and discussed above.

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IV. Summary of Final Rule
The Board has considered all
comments received and has adopted
Regulation II (Debit Card Interchange
Fees and Routing).
57 Other commenters suggested that the
government supply payment card network services
or that the Board reform money transmitter laws
rather than regulating interchange fees.

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For the interchange fee standard (set
forth in § 235.3), the final rule adopts a
modified version of proposed
Alternative 2 (stand-alone cap) and
provides that an issuer may not receive
or charge an interchange transaction fee
in excess of the sum of a 21-cent base
component and 5 basis points of the
transaction’s value (the ad valorem
component). The interchange fee
standard is based on certain costs
incurred by the issuer to effect an
electronic debit transaction (‘‘allowable
costs’’ or ‘‘included costs’’). The
standard is based on data collected by
the Board through its survey of covered
issuers and reflects comments received
from many parties. Issuer costs that are
incurred to effect a transaction include
the following costs related to
authorization, clearance, and settlement
of a transaction: network connectivity;
software, hardware, equipment, and
associated labor; network processing
fees; and transaction monitoring.
Several other costs that may be incurred
in effecting a transaction, such as costs
related to customer inquiries and the
costs related to rewards programs, were
not included for various reasons
explained below. As noted above, an
allowance for fraud losses is also
included as an issuer cost incurred to
effect a transaction. The Board did not
include other costs not incurred to effect
a particular transaction. Issuer costs that
are not incurred in effecting a
transaction include costs of corporate
overhead (such as senior executive
compensation); establishing the account
relationship; card production and
delivery; marketing; research and
development; and network membership
fees.
With respect to the fraud-prevention
adjustment, the interim final rule
(published separately in the Federal
Register) adopts the more general, less
prescriptive approach to standards
regarding the eligibility of an issuer to
receive the adjustment and sets the
adjustment at 1 cent per transaction.
The final rule prohibits
circumvention and evasion of the
interchange fee standard, as well as an
issuer receiving net compensation from
a payment card network.
The final rule exempts from the
interchange fee standard issuers that,
together with affiliates, have assets less
than $10 billion, debit cards issued
pursuant to certain governmentadministered programs, and certain
reloadable general-use prepaid cards.
The final rule provides that the Board
will publish a list annually of
institutions above and below the small
issuer exemption asset threshold to
facilitate the identification of exempt

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institutions. In addition, the Board will
annually collect and publish
information regarding interchange fees
collected by networks and received by
exempt and non-exempt issuers and
transactions to allow monitoring of the
effectiveness of the exemption for small
issuers.
With respect to network exclusivity,
the final rule adopts Alternative A (i.e.,
two unaffiliated networks for each
transaction). The final rule also adopts
the prohibitions on routing restrictions
in the proposed rule.
The final rule’s definition of
‘‘payment card network’’ excludes
three-party systems because they are not
payment card networks that route
transactions within the terms of the
statute. The final rule’s definition of
‘‘account’’ excludes accounts
established pursuant to bona fide trust
arrangements.
Various modifications throughout the
rule were made in response to
comments and additional information
available to the Board. The final rule
and the modifications adopted are
explained more fully below.
Section-By-Section Analysis
I. Authority and Purpose
The Board proposed to set forth the
authority and purpose of Regulation II
in § 235.1. The Board received no
comments on proposed § 235.1. The
Board, however, made two revisions to
that section. First, the Board has revised
the authority citation in proposed
§ 235.1(a) to reflect the section of the
United States Code in which EFTA
Section 920 is codified. Second, the
Board has revised § 235.1(b) to state that
Regulation II also implements standards
for receiving a fraud-prevention
adjustment.58
II. Definitions
A. Section 235.2(a)—Account
The Board proposed to define
‘‘account’’ to mean ‘‘a transaction,
savings, or other asset account (other
than an occasional or incidental credit
balance in a credit plan) established for
any purpose and that is located in the
United States.’’ The proposed definition
included both consumer and business
accounts, as well as accounts held
pursuant to a bona fide trust
arrangement.
1. Summary of Comments
The Board received comments on its
proposed definition of ‘‘account’’
related to the proposed inclusion of
58 See the companion interim final rule published
separately in the Federal Register.

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business-purpose accounts and bona
fide trust arrangements. A few
commenters suggested that the Board
exclude business accounts from the
definition of ‘‘account’’ because the
EFTA applies only to consumer
accounts. These commenters contended
that the Board should not infer
congressional intent to include business
debit cards from the parenthetical in
EFTA Section 920(c)(2) (definition of
‘‘debit card’’), which states that the
purpose of the account being debited is
irrelevant. In support of this argument,
one commenter noted that business
accounts and consumer accounts differ
both in the nature of purchases and the
account structure (e.g., business
accounts may have multiple employees
on a single account). Other commenters
stated that the Board has not previously
expanded the definition of ‘‘account’’ in
its Regulation E; these commenters saw
no reason to expand the term’s scope at
this time.59
A few commenters urged the Board to
exclude bona fide trust arrangements
from the definition of ‘‘account’’
because EFTA Section 903(2) excludes
bona fide trusts from the definition of
‘‘account.’’ These commenters asserted
that a bona fide trust arrangement is not
a ‘‘purpose’’ of the account; therefore,
the parenthetical in Section 920(c)(2)
does not affect the EFTA’s general
exclusion of bona fide trust
arrangements. Additionally, a few
commenters expressed concern that
including bona fide trust arrangements
in the definition of ‘‘account’’ could
result in different treatment of health
savings accounts (HSAs) and other
similar accounts that are structured as
bona fide trusts (proposed to be subject
to the fee standards) and those that are
structured as reloadable, general-use
prepaid cards (which would be exempt),
which could, a commenter contended,
create confusion for cards that access
both types of HSAs and similar
accounts. Finally, one commenter
suggested that payroll cards be excluded
from the definition of ‘‘account.’’
2. Analysis and Final Rule
EFTA Section 903(2) defines the term
‘‘account’’ to mean ‘‘a demand deposit,
savings, deposit, or other asset account
(other than an occasional or incidental
credit balance in an open credit plan as
defined in section 103(i) of [the EFTA]),
as described in regulations of the Board,
established primarily for personal,
family, or household purposes, but such
59 These commenters stated that the purpose of
both the EFTA and the Dodd-Frank Act was
consumer protection and that including business
accounts under the scope of rule was contrary to the
purpose behind EFTA Section 920.

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term does not include an account held
by a financial institution pursuant to a
bona fide trust agreement.’’ 60 Section
920(c)(2) of the EFTA, however, defines
the term ‘‘debit card’’ to mean a card
that may be used ‘‘to debit an asset
account (regardless of the purpose for
which the account is
established).* * *’’ 61 Some
commenters encouraged the Board to
disregard the parenthetical in Section
920(c)(2) as inconsistent with Section
903(2)’s definition that applies
throughout the EFTA. Doing so,
however, would render the
parenthetical mere surplusage, contrary
to principles of statutory construction.
The Board notes that Regulation E and
this rule have different scopes because
Section 920 has differing definitions
and scope of coverage than the rest of
the EFTA.
The Board interprets the parenthetical
as removing the limitation in EFTA
Section 903(2) that applies the
‘‘account’’ definition only to accounts
used for consumer purposes. Thus, the
Board has adopted its proposal to
include accounts used for business
purposes as ‘‘accounts’’ under Section
920. Accordingly, § 235.2(a) will
continue to include transaction, savings,
and other asset accounts, regardless of
the purpose for which the account was
established.This definition of ‘‘account’’
is limited to this part and does not
extend to other rules that implement
other provisions of the EFTA.
The Board agrees with the
commenters that a trust is a type of
account structure rather than a purpose
(such as a business purpose or personal
purpose) for which the account is held.
Therefore, the Board has revised its
proposed definition of ‘‘account’’ to
exclude bona fide trusts, consistent with
EFTA Section 903(2). For purposes of
Regulation E, the Board has stated that
whether an agreement is a bona fide
trust agreement is a question of state or
other applicable law.62 The Board
believes a similar approach is warranted
under this rule. In general, bona fide
agreements or arrangements are those
done in good faith and not merely a
device to evade a law.63 Accordingly,
the Board has revised the definition of
‘‘account’’ to exclude accounts held
under bona fide trust agreements that
are excluded from the definition of
U.S.C. 1693a(2).
U.S.C. 1693o–2(c)(2) (emphasis added).
62 12 CFR part 205, Supplement I, par. 2(b)(2). An
account held under a custodial agreement that
qualifies as a trust under the Internal Revenue Code
is considered to be a trust agreement for purposes
of Regulation E.
63 See, e.g., 44B Am. Jur. 2d. Interest and Usury
§ 14.

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‘‘account’’ under EFTA Section 903(2)
and rules prescribed thereunder. The
Board has added comment 2(a)–2 to
clarify that whether a trust arrangement
is bona fide is a matter of state or other
applicable law and that accounts held
under custodial agreements that qualify
as trusts under the Internal Revenue
Code are considered to be held in trust
arrangements.
With respect to excluding HSAs and
similar accounts, many commenters
pointed to statements by members of
Congress regarding their intent that
cards used in connection with flexible
spending accounts (FSAs), HSAs, and
health reimbursement accounts (HRAs)
not be subject to either the interchange
fee standards or the network exclusivity
and routing provisions.64 Other
commenters stated that HSAs and other
similar accounts are not ‘‘asset
accounts,’’ but are employer-sponsored
and administered arrangements under
which employees have an unsecured
right to reimbursement for certain
health-care-related purchases. The
commenters explained that the
employer in such arrangements is not
required to keep funds for the
reimbursements or to fund any specified
account. Some commenters stated that
HSAs and other similar accounts often
are structured as bona fide trusts.
The language in EFTA Section 920
does not provide for any exceptions to
the section’s provisions based on the
purpose for which an account was
established; moreover, Section 920(c)(2)
defines ‘‘debit card’’ as including cards
that may be used to debit an account
‘‘regardless of the purposes for which
the account was established.’’ Therefore,
the Board does not believe that the
statute exempts debit cards that access
HSAs and other similar accounts solely
because such accounts are established
for health care-related purposes. Such
cards and accounts, however, may be
otherwise exempt from the Board’s
interchange fee standards if they qualify
for another exemption. For example, as
commenters noted, some HSAs and
other similar accounts are structured as
bona fide trust arrangements. Cards that
access these HSAs would be exempt
from the requirements of this part
because they do not access ‘‘accounts,’’
as the term is defined in § 235.2(a). In
addition, some cards that access HSAs
and other similar accounts are
structured like prepaid cards where
funds are held in an omnibus account
(which is considered an ‘‘account’’
under § 235.2(a)) and the employee may
64 See 156 Cong. Rec. S5927 (statements of Sen.
Dodd) (2010); 156 Cong. Rec. H5225–26 (statements
of Rep. Larson and Rep. Frank) (2010).

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access the funds using a prepaid card.
Provided these cards are structured in
such a way that qualifies them for the
reloadable, general-use prepaid card
exemption in the statute, these cards
used to access HSAs and similar
accounts will be exempt from the rule’s
interchange fee standards. See
discussion of § 235.5(c). These cards,
however, will be subject to the rule’s
network exclusivity and routing
provisions. See discussion of delayed
effective date related to § 235.7.
Finally, the Board has adopted a
definition of ‘‘account’’ that restricts the
term to those accounts located in the
United States. The Board received no
comment on this part of the proposal.
The Board, however, has made
clarifying revisions to proposed
comment 2(a)–2, now designated as
2(a)–3.

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B. Section 235.2(b)—Acquirer
The Board proposed to define
‘‘acquirer’’ to mean ‘‘a person that
contracts directly or indirectly with a
merchant to provide settlement for the
merchant’s electronic debit transactions
over a payment card network.’’ The
Board proposed to exclude processors
from the definition of ‘‘acquirer.’’ The
Board received one comment on the
proposed definition. This commenter
supported a definition that limited
acquirers to those entities that move
money, and excluded processors,
gateways, and independent sales
organizations (‘‘ISOs’’).65
The Board has determined to adopt
§ 235.2(b) as proposed, but has made
minor revisions to proposed comment
2(b)–1 to clarify that an acquirer settles
for the transaction with the issuer,
rather than with the network itself.
Although the network calculates net
settlement amounts for issuers and
acquirers, settlement occurs between the
issuer and acquirer. The Board also
revised comment 2(b)–1 to clarify that
in some circumstances, processors may
be considered payment card networks.
See discussion of §§ 235.2(m) and
235.2(o).
C. Section 235.2(c)—Affiliate
The Board proposed to define the
term ‘‘affiliate’’ to mean ‘‘any company
that controls, is controlled by, or is
under common control with another
company.’’ The proposed definition
incorporated the definition of ‘‘affiliate’’
65 A gateway is an entity that connects multiple
networks. Merchants may sign-up with a gateway
to enable them to accept debit cards and the
gateway acts as a switch for the merchants to access
multiple networks. ISOs provide merchant- and
cardholder-acquisition services, including
deploying point-of-sale (‘‘POS’’) terminals.

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in EFTA Section 920(c)(1). The term
‘‘affiliate’’ is relevant for two purposes
in this part: determining which issuers
are considered ‘‘small’’ for purposes of
the small-issuer exemption, and
determining which prepaid cards are
considered ‘‘general-use.’’ 66 In
proposed comment 2(f)–5, the Board
explained that ‘‘two or more merchants
are affiliated if they are related by either
common ownership or by common
corporate control,’’ and that, for
purposes of this rule, the Board
considered franchises to be under
common corporate control ‘‘if they are
subject to a common set of corporate
policies or practices under the terms of
their franchise licenses.’’
The Board received one comment
suggesting that the Board use a
consistent definition of ‘‘affiliate’’ for
both the small issuer exemption and for
general-use prepaid cards, expressing a
preference for the control test set forth
in the proposed definition of ‘‘control.’’
This commenter expressed concern that
requiring only common ownership, and
not common control, could result in the
exclusion of closed-loop cards accepted
at merchants that are not truly affiliated.
The Board has considered the
comment and does not believe that
‘‘affiliate’’ is defined inconsistently in
the small-issuer and general-use prepaid
card contexts. First, proposed comment
2(f)–5 is consistent with the measure for
‘‘control’’ in proposed § 235.2(e)(3):
‘‘[t]he power to exercise, directly or
indirectly, a controlling influence over
the management or policies of the
company, as the Board determines.’’
Second, the acceptance of a ‘‘closedloop’’ card is not sufficient to cause
merchants to be affiliated as the term is
defined in this rule. For example,
closed-loop cards may be accepted at a
group of merchants that are not subject
to a common controlling influence over
their management and policies. Such
cards are considered ‘‘general-use
prepaid cards’’ (see discussion of
§ 235.2(i)) and would not be subject to
the interchange fee standards if they
satisfied the criteria for exemption in
§ 235.5(c). These closed-loop cards,
however, would not be excluded from
the network exclusivity and routing
provisions as would cards accepted only
at affiliated merchants. If the merchants
were affiliated, the prepaid card would
66 Under EFTA Section 920(a)(6), an issuer is
considered ‘‘small’’ if it, together with its affiliates,
has assets of less than $10 billion. 15 U.S.C. 1693o–
2(a)(6). EFTA Section 920 incorporates the
definition of ‘‘general-use prepaid cards’’ from the
Credit CARD Act of 2009, which defines ‘‘generaluse prepaid cards’’ as those cards that, among other
things, are redeemable at multiple, unaffiliated
merchants. 15 U.S.C. 1693l–1(a)(2)(A).

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not be considered ‘‘general-use’’ and
would be excluded from Section 920’s
definition of ‘‘debit card.’’
Both the EFTA’s definition and the
proposed definition of ‘‘affiliate’’ were
silent as to whether affiliated companies
included companies located outside the
United States. One commenter
suggested that the term be limited to
U.S. affiliates. The statutory language is
silent on this point, and the Board
believes it is appropriate to consider the
total resources available to an issuer
when determining whether it is
‘‘small.’’ 67 Accordingly, the Board has
adopted the definition of ‘‘affiliate’’ in
proposed § 235.2(c). The Board has
added language to comment 2(c)–1 to
clarify that the term ‘‘affiliate’’ includes
any U.S. and foreign affiliate.
D. Section 235.2(d)—Cardholder
The Board proposed to define
‘‘cardholder’’ to mean ‘‘the person to
whom a debit card is issued.’’ The
Board did not receive any comments on
the proposed definition of ‘‘cardholder’’
and has adopted § 235.2(d) as proposed.
E. Section 235.2(e)—Control
The Board proposed to define
‘‘control’’ as it is defined in existing
Board regulations.68 The Board did not
receive any comments specifically on
the proposed definition of ‘‘control,’’
although the Board received comments
on the definition of ‘‘affiliate,’’
discussed above. The Board has adopted
§ 235.2(e) as proposed.
F. Section 235.2(f)—Debit card
1. Summary of Proposal and Comments
EFTA Section 920(c)(2) defines the
term ‘‘debit card’’ as ‘‘any card, or other
payment code or device, issued or
approved for use through a payment
card network to debit an asset account
(regardless of the purpose for which the
account is established), whether
authorization is based on signature, PIN,
67 The Board considered the assets of both U.S.
and non-U.S. affiliates when determining which
issuers to survey. The Board computed assets using
the Consolidated Financial Statements for Bank
Holding Companies (FR Y–9C; OMB No. 7100–
0128), the Consolidated Reports of Condition and
Income (Call Reports) for independent commercial
banks (FFIEC 031 & 041; OMB No. 7100–0036) and
for U.S. branches and agencies of foreign banks
(FFIEC 002; OMB No. 7100–0032), the Thrift
Financial Reports (OTS 1313; OMB No. 1550–0023)
for thrift holding companies and thrift institutions,
and the Credit Union Reports of Condition and
Income (NCUA 5300/5300S; OMB No. 3133–0004)
for credit unions. The ownership structure of
banking organizations was established using the
FFIEC’s National Information Center structure
database.
68 See Regulation Y (Bank Holding Companies
and Change in Bank Control), 12 CFR 225.2(e) and
Regulation P (Privacy of Consumer Financial
Information), 12 CFR 216.3(g).

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or other means’’ and as including
general-use prepaid cards (as defined in
EFTA Section 915(a)(2)(A)) but
excluding paper checks. The proposed
definition incorporated the statutory
definition with some clarifying changes.
The proposed definition of ‘‘debit
card’’ had three parts. First, the
proposed definition included ‘‘any card,
or other payment code or device, issued
or approved for use through a payment
card network to debit an account,
regardless of whether authorization is
based on signature, personal
identification number (PIN), or other
means, and regardless of whether the
issuer holds the account.’’ Second, the
proposed definition included ‘‘any
general-use prepaid card.’’ 69 Finally,
the proposed definition excluded (1)
any cards, or other payment codes or
devices, that are redeemable only at a
single merchant or an affiliated group of
merchants; (2) checks, drafts, or similar
paper instruments, or electronic
representations thereof; and (3) account
numbers when used to initiate an ACH
transaction to debit a person’s account.
Additionally, the proposed commentary
explained that the term ‘‘debit card’’
included deferred debit cards (where
the transaction is posted to the
cardholder’s account but not debited for
a specified period of time) and
decoupled debit cards (where the issuer
does not hold the account being
debited). The Board received several
comments about which cards, or other
payment codes or devices, should or
should not be considered debit cards
under this part. Many of these
comments related to the proposed
commentary and are summarized and
analyzed below.

emcdonald on DSK2BSOYB1PROD with RULES2

2. Card, or Other Payment Code or
Device
Proposed comment 2(f)–1 explained
that the phrase ‘‘card, or other payment
code or device’’ includes cards, codes,
and devices in physical and nonphysical (i.e., electronic) form. The
Board received three comments
regarding which ‘‘payment codes’’
should be included or excluded from
the definition of debit card. One issuer
requested that the Board clarify that
‘‘payment code’’ does not include onetime passwords (or other numbers)
generated for purposes of authenticating
the cardholder, provided such
passwords/numbers are not used in lieu
of an account number. The Board does
not believe that a one-time password or
69 See discussion of § 235.2(i) for a discussion of
the term ‘‘general-use prepaid card.’’ Comment 2(i)–
7 explains that store cards are not included in the
term ‘‘debit card’’ under this rule.

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other number used for purposes of
authentication and in addition to the
card, or other payment code or device,
is itself a ‘‘payment code or device.’’ In
that case, the passwords/numbers
function like PINs or signatures.
Therefore, the Board has revised
proposed comment 2(f)–1 to clarify that
cards, or other payment codes or
devices, are not debit cards if used for
purposes of authenticating the
cardholder and used in addition to a
card, or other payment code or device.
One commenter requested that the
Board exclude account numbers from
the definition of debit card if the
account numbers are used to access
underlying funds held in a pooled
account, but where the underlying
funds do not move (i.e., the transaction
is a general ledger entry). By contrast,
another commenter suggested that such
use of account numbers be included in
the definition of debit card because the
account numbers are used to debit
‘‘asset accounts.’’ As discussed in
greater detail below in relation to
§ 235.2(m), account numbers, or other
payment codes or devices, that are used
only to initiate general ledger
transactions are not issued or approved
for use through a payment card network
because the entity receiving the
transaction information and data is not
routing the information to an
unaffiliated entity. Accordingly, even if
the account number is used to debit an
‘‘account,’’ the account number is not a
debit card because it was not issued or
approved for use through a payment
card network.
3. Deferred Debit Cards
Proposed comment 2(f)–2 explained
that deferred debit cards are included
within the proposed definition of ‘‘debit
card.’’ Like other debit cards, deferred
debit cards can be used to initiate direct
debits to the cardholder’s account, but
the issuer may not debit the funds until
after a pre-arranged period of time (e.g.,
two weeks) after posting the transaction
to the cardholder’s account. During this
time period, the funds typically are
unavailable to the cardholder for other
purposes, although the cardholder may
accrue interest on the funds until the
issuer debits the account.
The Board did not receive any
comments opposed to including
deferred debit cards within its
definition of ‘‘debit card,’’ but did
receive a few comments on the
proposed deferral time period, as well
as comments seeking clarification as to
which cards qualified as deferred debit
cards. Two commenters suggested that
the Board exclude from the definition of
‘‘debit card’’ any cards where settlement

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to the cardholder’s account is deferred
14 days or more after the transaction
because a 2003 network/merchant
settlement treats such cards as charge or
credit cards.70 The Board has
considered these comments and
determined not to revise proposed
comment 2(f)–2 to limit deferred debit
cards to those cards where the issuer
settles the transaction with the
cardholder within 14 days of the
transaction.
The fact that the cardholder initiates
transactions that debit an account, as
the term is defined in § 235.2(a), is the
characteristic of deferred debit cards
that distinguishes such cards from
charge cards and credit cards for
purposes of EFTA Section 920. In the
case of charge cards and credit cards,
the transactions post to lines of credit
rather than accounts. Excluding cards
that debit an account based on the time
period within which the account is
debited creates significant potential for
evasion and circumvention of Section
920’s provisions, as implemented by
this rule. The Board notes that the EFTA
and Regulation E limit the ability of an
issuer to structure deferred debit cards
to be more like charge cards or credit
cards. The EFTA and Regulation E
prohibit any person from conditioning
the extension of credit to a consumer on
such consumer’s repayment by means of
preauthorized electronic fund
transfers.71
Two commenters requested
clarification as to the types of products
that qualify as ‘‘deferred debit cards,’’
particularly as to the deferral period.
Deferred debit cards may have different
deferral periods specified in the
cardholder agreement; however, the
deferral period and when the hold is
applied are not necessary to
determining whether a card is a ‘‘debit
card’’ as defined in § 235.2(f). The Board
has revised proposed comment 2(f)–2 to
clarify that, in the case of deferred debit
cards, the issuer-cardholder agreement
governs the period of time for which the
issuer will hold the funds in the
cardholder’s account after the debit card
transaction and before debiting the
cardholder’s account.
The Board is not at this time
providing more examples of debit cards
that are considered ‘‘deferred debit
cards.’’ The deferred debit cards of
which the Board is aware use the
framework described in comment 2(f)–
2. The Board is removing the proposed
examples regarding the timing of
merchants sending electronic debit
transactions to acquirers as unnecessary
70 See
71 15

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to describe whether a debit card is a
deferred debit card.
4. Decoupled Debit Cards
Proposed comment 2(f)–3 explained
that the term ‘‘debit card’’ included
decoupled debit cards. As explained in
the proposed comment, decoupled debit
cards are issued by an entity other than
the entity holding the cardholder’s
account, and the issuer settles for the
transaction with the acquirer and with
the cardholder through an ACH
transaction that debits the cardholder’s
account.
The Board received a few comments
opposed to including decoupled debit
cards under the rule’s definition of
‘‘debit card,’’ and no comments
explicitly supporting their inclusion.
One commenter contended that
including decoupled debit cards within
the definition of ‘‘debit cards’’ is
inconsistent with the exclusion of ACH
transactions, because decoupled debit
cards are used to initiate ACH debits to
the account. Other commenters
suggested the Board exclude decoupled
debit cards issued by merchants because
including them would be inconsistent
with statutory intent to reduce merchant
debit card expense. One commenter
requested clarification as to the types of
products that qualified as ‘‘decoupled
debit cards.’’ Another commenter stated
that treating the location of the asset
account as irrelevant for defining ‘‘debit
card,’’ but relevant for purposes of the
small issuer exemption, is inconsistent.
The Board has considered the
comments received and has determined
to include decoupled debit cards that
process transactions over payment card
networks within the definition of ‘‘debit
card’’ as proposed with minor clarifying
revisions to the commentary.
Cardholders use decoupled debit cards
to initiate debits to their accounts. The
Board is aware of two types of
decoupled debit card transactions. The
first type, described in proposed
comment 2(f)–3, is where the
transaction is processed over a payment
card network, and the issuer settles the
transaction with the acquirer using the
normal network procedures, but settles
with the cardholder via an ACH
transaction. In this type of transaction,
the cardholder preauthorizes the ACH
transaction, and the issuer initiates the
ACH transaction shortly after
authorizing the transaction and settling
for the transaction with the acquirer
through the payment card network. The
second type is a transaction initiated
with a card issued by the merchant, and
the merchant’s processor initiates an
ACH debit to the cardholder’s account.
This second type of decoupled debit

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card transaction is processed solely
through an ACH operator and not
through a payment card network.
Decoupled debit cards that are used to
initiate ACH transactions at the point of
sale that are not processed over a
payment card network for any part of
the transaction (i.e., the second type) are
not debit cards under this part.
By contrast, if the card holder initiates
a decoupled debit card transaction, part
of which is processed over a payment
card network, the decoupled debit card
is a debit card for purposes of this part.
Unlike decoupled debit cards that
directly initiate ACH transactions,
merchants cannot distinguish these
decoupled debit cards from other debit
card transactions that would be subject
to interchange fees and network rules.
Accordingly, the Board does not believe
it is inconsistent to include in the
definition of ‘‘debit card’’ decoupled
debit cards that initiate transactions
processed over payment card networks,
while simultaneously excluding ACH
transactions initiated at the point of
sale.
Inclusion of decoupled debit cards
that initiate transactions processed over
payment card networks is consistent
with the provisions in EFTA Section
920, which are intended to reduce
merchant costs of accepting debit cards,
even if merchants are the issuers of such
cards (although the Board believes that
transactions initiated with merchantissued decoupled debit cards generally
would be processed through the ACH).
Section 920 is designed to achieve costreduction through limitations on
interchange transaction fees and
prohibitions on network exclusivity and
merchant routing restrictions, rather
than by excluding certain cards that
may be lower-cost to merchant issuers.
In addition, any inconsistency
between the requirement that an issuer
hold the account in order to be eligible
for the small issuer exemption and the
lack of relevance for purposes of
defining ‘‘debit card’’ is statutory.
Section 920(c)(9) defines the term
‘‘issuer’’ for general purposes of the
section as the person who issues the
debit card, or agent of such person. For
purposes of the small issuer exemption,
Section 920(a)(6) limits the term
‘‘issuer’’ to the entity holding the
cardholder’s account.
A few commenters requested that the
Board provide more specific examples
of decoupled debit cards. The
decoupled debit cards of which the
Board is aware use the framework
described in comment 2(f)–3.

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5. Hybrid Cards and Virtual Wallets
The Board requested comment on
whether additional guidance was
necessary to clarify whether products
with ‘‘credit-like’’ features are
considered debit cards for purposes of
this rule. The Board noted that if an
issuer offers a product that allows the
cardholder to choose at the time of the
transaction when the cardholder’s
account will be debited for the
transaction, any attempt to classify such
a product as a credit card would be
limited by the prohibition against
compulsory use under the EFTA and
Regulation E.
A few issuers, networks, and
processors suggested that the Board
exclude cards used to access or obtain
payment from a credit account (i.e.,
cards subject to the Truth in Lending
Act and Regulation Z), regardless of
whether the consumer chooses to repay
the credit account using an asset
account. These commenters indicated
that such cards could include cards that
enable the customer to pre-designate the
types of transactions to be paid from a
preauthorized debit to the asset account
more frequently than the monthly
billing cycle. Additionally, these
commenters urged the Board to
distinguish between credit cards that
require repayment using preauthorized
transfers and cards that permit
repayment using preauthorized
transfers, stating that the latter would
not run afoul of the prohibition against
compulsory use.
The Board is aware of two general
categories of cards with both credit- and
debit-like features (so-called ‘‘hybrid
cards’’). The first category includes
those cards, or other payment codes or
devices, used to initiate transactions
that access and post to credit accounts,
but that the cardholder repays through
a preauthorized debit to an asset
account. The second category of hybrid
cards includes those cards, or other
payment codes or devices, that may be
used to access multiple accounts
(including both credit and other
accounts) (often referred to as ‘‘virtual
wallets’’ or ‘‘mobile wallets’’). Cards
used to initiate transactions that access
and post to credit accounts are not
considered debit cards for purposes of
this rule because such cards are not
used to debit an account, as the term is
defined in § 235.2(a). Further, cards that
access credit accounts are not
considered debit cards regardless of
whether the cardholder pays the credit
balance through preauthorized transfers
from an account.
For example, a card may be used to
initiate transactions that access and post

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Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations
to credit accounts, but the issuer enables
the cardholder to preselect transactions
for immediate repayment (or repayment
prior to the monthly billing cycle) from
the cardholder’s asset account. The
issuer, then, may initiate a
preauthorized ACH debit to the
cardholder’s account in the amount of
the preselected transactions. Such
products, due to their classification as
credit cards, may not condition the
extension of credit on a consumer’s
repayment by means of preauthorized
electronic fund transfers.72 An issuer
may permit a cardholder to opt in to
preauthorization of some or all
transactions made using the credit or
charge card. The Board, however,
recognizes the potential for issuers to
restructure existing debit cards like
these hybrid cards in order to
circumvent and evade this rule.
Therefore, such cards will be considered
debit cards for purposes of this part if
the issuer conditions a cardholder’s
ability to preselect transactions for early
repayment on the cardholder
maintaining an asset account at the
issuer. See comment 2(f)–4.ii.
The Board has added comment 2(f)–
4.i to clarify that hybrid cards that
permit some transactions to be posted
directly to an account as defined in
§ 235.2(a), rather than posting first to a
credit account, are considered debit
cards for purposes of this part. Only
those transactions that post directly to
the account, however, will be
considered electronic debit transactions.
The second category of hybrid cards
consists of virtual or mobile wallets,
which store several different virtual
cards that each accesses a different
account. The Board has added comment
2(f)–5 to clarify the treatment of virtual
wallets under this rule. As explained in
the commentary, the payment codes or
devices (‘‘virtual cards’’) stored in a
virtual wallet may each access a
different account, which may be credit
accounts or accounts as defined in
§ 235.2(a). For example, a mobile phone
may store credentials (the payment
codes) for accessing four different
accounts or lines of credit, which the
cardholder can view on the phone’s
screen. At the point of sale, the
cardholder selects which virtual card to
use (e.g., by selecting the icon for the
issuer whose card the cardholder wishes
to use). If at least one virtual card within
the virtual wallet may be used to debit
an account under § 235.2(a), then that
virtual card is a debit card for purposes
of this part, notwithstanding the fact
that other cards in the virtual wallet
may not be debit cards for purposes of
72 15

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6. Checks and Similar Instruments
One commenter supported the
Board’s exclusion of electronic images
and representations of checks and
similar instruments. The Board has
retained the exclusion in § 235.2(f), as
well as the exclusions for checks, drafts,
and similar instruments.

distinguishing decoupled debit cards
(discussed above) from cardholderinitiated ACH transactions. The Board
has made minor revisions to the
proposed comment to clarify that an
account number used to initiate an ACH
transaction is not a debit card where the
person initiating the ACH transaction is
the same person whose account is being
debited and to clarify the distinction
between decoupled debit cards and
cardholder-initiated ACH transactions.

7. ACH Transactions
The Board received a few comments
on its proposed exclusion of account
numbers when used to initiate an
automated clearinghouse (ACH)
transaction to debit an account. One
commenter thought the Board should
consider account numbers used to
initiate ACH transactions to be
‘‘payment codes’’ in order to create a
level playing field between debit cards
and ACH transactions. One issuer
suggested that the Board broaden the
ACH exclusion to include intrabank
transfers initiated using an account
number.
The Board has considered these
comments and has determined that
account numbers used to initiate ACH
transactions should be excluded from
the definition of ‘‘debit card.’’ An ACH
transaction is processed through an
ACH operator, such as EPN or
FedACH®. As explained below in
relation to § 235.2(m), ACH operators
are not ‘‘payment card networks’’ under
EFTA Section 920. Therefore, an
account number used to initiate an ACH
transaction is not ‘‘issued or approved’’
for use through a payment card network
and, therefore, is not a ‘‘debit card’’ for
purposes of this rule. Payment
information used to initiate intrabank
transactions using an account number
are not processed through either ACH
operators or payment card networks
and, therefore, are not debit cards under
EFTA Section 920.
Even if ACH transactions were subject
to this part, they already would comply
with the provisions of this part.
Currently, ACH operators do not
establish, and receiving and originating
banks do not charge, fees that are
comparable to interchange fees. If a
merchant were to use the ACH to clear
its customers’ purchase transactions, its
bank chooses the ACH operator through
which it will originate transactions.
The Board believes retaining an
explicit exclusion from the definition of
‘‘debit card’’ in § 235.2(f) is unnecessary
but has retained commentary to explain
the exclusion (proposed comment 2(f)–
7 is now designated comment 2(f)–9).
This comment is useful in

G. Section 235.2(g)—Designated
Automated Teller Machine (ATM)
Network
Section 235.2(g) of the proposed rule
incorporated the statutory definition
(EFTA Section 920(a)(7)(C)) of
‘‘designated automated teller machine
network.’’ The proposed definition
included (1) all ATMs identified in the
name of the issuer; or (2) any network
of ATMs identified by the issuer that
provides reasonable and convenient
access to the issuer’s customers. The
Board did not receive any comments on
the proposed definition, and § 235.2(g)
is adopted as proposed, with the
exception of minor technical changes.
The Board also proposed comment
2(g)–1 to clarify the meaning of
‘‘reasonable and convenient access,’’ as
that term is used in § 235.2(g)(2). Under
proposed comment 2(g)–1, an issuer
would provide reasonable and
convenient access, for example, if, for
each person to whom a card is issued,
the issuer provided access to one ATM
within the metropolitan statistical area
(MSA) in which the last known address
of the person to whom the card is issued
is located or, if the address is not
known, where the card was first
purchased or issued.
Several consumer group commenters
recommended that the Board delete
proposed comment 2(g)–1. These
commenters noted that certain MSAs
are very large and that requiring only
one ATM within the same MSA as a
cardholder’s last known address (or, if
unknown, the card’s place of purchase
or issuance) could potentially be
burdensome for certain cardholders
when an MSA covers a sizeable area.
Another industry commenter suggested
that for a payroll card, an ATM available
at a cardholder’s workplace should be
considered to provide reasonable and
convenient access.
As discussed in the proposal, the
proposed comment was intended to
ensure that cardholders do not have to
travel a substantial distance for ATM
access. The Board agrees that certain
MSAs are very large and, for those
MSAs, providing access to one ATM
may not be reasonable or convenient for

this part. The entire virtual wallet is not
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many cardholders. Moreover, a network
that provides ATM access that is
reasonable and convenient to a
cardholder’s home or work address also
should be considered to provide
reasonable and convenient for purposes
of § 235.2(g)(2). Accordingly, the Board
has adopted a revised comment 2(g)–1
to provide that whether a network
provides reasonable and convenient
access depends on the facts and
circumstances, including the distance
between ATMs in the designated
network and each cardholder’s last
known home or work address or, if a
home or work address is not known,
where the card was first issued.
H. Section 235.2(h)—Electronic Debit
Transaction
EFTA Section 920(c)(5) defines
‘‘electronic debit transaction’’ as ‘‘a
transaction in which a person uses a
debit card.’’ The Board proposed to
define ‘‘electronic debit transaction’’ to
mean ‘‘the use of a debit card by a
person as a form of payment in the
United States’’ in order to incorporate
the concept of ‘‘payment’’ already
included in the statutory definition of
‘‘payment card network’’ and to limit
application of the rule to domestic
transactions.73 As discussed above in
relation to § 235.2(f), some debit cards
may be used to access both accounts as
defined in § 235.2(a) and lines of credit.
The Board has revised the definition of
‘‘electronic debit transaction’’ to specify
that a transaction is an electronic debit
transaction only if the debit card is used
to debit an account. The Board has
added comment 2(h)–1 to clarify that
the account debited could be, for
example, the cardholder’s asset account
or the omnibus account that holds the
funds used to settle prepaid card
transactions.
A few commenters requested
clarification on whether the rule would
apply to Internet transactions. Section
235.2(h) does not limit the term
‘‘electronic debit transaction’’ to
transactions initiated at brick-andmortar store locations; the term also
includes purchases made online or by
telephone or mail. Accordingly,
electronic debit card transactions
initiated over the Internet are within the
scope of this part.
One commenter suggested that the
definition of ‘‘electronic debit
transaction’’ not be limited to use as a
73 EFTA Section 920(c)(11) defines ‘‘payment
card network,’’ in part, as an entity ‘‘that a person
uses in order to accept as a form of payment a brand
of debit card.’’ See discussion related to § 235.2(q)
(definition of ‘‘United States’’) regarding the
application of the rule to only domestic
transactions.

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‘‘form of payment’’ because many POS
networks also function as ATM
networks. This commenter suggested
the Board expand the definition of
‘‘electronic debit transaction’’ to include
ATM transactions. For the reasons
discussed below in relation to
§ 235.2(m), the Board is not revising its
proposed definition of ‘‘electronic debit
transaction’’ to include ATM
transactions, but is adding comment
2(h)–2 to clarify that payment may be
made in exchange for goods or services,
as a charitable contribution, to satisfy an
obligation, or for other purposes.
As explained in the proposed
commentary, the term would include
use of a debit card for subsequent
transactions connected with the initial
transaction and would include cash
withdrawal at the point of sale
(provided the cardholder has also made
a purchase). The Board has revised
proposed comment 2(h)–1 (now
designated as comment 2(h)–3) to clarify
that a transaction, such as a return
transaction, is an electronic debit
transaction if the transaction results in
a debit to the merchant’s account and a
credit to the cardholder’s account.
The Board has also adopted its
proposed comments clarifying that
‘‘electronic debit transaction’’ includes
cash withdrawals at the point of sale
(comment 2(h)–4) and that transactions
using a debit card at a merchant located
outside of the United States are not
subject to this rule (comment 2(h)–5),
with minor conforming and clarifying
changes.
I. Section 235.2(i)—General-Use Prepaid
Card
EFTA Section 920(c)(2) defines the
term ‘‘debit card’’ as including ‘‘a
general-use prepaid card, as that term is
defined in section 915(a)(2)(A).’’ EFTA
Section 915(a)(2)(A), in turn, defines
‘‘general-use prepaid card’’ as those
cards, or other payment codes or
devices, that (1) are redeemable at
multiple, unaffiliated merchants or
service providers, or ATMs; (2) issued
in a requested amount, whether or not
such amount may be increased or
reloaded; (3) purchased on a prepaid
basis; and (4) honored upon
presentation for goods and services.74
The Board proposed to adopt the
statutory definition with some revisions.
The Board proposed to define ‘‘generaluse prepaid card’’ to mean a card, or
other payment code or device that is (1)
issued on a prepaid basis in a specified
amount, whether or not that amount
may be increased or reloaded, in
exchange for payment; and (2)

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redeemable upon presentation at
multiple, unaffiliated merchants or
service providers for goods or services,
or usable at ATMs. The proposed
definition included cards that a group of
unaffiliated merchants agrees to accept
via the rules of a payment card network
and cards that a select group of
unaffiliated merchants agrees to accept,
whether issued by a program manager,
financial institution, or network
(referred to as ‘‘selective authorization
cards’’). The Board requested comment
on whether selective authorization cards
that do not carry a network brand
should be included within the
definition of ‘‘general-use prepaid
card.’’ The Board received several
comments on its proposed definition,
primarily concerning the exclusions
from the definition of ‘‘general-use
prepaid card’’ and selective
authorization cards.
For the reasons discussed in relation
to §§ 235.2(h), (l), and (m), ATM
transactions are not electronic debit
transactions for purposes of this rule
because cash withdrawals are not
‘‘payments.’’ Accordingly, the Board has
revised the proposed definition to
eliminate the unnecessary reference to
prepaid cards’ usability at ATMs.
1. Credit CARD Act Exclusions
Several commenters urged the Board
to incorporate the exclusions to the
definition of ‘‘general-use prepaid card’’
in the Credit CARD Act of 2009 (CARD
Act) into the definition of ‘‘general-use
prepaid card.’’ These exclusions include
telephone cards; cards not marketed or
labeled as gift cards; loyalty, award, or
promotional gift cards; cards not
marketed to the general public; cards
issued only in paper form; and cards
redeemable solely for admission to
events or venues (or purchases of goods
and services at the events or venues) at
a particular location or affiliated
locations.75
The proposed definition generally
tracked the definition of ‘‘general-use
prepaid card,’’ set forth above, in EFTA
Section 915(a)(2)(A). EFTA Section
915(a)(2)(D) enumerates exclusions from
the term ‘‘general-use prepaid card’’ as
defined in Section 915(a)(2)(A). In light
of the explicit reference to Section
915(a)(2)(A) and the absence of a
reference to Section 915(a)(2)(D), the
Board has determined not to exclude the
CARD Act’s exclusions from the
definition of ‘‘general-use prepaid
card.’’ 76 Moreover, one of the
75 15

U.S.C. 1693l–1(a)(2)(D).
Board also notes that EFTA Section
920(c)(2) does not refer to Section 915(a)(2) more
broadly.
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enumerated exclusions in Section
920(a)(7)(A)(ii) is for cards ‘‘reloadable
and not marketed or labeled as a gift
card or gift certificate.’’ If such cards
were already excluded from Section
920’s definition of ‘‘debit card’’ by
virtue of their exclusion from the term
‘‘general-use prepaid card’’ in the CARD
Act, Section 920(a)(7)(A)(ii)’s express
exemption of such cards would be
superfluous. Therefore, the Board is
adopting the definition of ‘‘general-use
prepaid card’’ as proposed (with the
exception of removing the unnecessary
ATM reference). The cards excluded
from the CARD Act’s definition of
general-use prepaid card may otherwise
be excluded from the definition of
‘‘debit card’’ (i.e., if they are not
redeemable at multiple, unaffiliated
merchants) or exempt from the
interchange fee standards (e.g., if they
are reloadable).
2. Selective Authorization Cards
Several commenters requested that
the Board exclude ‘‘selective
authorization cards’’ from the definition
of ‘‘general-use prepaid cards.’’ These
commenters asserted that selective
authorization cards more closely
resemble cards that are accepted at only
one merchant or affiliated merchants.
Many of these commenters argued that
selective authorization cards provide
consumers with more shopping options
than cards accepted at only one
merchant, thus providing the consumer
with more protection in the event of a
merchant’s bankruptcy. Some
commenters suggested excluding only
those cards that do not carry a network
brand.
The Board has considered the
comments and has determined to
include selective authorization cards
within the definition of ‘‘general-use
prepaid card.’’ Selective authorization
cards provide benefits to the merchants
or business districts wishing to promote
their business, as well as to consumers
wishing to mitigate their exposure in the
event of a merchant’s bankruptcy.
Nonetheless, one characteristic of
general-use prepaid cards is that they
are redeemable at multiple, unaffiliated
merchants. Two or more merchants are
affiliated if they are related either by
common ownership or by common
corporate control.77 Two or more
merchants are not ‘‘affiliated’’ within
the rule’s meaning of the term merely
because they agree to accept the same
selective authorization card. Therefore,
selective authorization cards are
redeemable at multiple, unaffiliated
77 See the discussion on the definition of
‘‘affiliate’’ (§ 235.2(c)), above, in this notice.

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merchants. This is true regardless of
whether or not the card carries the
mark, logo, or brand of a network. In
fact, the Board understands that
transactions using some selective
authorization cards that do not display
a network brand logo on the card itself
are processed over ‘‘brands’’ of payment
card networks, including the major
networks or smaller networks.
Accordingly, there is not a basis for
distinguishing network-branded
selective authorization cards from nonnetwork branded selective authorization
cards.78 Selective authorization cards,
however, like other general-use prepaid
cards, may not be subject to certain
provisions of this part. For example, if
the selective authorization card satisfies
the requirements in § 235.5(c) (e.g., the
card is reloadable and not marketed as
a gift card), the card would not be
subject to the interchange fee standards.
Proposed comment 2(i)–2 explained
that ‘‘mall cards’’ are considered
general-use prepaid cards because the
cards are accepted at multiple,
unaffiliated merchants. The Board is
aware, however, that selective
authorization cards are used outside the
shopping mall environment. Selected
groups of merchants within the same
business district or located near a
university also may accept selective
authorization cards. Accordingly, the
Board has expanded the scope of the
proposed comment to include selective
authorization cards used in all contexts.
3. Other Comments
The Board received one comment
requesting clarification as to whether
‘‘gift cards’’ are included under the
definition of ‘‘general-use prepaid
cards.’’ Prepaid gift cards that are
redeemable at a single merchant or a
group of affiliated merchants are not
included within the definition of
‘‘general-use prepaid cards.’’ By
contrast, if the gift card is redeemable at
multiple, unaffiliated merchants, then
the gift card is a ‘‘general-use prepaid
card.’’ Gift cards that are general-use
prepaid cards are not exempt from the
interchange fee standards.
J. Section 235.2(j)—Interchange
Transaction Fee
1. Summary of Proposal and Comments
EFTA Section 920(c)(8) defines
‘‘interchange transaction fee’’ as ‘‘any
fee established, charged, or received by
a payment card network for the purpose
78 For the same reason, the Board is revising its
proposed comment 2(i)–2 to clarify that a generaluse prepaid card is not required to display the
network brand, mark, or logo in order to come
within the definition of ‘‘general-use prepaid card.’’

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of compensating an issuer for its
involvement in an electronic debit
transaction.’’ The Board proposed to
define ‘‘interchange transaction fee’’ to
mean ‘‘any fee established, charged, or
received by a payment card network and
paid by a merchant or acquirer for the
purpose of compensating an issuer for
its involvement in an electronic debit
transaction.’’
2. Paid by a Merchant or an Acquirer
The Board proposed to add the phrase
‘‘and paid by a merchant or acquirer’’ as
a clarification of current market
practice.79 One commenter expressed
concern that, by adding ‘‘and paid by a
merchant or acquirer’’ to the statutory
definition, the Board was opening up
the possibility that an acquirer would
contract with a middleman to pay the
fee on the acquirer’s behalf, which
would result in circumvention or
evasion of the rule. The Board does not
believe that the phrase would enable
such a practice. Under principles of
agency (governed by state law), if an
acquirer contracts with a third party to
pay an interchange transaction fee on
behalf of an acquirer, the fee is
considered to be paid by the acquirer
and would be subject to the same
restrictions as if the fee were in fact paid
by the acquirer. Although the Board
understands that, today, acquirers pay
interchange transaction fees to issuers
through settlement effected by a
payment card network (and then pass
the fee on to merchants), the Board has
retained the proposed addition, noting
that the interchange transaction fee can
be paid either by a merchant or acquirer.
The Board also has made minor
revisions to comment 2(j)–2 to clarify
that the fees payment card networks
charge to acquirers for network services
are not considered ‘‘interchange
transaction fees.’’
3. Established, Charged, or Received
Merchant commenters voiced
concerns that issuers may attempt to
circumvent the interchange fee
standards (applicable to those fees
‘‘established, charged, or received’’ by a
network) by collectively setting fees and
imposing those collectively set fees on
acquirers, and ultimately merchants,
through the networks’ honor-all-cards
rules. For example, the largest issuers
may collectively determine to charge
interchange transaction fees above the
cap and effect this decision by dictating
to each network the agreed upon
amount. The network, then, would
permit each issuer to charge that
amount, and because merchants would
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be required to accept all the network’s
cards, merchants would pay the amount
determined by the issuers.
Section 920(c)(8) of the EFTA defines
the term ‘‘interchange transaction fee’’
to mean ‘‘any fee established, charged,
or received by a payment card network
* * * for the purpose of compensating
an issuer for its involvement in an
electronic debit transaction.’’
Accordingly, interchange transaction
fees are not limited to those fees set by
payment card networks. The term also
includes any fee set by an issuer, but
charged to acquirers (and effectively
merchants) by virtue of the network
determining each participant’s
settlement position. In determining each
participant’s settlement position, the
network ‘‘charges’’ the fee, although the
fee ultimately is received by the issuer.
An issuer, however, would be permitted
to enter into arrangements with
individual merchants or groups of
merchants to charge fees, provided that
any such fee is not established, charged,
or received by a payment card network.
The Board has added paragraph 2(j)–3 to
the commentary to explain that fees set
by an issuer, but charged by a payment
card network are considered
interchange transaction fees for
purposes of this part. The Board plans
to monitor whether collective fee setting
is occurring and whether it is necessary
to address collective fee setting or
similar practices through the Board’s
anti-circumvention and evasion
authority.
One commenter urged the Board to
adopt a definition of ‘‘interchange
transaction fee’’ that covers both the fee
flowing from merchant to network and
the fee flowing from network to issuer
so as to require that the two amounts be
equal. This commenter was concerned
that, otherwise, networks with
widespread acceptance would be able to
engage in price discrimination.
Networks may charge lower fees to
acquirers than they pass through to the
issuers in order to compete for
transaction volume in certain market
segments, while charging higher fees to
acquirers than they are passing through
to the issuers in other market segments,
although today these amounts are the
same. The Board, however, has
determined not to revise its proposed
definition of ‘‘interchange transaction
fee’’ to cover both the fee flowing from
merchant to network and the fee flowing
from network to issuer so as to require
that two amounts be equal. By statute,
an interchange transaction fee is a fee
established, charged, or received by a
payment card network for the purpose
of compensating an issuer and Section
920(a) limits the amount that the issuer

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may receive. By contrast, Section 920(a)
does not prohibit networks from
charging other fees to merchants or
acquirers that are not passed to the
issuer and does not require that the
network pass through to the issuer the
same amount charged to the acquirer.
The Board plans to monitor whether
networks are charging other fees that are
being passed to the issuer and
determine whether it is necessary to
address network fees through the
Board’s anti-circumvention and evasion
authority.
K. Section 235.2(k)—Issuer
1. Summary of Proposal and Comments
EFTA Section 920(c)(9) defines the
term ‘‘issuer’’ to mean ‘‘any person who
issues a debit card, or credit card, or the
agent of such person with respect to
such card.’’ The Board proposed to
define ‘‘issuer’’ to mean ‘‘any person
that issues a debit card.’’ Proposed
comments 2(k)–2 through 2(k)–5
provided examples of which entity was
considered the issuer in a variety of
debit card arrangements. As described
in the proposed commentary, the issuer
in four-party systems is the bank
holding the cardholder’s account, and
the issuer in three-party systems is the
entity acting as issuer and system
operator (and typically acquirer as well).
The issuer in debit card BIN-sponsor
arrangements is the bank holding the
cardholder’s account, and the issuer in
prepaid card BIN-sponsorship
arrangements is the BIN sponsor
holding the omnibus account.80 Finally,
the issuer of a decoupled debit card is
the entity providing the card to the
cardholder, not the bank holding the
cardholder’s account.
The Board received several comments
on its proposed definition of ‘‘issuer,’’
one of which generally supported the
proposed definition. Many of the
comments received addressed the
proposed removal of the phrase ‘‘or
agent of such person’’ from the statutory
definition. Two commenters suggested
that Board exclude third-party agents as
proposed, because unlike credit cards,
debit card issuers typically do not use
third-party agents. One commenter
argued that the agent of an issuer should
80 As explained in the proposed commentary,
payment card networks assign Bank Identification
Numbers (‘‘BINs’’) to member institutions for
purposes of issuing cards, authorization, clearance,
settlement, and other processes. In exchange for a
fee or other financial considerations, some member
institutions permit other entities to issue debit
cards using the member-institution’s BIN. The
entity permitting the use of its BIN is referred to as
the ‘‘BIN sponsor’’ and the entity that uses the BIN
to issue cards is often referred to as the ‘‘affiliate
member.’’ BIN-sponsor arrangements are done for
debit cards (including prepaid cards).

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only be considered the issuer when the
agent has a level of control such that the
role of the issuer is subordinated to that
of its agent. A few other commenters
requested that the Board clarify the
effect on the interchange fee restrictions
of eliminating ‘‘or agent of the issuer’’
and further study the issue.
The Board also received a few
comments requesting clarification on
whether an issuer that outsources
processing functions is responsible for
complying with the requirements, or
whether the third-party processor must
comply with the requirements. One
commenter specifically expressed
concern about a covered issuer being
able to contract with a small issuer for
issuance of the card and having the
small issuer receive and pass back the
higher interchange fees. The Board also
received a comment requesting
clarification on which party is
considered the issuer under a variety of
mobile payments arrangements.
2. Analysis and Final Rule
The Board has considered the
comments and has determined to revise
its definition of ‘‘issuer’’ to clarify the
meaning of ‘‘issue.’’ In general, the
proposed commentary explained which
entity is the issuer in terms of which
entity has the underlying contractual
agreement with the cardholder.
Although the underlying contractual
agreement with the cardholder is one of
the defining characteristic of issuing
debit cards, the Board believes that it is
clearer and more precise to explain the
underlying agreement in terms of
authorizing the use of the card to
perform electronic debit transactions.
The entity that authorizes use of the
card may also be the entity that arranges
for the cardholder to obtain the card.
The revisions to the commentary
describe this component of issuing in
terms of ‘‘authorizing’’ the cardholder to
use the card to perform electronic debit
transactions, rather than the more
general term ‘‘provide’’ as proposed.
Therefore, the identity of the issuer is
not determined by which entity
performs issuer processing, but rather
by which entity authorized the
cardholder to use the card to perform
electronic debit transactions.
The Board has revised comment 2(k)–
1 to provide more guidance on which
entity is the issuer for purposes of this
part. Comment 2(k)–1 explains that a
person issues a debit card by
authorizing a cardholder to use the debit
card to perform electronic debit
transactions. That person may provide
the card directly or indirectly to the
cardholder. For example, a person may
use a third-party processor to distribute

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a plastic card to the cardholder, or may
use a phone network or manufacturer to
distribute a chip or other device as part
of a phone. The entity that distributes
the card, or other payment code or
device, is not the issuer with respect to
the card unless that entity also is the
one authorizing the cardholder to use
the card, or other payment code or
device, to perform electronic debit
transactions.
Proposed comments 2(k)–2 and 2(k)–
3 discussed the identity of the issuer in
four-party and three-party systems,
respectively. In light of the changes
discussed below in relation to
§ 235.2(m), which clarify that threeparty systems are not payment card
networks for purposes of this rule, the
Board has deleted the proposed
commentary language that discusses
three-party systems and is making other
clarifying changes for consistency in
other commentary provisions. See
comment 2(k)–2.
Proposed comment 2(k)–4 described
which entity was the issuer under two
different types of BIN-sponsor
arrangements: the sponsored debit card
model and the prepaid card model.
Proposed comment 2(k)–4.i stated that
the issuer in a sponsored debit card
arrangement was the community bank
or credit union providing debit cards to
its account holders using a BIN of
another institution (the ‘‘BIN sponsor’’).
The Board has revised the proposed
comment to explain that the community
bank or credit union is an issuer if it
authorizes its account holders to use the
debit cards to access funds through
electronic debit transactions. The
community bank or credit union may
provide debit cards directly or
indirectly (e.g., through its BIN sponsor)
to cardholders. The BIN sponsor is not
considered the issuer for purposes of
this part because the BIN sponsor does
not enter into an agreement with the
cardholder authorizing the cardholder
to use the card to perform electronic
debit transactions to access funds. The
Board also has revised the comment to
refer consistently to the ‘‘bank or credit
union’’ throughout the comment. See
comment 2(k)–3.i.
Proposed comment 2(k)–4.ii stated
that the issuer in the second type of
BIN-sponsor model—the prepaid card
model—is the BIN sponsor holding the
funds underlying the prepaid cards. The
Board has revised the proposed
comment to clarify that, under these
arrangements, the BIN sponsor typically
uses a program manager to distribute
cards to cardholders, and the BIN
sponsor typically holds the funds in an
omnibus or pooled account. Under these
arrangements, either the BIN sponsor or

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the program manager may track the
amount of underlying funds on each
card. The revised comment explains
that the BIN sponsor is the issuer
because it is the entity authorizing the
cardholder to use the card to perform
electronic debit transactions to access
the funds held by the BIN sponsor and
also has the contractual relationship
with the cardholder. See comment 2(k)–
3.ii. The Board also has revised this
comment, as well as other comments, to
refer to ‘‘member institutions’’ rather
than ‘‘member-financial institutions’’ for
consistency throughout the
commentary.
Proposed comment 2(k)–5 explained
that the issuer with respect to
decoupled debit card arrangements is
the entity that provides the debit card to
the cardholder and initiates a
preauthorized ACH debit to the
cardholder’s account at a separate
institution. The Board has revised
proposed comment 2(k)–5 (now
designated as 2(k)–4) to clarify that the
bank or other entity holding the
cardholder’s funds is not the entity
authorizing the cardholder to use the
decoupled debit card to perform
electronic debit transactions. Rather, the
bank or other entity holding the
cardholder’s funds has authorized
access to the funds through ACH debits
in general, but not specifically through
the decoupled debit card. The Board has
deleted the statement in proposed
comment 2(k)–5 that the accountholding institution does not have a
relationship with the cardholder with
respect to the card because the
statement is unnecessary to explain the
identity of the issuer of the card.
The Board has not provided examples
in the commentary that are specific to
mobile devices and mobile payments. A
mobile device, such as a chip in or on
a telephone or a software application on
the telephone, is one type of payment
code or device that may be used to
access underlying funds. If the
cardholder’s bank authorizes the
cardholder to use a device connected
with the phone and arranges for the
cardholder to obtain the device through
the phone network or manufacturer, or
other party, the cardholder’s bank is the
issuer with respect to the mobile device.
By contrast, if the mobile device is more
like a decoupled debit card where the
mobile device is used to initiate debits
to an account, but those debits settle
through a preauthorized ACH
transaction, the cardholder’s bank is not
the issuer. Rather, the entity that
provided the mobile device to the
cardholder to ultimately access the
underlying funds is the issuer.
Depending on the debit card

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43413

arrangement, this entity may be either
the phone network, phone
manufacturer, or other entity.
As explained in the proposal, as a
matter of law, agents are held to the
same restrictions with respect to the
agency relationships as their principals.
In other words, a third-party processor
cannot act on behalf of an issuer and
receive higher interchange fees than are
permissible for the issuer to receive
under this rule. For example, if an
issuer uses a third-party processor to
authorize, clear, or settle transactions on
its behalf, the third-party processor may
not receive interchange fees in excess of
the issuer’s permissible amount.
Therefore, the Board does not believe
that removing the clause ‘‘or agent of
such person’’ will have a substantive
effect on either the interchange fee
restrictions or the network exclusivity
and routing provisions. In assessing
compliance, any interchange transaction
fee received by the agent of the issuer
will be deemed to be an interchange
transaction fee received by the issuer.
L. Section 235.2(l)—Merchant
EFTA Section 920 does not define the
term ‘‘merchant.’’ 81 The Board
proposed to define ‘‘merchant’’ to mean
‘‘any person that accepts debit cards as
payment for goods or services.’’ The
Board did not receive comments
specifically on the proposed definition;
however, a few commenters suggested
that ATM operators be included in the
definition of ‘‘merchant.’’ As discussed
below in relation to § 235.2(m), ATM
operators do not accept payment in
exchange for goods or services. Rather,
ATM operators facilitate cardholders’
access to their own funds. The Board
has revised § 235.2(l) so as to not limit
the purposes for which a person accepts
payment to being in exchange for goods
or services. See § 235.2(h) and comment
2(h)–2. This expansion does not include
ATM operators within the definition of
‘‘merchant.’’
M. Section 235.2(m)—Payment Card
Network
EFTA Section 920(c)(11) defines
‘‘payment card network’’ as ‘‘an entity
that directly, or through licensed
members, processors or agents, provides
the proprietary services, infrastructure,
and software that route information and
data to conduct debit card or credit card
transaction authorization, clearance,
and settlement, and that a person uses
in order to accept as a form of payment
a brand of debit card, credit card or
81 Section 920(c)(11)’s definition of ‘‘payment
card network’’ refers to ‘‘an entity * * * that a
person uses in order to accept as a form of payment
a brand of debit card.’’

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emcdonald on DSK2BSOYB1PROD with RULES2

other device that may be used to carry
out debit or credit transactions.’’ The
Board proposed a modified version of
the statutory definition as defining the
term ‘‘payment card network’’ to mean
an entity that (1) directly or indirectly
provides the services, infrastructure,
and software for the authorization,
clearance, and settlement of electronic
debit transactions and (2) establishes the
standards, rules, or procedures that
govern the rights and obligations of
issuers and acquirers involved in
processing electronic debit transactions
through the network. Proposed
commentary 2(m)–1 further explained
the proposed criteria that only those
entities that establish rules governing
issuers and acquirers be considered
payment card networks. The Board
received several comments on its
proposed definition of ‘‘payment card
network.’’ A few commenters generally
supported the Board’s proposed
definition.
A few commenters supported the
Board’s proposed exclusion of issuers,
acquirers, and processors from the
definition of ‘‘payment card network.’’
These commenters argued that
including these entities in the definition
was beyond the intent of EFTA Section
920 and would have unintended
consequences. By contrast, other
commenters argued that the statutory
definition of ‘‘payment card network’’
was broad enough to include processors
and gateways, among other entities. One
commenter suggested that the Board
consider third-party intermediaries to be
‘‘payment card networks’’ if a network
contracts with them to perform
functions traditionally performed by a
network.
1. Standards, Rules, or Procedures
Governing Issuers and Acquirers
One commenter expressed concern
that adding the ‘‘standards, rules, or
procedures’’ criteria would reduce the
Board’s flexibility to cover emerging
payment systems under the rule. A few
commenters also suggested that the
Board impose substantive requirements
on the rules that entities establish in
order to be considered ‘‘payment card
networks’’ for purposes of this rule. In
particular, these commenters suggested
the Board require the ‘‘standards, rules,
or procedures’’ to include consumer
chargeback rights.
The Board has considered the
comments received and has determined
to revise the final rule to eliminate the
‘‘standards, rules, or procedures’’
criteria. This recognizes that processors
and gateways may be ‘‘payment card
networks’’ with respect to electronic
debit transactions depending on their

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role (discussed below in connection
with this defined term). To be
considered a payment card network for
purposes of this rule an entity must do
more in relation to a transaction than
provide proprietary services,
infrastructure, and software to route the
transaction information to conduct
authorization, clearance, and settlement.
The Board continues to believe that an
entity that acts solely as an issuer,
acquirer, or processor with respect to an
electronic debit transaction is not
covered by the definition of ‘‘payment
card network,’’ because such entities do
not route information and data between
an acquirer and an issuer with respect
to the transaction. In order to make this
clear, the final rule provides that an
entity is considered a payment card
network only if the entity routes
electronic debit transaction information
and data between an acquirer and
issuer.82
Processors and gateways may take on
different roles depending on the
transaction. For example, for a given
transaction, an entity may act as
processor to both the acquirer and the
issuer. The acquirer and issuer may
wish to bypass the network for such a
transaction and may themselves
establish standards, rules, or procedures
for so doing, while relying on the
processor or gateway to process the
electronic debit transaction and charge
and pay fees between the acquirer and
issuer. In that case, the Board believes
the processor is acting as a payment
card network and should be considered
a ‘‘payment card network’’ with respect
to the transaction for purposes of the
rule. Accordingly, the Board has revised
the commentary to the definition of
‘‘payment card network’’ to explain that
an entity that acts as processor between
issuers and merchants without routing
the transaction through an intervening
payment card network would be
considered a payment card network
with respect to those transactions. See
comment 2(m)–3.
Some emerging payment systems may
resemble payment card networks, while
others may resemble acquirers or
acquirer processors. Like existing
entities, if the emerging payment system
routes transaction information and data
between acquirers and issuers, and not
to an intervening payment card
network, the system will be considered
a payment card network for purposes of
those transactions, provided the entity
satisfies the other criteria in § 235.2(m).
82 The Board is not adopting the guidelines, rules,
or procedures requirement and, therefore, it is not
necessary to address the comments regarding
substantive requirements of such standards, rules,
or procedures.

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If a payment card network contracts
with another entity to perform networklike functions on behalf of the payment
card network, the other entity is
considered the agent of the payment
card network.
2. Proprietary Services and Brands of
Payment Cards
The proposal did not include the
statutory text that a payment card
network provides ‘‘proprietary’’
services, infrastructure, and software
provided for authorization, clearance,
and settlement and that those services
enable a person to accept ‘‘a brand of
debit card.’’ The Board received one
comment suggesting the Board retain
the statutory concept that a payment
card network provides ‘‘proprietary’’
services that a person uses to accept ‘‘a
brand of debit card.’’ In light of the
other transaction types that resemble
electronic debit transactions (e.g., ACH
transactions), specifically incorporating
the concept of payment card networks
providing proprietary services that a
person uses to accept ‘‘a brand of
payment card’’ (although not necessarily
the brand of the entity providing the
services, infrastructure, and software) is
a meaningful way of distinguishing
between the networks traditionally
thought of as ‘‘payment card networks’’
and other entities that provide services,
infrastructure, and software that provide
debits and credits to accounts on their
own books. Accordingly, the final rule
adopts the more complete statutory
language rather than the truncated
proposed language.
The proposed definition of ‘‘debit
card’’ excluded account numbers used
to initiate an ACH transaction. As noted
above in the discussion of § 235.2(f),
retaining an explicit exclusion within
the definition of ‘‘debit card’’ is no
longer necessary because an account
number used to initiate ACH
transactions is not a ‘‘brand’’ of debit
card or other device, as the account
number is not associated with a ‘‘brand’’
of ACH network. An ACH transaction is
processed through an ACH operator,
either EPN or FedACH®. Merchants use
account numbers or other information to
initiate a particular type of transaction
(i.e., ACH), but these account numbers
are not ‘‘brands’’ of cards, or other
payment codes or devices. Therefore,
ACH operators should not be considered
‘‘payment card networks’’ for purposes
of the rule. The Board has added
comment 2(m)–4 that explains that ACH
operators are not considered ‘‘payment
card networks’’ under this part.

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3. Credit Cards
The Board proposed to remove the
reference to ‘‘credit cards’’ from the
definition of ‘‘payment card network’’ as
unnecessary in light of the fact that the
Board’s rule would apply only to debit
card-related interchange fees and
routing restrictions. One commenter
suggested the Board retain the
references to ‘‘credit card’’ because
removing the reference would have an
impact on the application of EFTA
Sections 920(b)(2) and (b)(3), as well as
for the application to hybrid credit-debit
cards. Removing the reference to ‘‘credit
card’’ in the definition of payment card
network will not affect the application
of Section 920(b)(2) (discounts at the
point of sale) or Section 920(b)(3)
(transaction minimums and
maximums). Section 920(b)(2) is not
dependent on any Board rulemaking,
and Section 920(b)(3) authorizes the
Board to increase the level of the
minimum transaction value merchants
may impose. The Board, however, did
not request comment on an increase and
is not at this time adopting provisions
in this part pursuant to Section
920(b)(3). If the Board determines to
increase the minimum dollar value in
Section 920(b)(3), the Board at that time
will consider whether revisions to the
definition of payment card network are
necessary for that purpose. Therefore,
the Board has not retained the statutory
reference to ‘‘credit card’’ in the
definition of payment card network.
4. Routing Transaction Information and
Three-Party Systems
The proposed definition of payment
card network did not incorporate the
statutory concept of providing services,
infrastructure, and software ‘‘to route
information and data to conduct’’ debit
card transactions. Rather, the Board
proposed to shorten the definition to
include the provision of services,
infrastructure, and software ‘‘for’’
authorization, clearance, and settlement.
The Board did not receive comments
specifically on this proposed change
from the definition in EFTA Section
920(c)(11). The Board did, however,
receive comments on the inclusion of
three-party systems within the scope of
the rule.
emcdonald on DSK2BSOYB1PROD with RULES2

a. Summary of Proposal
The Board proposed that its rule cover
three-party systems as well as four-party
systems. The Board noted, however, the
practical difficulties in applying the
interchange fee standards to three-party
systems, which charge only a merchant
discount and no explicit interchange
fee. Specifically, a three-party system

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could apportion its entire merchant
discount to its role as network or
acquirer, rendering the interchange fee
zero, in effect, and EFTA Section 920
does not restrict fees an acquirer charges
a merchant. Therefore, the Board
requested comment on the appropriate
application of the interchange fee
standards to electronic debit
transactions processed over three-party
systems.
In addition, the Board requested
comment on how the network
exclusivity and routing provisions
should be applied to three-party
systems, including alternatives that
could minimize the compliance burden
on such systems. If those provisions
were applied to a three-party system,
debit cards issued by the network must
be capable of routing transactions
through at least one unaffiliated
payment card network, in addition to
the network issuing the card, and the
network may not inhibit a merchant’s
ability to route a transaction to any
other unaffiliated network(s) enabled on
a debit card. The Board recognized that
the nature of a three-party system could
be significantly altered by any
requirement to add one or more
unaffiliated payment card networks
capable of carrying electronic debit
transactions involving the network’s
cards.
b. Summary of Comments
The Board received comments
regarding the application of both the
interchange fee standards and the
network exclusivity and routing
provisions to three-party systems. In
general, almost all of these comments
recognized that three-party systems do
not charge explicit interchange fees, but
many of the commenters (particularly
issuers and four-party systems) were
concerned that exempting three-party
systems from the interchange fee
standards would create an uneven
playing field. Some of these commenters
were concerned that excluding threeparty systems would prompt current
four-party systems to vertically integrate
and become three-party systems, which
they believed could be considered
circumvention or evasion of the rule.
Other commenters recommended that, if
covering three-party systems was not
feasible, the Board should at least
examine whether excluding three-party
systems places four-party systems at a
competitive disadvantage.
One commenter suggested the Board
require three-party systems to provide
the Board with an allocation of the
merchant discount that explicitly
identifies an ‘‘interchange fee.’’ Other
commenters that favored applying the

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interchange fee standards to three-party
systems also suggested that the Board
prohibit a three-party system from
allocating fees away from the issuer side
and to the acquirer side. Other
commenters suggested that the Board
deem three-party systems to be in
compliance if the merchant discount
charged by three-party systems was
similar to merchant discounts charged
in four-party systems.
Other issuers and three-party systems
supported excluding three-party
systems from the interchange fee
standards, noting that such systems
currently do not establish or charge a fee
similar in concept to an ‘‘interchange
fee.’’ These commenters also stated that
the Board had no authority under EFTA
Section 920 to regulate merchant
discounts. Moreover, some of these
commenters claimed that developing a
framework and method for calculating
an implicit merchant discount would be
unworkable and arbitrary. Commenters
(including some representing
merchants) contended that three-party
systems do not raise the same
centralized price-setting concerns as
four-party systems because merchants
negotiate directly with the three-party
system setting the merchant discount.
With respect to the network
exclusivity and routing provisions, the
Board received comments from issuers
and networks, some of which supported
applying the provisions to three-party
systems, whereas others did not. Almost
all of these commenters recognized the
circuitous routing that would result if
three-party systems were subject to the
network exclusivity and routing
provisions (because all transactions on
cards issued for three-party systems
ultimately would need to be routed back
to the system operator/issuer for
authorization, clearance, and
settlement), but, similar to the
application of the interchange fee
standards, commenters believed that
exempting three-party systems would
create an uneven playing field.83 By
contrast, several commenters supported
excluding three-party systems from the
network exclusivity and routing
provisions’ coverage because, by
definition, three-party systems operate
on a single ‘‘network.’’ Therefore, the
commenters contended, application of
the rules to three-party systems would
have a detrimental effect on the threeparty business model. One three-party
83 If a three-party system were to enable its cards
for transaction processing over a second network,
the authorization, clearance, and settlement would
be done by the three-party system. Therefore, the
transaction would go outside the system only to be
sent back to the system for authorization, clearance,
and settlement.

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system stated that the Board should
invoke EFTA Section 904(c) to exempt
three-party systems.84 This commenter
asserted that three-party systems do not
‘‘restrict’’ the networks over which an
electronic debit transaction may be
processed ‘‘by contract, requirement,
condition, penalty,’’ or other similar
method.85 Rather, according to the
commenter, the closed-loop
characteristic is intrinsic to three-party
systems. The commenter concluded that
the network exclusivity and routing
provisions were ambiguous as applied
to three-party systems.
The Board also received a few
comments on its characterization of
three-party systems in its proposed rule.
One commenter asserted that the
Board’s characterization ignores the fact
that some ‘‘three-party systems’’ provide
network and issuing functions but not
acquiring functions. This commenter
suggested that the Board should
characterize three-party systems as
those where the network is also the
issuer, regardless of whether the entity
acquires transactions, because the rules
are primarily focused on network-issuer
relationship. Similarly, another
commenter stated that ‘‘three-party
systems’’ may have the ability to route
transactions outside the system, and
that, in such cases, the network
exclusivity and routing provisions
should apply to the ‘‘three-party
system.’’ A few commenters requested
that the Board provide more examples
of three-party systems.

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c. Analysis and Final Rule
In a three-party payment system, the
same entity serves as the issuer and
system operator, and typically the
acquirer.86 For debit card transactions
in three-party systems, the merchant
sends the authorization request, as well
as any other information necessary to
settle a transaction, typically to one
entity. By contrast to four-party systems,
the system operator that receives the
transaction information and data does
not direct the information and data to
another party. Rather, that entity uses
the transaction information and data to
approve or decline the transaction, as
well as to settle the transaction with
both the merchant and the cardholder.
If the three-party system involves
84 See discussion in connection with § 235.5
regarding the Board’s authority under EFTA Section
904(c) as applied to this rulemaking.
85 This commenter argued that the Board should
interpret ‘‘or otherwise’’ to mean by devices or
mechanisms similar to those specifically listed.
86 In addition, under a three-party system, outside
processors may provide some processing services to
the merchant, but are not authorized to acquire
transactions. The other parties to a three-party
system are the cardholder and the merchant.

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separate acquirers, the issuer/system
operator will remit funds to the acquirer
through whatever settlement method the
parties agreed to.
A merchant must send the transaction
information and data to the issuer (or
issuer’s processor) for authorization, as
well as clearance and settlement. In a
four-party system, the information and
data are sent to a network that, in turn,
sends the information and data to an
issuer (or the issuer’s processor).
Network entities in four-party systems
provide services, infrastructure, and
software that receive transaction
information and data from the merchant
side of the transaction and send the
information and data to the designated
issuer. By contrast, in a three-party
system, a single entity operates the
system and holds the cardholder’s
account. Typically that entity holds the
merchant’s account as well, but may
permit other entities to acquire
transactions. Once the system operator
receives the transaction information and
data, the operator does not send the
information and data on to another
point. Rather, all authorization and
settlement decisions and actions occur
within that entity. Therefore, three-party
systems provide services for merchants
to send and receive transaction
information and data, but not to ‘‘route’’
transaction information and data.
Merchants are able to protect
themselves from excessive fees in threeparty systems by negotiating directly
with the issuer-system operator, unlike
in the case of four-party systems, where
a network intervenes between the issuer
and merchant.
EFTA Section 920(c)(11) defines
‘‘payment card network’’ as ‘‘an entity
that directly, or through licensed
members, processors, or agents,
provides the proprietary services,
infrastructure, and software, that route
information and data to conduct debit
card or credit card transaction
authorization, clearance, and settlement
* * *’’ 87 The Board’s proposal did not
include the statutory text that a payment
card network provide the services,
infrastructure, and software that ‘‘route
information and data to conduct’’
electronic debit transaction
authorization, clearance, and settlement.
The statute does not define the term
‘‘route.’’ The term ‘‘route’’ is commonly
defined as ‘‘to send by a certain [or
selected] route’’ or ‘‘to divert in a
specified direction.’’ 88 In other words,
routing suggests involvement other than
Section 920(c)(11).
e.g., Webster’s New World Dictionary and
Thesaurus at 558 (2d ed. 2002); Merriam Webster’s
Collegiate Dictionary at 1021 (10th ed. 1993).

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88 See,

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merely receiving and using information
and data; specifically, routing suggests
sending the information and data to
another point or destination.89
Connecting numerous different points,
in this case numerous merchants and
issuers, is a fundamental element of any
network. The final rule modifies the
proposal to incorporate this statutory
reference to routing in the definition of
payment card network.
Accordingly, three-party systems are
not ‘‘payment card networks’’ for
purposes of the rule because they do not
‘‘provide[] the proprietary services,
infrastructure, and software that route
information and data to an issuer from
an acquirer to conduct the
authorization, clearance, and settlement
of electronic debit transactions.’’ 90
Because three-party systems are not
payment card networks, they are not
subject to the interchange fee standards
(as there is no payment card network
establishing, charging, or receiving a
fee) or to the network exclusivity or
routing provisions (as there is no
payment card network to which an
issuer could restrict the processing of
transactions).91
The Board has made conforming
changes to its proposed commentary.
First, the third sentence in proposed
comment 2(m)–1 that stated that threeparty systems are considered payment
card networks has been removed.
Second, commentary to explain the
routing component of the definition and
the definition’s application to threeparty systems has been added. Comment
2(m)–1 has been revised to state that an
entity that authorizes and settles an
electronic debit transaction without
routing information to another entity
generally is not considered a payment
card network. New comment 2(m)–2 has
been added to explain that three-party
systems are not ‘‘payment card
networks’’ for purposes of the rule.
Comment 2(m)–2 clarifies that ‘‘routing’’
transaction information and data
involves sending such information and
data to an entity other than the entity
that initially receives the information
and data, and does not include merely
receiving information and data. See
comment 2(p).
89 See discussion below in connection with
§ 235.2(p).
90 Transactions through three-party systems are
similar to other ‘‘on-us’’ transactions that can be
authorized, cleared, and settled using a book-entry
rather than sending information to another point.
91 Because three-party systems are not payment
card networks for purposes of this rule, it is not
necessary to address the comments regarding
calculating an implicit interchange fee for threeparty systems.

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emcdonald on DSK2BSOYB1PROD with RULES2

5. ATM Transactions and Networks
a. Summary of Proposal and Comments
The Board requested comment on
whether ATM transactions and
networks should be included within the
scope of the rule. The Board also
requested comment on how to
implement the network exclusivity
provision if ATM transactions and
networks are included within the scope
of the rule. The Board noted that the
interchange fee standards would not
apply to ATM interchange fees, which
currently flow from the issuer to the
ATM operator, and therefore do not
meet the statutory definition of
‘‘interchange transaction fee.’’
The network-exclusivity prohibition
and routing provisions, however, would
directly affect the operations of ATM
networks if these provisions were
applied to such networks. Issuers would
be required to offer ATM cards that can
be accepted on at least two unaffiliated
networks, and the ATM operator would
have the ability to choose the network
through which transactions would be
routed. The proposal explained that
covering ATM networks under the rule
may result in very different economic
incentives than coverage of point-of-sale
debit card networks because the party
receiving the interchange fee would be
able to control the transaction routing.
The Board received comments in
support of excluding ATM transactions
from the scope of the rule and in
support of including ATM transactions
within the scope of the rule. Those
commenters that opposed including
ATM transactions within the scope of
the rule argued that ATM withdrawals
are not a payment for goods or services.
Rather, these commenters argued that
the customer is accessing his or her own
funds. By contrast, commenters in
support of including ATM transactions
within the scope of the rule asserted
that ATM operators are ‘‘merchants’’
selling convenient access to cash and
that ATM transactions debit accounts.
Both the commenters in support of
and opposed to including ATM
transactions supported the Board’s
interpretation that interchange fees for
ATM transactions would be excluded
from the rule’s coverage (even if ATM
transactions were otherwise included)
because issuers do not receive or charge
interchange fees for ATM transactions.
A few commenters believed ATM
transactions to be outside the scope of
EFTA Section 920 because merchants
are not charged for ATM transactions.
Furthermore, commenters stated that,
unlike for debit card transactions, ATM
networks currently have incentives to
lower interchange fees in the ATM

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industry in order to compete among
issuers, who are paying interchange
fees. Commenters also contended that
applying the interchange fee standards
to ATM interchange fees could render
ATM terminals cost-prohibitive,
emphasizing the extent to which ATM
operators rely on interchange to cover
operational costs. Moreover, one
commenter asserted that the Board did
not have sufficient information about
ATM interchange fees and costs to set
standards for such interchange fees.
The commenters supporting
application of the network exclusivity
and routing provisions to ATM
transactions generally were ATM
operators or acquirers. These
commenters argued that including ATM
transactions within the scope of the
network exclusivity and routing
provisions would increase competition
in the ATM industry and enable ATM
operators to route transactions to the
network with the lowest network fees.
More generally, these commenters
claimed that eliminating network
exclusivity and routing practices in the
ATM industry would benefit consumers
through reduced ATM convenience fees,
help small issuers relying on nonbank
ATMs, and ensure that cash remains a
viable alternative to debit cards. One
commenter suggested that issuers be
able to satisfy any requirement for
multiple networks by enabling debit
networks that also function as ATM
networks.
By contrast, the commenters that
opposed applying the network
exclusivity and routing provisions to
ATM transactions were generally issuers
and payment card networks. These
commenters argued that including ATM
transactions under the rule would
enable the party receiving the
interchange fee to direct the routing of
the transaction, a practice prohibited by
the network routing provisions in the
point-of-sale environment. Commenters
also expressed concern that, if the
network exclusivity provision applied
to ATM cards and networks, the
establishment of settlement
arrangements with multiple networks
would create a large burden on issuers,
which could result in higher consumer
fees. One issuer that was opposed to
applying the network exclusivity
provisions to ATM cards argued that
doing so was unnecessary because many
issuers currently have at least two
unaffiliated network options on their
cards.92
92 The Board also received comments requesting
that the Board permit ATM operators to impose
differential surcharges based on the network the
transaction is routed over. This suggestion is
outside the scope of the rule.

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b. Analysis and Final Rule
The Board has considered the
comments and has determined that
ATM transactions are not subject to
either the interchange fee standards or
the network exclusivity and routing
provisions. The statute does not
expressly include ATM transactions
within its scope, but ATM cards, similar
to debit cards, are used to debit
accounts, as the term is defined in
§ 235.2(a). The terms ‘‘debit cards’’ and
‘‘electronic debit transaction’’ are both
connected to EFTA Section 920(c)(11)’s
definition of ‘‘payment card network,’’
which is limited to those networks a
person uses to accept a debit card ‘‘as
a form of payment.’’ ‘‘Payment’’
generally is thought of as exchanging
money for goods or services or other
purposes (e.g., satisfying an obligation
or a making a charitable contribution),
rather than changing the form of a
person’s money (e.g., from a balance in
an account to cash).93 In an ATM
transaction, a person is using the card
to access his or her money. Similarly, a
cardholder may use an ATM to transfer
money from one account to another.
Withdrawing money from one’s own
account is not a payment to an ATM
operator in exchange for goods or
services, to satisfy an obligation, or for
other purposes.94 Therefore, a network
providing only ATM services is not a
payment card network. Consequently, a
card is not a ‘‘debit card’’ by virtue of
its being issued or approved for use
through an ATM network, which, in
turn, means that the ATM transaction is
not an ‘‘electronic debit transaction’’ as
those terms are defined in EFTA Section
920. Therefore, ATM networks and
transactions are not within the scope of
either the interchange fee standards or
the network exclusivity and routing
provisions. The Board has added
comment 2(m)–5, which clarifies that
ATM networks are not payment card
networks for purposes of this part.
One commenter suggested the Board
address the treatment of ATM
transactions within the rule text. As
discussed above in connection with
§ 235.2(h), the Board has not explicitly
excluded ‘‘transactions initiated at an
automated teller machine (ATM),
including cash withdrawals and balance
transfers initiated at an ATM’’ in the
definition of ‘‘electronic debit
transaction.’’
93 See Black’s Law Dictionary at 950 (abridged 8th
Ed.); Merriam Webster’s Collegiate Dictionary at 963
(10th ed. 1993).
94 To the extent the cardholder is paying for the
service of being able to access his or her money, the
amount paid for that service is the convenience fee
charged by the ATM operator.

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Even if ATM transactions were
included within the scope of the rule,
interchange fees received on ATM
transactions are not ‘‘interchange
transaction fees’’ as defined in EFTA
Section 920(c)(8) because ATM
interchange fees do not compensate an
issuer. Additionally, applying the
network exclusivity and routing
provisions to ATM transactions would
provide incentives to the party directing
the routing to select the network that
maximizes interchange fees, although
also one that minimizes network fees.

emcdonald on DSK2BSOYB1PROD with RULES2

6. Non-traditional and Emerging
Payments Systems
a. Summary of Proposal and Comments
The Board requested comment on
whether non-traditional or emerging
payment systems should be covered by
the definition of ‘‘payment card
network.’’ In its request for comment,
the Board provided examples of nontraditional or emerging payment
systems, which included systems in
which a consumer uses a mobile phone
to purchase goods or services with the
payment amount billed to the mobile
phone account or debited directly from
the consumer’s bank account, or
systems such as PayPal, in which a
consumer may use a third-party
payment intermediary and use funds
that may be held either by the
intermediary or in the consumer’s
account held at a different financial
institution.95 The Board stated that
these non-traditional and emerging
payment systems arguably satisfied the
proposed criteria for payment card
networks, and requested comment on
how it would distinguish these payment
systems from traditional debit card
payment systems in the event
commenters believed such nontraditional and emerging payment
systems should not be covered.
The Board received numerous
comments on whether emerging
payment networks should be considered
‘‘payment card networks’’ under the
rule, and as groups, both issuers and
networks were divided as to their views.
The Board received comments from
issuers, networks, and merchants that
supported including emerging payment
systems and more generally, any entity
that satisfied the criteria of a ‘‘payment
card network’’ under the proposed
definition. These commenters argued
that excluding emerging payments
technologies would create an unfair
benefit to the emerging payment
95 A few commenters stated that PayPal should no
longer be considered an ‘‘emerging’’ payment
system due to its broad adoption and that PayPal
operates like a three-party system.

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systems.96 In addition, some
commenters believed that emerging
payment systems should be built for
multiple routing options and that the
Board should encourage the
interoperability of systems and
technologies.
The Board also received comments
from networks, issuers, and emerging
payments technology providers that
supported excluding emerging payment
systems from the definition of ‘‘payment
card network.’’ These commenters
argued that including emerging
payments technologies would hinder
development and innovation of new
technologies because networks, issuers,
and other processors would be less
likely to innovate if they must share
new technology with at least one other
network under the network exclusivity
provisions. Commenters asserted that
inclusion often would not be practical
because alternative form factors initially
may not be capable of being processed
on more than one unaffiliated network.
Moreover, one commenter asserted that
innovation could be hindered if a
competing payment card network
blocked adoption of technology by
refusing to use it, and thereby prevented
the technology from being processed
over more than one network. One
commenter further contended that such
a barrier would exacerbate the already
significant barriers to entry in the
payments industry. A few of these
commenters asserted that nontraditional payment systems offer a
competitive alternative to the traditional
payment card networks. One commenter
argued that the emerging payments
technologies should be excluded
because merchant adoption of
technology is voluntary. Another
commenter suggested that the Board
initially exclude emerging payment
systems, but continue to monitor
whether such systems continue to be
‘‘emerging.’’
A few commenters (typically
merchants and emerging payment card
networks) suggested that emerging
payment systems be subject to the rule,
but not while the emerging payment
system is deployed on a limited, pilot
basis. Similarly, one commenter
suggested that emerging payment
technologies be included, but that an
issuer be able to rebut the presumption
of inclusion by demonstrating that
processing over two networks is not
technologically possible or cannot be
deployed in a cost-effective manner.
96 One of these commenters stated that
asymmetric regulation would distort innovation
and market evolution.

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b. Non-traditional Payment Systems
Non-traditional and emerging
payment technologies generally fall into
three categories: those that facilitate
payments but do not come within the
scope of the definition of ‘‘payment card
network,’’ emerging devices or
authentication methods used to access
existing payment card networks, and
new payment card networks. In general,
non-traditional payment systems should
not be excluded from coverage merely
because the payment systems are ‘‘nontraditional.’’ Excluding these systems
solely because they are ‘‘nontraditional’’ would not result in a rule
that is flexible to accommodate future
developments in the industry. Rather,
the application of the rule to nontraditional payment systems is
determined by whether the
characteristics of the entity with respect
to transactions make the entity a
payment card network, issuer, or
acquirer as those terms are defined in
the rule.
Some non-traditional payment
systems perform functions similar to
traditional payment card networks, but
are structured such that these entities
are not ‘‘payment card networks’’ as the
term is defined in the rule. For example,
an entity may provide services that
enable merchants to accept payments
from customers by permitting customers
to prefund accounts with the entity.
Similar to prepaid cards, such accounts
could be prefunded with ACH transfers
or by a debit or credit card transaction
that debits the customer’s account at an
issuer. Later, a customer may use his or
her account information to initiate a
debit to her account with the entity in
order to pay the merchant for goods or
services. If the customer and merchant
both hold accounts with the entity,
similar to three-party systems, the entity
does not route the transaction
information and data. Rather, the entity
uses the information to make a debit
entry to the customer’s account and a
credit entry to the merchant’s account.
Therefore, an entity is not a ‘‘payment
card network’’ for purposes of this rule
when the entity does not send the
transaction information and data to
another point and instead merely makes
book-keeping entries.
Like other three-party systems, a nontraditional payments system that is not
a ‘‘payment card network’’ with respect
to some transactions may be a payment
card network, issuer, or acquirer with
respect to other transactions. For
example, in addition to permitting its
customers to debit accounts to pay
merchants that also have accounts with
the entity, the entity may issue debit

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cards to account-holding customers or
merchants that may be used outside the
entity/system and the transactions of
which are processed over four-party
systems. Under these circumstances, the
entity is an issuer with respect to
electronic debit transactions that are
initiated using the debit card. If the
entity, together with its affiliates, has
assets of $10 billion or more, then the
interchange fee restrictions apply to the
entity. The network exclusivity and
routing provisions will apply regardless
of the entity’s asset size.
c. Emerging Technologies That Access
Existing Networks
Another category of emerging
payments technology is new access
devices used to initiate debit card
transactions processed over existing
payment card networks. For example,
many networks have approved the use
of contactless devices to initiate
transactions processed over their
networks. These contactless devices
may be issued as a separate card or
included on or accessible through a
mobile phone. The Board received
comments both supporting and
opposing application of the Board’s rule
to such new devices. The Board has
considered the comments and has
determined that new or emerging access
devices are included within the scope of
the proposed rule if they are issued or
approved for use through a payment
card network and otherwise meet the
criteria for being a debit card as the term
is defined in this rule (e.g., the card,
code, or device debits the cardholder’s
account or a general-use prepaid card).
New and emerging access devices are
discussed more fully in the context of
§ 235.2(f)’s definition of ‘‘debit card’’
and the network exclusivity and routing
provisions in § 235.7.

emcdonald on DSK2BSOYB1PROD with RULES2

N. Section 235.2(n)—Person
The Board proposed to define
‘‘person’’ to mean ‘‘a natural person or
an organization, including a
corporation, government agency, estate,
trust, partnership, proprietorship,
cooperative, or association.’’ The Board
received no comments on its proposed
definition of ‘‘person’’ and has adopted
the definition as proposed.
O. Section 235.2(o)—Processor
The Board proposed to define the
term ‘‘processor’’ to mean ‘‘a person that
processes or routes electronic debit
transactions for issuers, acquirers, or
merchants.’’ One commenter suggested
that the definition of processor be
expanded to include processors that
process on behalf of ATM operators.
The Board does not consider ATM

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operators to be merchants for purposes
of this rule. Additionally, ATM
networks and transactions are not
‘‘payment card networks’’ or ‘‘electronic
debit transactions,’’ respectively, for
purposes of this rule. Therefore, the
Board has not expanded the definition
of ‘‘processor’’ to include those
processors that process on behalf of
ATM operators. The Board has adopted
the definition of ‘‘processor’’ as
proposed and its associated commentary
with minor clarifying revisions.
P. Section 235.2(p)—Route
The Board did not propose to define
the term ‘‘route.’’ One commenter
suggested the Board define the term
‘‘network routing’’ to mean ‘‘the act of
routing a transaction from the point of
sale to point of authorization,’’ but to
exclude from the meaning of ‘‘network
routing’’ any settlement or dispute
handling functions unless the network
and the gateway is the same entity. The
Board is unaware of whether payment
card networks currently permit entities
to handle settlement and disputes
through different entities than those
through which the transaction was
initially routed. Under § 235.7 of the
final rule, such a rule would not be
prohibited.
The Board is adding a definition of
the term ‘‘route’’ in § 235.2(p). EFTA
Section 920 uses the term ‘‘route’’ in the
definition of ‘‘payment card network’’
and requires the Board to prescribe
regulations that prohibit issuers and
networks from inhibiting the ability of
merchants to ‘‘direct the routing’’ of
electronic debit transactions. EFTA
Section 920 does not define ‘‘route’’ or
‘‘routing.’’ The Board also is not aware
of other statutes that use those terms in
similar contexts.
As discussed above in connection
with § 235.2(m), the term ‘‘route’’ is
commonly defined as ‘‘to send by a
certain [or selected] route’’ or ‘‘to divert
in a specified direction.’’ 97 In other
words, routing suggests involvement
other than merely receiving and using
information and data; specifically, it
involves sending the information and
data to another point or destination.
These definitions apply to the term
‘‘route’’ in the context of electronic
debit transactions.
In a four-party system, when a
merchant accepts a debit card as a form
of payment, the merchant sends the
transaction information to its acquirer or
processor. The acquirer or processor
uses the transaction information to
97 See, e.g., Webster’s New World Dictionary and
Thesaurus at 558 (2d ed. 2002); Merriam Webster’s
Collegiate Dictionary at 1021 (10th ed. 1993).

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43419

determine the network(s) over which it
may send the transaction. For example,
for signature-based transactions, the
acquirer or processor looks to the first
number in the BIN and directs the
transaction to the appropriate network.
The network then directs the transaction
to the appropriate issuer. For PIN-based
transactions, the acquirer or processor
usually compares the information
received from the merchant to ‘‘BIN
tables,’’ which the acquirer or processor
uses to determine the networks over
which transactions initiated by cards
with various BINs may be routed. The
acquirer or processor then sends the
transaction over the appropriate
network, which, in turn, sends the
information to the appropriate issuer.
Each party that receives the information
must select the path the information
will take to reach the entity to which it
is sending the information and data.
Therefore, the Board has defined the
term ‘‘route’’ in § 235.2(p) to mean ‘‘to
direct and send information and data to
an unaffiliated entity or to an affiliated
entity acting on behalf of the
unaffiliated entity.’’ Comment 2(p)–1
explains that the point to which a party
directs or sends the information may be
a payment card network or processor (if
the entity directing or sending the
information is an acquirer), or an issuer
or processor acting on behalf of the
issuer (if the entity directing and
sending the information is a payment
card network). As a result, an entity
does not route information and data if
the entity merely sends the information
and data to affiliated book-keeping
entities within itself.
As stated in the discussion on the
scope of this part, three-party systems
are not payment card networks because
they do not ‘‘route’’ information to
another point. Rather, a three-party
system receives the transaction
information and processes the
information internally in order to
authorize and settle the transaction.
Q. Section 235.2(q)—United States
The Board proposed to define ‘‘United
States’’ to mean ‘‘the States, territories,
and possessions of the United States,
the District of Columbia, the
Commonwealth of Puerto Rico, or any
political subdivision of any of the
foregoing.’’ One network-commenter
suggested that the Board limit its
definition of ‘‘United States’’ to the 50
states plus the District of Columbia in
order to minimize the costs associated
with reprogramming. This commenter
also noted that if the Board includes
U.S. territories, the Board should survey

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issuers in those territories regarding
their costs.98
The Board proposed a definition of
the term ‘‘United States’’ that is
consistent with the EFTA’s definition of
‘‘State.’’ 99 The definition of ‘‘account’’
in § 235.2(a) is limited to accounts that
are held in the United States and the
definition of ‘‘electronic debit
transaction’’ to those transactions
accepted as a form of payment in the
United States because the EFTA
provides no indication (such as a
conflicts of law provision) that Congress
intended for Section 920 to apply to
international transactions (i.e., those
where the merchant or account debited
is located in a foreign country).100
Accordingly, limiting the scope of this
part to transactions initiated at United
States merchants to debit accounts in
the United States avoids both
extraterritorial application of this part as
well as conflicts of laws. By contrast,
including the Commonwealth of Puerto
Rico and other territories or possessions
of the United States does not implicate
the same extraterritorial application
concerns because the EFTA already
applies to these jurisdictions. Therefore,
the Board has not revised its definition
of ‘‘United States,’’ now designated as
§ 235.2(q).
III. Section 235.3 Reasonable and
Proportional Interchange Transaction
Fees

emcdonald on DSK2BSOYB1PROD with RULES2

Section 235.3 sets forth a standard for
assessing whether the amount of any
interchange transaction fee that an
issuer receives or charges with respect
to an electronic debit transaction is
reasonable and proportional to the cost
incurred by the issuer with respect to
the transaction for purposes of EFTA
Section 920(a)(2). Under § 235.3(b), an
issuer may not charge or receive any
interchange transaction fee that exceeds
the sum of 21 cents plus 5 basis points
of the transaction’s value.
98 Based on information available to the Board,
the Board distributed surveys to an institution that,
together with its affiliates, had assets of more than
$10 billion and that filed one of the following
reports: The Consolidated Financial Statements for
Bank Holding Companies (FR Y–9C; OMB No.
7100–0128), the Consolidated Reports of Condition
and Income (Call Reports) for independent
commercial banks (FFIEC 031 & 041; OMB No.
7100–0036), the Reports of Assets and Liabilities of
and for U.S. branches and agencies of foreign banks
(FFIEC 002; OMB No. 7100–0032), the Thrift
Financial Reports (OTS 1313; OMB No. 1550–0023)
for thrift holding companies and thrift institutions,
and the Credit Union Reports of Condition and
Income (NCUA 5300/5300S; OMB No. 3133–0004)
for credit unions.
99 15 U.S.C. 1693a(10).
100 Interchange fees for electronic debit
transactions initiated in a foreign country also may
be subject to restrictions imposed by that country.

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A. Summary of Proposal and Comments
The Board requested comment on two
alternative standards for determining
whether the amount of an interchange
transaction fee is reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction.
Under proposed Alternative 1, an issuer
could comply with the standard for
interchange fees by calculating its
allowable costs and receiving an
interchange fee that does not exceed its
per-transaction allowable costs, up to a
cap of 12 cents per transaction. An
issuer’s allowable costs with respect to
each transaction would be the sum of
those costs that are attributable to the
issuer’s role in authorization, clearance,
and settlement of an electronic debit
transaction and that vary with the
number of transactions sent to the issuer
within a calendar year (variable costs)
divided by the number of electronic
debit transactions on which the issuer
received or charged an interchange
transaction fee during that year (average
variable cost). The proposal defined the
issuer’s role in authorization, clearance,
and settlement as receiving and
processing authorization requests
(including voice authorization and
referral inquiries); receiving and
processing presentments and
representments; initiating, receiving,
and processing chargebacks,
adjustments, and similar transactions;
transmitting and receiving funds for
interbank settlement; and posting
electronic debit transactions to
cardholders’ accounts. Alternative 1
also would permit an issuer to receive
or charge an interchange fee that does
not exceed a safe harbor amount of 7
cents per transaction without
demonstrating costs. Under Alternative
2, an issuer would comply with the
standard for interchange fees as long as
it does not receive or charge an
interchange fee in excess of 12 cents per
transaction. All of the proposed
amounts were based on cost data for
issuers responding to a Board survey in
which those issuers reported
information related to their transaction
costs.
The Board received numerous
comments on all aspects of its proposed
interchange fee standards. Merchants
and their trade groups overwhelmingly
supported adoption of the framework in
Alternative 1 because that proposed
standard would result in the greatest
reduction from the current interchange
fees (the savings of which could
potentially be passed on to consumers

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as lower retail prices).101 A few
individual commenters supported the
position of merchants and their trade
groups. Issuers, many consumers, and
payment card networks, on the other
hand, opposed both proposed
interchange fee standards for a variety of
reasons, arguing that the limits in the
proposals were not compelled by statute
and expressing concerns that either of
the proposed alternatives would
decrease revenue to issuing banks,
result in increased cardholder fees or
decreased availability of debit card
services, reduce benefits to merchants
when compared to other forms of
payment, and stifle innovation in the
payment system, among other things.
The Board received numerous
comments, primarily from issuers and
networks, on its proposed interpretation
of the meaning of ‘‘reasonable’’ and
‘‘proportional’’ to cost in Section
920(a)(2).102 Issuers and networks
asserted that the Board was bound by,
or at least should look to, the
jurisprudence surrounding the phrase,
‘‘just and reasonable,’’ used in
connection with ratemaking for public
utilities or other regulated entities.
These commenters argued that, by
referring to fees that are ‘‘reasonable’’
and ‘‘proportional’’ to cost, Congress
intended the Board to follow ratemaking
jurisprudence that requires full recovery
of costs (including depreciation) and a
reasonable return on the rate base
(asserted by the commenters to be the
entire debit card program cost). These
commenters argued that an interchange
fee standard must be adopted in
accordance with the ratemaking
jurisprudence in order to avoid a
violation of the takings prohibition in
the Fifth Amendment to the U.S.
Constitution. Issuers and networks
believed that the failure to consider the
recovery of all types of costs plus a
reasonable profit for all issuers
(including those with allowable costs
above the level of the proposed cap), as
well as the Board’s proposed
consideration of an issuer’s ability to
recover costs from consumers, were
inconsistent with the ratemaking
jurisprudence. More generally, these
issuers and networks objected to any
cap that would not permit each covered
issuer to recover the entire amount of its
allowable costs.
101 Several merchant-commenters stated that they
saw no need for any interchange fees and that debit
card transactions should clear at par like check
transactions.
102 In general, unlike issuers and networks,
merchants and their representatives did not
comment in detail about the meaning of the phrase
‘‘reasonable’’ and ‘‘proportional’’ to the cost.

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By contrast, merchants and their trade
groups argued that debit cards are only
one part of a checking account product,
that issuers do not need to obtain full
cost recovery from merchants through
interchange fees, and that robust debit
card markets exist in other countries
that have low or no interchange fees.
Therefore, merchants and their
representatives supported the proposal
to limit allowable costs to a narrow
group of costs associated mainly with
authorization, clearance, and settlement
of a transaction and to establish a cap
at a level that does not permit 100
percent of covered issuers to recover
allowable costs through interchange
fees.
Other issuers and networks suggested
that the Board should not follow the
ratemaking jurisprudence because,
unlike public utilities, no natural
monopoly exists for issuers, which
eliminates the risks of excessive profits
and charges (as issuers do not have
captive customers). Some of these
commenters suggested how the Board
should interpret the phrase ‘‘reasonable
and proportional to the cost incurred by
the issuer’’ independent from
ratemaking jurisprudence. Many of
these commenters read EFTA Section
920(a)(2) as requiring interchange fees
that are in ‘‘reasonable proportion’’ to
the issuer’s cost of the transaction.
Several issuers and networks contended
that an interchange fee was not
‘‘reasonable’’ unless the fee included
profit or a mark-up on cost. A few
commenters argued that Congress
demonstrated its intent that issuers be
permitted to receive or charge
interchange transaction fees that
exceeded their costs by using the phrase
‘‘proportional to’’ rather than ‘‘equal
to.’’ One commenter contended that the
‘‘reasonableness’’ of a fee should vary
based on the scope of allowable costs.
For example, reasonableness may be a
different standard when compared to
total cost than when compared to
average variable cost. Other commenters
viewed reasonableness independently
from proportionality and suggested that
the ‘‘reasonableness’’ of a fee take into
consideration the benefits (or value) of
debit cards to consumers and merchants
(particularly through the analogy to
checks).
Numerous issuers, networks,
depository institution trade
organizations, and individuals objected
to fee limits as inconsistent with the
directive that the Board establish
‘‘standards for assessing’’ whether the
amount of an interchange fee is
reasonable and proportional to cost.
These commenters objected to the
establishment of both the safe harbor

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and the cap because both involved
numerical limits rather than subjective
or flexible standards for assessing
whether a fee was reasonable and
proportional to cost. Few of these
commenters provided specific
suggestions about structuring the more
flexible standards (other than
eliminating the proposed cap). One
issuer suggested that the Board specify
the allowable costs and then specify
how interchange fees may be structured
to account for the variation in risk
associated with different types of
transactions. This commenter suggested
that the Board specify how to determine
a reasonable rate of return and that each
network could gather cost information
from each covered issuer in order to
determine permissible interchange fees.
A few commenters suggested the Board
follow the approach used in its
Regulation Z to interpret similar
language in section 149 of the Truth in
Lending Act (TILA), which did not set
specific numerical limits, but did
include safe harbor fee levels.103
Merchants supported a cap as
necessary to prevent interchange fees
from becoming excessively high, but
objected to a safe harbor as inconsistent
with the statutory language, which they
viewed as requiring a connection to
each issuer’s specific costs. Some
commenters argued that a cap involves
an arbitrary limit on interchange fees
and would be an unauthorized
assessment of the reasonableness of the
level of costs rather than of interchange
fees. Other commenters contended that
a single cap creates a variable
relationship between interchange fees
and costs across issuers, rather than a
uniform proportional relationship.
A few commenters contended that the
Board had no statutory basis for
considering incentives to reduce costs.
These commenters argued that issuers
always have such incentives, and
therefore a cap was not necessary to
create such incentives. A few
commenters also argued that any cap on
cost recovery would ultimately reduce
efficiency gains by discouraging firms
from investing capital needed to achieve
efficiency gains if those investments
were not recovered under the cap.
One commenter argued that a cap was
unnecessary in light of the network
exclusivity and routing restrictions and
believed that a cap would distort the
market outcome of those provisions. By
contrast, some merchants did not
believe that the network exclusivity and
103 See 12 CFR 226.52(b)(1) (an issuer may impose
a fee that ‘‘represents a reasonable proportion of the
total costs incurred by the card issuer for that type
of violation’’).

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routing provisions would result in
significant downward pressure on
interchange fee levels under proposed
Alternative A.
Many of the commenters opposed to
a cap and/or safe harbor, however,
recognized the appeal of a cap or a safe
harbor from the perspective of
transparency and administrative
simplicity and stated that a pure issuerspecific standard would be difficult to
implement operationally and difficult to
enforce. Merchants and one acquirer/
processor acknowledged that having
either a cap or a safe harbor would make
the interchange fee structure simpler for
merchants to understand, which could
increase transparency and reduce
operational risks. One network asserted
that an issuer-specific approach would
result in unpredictable interchange fees
for merchants because merchants would
not know in advance the issuers of their
customers’ debit cards.
As between proposed Alternative 1
and 2, most issuers viewed Alternative
2 as the better alternative due to its ease
of compliance, but preferred a higher
cap. Other issuers supported a variant of
Alternative 1—issuer-specific standards
with a higher safe harbor and no cap.
Issuers supported raising the cap and/or
safe harbor to ensure recovery of costs
such as the payment ‘‘guarantee,’’
network processing fees, customer
service costs, rewards programs, fixed
costs, and a return on investment.104 A
few issuers suggested that any inclusion
of the payment guarantee and fraud
losses be done on an ad valorem basis
and vary by merchant type.
Merchants and their representatives
generally supported the more issuerspecific Alternative 1 as most consistent
with the statute and reflective of the
actual costs of most covered issuers,
which they asserted are significantly
below both the proposed 12-cent cap
and 7-cent safe harbor.105 Some
acquirers and merchant processors
acknowledged that Alternative 2 would
be the easier alternative to implement,
but objected to a safe harbor as
inconsistent with the statute. Many of
these commenters encouraged the Board
104 Allowable costs are discussed in more detail
later in this section. Many issuers, both covered by
and exempt from the interchange fee standards,
provided information in their comment letters
about their estimated costs of debit card
transactions, derived from internal accounting or
industry studies. These costs generally ranged from
14 cents per transaction to 63 cents per transaction.
A few commenters provided information about the
cost components of these estimates.
105 Several merchant commenters referenced a
2004 industry study (STAR CHEK Direct Product
Overview study; First Annapolis Consulting) that
found the per-transaction costs to be 0.33 cents for
PIN debit and 1.36 cents for signature debit, but the
study was not provided with the comments.

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to revise any safe harbor to base it on
the mean cost across transactions rather
than the median issuer cost in order to
provide a greater link between costs and
fees for most transactions, as well as
greater incentives to lower costs. One
commenter asserted that the averagecost measurement is more
‘‘economically meaningful’’ than the
median. Most merchants objected to an
ad valorem component.
B. Final Interchange Fee Standard

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1. Description of Final Rule
The Board has considered all of the
comments it has received and has
determined to adopt in the final rule a
modified version of the approach in
proposed Alternative 2. Under the final
rule, each issuer could receive
interchange fees that do not exceed the
sum of the permissible base component
and the permissible ad valorem
component. The standard’s base amount
per transaction is 21 cents, which
corresponds to the per-transaction
allowable cost, excluding fraud losses,
of the issuer at the 80th percentile,
based on data collected by the Board in
a survey of covered issuers. The ad
valorem amount is 5 basis points of the
transaction’s value, which corresponds
to the average per-transaction fraud
losses of the median issuer, based on the
same survey data. Each issuer’s
supervisor is responsible for verifying
that an issuer does not receive
interchange fee revenue in excess of that
permitted. See § 235.9. The Board
recognizes that issuers’ costs may
change over time, and the Board
anticipates that it will periodically
conduct surveys of covered issuers in
order to reexamine and potentially reset
the fee standard.
2. Reasonable and Proportional to Cost
EFTA Section 920(a)(2) does not
clearly require either transactionspecific or issuer-specific standards.
Section 920(a)(2) provides that ‘‘the
amount of any interchange transaction
fee that an issuer may receive or charge
with respect to an electronic debit
transaction shall be reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction.’’
Some commenters interpreted this
language as limiting the permissible
interchange fee amount for a particular
issuer to a proportion of the allowable
costs incurred by that issuer. Other
commenters interpreted this language as
permitting the permissible interchange
fee amount to be set in accordance with
the allowable costs of the average issuer
or an issuer at a reasonable ranking
among issuers. Nearly all commenters

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appear to believe the language did not
require computing the actual allowable
cost of each specific transaction; none
argued for such a calculation. Instead,
commenters generally interpreted
Section 920(a)(2) as referring to the cost
of an average electronic debit
transaction or type of electronic debit
transaction (e.g., PIN vs. signature) or
some other categorization of the
transaction (e.g., card-present vs. cardnon-present).
The two proposals offered for
comment by the Board covered both
interpretations. Alternative 1 included
an issuer-specific measurement of costs
and fees. Alternative 2 was based on the
average costs incurred by an issuer at
the 80th percentile of allowable costs,
based on certain survey data. As noted
above, after consideration of the
language and purpose of the statute and
the practical results of various
interpretations of the statute, the Board
is adopting in the final rule a variant of
the approach proposed as Alternative 2.
Under this approach, an issuer may not
receive an interchange fee that exceeds
the sum of a base component,
corresponding to the per-transaction
allowable costs of the issuer at the 80th
percentile as reported on the Board’s
survey, and an ad valorem component,
corresponding to the per-transaction
fraud loss of the median issuer as
reported on the Board’s survey.
As an initial matter, the Board
believes this approach is consistent with
the language in Section 920(a)(2).
Section 920(a)(2) refers to ‘‘an issuer’’
and ‘‘an electronic debit transaction;’’ in
other words, to a representative issuer
and transaction. Section 920(a)(2)’s
subsequent use of ‘‘the issuer’’ and ‘‘the
transaction’’ is reasonably read as a
reference back to the original
representative use of each term (i.e., an
issuer receiving an interchange fee and
a transaction for which a fee is
received). This reading fulfills the
purposes of the provision by allowing a
standard to be set that ensures that
interchange transaction fees are
reasonable and are proportional to
allowable costs without imposing undue
compliance burdens on issuers or
networks. This approach also provides
transparency to issuers, networks,
acquirers, merchants, and supervisors
that will result in the most effective
monitoring and enforcement of
compliance.
The Board considered an alternative
interpretation of Section 920(a)(2) under
which the section would require that
each interchange fee that a particular
covered issuer receives be reasonable
and proportional to the cost incurred by
that issuer for the particular transaction

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for which the issuer is receiving the
interchange fee. This reading, however,
would result in a statutory requirement
that is virtually impossible to
implement. First, interchange fees are
computed at the time of the transaction,
and an issuer’s costs for a specific
transaction cannot be ascertained at the
time the issuer receives the interchange
fee. The cost of each transaction varies
based on a variety of factors, including
factors that may not be known to the
issuer at the time it charges or receives
the interchange fee. For example, the
cost of network fees for a transaction
may vary based on the volume of
transactions that the issuer processes
through a given network. The issuer
cannot precisely control or know the
volume of transactions at any given
moment when a particular transaction
occurs, because that volume depends
largely on customer usage of their debit
cards and merchant routing decisions;
for example, lower transaction volume
may result in higher network fees for
each transaction.
Second, even assuming an issuer
could calculate the cost of each
transaction, transaction-specific
interchange fees would result in an
exceedingly complex matrix of
interchange fees. Each issuer would be
required to provide each network with
data reflecting that issuer’s actual cost
per transaction, and each network
would then be required to ensure that
no more than the allowable portion of
these actual costs would be covered by
an interchange fee. These calculations
would be required for tens of billions of
electronic debit transactions and a large
and growing number of covered
issuers.106 This would introduce
tremendous complexity and
administrative costs for issuers,
networks, acquirers, and merchants, as
well as difficulty in monitoring and
enforcing compliance. Thus,
interpreting Section 920(a)(2) as
requiring interchange fees to be
calculated based on the cost of each
transaction for which an interchange fee
is charged or received would be an
absurd result the Board does not believe
Congress intended.107
106 According to the Board’s survey, there were
37.6 billion electronic debit transactions in 2009.
The Board sent the survey to 131 covered financial
organizations (some of which represented multiple
affiliated issuers). The issuers responding to the
survey, which does not cover the universe of
covered issuers, accounted for about 60 percent of
these transactions—roughly 22.6 billion
transactions.
107 In general, statutes should be interpreted to
avoid an absurd result. See Harrison v. Benchmark
Elecs. Huntsville, Inc., 593 F.3d 1206, 1212 (11th
Cir. 2010).

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This impractical result is not
compelled by the words of Section
920(a)(2). As explained above, Section
920(a)(2) may be reasonably read to
limit interchange fees based on the
allowable costs for a representative
issuer in a representative electronic
debit transaction.
Some commenters urged adoption of
an interpretation of Section 920(a)(2)
that focuses on the costs incurred by a
specific issuer in connection with a
representative electronic debit
transaction. This view, however, does
not represent a consistent reading of the
words of Section 920(a)(2). As noted
above, Section 920(a)(2) refers to ‘‘an
issuer’’ and ‘‘an electronic debit
transaction’’ when identifying the
amount of a fee that shall be restricted.
Later, Section 920(a)(2) refers to both
the cost incurred by ‘‘the issuer’’ and
the cost of ‘‘the transaction.’’ If ‘‘the
issuer’’ in this second location is
interpreted not as a reference to the
original representative issuer, but
instead as a reference to a specific
issuer, then the same interpretation
would seem to be required by the
identical and parallel references to ‘‘a
transaction’’ and ‘‘the transaction’’ in
that same sentence. As explained above,
this leads to an extraordinarily complex
and burdensome result. Commenters
recognized this in supporting an
interpretation of ‘‘a transaction’’ and
‘‘the transaction’’ as both referring to a
representative electronic debit
transaction, distinguishing electronic
debit transactions and the costs related
to those transactions from the costs
related to other types of transactions,
such as credit card transactions. In the
same way, the parallel use of the same
construction in referencing ‘‘an issuer’’
and ‘‘the issuer’’ in the same sentence
supports the interpretation of those
references as references to a
representative issuer of debit cards.
Moreover, establishing issuer-specific
interchange fee standards would
significantly increase the burden on
supervisors to assess compliance and
make it impossible for networks,
acquirers, and merchants to know
whether issuers were in compliance
with the standards under Section 920.
Under any issuer-specific framework,
each supervisor would need to
determine for each transaction whether
an issuer is receiving an interchange fee
that does not exceed its allowable costs.
Further, in contrast to the adopted
approach that includes a publicly
known maximum permissible fee, an
issuer-specific approach would
introduce uncertainty for networks and
merchants, neither of which would
know whether interchange fees received

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or charged by a given issuer were in
compliance with the statutory standard.
In addition, this approach would not
create the incentive to reduce costs that
is created by an approach like
Alternative 2.
Section 920(a)(2) raises a second
definitional matter. Section 920(a)(2)
requires that the amount of any
interchange fee be ‘‘reasonable’’ and
‘‘proportional to the cost incurred by the
issuer,’’ without defining either
‘‘reasonable’’ or ‘‘proportional.’’ Instead,
Section 920(a)(3) requires the Board to
give meaning to those terms through its
standards. For purposes of establishing
standards for assessing whether the
amount of any interchange fee is
‘‘reasonable’’ and ‘‘proportional’’ to
cost, the Board has established a
reasonable limit on the highest amount
of an interchange fee that an issuer may
receive and has based that limit on the
average per-transaction allowable costs
incurred by issuers with respect to
electronic debit transactions.
This approach gives meaning and
effect to both terms. The statute’s use of
the term ‘‘reasonable’’ implies that,
above some amount, an interchange fee
is not reasonable. The term
‘‘reasonable’’ commonly is defined as
meaning ‘‘fair, proper, or moderate’’ or
‘‘not excessive,’’ and what is
‘‘reasonable’’ generally depends on the
facts and circumstances.108 Section
920(a) does not specify whether
reasonableness is assessed from the
merchant’s or issuer’s perspective or
from another perspective. The use of the
term ‘‘proportional’’ requires a
relationship between the interchange fee
and costs incurred; however, it does not
require equality of fees and costs or
demand that the relationship be
constant across all quantities. The term
‘‘proportional’’ has a variety of
meanings, including ‘‘forming a
relationship with other parts or
quantities’’ or ‘‘corresponding in degree,
size, or intensity.’’109 The final rule
adopts a standard for both terms: a cap
that delineates a separation between a
‘‘reasonable’’ fee and a fee that is not
reasonable; and a requirement that the
relationship between the amount of an
interchange fee that may be received by
an issuer and the cost of the transaction
be set by reference to the allowable costs
of electronic debit transactions.
In establishing this standard, the
Board rejected a more mathematical
108 Black’s Law Dictionary at 1272 (7th ed. 1999)
(defining ‘‘reasonable’’); Webster’s New World
Dictionary & Thesaurus at 529 (2nd Ed. 2002)
(defining ‘‘reasonable’’).
109 American Heritage Dictionary at 1049 (1976);
Merriam Webster’s Collegiate Dictionary at 936
(10th ed. 1995) (defining ‘‘proportional’’).

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interpretation of the word
‘‘proportional’’ that would require a
constant proportion between costs and
fees. As explained above, that reading is
not required to give meaning to the term
‘‘proportional’’ in the statute. As
interpreted by the Board, the term
eliminates quantities that do not have
the required relationship—in this case,
excluding costs that are not related to
electronic debit transactions. Moreover,
the term ‘‘proportional’’ is a meaningful
and descriptive alternative to ‘‘equal
to.’’ In this way, Congress indicated that
interchange fees must have a
relationship to related costs, but need
not be equal to those costs. Had
Congress intended a fixed proportion
between an issuer’s transaction cost and
the amount of an interchange fee,
Congress could have required an
interchange fee to have a ‘‘given
proportion to,’’ ‘‘be equal to,’’ or have a
‘‘fixed proportion to’’ cost.
Several commenters suggested the
Board follow an approach similar to the
rules prescribed under Section 149 of
the Truth in Lending Act, which uses
language similar to EFTA Section
920(a)(2) and requires that penalty fees
assessed by credit card issuers be
reasonable and proportional to the
omission with respect to, or violation of,
the cardholder agreement.110 Section
149 of TILA required the Board to
consider the costs incurred by issuers as
a result of credit card violations in
addition to other factors, which
included the need to deter violations.
Under the Board’s TILA rule, a penalty
fee is reasonable and proportional to the
omission or violation if the penalty fee
is a reasonable proportion of the
creditor’s total cost of addressing that
type of omission or violation for all
consumers, which ensures that no
individual consumer bears an
unreasonable or disproportionate share
of the creditor’s costs of the type of
violation. That rule establishes a safe
harbor for compliance with the Board’s
standards, but does not establish a cap
on the amount of penalty fees.111
The Board believes the context and
usage of the terms ‘‘reasonable’’ and
‘‘proportional’’ in Section 149 of TILA
and Section 920 of the EFTA allow for
different approaches to effectuate the
specific purposes of each section. The
reference in TILA incorporates a
subjective determination, relating to the
proportionality of a fee to the violations
of a contract, while the reference in
Section 920 relates to the
proportionality of a fee to a numerical
cost. In the Board’s TILA standards, ‘‘a
110 15
111 12

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reasonable proportion’’ is based on a
creditor’s total cost of all violations of
that type, and is readily set based on the
costs to the creditor and monitored by
supervisors, with variation across
creditors reinforcing competition to the
benefit of consumers. In the case of
penalty fees regulated by TILA, the
consumer paying the fee may stop its
relationship with the creditor charging
the fee.
Although that approach may be
permissible under Section 920, the
Board believes for the reasons discussed
above that a single cap is a more
appropriate approach in the context of
interchange fees. In particular, practical
implementation concerns, constraints
on the data currently available to the
Board, lack of competition in
interchange fees, more effective and
consistent monitoring, and other factors
justify a different approach than the
interpretation under TILA. Accordingly,
the Board does not believe interpreting
‘‘proportional to’’ the same way in both
the interchange fee context and the
credit card penalty fee contexts is
appropriate.
Based on the interpretations
discussed above, the standard set in the
final rule assesses whether an
interchange fee is reasonable and
proportional to costs by reference to
certain average per-transaction costs
directly related to particular electronic
debit transactions of covered issuers. As
explained below, in setting the cap, the
Board relied on data that were available
to it through its survey, and the Board
included only certain issuer costs
directly related to effecting particular
electronic debit transactions. The Board
did not consider any costs of processing
credit card transactions, ACH
transactions, or other transactions that
access a cardholder’s account (but did
consider a pro rata portion of certain
costs that are joint between debit cards
and credit cards, or between debit card
and other transactions that access a
cardholder’s account). Similarly, the
Board did not consider corporate
overhead or other costs, whether or not
related to debit cards, that are not
related to particular electronic debit
transactions (such as advertising and
marketing costs for debit card
programs). By so limiting the
considerations, the Board ensures that
the amount of an interchange fee is
related to issuers’ costs of effecting the
electronic debit transaction and not to
other factors.
3. Cost Considerations
EFTA Section 920(a)(4)(A) requires
the Board to consider the ‘‘functional
similarity’’ between electronic debit

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transactions and checking transactions
that are required within the Federal
Reserve System to clear at par. Section
920(a)(4)(B) requires the Board to
distinguish between ‘‘the incremental
cost incurred by an issuer for the role of
the issuer in the authorization,
clearance, or settlement of a particular
electronic debit transaction,’’ and ‘‘other
costs incurred by an issuer which are
not specific to a particular electronic
debit transaction.’’ The statute directs
the Board to consider the former costs
in establishing an interchange fee
standard, and prohibits it from
considering the latter costs. The Board
interprets the prohibition in Section
920(a)(4)(B)(ii) on considering certain
costs as prohibiting inclusion of these
costs in the standards set under Section
920(a)(3), and not as a prohibition on
the Board collecting information about
and determining the scope of these
costs.
Beyond these instructions, as
explained below, Section 920 does not
restrict the factors the Board may
consider in establishing standards for
assessing whether interchange
transaction fees are reasonable and
proportional to cost, such as costs that
are specific to a particular electronic
debit transaction but are not
incremental or are not related to the
issuer’s role in authorization, clearance,
and settlement. As explained below, the
Board carefully evaluated the costs that
could be considered under Section
920(a)(4) as well as the data available
regarding these costs in establishing a
standard for determining whether an
interchange fee is reasonable and
proportional to cost, and did not
include costs prohibited by Section
920(a)(4)(B)(ii) in establishing the
interchange fee standard.
a. Summary of proposal
The Board proposed standards for
interchange fees that are based on the
per-transaction costs an issuer incurs
only for authorization, clearance, and
settlement and that vary with the
number of transactions within the
reporting period (i.e., average variable
cost). The proposal excluded network
processing fees, as well as other costs
not related to authorization, clearance,
and settlement that varied with the
number of transactions. The proposal
also excluded all costs that did not vary
with changes in transaction volumes up
to capacity limits within a calendar
year. See proposed comment 3(c)-3.i.
Under the proposal, an issuer could
allocate a pro rata share of debit card
costs included among variable costs of
authorization, clearance, and settlement

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that were shared with credit card or
other programs.
The Board based both of its fee
standard alternatives on an issuer’s pertransaction variable costs of
authorization, clearance, and settlement.
The regulatory text for Alternative 1,
which incorporated an issuer-specific
cost component, included a detailed
description of allowable costs. Proposed
§ 235.3(c)(1) described the exclusive list
of allowable costs as including the costs
that are attributable to receiving and
processing authorization requests;
receiving and processing presentments
and representments; initiating,
receiving, and processing chargebacks,
adjustments, and similar transactions;
transmitting and receiving funds for
interbank settlement; and posting
electronic debit transactions to
cardholders’ accounts. Proposed
§ 235.3(c)(2) stated that fees paid to a
network were not an allowable cost.
Proposed comment 3(c)–2.i clarified
that, with respect to authorization, an
issuer’s allowable costs included costs
for activities such as data processing,
voice authorization and referral
inquiries, and did not include the costs
of pre-authorization activities with the
primary purpose of fraud prevention
(e.g., transactions monitoring). Proposed
comment 3(c)–2.ii explained that an
issuer’s clearance costs included costs
for activities such as data processing
and reconciling the clearing message.
With respect to non-routine
transactions, proposed comment 3(c)–
2.iii explained that an issuer’s costs
included data processing to prepare and
send the chargeback, or other similar
message and reconciliation expenses
specific to non-routine transactions, but
allowable costs did not include the costs
of receiving cardholder inquiries about
particular transactions. Finally,
proposed comment 3(c)–2.iv explained
that an issuer’s settlement costs, for
purposes of determining allowable
costs, included fees for settling through
a net settlement service, ACH, or
Fedwire®, as well as data processing
costs incurred for account posting.
b. Summary of comments
Merchants overwhelmingly supported
the proposal to interpret the first
consideration in Section 920(a)(4)(B) as
limiting allowable costs to only the
incremental costs of authorization,
clearance, and settlement. One
merchant trade group expressed a
preference for including only
authorization costs (noting that the
statutory requirement to ‘‘consider’’
other costs did not require ‘‘inclusion’’
of those costs in allowable costs), but
concluded that including clearance and

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settlement costs would also be
permissible in light of the statutory
mandate to consider those costs.
By contrast, issuers and networks
advocated expanding the proposed set
of allowable costs, asserting that Section
920(a)(4)(B) does not require that
allowable costs be limited to the
incremental costs of authorization,
clearance, and settlement of a particular
transaction. Issuers and networks
suggested a variety of ways by which
the Board could expand the set of
allowable costs, such as by including an
expanded definition of activities
considered to be part of authorization,
clearance, and settlement; including
more, or all, costs that are specific to a
particular transaction, but not incurred
for authorization, clearance, or
settlement; including all costs
associated with a debit card program;
and including all costs associated with
deposit accounts or general operations
of the bank.112 As further discussed
below, many issuers suggested that
other allowable costs could include
costs of computer equipment and other
capital assets, card production and
delivery, customer service, statements,
and resolution of billing errors, as well
as an allowance for profit.
With respect to authorization,
clearance, or settlement costs, many
commenters believed that the proposal
improperly limited the costs of
authorization, clearance, and settlement
to the costs of sending the message and
funds between parties to a
transaction.113 In general, commenters
suggested expanding the interpretation
of authorization activities to include the
costs of building, updating, and
maintaining databases of cardholder
information and behavior patterns that
are necessary for determining whether
the card and account are valid. In
addition, numerous issuers suggested
including the cost of monitoring
transactions to determine whether a
particular transaction is fraudulent,
which one network noted could involve
establishing and maintaining complex
algorithms. (Transactions monitoring is
discussed separately below.) Many
issuers suggested including the network
processing fees (e.g., switch fees) they
112 Several commenters encouraged the Board to
view settlement as not complete until after the
period during which network rules permit an issuer
to charge back a transaction has ended. As
discussed in this section, adopting a specific
definition of ‘‘authorization,’’ ‘‘clearance’’ or
‘‘settlement’’ is unnecessary.
113 A few commenters suggested that the Board
expand allowable costs to include data processing
costs of authorization, clearance, and settlement.
The proposal included these costs to the extent the
costs varied with the number of transactions sent
to the issuer.

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pay for authorizing, clearing, and
settling each transaction. Another issuer
suggested including, as an authorization
cost, the cost of PIN management, but
did not elaborate as to what that activity
entailed. Numerous issuers suggested
that the final rule include the cost or
value of the payment guarantee as a cost
of authorization. This feature is
discussed separately below.
The Board received numerous
comments on its proposed
interpretation of the incremental cost of
a particular transaction. Merchants, as
well as a few other commenters,
supported the use of average variable
costs (i.e., the average value of those
costs that vary with the number of
transactions sent to an issuer within a
calendar year). Issuers and networks
generally opposed this interpretation of
the incremental cost of a particular
transaction, and several commenters
offered alternative definitions of
‘‘incremental cost.’’ Several commenters
stated that ‘‘incremental cost’’ had a
well-established meaning—the cost
saved by a service provider if it did not
provide the service, or the cost incurred
to provide the service. Many issuers
argued that the relevant service was
debit card programs and, based on this
proposed definition, suggested that all
of the program’s costs should be
considered, including customer service
costs, the cost of statements, costs from
resolution of billing errors, card
production and delivery, capital costs,
and an allowance for profit, as well as
account set-up costs.114
Other commenters argued that the
proposal arbitrarily limited the period of
time used for determining whether a
given cost was ‘‘incremental.’’ One
commenter suggested that incremental
costs include costs that varied over a
multi-year period (e.g., 3–5 years). Still
others asserted that the costs of debit
card transactions can vary based on
measures other than time, such as
transaction volume (e.g., peak-load
volumes); therefore, many in-house
costs are variable with changes in
transaction volume larger than one
transaction. Among the costs
commenters argued should be included
because they vary over time or over
other measures are customer service
costs; equipment and other capital costs,
labor costs, and overhead costs; network
membership and gateway fees; debit
program administration costs, including
marketing; insurance costs; and research
and development costs. These
commenters contended that excluding
consideration of these costs would
114 These and similar costs are discussed in more
detail later in this section.

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encourage issuers to shift transaction
processing to third-party processors that
would convert all costs into incremental
costs that vary with the number of
transactions over the short term.
Commenters argued that this result
would be less efficient in the long run
and could lead to higher interchange
fees and customer costs. A few
commenters argued that a broader
reading of incremental costs was
necessary to ensure that a cap would
further general policy goals of efficiency
and innovation, and contended that
many efficiency gains and innovations
cannot be achieved absent specific
upfront investment. A few commenters
argued that considering a broader range
of costs would minimize barriers to
entry and promote competition.
The Board also received numerous
comments on the proposed distinction
between costs that are specific to a
particular transaction and costs that are
not specific to a particular transaction
for purposes of the considerations in
Section 920(a)(4)(B). Commenters
disagreed as to which costs were
specific to a particular transaction and
which costs were not. A few
commenters suggested that issuers be
permitted to recover certain transaction
costs even if the cost is not paid for,
charged, or incurred on a pertransaction basis. Costs that commenters
suggested as being specific to a
particular transaction included costs
incurred for chargebacks, transactionspecific customer service inquiries,
providing statements, providing rewards
(and associated rewards-program
administration), and depreciation. One
commenter argued that any cost can be
allocated to a specific transaction, and
therefore the statute does not resolve
which costs are specific to a transaction.
Several commenters recognized that
although any cost could be allocated to
any transaction, the relationship of a
cost to a particular electronic debit
transaction varies.
In addition to the proposed
interpretation of individual provisions,
the Board received numerous comments
about how Section 920(a)(2) and the
considerations in Section 920(a)(4)(B)
should be interpreted together. Some
merchant commenters argued that the
Board should interpret Section
920(a)(4)(B)(ii) as prohibiting inclusion
of all costs that were not an incremental
cost of authorization, clearance, and
settlement. Several other commenters
asserted that Section 920(a)(4)(B) is
silent with respect to non-incremental
costs associated with authorization,
clearance, and settlement. Specifically,
these commenters argued that Section
920(a)(4)(B)(i) addressed the

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incremental costs of authorization,
clearance, and settlement of a particular
transaction, Section 920(a)(4)(B)(ii)
addressed costs that are not specific to
a particular transaction, but neither
paragraph addressed costs that were
specific to a particular transaction but
were not an incremental cost of
authorization, clearance, and settlement.
Other commenters argued that Section
920(a)(4)(B)(ii) excludes only costs that
are not specific to electronic debit
transactions in general, rather than costs
that are not specific to a particular
electronic debit transaction. Several
issuers and networks asserted that
Section 920(a)(4)(B) requires the Board
only to ‘‘consider’’ some costs and that
the cost considerations are not binding
in the development of fee standards
under Section 920(a)(2), which requires
that the amount of an interchange fee be
reasonable and proportional to ‘‘the cost
incurred by the issuer with respect to
the transaction.’’ One depository
institution trade group contended that
there is no indication of Congressional
intent that issuers not be able to recover
all of the substantial costs incurred to
provide debit card services.
c. Overview of Costs Considered Under
the Final Rule
EFTA Section 920(a)(4)(B) requires
the Board to distinguish between two
types of costs when establishing
standards for determining whether the
amount of any interchange fee is
reasonable and proportional to the cost
incurred with respect to the transaction.
In particular, Section 920(a)(4)(B)
requires the Board to distinguish
between ‘‘the incremental cost incurred
by an issuer for the issuer’s role in
authorization, clearance, or settlement
of a particular electronic debit
transaction,’’ which costs the statute
requires the Board to consider, and
‘‘other costs incurred by an issuer which
are not specific to a particular electronic
debit transaction,’’ which the statute
prohibits the Board from considering.
Section 920(a)(4)(B) does not define
which types of costs are ‘‘not specific to
a particular electronic debit
transaction.’’ Therefore, the Board must
define these costs. The Board had
proposed to exclude from allowable
costs those costs that cannot be
attributed to any identified transaction
(referred to as ‘‘fixed costs’’ in the
proposal), even if those costs were
specific to effecting debit card
transactions as a whole.
Many commenters argued that this
reading was not compelled by the
statute, excluded costs that could be
considered under the statute, and was
an unworkable approach in practice. In

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particular, they argued that identifying
whether a particular cost would not be
incurred but for one particular
transaction is an impractical approach
to determining which costs not to
consider because of the very large
number of transactions many covered
issuers process in a day or other time
period. This volume makes it virtually
impossible to attribute the actual cost of
the activity (e.g., receiving messages) to
one specific transaction.
Based on a consideration of these and
other comments on the scope of the
prohibition in Section 920(a)(4)(B)(ii),
the Board has revisited its proposed
interpretation of Section 920(a)(4)(B).
The Board notes that this section is
ambiguous and may be read in several
ways. An interpretation that Section
920(a)(4)(B) prohibits consideration of
all costs that are not able to be
specifically identified to a given
transaction would appear to exclude
almost all costs related to electronic
debit transactions because very few
costs could be specifically assigned to a
given transaction.115 Moreover, as many
commenters noted, operational
constraints make the determination of
which in-house costs an issuer incurs in
executing any particular transaction
virtually impossible in practice.
Section 920(a)(4)(B) has another
straightforward interpretation that is
workable and gives important meaning
to this section. This reading would
interpret costs that ‘‘are not specific to
a particular electronic debit
transaction,’’ and therefore cannot be
considered by the Board, to mean those
costs that are not incurred in the course
of effecting any electronic debit
transaction. The statute allows the
Board to consider any cost that is not
prohibited—i.e., any cost that is
incurred in the course of effecting an
electronic debit transaction. This
interpretation would not require
identification of the cost of a given
electronic debit transaction. In this way,
the interpretation gives life and meaning
to the prohibition in Section
920(a)(4)(B)(ii) without creating the
tremendous burdens and practical
absurdities discussed by commenters
and noted above. Examples of the costs
the Board is prohibited from
considering are discussed below.
As noted above, there exist costs that
are not encompassed in either the set of
costs the Board must consider under
Section 920(a)(4)(B)(i), or the set of costs
the Board may not consider under
Section 920(a)(4)(B)(ii). These costs, on
115 Network switch fees and issuer-processor pertransaction fees are among the few costs that could
be assigned to individual transactions.

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which the statute is silent, are those that
are specific to a particular electronic
debit transaction but that are not
incremental costs related to the issuer’s
role in authorization, clearance, and
settlement. Although Section 920(a)
does not specifically instruct the Board
on how these costs should be
considered in establishing the debit
interchange fee standard, the section
does not prohibit their consideration.
Indeed, the requirement that one set of
costs be considered and another set of
costs be excluded suggests that Congress
left to the implementing agency
discretion to consider costs that fall into
neither category to the extent necessary
and appropriate to fulfill the purposes
of the statute. Had Congress intended
otherwise, it would have prohibited
consideration of all costs other than
those required to be considered, rather
than simply prohibiting consideration of
a particular set of costs. Moreover, the
statutory phrasing of the costs that must
be considered and of the costs that may
not be considered leaves no doubt that
costs that are not within the category of
prohibited costs and that are not
incremental costs of authorization,
clearance, and settlement may still be
considered in establishing standards
under Section 920(a).116
In discussing the costs that the Board
is required to consider under Section
920(a)(B)(4)(i), the proposal noted that
there is no single generally-accepted
definition of the ‘‘incremental cost’’ of
a particular unit of a service. As a result,
the Board proposed to apply a definition
to this term. The Board proposed to
consider a cost to be an ‘‘incremental
cost * * * of a particular transaction’’
for purposes of Section 920(a)(4)(B)(i) if
the cost varied with the number of
transactions sent to an issuer within a
year.
Several commenters urged defining
‘‘incremental cost’’ as the difference
between the cost incurred by a firm if
it produces a particular quantity of a
good and the cost incurred by the firm
if it does not produce the good at all.117
This definition would include any fixed
or variable costs that are specific to the
116 The reference in Section 920(a)(4)(B)(i)
requiring consideration of the incremental costs
incurred in the ‘‘authorization, clearance, or
settlement of a particular transaction’’ and the
reference in Section 920(a)(4)(B)(ii) prohibiting
consideration of costs that are ‘‘not specific to a
particular electronic debit transaction,’’ read
together, recognize that there may be costs that are
specific to a particular electronic debit transaction
that are not incurred in the authorization, clearance,
or settlement of that transaction.
117 Baumol, William J., John C. Panzar, and Robert
D. Willig (1982), Contestable Markets and the
Theory of Industry Structure. New York: Harcourt
Brace Jovanovich.

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entire production run of the good and
would be avoided if the good were not
produced at all. Another definition of
‘‘incremental cost’’ suggested by
commenters was the cost of producing
some increment of output greater than a
single unit but less than the entire
production run.118 The Board noted in
the proposal these definitions do not
correspond to a per-transaction measure
of incremental cost that could be
applied to any particular transaction.
Other commenters urged the Board to
interpret ‘‘incremental cost’’ as
differentiating between ‘‘fixed’’ and
‘‘variable’’ costs. Although relying on
the variable cost incurred by the issuer
to authorize, clear, and settle an
electronic debit transaction is a way to
interpret the incremental cost of
authorization, clearance, and settlement
of a particular transaction, the meanings
of fixed costs and variable costs depend
on a variety of factors, and these
concepts are difficult to apply in
practice. As asserted by many
commenters, whether a cost incurred by
an issuer for authorization, clearance,
and settlement of transactions is thought
of as ‘‘fixed’’ or ‘‘variable’’ depends on
the relevant time horizon and volume
range. As applied to the proposed
interchange fee standards, the same type
of cost may appear variable in one year,
but fixed in a different year. For
example, if an increase in the number of
transactions processed from one year to
the next requires the acquisition of
additional equipment in the second
year, hardware costs that would be
considered fixed in the first year would
be variable in the second year.
Inconsistent treatment of the same
type of cost would make tracking costs
for purposes of reporting exceedingly
difficult for issuers. This difficulty is
compounded by the fact that, even if a
clear line could be drawn between an
issuer’s costs that are variable and those
that are fixed, issuers’ cost-accounting
systems are not generally set up to
differentiate between fixed and variable
costs. Rather, cost-accounting systems
typically are used for internal
management purposes, and determining
which part of total costs is variable and
which is fixed often requires a
subjective judgment by the issuer. This
fact could result in significant variation
across issuers as to which costs are
allowable and which are not.
118 Another interpretation of ‘‘incremental cost’’
would be marginal cost, often assumed to be, but
not required to be, the additional cost of the last
unit produced. The proposal highlighted the
practical difficulties of measuring the marginal cost
of a transaction. The Board did not receive
comments regarding the use of marginal cost.

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Moreover, nearly any cost that could
be defined as fixed if incurred by an
issuer that performs its transactions
processing in-house could be
considered as variable if the issuer were
to outsource its debit card operations to
a third-party processor that charged
issuers a per-transaction fee based on its
entire cost, including both fixed and
variable costs. This makes enforcement
of a distinction between fixed and
variable costs very difficult and
potentially uneven.
Commenters argued that an issuer
incurs costs to effect an electronic debit
transaction other than the variable
authorization, clearance, and settlement
costs the Board originally proposed to
include as allowable costs. Specifically,
issuers incur costs to connect to the
network and to purchase and operate
the hardware and software used for
processing transactions, including
associated labor cost. As stated above,
these costs are not readily placed in the
‘‘variable’’ or ‘‘fixed’’ categories because
their categorization depends on the
relevant range of transactions and the
time horizon. However, no electronic
debit transaction can occur without
incurring these costs, making them costs
specific to each and every electronic
debit transaction.
Many complexities also exist in
attempting to define costs that are or are
not ‘‘incurred by an issuer for the role
of the issuer in the authorization,
clearance, or settlement’’ of an
electronic debit transaction under
Section 920(a)(4)(B)(i). As noted above,
many commenters disputed the
proposed definition of authorization,
clearance, and settlement as arbitrarily
excluding costs related to dispute
settlement and account set-up because
these costs are incurred before or after
the transaction has occurred. The Board
considered these comments and
included additional costs to the extent
described below. The Board does not
find it necessary to determine whether
costs are ‘‘incremental,’’ fixed or
variable, or incurred in connection with
authorization, clearance, and settlement.
Under the framework established by the
statute, all costs related to a particular
transaction may be considered, and
some—the incremental costs incurred
by the issuer for its role in
authorization, clearance, and
settlement—must be considered. In
determining the interchange fee
standard, the Board considered the
authorization, clearance, and settlement
costs described in the proposal for
which data were available. By
considering all costs for which it had
data other than prohibited costs, the
Board has complied with the statutory

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mandate not to consider costs identified
in Section 920(a)(4)(B)(ii), has fulfilled
the statutory mandate requiring
consideration of the costs identified in
Section 920(a)(4)(B)(i), and has chosen
to consider other costs specific to
particular electronic debit transactions
to the extent consistent with the
purpose of the statute, in establishing its
standard required under Section
920(a)(3)(A).
d. Examples of Costs Not Included in
Setting the Standard
On the basis described above, in
establishing the standards for
implementation of Section 920(a)(2), the
Board did not include in the
establishment of the interchange fee
standard those costs that are not specific
to a particular electronic debit
transactions.119 In addition, the Board
did not include certain costs that are
specific to a particular electronic debit
transaction but are not incremental costs
incurred by the issuer for its role in the
authorization, clearance, and settlement
of a particular transaction. The costs the
Board did not consider in setting the
standards include costs associated with
corporate overhead or establishing and
maintaining an account relationship;
general debit card program costs, such
as card production and delivery costs,
marketing expenditures, and research
and development costs; and costs for
non-sufficient funds handling. Although
the Board recognizes that all of these
costs may in some way be related to
debit card programs and transactions,
the Board believes that many of these
costs are not specific to a particular
electronic debit transaction within the
meaning of the prohibition in Section
920(a)(4)(B)(ii) and therefore may not be
considered by the Board. The Board has
also determined not to include the costs
resulting from non-sufficient funds, the
costs of rewards programs, or costs of
handling cardholder inquiries for
various reasons discussed below.
Corporate overhead and account
relationship costs. Corporate overhead
costs incurred by an issuer for its
general business operations are shared
across all product lines of the issuer and
are not specific to a particular electronic
debit transaction. In fact, although a
portion of these costs could relate to
debit card programs, these costs are not
specific to any electronic debit
transaction because they are not
incurred in the course of effecting
electronic debit transactions. Corporate
119 The Board also did not include a level of profit
or a rate of return as an allowable cost in setting
its standard. To the extent profit is a ‘‘cost,’’ it is
not one that is specific to a particular transaction.

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overhead costs include, but are not
limited to, the costs of compensation for
executive management; the costs of
support functions such as legal, human
resources, and internal audit; and the
costs to operate the issuer’s branch
network.
Some commenters recommended the
final rule include the costs of account
set-up, including the costs of performing
customer due diligence, enrolling the
customer in on-line banking, and
acquiring customers (e.g., through
marketing). Costs that are incurred with
respect to the cardholder account
relationship are not specific to any
electronic debit transaction. Once an
account is established, an issuer may
incur ongoing costs of maintaining the
account and customer relationship,
including costs of receiving and
resolving certain account-related
customer inquiries, account-related
regulatory compliance cost (e.g., BSA/
AML compliance, Regulation E
compliance, and FDIC insurance),120
and ATM-related costs. These costs are
also not incurred in the course of
effecting an electronic debit transaction,
and, as with cardholder account costs,
would be incurred even if the customer
engaged in no electronic debit
transactions.
Debit card program costs. Many
issuers and networks suggested that the
final rule include all costs related to
debit card programs. As noted above,
those commenters urged the Board to
read Section 920(a)(4)(B)(ii) to exclude
only those costs that are not related to
electronic debit transactions or the debit
card program.
The Board’s interpretation of the
statute distinguishes between costs
incurred in effecting electronic debit
transactions and broader program costs.
Card production and delivery costs were
excluded because they are not incurred
in the course of effecting electronic
debit transactions. Although each debit
card transaction uses a debit card or
information from the debit card, an
issuer’s card production and delivery
costs (e.g., creating plastic cards and
alternate devices such as key fobs, and
mailing them to cardholders) are
incurred without regard to whether,
how often, or in what way an electronic
debit transaction will occur. For
example, a customer may never use the

debit card for an electronic debit
transaction or may use the card only for
ATM transactions (which are not
covered by this rule). A customer may
also use only the debit card number (as,
for example, in Internet or
preauthorized recurring electronic debit
transactions) and not the card or
alternate device provided by the issuer.
Excluding the cost of debit card
production and delivery from the
interchange fee charged to the acquirer
is consistent with another requirement
of Section 920(a). Section 920(a)(4)(A)
requires the Board to consider the
functional similarity between electronic
debit transactions and check
transactions. In the case of checks, the
check-writer or his bank typically bears
the cost of producing and obtaining
blank checks.
An issuer’s marketing costs and costs
of research and development to improve
its debit card products and programs are
not costs that are specific to particular
electronic debit transactions within the
meaning of the statute. Marketing costs
could include, for example, the cost of
informing cardholders of the availability
of optional debit card products and
services, and the cost of advertising
campaigns for the issuer’s debit card
program. Research and development
costs could include, for example, costs
related to debit card enhancements,
process improvements, and debit card
product development. In addition to not
being costs specific to effecting
particular electronic debit transactions,
analogous costs incurred by a payor’s
bank for its check service are not
reimbursed by the payee’s bank.
Debit card issuers also incur costs in
order to comply with Federal, state, or
local regulations, including costs of
providing account statements. Although
the costs of providing statements relate
to conducting electronic debit
transactions generally, the statement
relates to the entire account relationship
and the total number of all types of
transactions in the cardholder’s account
and is triggered by the account
relationship as opposed to any specific
transaction.121 Moreover, analogous
costs incurred by a payor’s bank for its
check service are not reimbursed by the
payee’s bank.
As explained below, the Board
considered and determined to include

120 Federal, State, or local regulations that are not
tied directly to the debit card program include Bank
Secrecy Act/anti-money laundering (BSA/AML)
regulations. Among other things, BSA/AML
requires banks to report suspicious activity that
might signify money laundering, tax evasion, or
other criminal activities. 12 U.S.C. 1829b and 1951–
1959; 31 U.S.C. 5311–5314, 5316–5332; 31 CFR part
1010.

121 Some issuers argued that enabling a second,
unaffiliated network on a debit card was a
‘‘compliance cost’’ (created by this rule). To the
extent an issuer incurs costs related to enabling an
unaffiliated network that are otherwise considered
to be incurred in effecting an electronic debit
transaction (e.g., network connectivity costs to
comply with § 235.7), such costs would be included
as a basis for the interchange fee standard.

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network switch fees in establishing
standards under Section 920(a).
However, the Board did not include the
cost of network membership. Although
network membership is necessary in
order to process transactions over a
particular network, membership fees are
not incurred each time a cardholder
uses a debit card and, in fact, are
incurred for activities other than those
related to particular electronic debit
transactions, such as marketing and
research and development.
Payment guarantee and non-sufficient
funds handling. If an issuer authorizes
an electronic debit transaction, network
rules typically require the issuer to pay
the transaction, subject to specific
chargeback rights provided by network
rules. One aspect of the issuer’s
obligation is the so-called ‘‘payment
guarantee,’’ which refers to network
rules that specify that an issuer that
authorizes a transaction may not return
that transaction for insufficient funds or
an invalid account. Several issuers and
networks suggested including the cost of
providing the payment guarantee as an
authorization or settlement cost. Many
of these commenters asserted that the
payment guarantee that issuers provide
merchants for electronic debit
transactions is one of the primary
differences between electronic debit
transactions and checking transactions.
Commenters both in favor of and
opposed to including the cost of the
payment guarantee as an allowable cost
stated that for check transactions
merchants are able to purchase check
verification and guarantee services.
Commenters that supported including
the cost of the payment guarantee as an
allowable cost suggested that the Board
measure the costs in terms of risk
exposure, overdraft losses, or the value
to the merchant (by considering the
price merchants pay for comparable
check verification and guarantee
services). A few issuers asserted that if
they were not compensated for the
payment guarantee, then they should be
permitted to return a transaction for
insufficient funds.122 More generally,
some commenters noted that networks
could change existing chargeback rights
if issuers were not reimbursed for their
costs incurred as part of the payment
guarantee.
By contrast, other commenters
(predominantly merchants) opposed
including the cost of the payment
122 A few issuers suggested that, if the payment
guarantee were not included in the base interchange
fee, an issuer should be able to charge separately
for the guarantee. However, if an issuer were to
charge or receive a fee for a payment guarantee
through a network, then such a fee would be an
interchange transaction fee for purposes of this rule.

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guarantee as an allowable cost because,
for check transactions, purchasing the
verification or guarantee is optional and
not required in order to accept checks.
Merchants also stated that network rules
permitted issuers to charge back
transactions alleged to be fraudulent
and therefore, the commenters argued,
the payment guarantee was not really a
guarantee. Some merchants also noted
that they are constrained from taking
certain steps to minimize fraud because
payment card networks discourage
merchants from checking the
identification of the cardholders in
order to reduce inconvenience
associated with use of the card.
The Board has considered the
comments received on payment
guarantees. The final rule does not
include the payment-guarantee cost
(including non-sufficient funds
handling) within the allowable costs.
Losses that result from the payment
guarantee are incurred when an issuer
authorizes a transaction that overdraws
the cardholder’s account. However,
losses associated with a debit card
payment guarantee are largely within
the issuer’s control. An issuer is usually
able to decline transactions for which
there are insufficient funds, whereupon
the merchant will not complete the
transaction using the particular debit
card. When an issuer approves an
authorization request, it generally places
a hold on the cardholder’s funds
pending settlement. If an issuer
approves the transaction knowing there
are insufficient funds in the account, or
does not place a hold on funds
underlying an approved transaction, the
issuer is choosing to incur any costs
incurred in obtaining funds from the
cardholder. The issuer incurs this cost
as a service to its cardholders, and
generally imposes fees to recover the
associated risk that a cardholder may
fail to provide subsequent funding for
the transaction.123 Although some
issuers argued that the payment
guarantee is analogous to checkguarantee services for which the
merchant pays, check guarantee services
are generally provided by firms that do
not hold the customers’ accounts.
Therefore, these guarantees are made
based on less complete information and
123 There are some instances in which a
transaction is not cleared until after the
authorization hold expires (generally after three
days), which may result in an overdraft that was not
within the control of the issuer. Although this
represents a cost to the issuer of the payment
guarantee that is not caused by the issuer
knowingly authorizing a nonsufficient funds
transaction, the data are not available to separate
these ‘‘NSF’’ costs from all other ‘‘NSF’’ costs.

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the fees for these services reflect this
incremental risk.
Cardholder rewards. Issuers offer
rewards to customers in order to
promote use of the issuer’s debit cards,
and debit card networks develop these
rewards programs to be offered by
issuers in order to promote the use of
the network’s cards. The costs of the
rewards and associated program
administration depend upon the level of
rewards the issuer deems desirable to
effectively compete for account holders.
Although an issuer may give
cardholders rewards for each
transaction (or value of transactions),
this cost is a customer-relationship
program cost that the issuer chooses to
incur. Thus, rewards costs are more akin
to marketing costs designed to attract
customers to the issuer and the network
than to transaction costs incurred in the
course of effecting an electronic debit
transaction.
Moreover, rewards programs often
benefit a specific group of merchants
determined by the debit card network or
issuer. Including these costs in
interchange fees that are charged to all
merchants would amount to a
subsidization of selected merchants by
all other merchants that do not benefit
from the rewards program (including
competitor merchants). Although
payor’s banks typically do not offer
rewards programs for the use of checks,
an institution that chose to do so would
bear the associated costs and would not
receive reimbursement for these costs
from the payee’s bank. The Board has
not included the costs of rewards in
establishing the fee standard.
Cardholder inquiries. Issuers incur
costs for activities necessary to receive
and resolve cardholder inquiries before
and after transactions. Issuers and
networks argued that the costs of
handling customer inquiries and
disputes should be included because
such costs relate to a particular
transaction. Moreover, issuers stated
that not including these costs would
eliminate incentives for issuers to
provide anything but the minimum,
legally mandated customer service.
Many costs related to cardholder
inquiries do not relate to specific
transactions. Rather, they relate to
balance inquiries, reports of lost or
stolen cards, requests for other
replacement or additional cards,
inquiries about ancillary products and
services, and other non-transaction
specific inquiries. In addition, issuers
often take the opportunity of a
cardholder inquiry to engage in
marketing activities unrelated to any
particular electronic debit transaction
(or to debit programs generally).

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However, some customer service
inquiries relate to particular
transactions. Fielding these inquiries is
partly a cost of a service required by
regulatory and network rule
requirements and partly a cost of
managing the customer relationship.
Payor’s banks bear the costs
associated with customer inquiries for
check transactions and do not receive
reimbursement for these costs from the
payee’s bank. Moreover, the cost data
obtained by the Board in response to its
issuer survey does not allow for the
separation of the costs of cardholder
inquiries related to specific transactions
from the costs of inquiries that do not
related to particular transactions. Thus,
it is not currently possible to accurately
separate out and assess cost data for
customer inquiries related solely to
particular debit transactions.
Accordingly, the Board has not included
the costs of cardholder inquiries in
establishing the fee standard.
e. Costs Included in Setting the
Standard
The Board has included in its
establishment of the interchange fee
standard the following types of costs
from its issuer survey: total transactions
processing costs (including costs
reported as fixed and variable
authorization, clearance, and settlement
costs, network processing fees (e.g.,
switch fees), and the costs of processing
chargebacks and other non-routine
transactions), transactions monitoring,
and fraud losses. An issuer may use the
same processing platform for its debit
card and credit card operations (or debit
card and ATM card operations) to take
advantage of economies of scope and
scale. The costs of these activities and
equipment are referred to as ‘‘joint
costs’’ because they are shared. Joint
costs between debit card and credit card
programs may include network
connectivity used for multiple card
program activities; common hardware,
software, and associated labor that are
shared across card programs; and
customer settlement applications used
for all transaction account processing. In
these cases, in the Board’s survey, costs
(excluding fraud losses) were allocated
to electronic debit transactions on a pro
rata basis. The costs the Board included
in establishing the fee standard are
discussed further below.
Transactions processing. In addition
to the proposed allowable costs
described in relation to proposed
Alternative 1, an issuer must maintain
and use network connectivity to effect
each transaction because the issuer must
be able to receive the particular
authorization request, send the
particular approval or denial message,

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and receive the related clearing and
settlement message. Likewise, an issuer
must maintain and use computer
equipment that can process each
authorization request by checking for
the validity of the card and account, as
well as checking and updating the
amount of funds in an account. The
issuer must also employ staff to operate
and maintain the computer equipment
involved in transaction processing. Each
transaction uses the equipment,
hardware, software and associated labor,
and no particular transaction can occur
without incurring these costs. Thus,
these costs are ‘‘specific to a particular
transaction.’’ The most reasonable way
to measure and allocate these costs on
a per-transactions basis is by averaging
these costs across the total number of
electronic debit transactions that use the
resource.124
Costs of chargebacks and other nonroutine transactions. Transactions are
not limited to the initial purchase. An
issuer may initiate a chargeback
transaction to reverse settlement with
both the acquirer and the cardholder,
and an acquirer may present the
transaction again to the issuer if the
acquirer believes the issuer is not
entitled to charge back the
transaction.125 The proposal included as
allowable costs the costs of ‘‘initiating,
receiving, and processing chargebacks,
adjustments, and similar transactions’’
and the costs of ‘‘receiving and
processing representments of electronic
debit transactions’’ (but not the actual
amount of the chargeback, adjustment,
or representment. Proposed comment
3(c)–2.iii stated that an issuer’s
activities associated with non-routine
transactions included activities such as
data processing to prepare and send the
chargeback message and reconciling the
chargeback with the cardholder’s
account, but excluded costs of receiving
cardholder inquiries about particular
124 The Board’s survey data included the costs of
loading funds to prepaid cards as part of reported
processing costs. The Board does not believe these
costs should be considered in establishing the
interchange fee standard because they are not
specific to a particular electronic debit transaction
and are more akin to deposit account costs, which
have not been included in setting the debit
interchange fee standard. However, these costs
could not be separated from other processing costs
that should be included. Because reloadable
prepaid cards transactions are a very small
proportion of total electronic debit transactions, the
Board believes this inclusion is immaterial and
does not affect the calculation of the overall cap
amount. Future surveys will ask that this cost not
be included in reporting processing costs for
reloadable prepaid costs.
125 The circumstances under which an issuer may
reverse a transaction vary based on network rules
and include an error in the transaction information,
duplicate processing, an unauthorized transaction,
and non-receipt of merchandise.

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transactions. Several issuers suggested
including costs of processing
chargebacks, other than the costs
proposed (e.g., data processing and
sending the message), such as the costs
of resolving cardholder inquiries to
determine whether the issuer has a
chargeback right. One consumer group
encouraged including the cost of
processing chargebacks in allowable
costs in order to encourage issuers to
use networks that provide chargeback
rights to consumers.126 A few merchants
opposed including the costs of fraudrelated chargebacks, arguing such costs
should be included as part of the fraudprevention adjustment, if at all.
Chargebacks and other non-routine
transactions are separate transactions
that essentially unwind the initial
transaction (see discussion of the
definition of ‘‘electronic debit
transaction,’’ § 235.2(h)). The associated
costs of processing these transactions
are ‘‘specific to a particular
transaction.’’ The final rule considers
the costs of processing chargebacks and
other non-routine transactions as a basis
for establishing the standard for
interchange fees. As implied by the
discussion in a companion interim final
rule, published separately in the
Federal Register, the costs of processing
chargebacks are not considered for
purposes of the fraud-prevention
adjustment; therefore, including the
issuer’s cost of processing fraud-related
chargebacks in the interchange fee
standard will not result in doublerecovery.
Network processing fees. The Board
received numerous comments on the
proposed exclusion of network
processing fees (e.g., switch fees) as a
type of allowable cost. Many issuers and
networks requested that the Board
include network processing fees because
such fees are directly related to the
authorization, clearance, and settlement
of a transaction. One network asserted
that excluding network processing fees
created an inconsistency if pertransaction fees paid to third parties
could be included as allowable costs.
Merchants, by contrast, overwhelmingly
supported the exclusion of network
processing fees because, if such fees
were included, merchants would be in
the position of paying all network fees
for a transaction. One issuer contended
that if network processing fees were
126 That commenter suggested that, under
proposed Alternative 1, the Board should allow
issuers to recover costs where the merchant has
gone out of business, and under proposed
Alternative 2, the Board should reduce the cap to
11 cents and allow issuers to recover 1 cent for
maintaining an effective debit card chargeback
program.

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excluded, issuers should be permitted to
receive net compensation from the
networks so that issuers could realize
the value to the networks of their
cardholder base. This is discussed
further in the section related to
circumvention and evasion.
The Board believes that network
processing fees are both specific to a
particular transaction and incurred for
the issuer’s role in authorization,
clearance, and settlement. Network
processing fees are incurred by issuers
in the course of effecting electronic
debit transactions, and the total amount
of fees charged to an issuer is
determined by the amount of electronic
debit transactions processed for that
issuer. The Board has included network
processing fees in determining the
standard for interchange fees. Merchantrouting choice may place downward
pressure over time on the level of
network fees assessed to acquirers. To
the extent that acquirers and merchants
may be in the position of directly paying
all of their network fees as well as
paying the network fees of covered
issuers through interchange fees, such
an arrangement would be similar to
traditional paper-check processing
where the payee’s bank (the corollary to
the acquirer for the merchant) typically
pays all of the processing costs, while
the payor’s bank (the corollary of the
issuer in an electronic debit transaction)
typically pays no processing fees. The
Board recognizes, however, that in
electronic check collection systems,
both the payee’s bank and the payor’s
bank generally pay processing fees.
Transactions monitoring. The
proposal excluded authorization-related
fraud-prevention costs from allowable
costs in proposed § 235.3. Numerous
commenters (predominantly issuers)
recommended including costs of such
fraud-prevention activities in the
interchange fee standard because the
pre-authorization fraud-prevention
activities are integral to transaction
authorization. These commenters
suggested that such costs could include
the cost of enrolling in or maintaining
programs that monitor transactions prior
to making the decision to authorize the
transaction. Merchants and a few other
commenters opposed including fraudprevention costs in the interchange fee
standard because such costs are
intended to be included through the
fraud-prevention adjustment.
Transactions monitoring systems
assist in the authorization process by
providing information to the issuer
before the issuer decides to approve or
decline the transaction. Issuers may
monitor transactions through the use of
neural networks and fraud-risk scoring

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Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations
systems. Transactions monitoring is as
integral to the authorization decision as
confirming that a card is valid and
authenticating the cardholder. For
example, an issuer may flag a
transaction as suspicious and decline
the authorization request or require the
merchant to verify the transaction with
the issuer before deciding whether to
approve or deny the transaction.
In comparison, the types of fraudprevention activities considered in
connection with the fraud-prevention
adjustment (discussed in an interim
final rule published separately in the
Federal Register) are those activities
that prevent fraud with respect to
transactions at times other than when
the issuer is effecting the transaction.
The issuer’s cost of this type of action
is not considered a cost of authorization.
For example, an issuer may send
cardholders alerts after authorizing a
transaction or series of transactions to
inquire about suspicious activity. These
subsequent alerts are intended to
prevent future fraudulent transactions
and are not a cost of authorizing a
particular transaction. Any costs of
those subsequent alerts are considered
in the fraud-prevention adjustment, but
not as a basis for the interchange fee
standard. Similarly, the cost of research
and development of new authentication
methods would be considered in the
fraud-prevention adjustment but would
not be a cost that is specific to a
particular electronic debit transaction
and therefore cannot be considered in
determining the fee standard.
Fraud losses. The proposal did not
include fraud losses incurred with
respect to electronic debit transactions
as an allowable cost. Numerous
merchants argued for this exclusion
because they believed that allowing
issuers to pass fraud losses on to
acquirers or merchants through the
interchange fee would largely eliminate
the incentive for issuers to take steps to
minimize fraud losses, contrary to
policy goals of reducing the occurrence
of, and losses from, fraudulent
electronic debit transactions. On the
other hand, numerous issuers and some
networks supported including fraud
losses as costs that are specific to a
particular transaction. These
commenters argued that it would be
unreasonable for issuers to bear fraud
losses without any compensation from
merchants because merchants receive
benefits from authorized debit card sales
(including the payment guarantee) and
are in a unique position to prevent fraud
losses by checking for cardholder
identification or signature, among other
things. Moreover, these commenters
argued that excluding fraud losses from

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allowable costs would encourage
merchants to ignore possible fraudulent
electronic debit transactions. A few
issuers also indicated that they incur
insurance costs against fraud losses,
including paying a per-account
deductible.
Two issuers provided general
suggestions for measuring the amount of
fraud losses that should be included in
allowable costs. One issuer suggested
that fraud losses be reflected as a
variable component in the interchange
fee standards because fraud losses
increase with transaction size. Another
issuer suggested that interchange fees
reimburse an issuer for fraud losses
based on the issuer’s fraud levels vis-àvis industry fraud levels, but did not
elaborate further as to the precise
formula to be used.
The Board has considered the
comments received on fraud losses. The
final rule includes an allowance for
fraud losses in determining the
interchange fee standard. For purposes
of the final rule, fraud losses are those
losses incurred by the issuer, other than
losses related to nonsufficient funds,
that are not recovered through
chargebacks to merchants or debits to or
collections from customers.127
Fraud losses are costs that are specific
to a particular transaction. The issuer’s
fraud losses are generally the result of
the authorization, clearance, and
settlement of an apparently valid
transaction that the cardholder later
identifies as fraudulent. An issuer may
experience losses for fraud that it cannot
prevent and cannot charge back to the
acquirer or recoup from the
cardholder.128 The most common types
of fraud reported in the Board’s survey
were counterfeit card fraud, lost and
stolen card fraud, and card-not-present
fraud.129 Certain fraud and the related
losses can be reduced through actions
by the merchants. Even if the merchant
takes all reasonable steps to verify the
card user, however, the transaction may
nonetheless be fraudulent.
Permitting issuers to recover at least
some fraud losses through interchange
fees is reasonable given that the source
of fraud could be any participant in an
127 The amount of the fraud-prevention
adjustment permitted under the accompanying
interim final rule published separately in the
Federal Register does not include consideration of
fraud losses. The adjustment amount is based on
fraud-prevention costs, rather than fraud losses.
128 Rules regarding chargeback rights and
obligations vary across payment card networks.
Some networks have rules that prevent an issuer for
imposing any liability on the cardholder for
unauthorized transactions.
129 Counterfeit-card fraud is when a fraudster
obtains information about the card and creates a
replica of the card.

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electronic debit transaction and that the
exact source of fraud often is unknown.
Payment card network rules allocate
responsibility for fraudulent
transactions, but this allocation does not
necessarily result in the loss ending up
with the party that was in the best
position to prevent the fraud. For
example, the loss may have occurred
from a data breach at a merchant or
acquirer not involved in the fraudulent
transactions. Additionally, network
rules that are vague with respect to
merchant requirements for
authenticating a signature may lead to
fraud losses being borne by the issuer
when the merchant was in a position to
compare the cardholder’s signature with
the signature on the back of a card and
prevent the fraud.
Allowing a portion of fraud losses to
be recovered through interchange fees
will not eliminate the incentive for
issuers to monitor and prevent fraud.
Issuers will continue to bear the cost of
some fraud losses and cardholders will
continue to demand protection against
fraud.
The cost of a fraud loss varies with
the amount of the transaction. For
example, an issuer takes on a greater
risk when approving a $100 transaction
than a $5 transaction because the
amount of the potential loss is greater.
Therefore, fraud losses are best assessed
through an ad valorem component in
the interchange fee standards.
C. Section 235.3 Interchange Fee
Standards
EFTA Section 920(a)(3) requires the
Board to establish ‘‘standards for
assessing’’ whether the amount of any
interchange transaction fee that an
issuer receives or charges with respect
to an electronic debit transaction is
reasonable and proportional to the cost
incurred by the issuer with respect to
the transaction. The Board proposed
that an issuer must comply with its
interchange fee standards, under both
proposed alternatives, on a pertransaction basis; that is, an issuer could
not receive any interchange fee that
exceeds its maximum permissible fee.
The Board requested comment on two
other applications of the interchange fee
standards: one that would permit an
issuer to comply with the fee standard,
on average, for all of its electronic debit
transactions, and another that would
evaluate compliance at a network level
and permit an issuer to comply with the
fee standard if, for a particular network,
all covered issuers on that network
received the amount of the fee standard,
on average, for all electronic debit
transactions over the network.

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1. Standards for Assessing
A number of issuers argued that a cap
on interchange fees was a limit and not
a ‘‘standard for assessing’’ whether
interchange fees were reasonable and
proportional to costs. These commenters
argued that Section 920(a) requires more
flexible guidelines.
The term ‘‘standards’’ generally
means ‘‘something established by
authority as a rule for the measure of
quantity, quality, etc.’’ or the ‘‘rule or
principle that is used as a basis for
judgment.’’ 130 The final rule sets the
standard for the maximum permissible
interchange transaction fee that may be
received by a covered issuer (i.e., a
transaction-level standard). If an
interchange fee that an issuer receives
does not exceed the cap, the amount of
the interchange fee is reasonable and
proportional to transaction cost. In this
way, the cap represents a standard; it is
a ‘‘rule for the measure of quantity’’ and
‘‘a basis for judgment.’’
The Board recognizes that providing a
standard in the form of general
guidelines would provide networks
with more flexibility in setting
interchange fees. The Board believes,
however, that this approach would be
extremely difficult to implement and is
not required by the statute. Section
920(a) uniquely positions the Board to
obtain information regarding each
covered issuer’s costs and, thus, to
consider the transaction costs across all
covered issuers in order to determine
the point at which interchange fees
would no longer be reasonable in light
of allowable transaction costs. By
contrast, a payment card network does
not process transactions for each
covered issuer and would receive
information from only a subset of
covered issuers. Without a uniform
numerical standard applicable to all
issuers, networks, and transactions (i.e.,
as adopted in this rule), the definition
of the highest reasonable fee could vary
across issuers, networks, and
transactions. This would make
enforcement of the statute extremely
difficult and burdensome for all parties
and would encourage issuers to choose
a network based on the network’s
application of the fee standards, rather
than based on the services provided by
the network.
Setting a uniform standard of the
maximum permissible interchange
transaction fee that may be received by
a covered issuer is also the most
practical and least burdensome
approach in the context of a complex
130 Webster’s New World Dictionary and
Thesaurus 17 (2nd ed. 2002); Random House
Webster’s Unabridged Dictionary (2nd ed. 2001).

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and dynamic system that handles large
and growing volumes of transactions. As
many commenters recognized, more
general cost-based standards (including
proposed Alternative 1) would place a
significant burden on industry
participants and supervisors.
In addition to meeting the words and
purpose of the statute, the final rule’s
standard provides the proper economic
incentives for issuers to improve their
efficiency. The final rule provides each
issuer an incentive to reduce its pertransaction costs below the level of the
cap. The Board will use the data
collection authority provided in Section
920(a) to regularly collect data on the
costs incurred by issuers in connection
with electronic debit transactions and,
over time, will adjust the standards
based on reported costs, if appropriate.
Lower costs should result in a lower
interchange fee cap as issuers become
more efficient.
2. Transaction-Level Standard
In general, merchants, a few payment
card networks, and acquirers (as well as
other types of commenters) opposed
both an issuer- and network-averaging
approach in favor of a transaction-level
approach. Merchants contended that
averaging would enable the
continuation of price discrimination
against merchants, and Internet
merchants in particular. A few of these
commenters stated that averaging was
inconsistent with the language of the
statute because it permits consideration
of non-cost factors in the interchange fee
determination. Commenters opposed to
averaging also argued that it would
impose a substantial administrative
burden on issuers, payment card
networks, acquirers, and regulators.
Additionally, a few commenters were
concerned that averaging likely would
result in statutory violations because
predicting the transaction mix ex ante is
exceedingly difficult, and issuers would
be unable to control whether they met
the target average because merchants
would control routing. Another
commenter was concerned that, under a
network-averaging approach, the largest
issuers on a network would receive
higher interchange fees than smaller
issuers. One issuer suggested that the
safe harbor be an average effective rate
that approximates current fee levels in
order to avoid injecting significant risk
into the payment system. This issuer
suggested that the Board consider
adjusting the safe harbor no sooner than
one year after the exclusivity and
routing rules go into effect, which
should provide the Board time to
evaluate whether routing rules are
increasing competition.

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A few commenters supported an
issuer-averaging approach, including
one issuer that suggested that the safe
harbor be an average of all of an issuer’s
interchange fees across all networks.
One network contended that permitting
network averaging was necessary to
provide meaningful flexibility in setting
interchange fees, would provide
incentives for fraud prevention, and
would account for cost and risk
variation across transactions. One
network suggested that network
averaging could be combined with a
transaction-level upper boundary. The
commenters in favor of a networkaveraging approach suggested that
networks would demonstrate
compliance through regular reporting,
and any issuers participating in those
networks would be deemed to be in
compliance. If a network exceeds the
standard amount, the commenter
suggested that the Board could either
permit variation or require corrective
actions.
The Board has determined to adopt
neither an issuer-averaging nor a
network-averaging standard. An issueraveraging approach, where the only
requirement is that an issuer, on
average, receive an interchange fee that
does not exceed the cap, would be
significantly less burdensome from an
enforcement perspective, but would be
less likely to produce actual
compliance. Issuers and networks
would be unlikely to accurately predict
an issuer’s transaction mix ex ante
because of fluctuation in cardholders’
shopping patterns and merchant routing
choice, and therefore may not be able to
exactly meet an issuer average.
Moreover, such an approach would be
less transparent than a transaction-level
standard because each party would be
unable to determine whether a given
interchange fee complied with the
standard. Similarly, although a networkaveraging approach to the standard
would provide networks with more
flexibility to vary the amounts of
interchange transaction fees by
merchant type and transaction type, an
individual issuer’s compliance would
depend on the amounts of interchange
transaction fees received by other
issuers on the network.
3. Determining the Interchange Fee
Standard
The Board surveyed institutions
expected to be covered by the
interchange fee standards to determine
their costs relating to debit card
programs, among other things. As
discussed above, there is no industry
standard for cost-accounting systems
because institutions use cost-accounting

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systems predominantly for internal
management purposes. In recognition of
this, the survey contained instructions
regarding the types of costs a
responding issuer should report and the
types of costs a responding issuer
should exclude entirely from its survey
responses. Issuers also were asked to
provide information on the number of
purchase and other electronic debit
transactions (such as returns and
chargebacks).131 132
Responding issuers were instructed to
exclude corporate overhead costs or any
other overhead costs for activities that
are not directly related to the issuer’s
debit card program. If the responding
issuer incurred overhead costs directly
related to activity in a card program, the
issuer could allocate those costs to card
program activity. Similarly, if an issuer
incurred costs for an activity that was
jointly attributable to electronic debit
transactions and another program (such
as credit cards), the issuer was
instructed to allocate the costs of that
activity across the programs on a pro
rata basis. Issuers were instructed to
include the depreciation or amortization
of capital expenditures. Throughout the
survey instructions, issuers were
directed not to include costs that were
not tied to debit card programs.
With respect to costs incurred for
debit card program activity, the survey
requested cost information for the total
costs of several activities that were not
included as part of authorization,
clearance, or settlement: Card
production and delivery; cardholder
inquiries; rewards, incentives, and
affinity-partnerships; network
membership; research and development;
and compliance.133 Survey respondents
were instructed not to include the costs
for these activities in any other cost
category, which allowed isolation of
these cost categories and prevented
131 In a purchase transaction, value is transferred
from the cardholder to the merchant in exchange for
goods and services. In a return transaction, the
merchant reverses a purchase transaction (due, for
example, to the return of goods by the cardholder),
and value is transferred from the merchant to the
cardholder.
132 Although the response rates for the surveys
were high, some respondents were not able to
provide information on all data elements requested
in the surveys. For example, most respondents
provided cost data at an aggregate level, but some
were unable to provide cost data at the level of
detail requested in the surveys. In addition,
inconsistencies existed in some reported data
within individual responses and across responses.
Where possible, minor problems (e.g., adding
components to determine the total or removing
minus signs) were resolved, but responses with
major problems (e.g., failing to provide critical
transaction volume information) were not used.
133 Issuers were instructed to put information
regarding these costs in Section IV of the Card
Issuer Survey.

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double-counting of costs. For the
reasons stated above, costs for these
activities were not considered as the
basis for the interchange fee standard.
As discussed in more detail above, the
types of costs that form the basis for the
interchange fee standard are costs
incurred for processing electronic debit
transactions,134 chargebacks, and
similar transactions, including network
processing fees and transactions
monitoring costs; and fraud losses. Each
of these categories was reported
separately. With respect to transaction
processing, issuers were instructed to
include the total costs associated with
providing authorization for transactions
(including data processing, connectivity
expenses, voice authorization inquiries,
and referral inquiries); clearing and
settlement (including receiving,
verifying, reconciling, settling
transactions with other financial
institutions, and posting transactions to
cardholder’s accounts); and processing
chargebacks and other erroneous
transactions. Issuers were instructed to
separately report network processing
fees and their cost for transactions
monitoring prior to authorization.135
Issuers were asked to report costs
directly attributable to PIN debit,
signature debit, and prepaid card
programs.
These data were used to compute an
average per-transaction cost for each
issuer that reported costs for
authorization, clearance and settlement,
network fees, and transactions
monitoring based on the number of
routine purchase transactions.136 For
each such issuer, the total of these costs
was computed and divided by the total
number of purchase transactions sent to
the issuer for authorization during 2009.
The data from the Board’s survey
showed that these average pertransaction costs reported by covered
issuers ranged from 3 cents to 66 cents
134 These transactions included purchase and
return transactions, authorizations without value
transfer, denials, and funds loads to prepaid cards.
135 Issuers were instructed to report these costs,
except for transactions monitoring, in Section III of
the Card Issuer Survey. Issuers were instructed to
report all of their fraud-prevention activities and
the total costs incurred for each activity in Section
V of the Card Issuer Survey. The most commonly
reported activity was transactions monitoring.
136 The number of respondents varies across the
cost-categories because not all issuers were able to
break out certain cost information. For example, a
number of prepaid card issuers reported that they
did not know the specific costs associated with
their prepaid card program. In some cases those
issuers provided more complete data for their
signature and PIN programs. In those cases, the
issuer’s signature and PIN purchase transactions
and costs are included, but their prepaid purchase
transactions and costs are excluded.

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43433

per transaction.137 The Board used this
range as a starting point for setting
standards for the base component.
Within this range, the Board ranked the
average per-transaction allowable cost
from the lowest- to highest-cost issuer.
The distribution of issuer costs in the
survey is quite skewed, with the
distribution concentrated in the range of
costs below the 80th percentile, and a
scattered set of institutions with
significantly higher costs above this
point. Below the 80th percentile, the
difference between the per-transaction
allowable costs of adjacently-ranked
issuers is small. For example, among
issuers whose costs are between the
20th and the 80th percentiles, the
largest cost difference over a 5percentile range of the distribution (e.g.,
from the 60th to 65th percentile) is
about 3 cents. Above the 80th
percentile, however, the distribution
shows a marked discontinuity, with pertransaction allowable costs varying
more significantly across issuers of
similar rank. Between the 80th and 85th
percentiles, the difference in costs is
about 20 cents. The average pertransaction cost of the issuers above the
80th percentile is 49 cents, more than
double the level of the cap, and greater
than the average interchange fee level
recorded in the survey. It appears that
some of these higher-cost issuers may
face unique circumstances regarding
their overall business orientation; for
example, some of the issuers with high
reported costs appear to be
organizations whose commercial
banking operations (and associated
debit card programs) are small relative
to their overall operations. The Board
therefore does not believe that setting
interchange fee standards to
accommodate these higher-cost issuers
would be reasonable or proportional to
the overall cost experience of the
substantial majority of covered issuers.
Moreover, the Board does not believe
that it is consistent with the statutory
purpose to permit networks to set
interchange fees in order to
accommodate 100 percent of the average
per-transaction cost of the highest-cost
issuers.
Based on a review of the survey data
and public comments, and for the
137 One merchant group stated that the cost
estimates in the Board’s survey contained an
upward bias due to the inclusion of higher-cost
prepaid cards (many of which would be excluded).
Unlike other debit cards, issuers may not have
information on which prepaid cards are exempt
because an exemption may be determined by factors
in the program manager’s or merchant’s control
(such as whether the card is marketed or labeled as
a gift card). Accordingly, the survey did not instruct
issuers to differentiate between exempt and nonexempt prepaid cards when reporting data.

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reasons explained above, the final rule
establishes a standard that caps the base
component of any interchange fee at 21
cents per transaction, which
corresponds to the 80th percentile
issuer’s average per-transaction
included costs.
Fraud losses vary by the value of the
transaction and, thus, were considered
separately. Issuers were asked to report
fraud losses—the total value of
fraudulent transactions less any
amounts recovered from acquirers,
cardholders, or other parties. For issuers
that reported net fraud losses, total net
fraud losses were divided by the total
value of purchase transactions.138 The
Board’s survey indicated that the
average per-transaction fraud loss,
measured in basis points (bps), varied
among responding issuers and ranged
from 0.86 bps to 19.64 bps.
The Board has determined that it is
appropriate to include an allowance for
fraud losses in the interchange fee
standard, capped at approximately the
median of reported issuer fraud losses (5
bps). Using the median figure recognizes
that, as explained above, fraud losses
can result from the actions or inaction
of merchants as well as issuers, and will
provide incentives for both issuers and
merchants to take appropriate steps to
reduce fraud losses, since each group
will incur some costs for these losses.
Issuers that incur the included costs
at a level below the interchange fee
standard cap (the sum of 21 cents and
5 bps multiplied by the value of the
transaction) may retain the difference
between their costs and the cap. The
cap, however, will result in some
issuers not fully recovering their average
per-transaction cost through interchange
fees. Some commenters argued that this
result is inconsistent with ratemaking in
other contexts in which rates enable
regulated entities to recover costs plus
a reasonable profit. The Board has
considered the comments and, for the
reasons explained above, believes that
the similarities between the statutes
governing rates for public utilities and
other regulated entities and Section 920
are limited. In summary, EFTA Section
920(a) does not use the term ‘‘just and
reasonable’’ that is typically used in
public utility rate-setting statutes.139
Congress is well aware of this term of art
and would have used that phrase had it
intended the Board to consider other
138 Issuers were instructed to report information
related to fraud losses in Section VI of the Card
Issuer Survey. Issuers that reported net fraud losses
were not limited to those issuers that reported cost
information necessary to calculate the base
interchange fee component.
139 See, e.g., Natural Gas Act, 15 U.S.C. 717 et seq.
Duquense Light Co. v. Barash, 488 U.S. 299 (1989).

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ratemaking jurisprudence. In addition,
public utility rate-setting involves
unique circumstances, none of which is
present in the case of setting standards
for interchange transaction fees. Issuers
are unlike public utilities and similarly
regulated entities, which typically are
required to provide the regulated service
to the public or are otherwise restricted
from discontinuing provision of the
regulated service. In addition, unlike in
the case of public utilities and similar
entities where the entity’s only source of
revenue for the service or commodity is
the regulated rate, Section 920 regulates
only the fees issuers receive from the
merchant side of the transaction, not
from all sources.140
4. Uniform Interchange Fee Standard
Section 235.3(a) applies to all
electronic debit transactions not
otherwise exempt from the rule, and the
maximum permissible interchange fee is
the same irrespective of the network
over which the transaction is processed,
the type of debit card, and the method
of cardholder authentication. To
determine amounts that would be
proportional to cost, the Board
considered the average per-transaction
allowable costs of issuers for signaturebased debit, PIN-based debit, and
prepaid card transactions.
a. Summary of Proposal and Comments
Under both proposed alternatives, the
maximum permissible interchange fee
would be the same irrespective of card
type, network, or cardholder
authentication method. The Board noted
that issuers reported higher allowable
costs for prepaid cards and requested
comment on whether it should have
separate standards for prepaid card
transactions.
Several issuers, networks, merchants,
and their trade groups opposed setting
different standards (particularly the cap)
for PIN-based and signature-based debit
card transactions for a variety of
reasons, including to avoid any possible
discrimination between PIN-based and
signature-based networks and to reduce
operational complexity. Some of these
commenters stated that authentication
methods will likely expand beyond PIN
and signature and that accounting for all
types of authentication methods would
140 Several commenters pointed to BrooksScanlon Co. v. R.R. Comm’n of La., 251 U.S. 396
(1920), in support of the proposition that the Board
should not consider an issuer’s ability to receive
revenue by charging cardholders fees. The Board
believes that there is a material difference between
looking to revenue from a separate but commonlyowned business (as was the case in Brooks-Scanlon)
and looking to revenue from the same service. See
Baltimore & Ohio Railroad v. U.S., 345 U.S. 146,
150 (1953).

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further increase operational complexity
of standards that differentiate by
authentication method. Moreover,
interchange fee standards that
differentiate by authentication method
may impede the introduction of new
and innovative authentication methods.
Some merchant commenters believed
one uniform interchange fee standard
would drive the marketplace to PINbased transactions, which the merchants
asserted was ‘‘the lowest cost, most
secure, and best functioning’’ method.
One merchant commenter contended
that having one cap would eliminate
circumvention and evasion concerns.
Other commenters supported having
different standards for PIN-based and
signature-based transactions because of
different risks and costs associated with
each type of transaction. These
commenters contended that having one
cap would decrease incentives for
merchants to use, or become enabled to
use, PIN-based transactions (especially
in light of the expense of PIN pads).
Additionally, some commenters
believed a single cap would unfairly
affect issuers that process
predominantly signature transactions
and would result in an issuer recovering
a different portion of its costs from year
to year depending on its transaction
mix.
Several commenters that are active
participants in the prepaid industry
encouraged the Board to adopt a
separate fee standard for prepaid cards
in light of the higher costs. Other
commenters suggested the Board allow
for variation in interchange fees among
different types of prepaid cards, because
the costs of authorization, clearance,
and settlement vary depending upon the
type of prepaid card (e.g., a nonreloadable general-use prepaid card and
a health savings account prepaid card).
b. Analysis of Comments and Final Rule
Electronic debit transactions are
processed over numerous different
networks with numerous different
pricing structures and participation
rules and requirements, and each
network’s pricing, rules, and
requirements vary by type of
transaction. Signature networks may
have higher switch fees than PIN
networks, and within those groups,
switch fees vary by network. Similarly,
each network may have different rules
related to charging back fraudulent
transactions, and the rules vary by type
of transaction (e.g., card-present and
PIN-based). Moreover, new card types
and transaction types are developing
due to innovation in the payment card
industry.

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Accordingly, if the standard were to
differentiate between signature-based
networks and PIN-based networks and
were to recognize differentiation across
all networks (i.e., a network-specific
standard) and transaction types (e.g.,
card-present and card-not present), the
resulting interchange fee standard
would require issuers to track their costs
(including fraud losses and switch fees)
by network and transaction type in
order to submit information to the
Board. This level of detail would
impose larger reporting burden on
issuers, as well as a burden on
supervisors, to ensure that an issuer was
receiving the appropriate interchange
fee revenue from each network for each
transaction type.
As discussed above, the final rule
accounts for variation in the cost
incurred by an issuer in effecting an
electronic debit transaction by
considering the costs of all types of
electronic debit transactions across all
issuers responding to the Board’s
survey. By treating allowable costs that
are likely to vary based on network and/
or transaction type (e.g., network fees
and fraud losses) the same—on an
average basis for any given transaction
regardless of the network, card type, or
transaction type—the final rule avoids
providing incentives for issuers to steer
consumers to use higher-cost networks,
cards, and transaction types.
Several merchants suggested that the
same interchange fee standard should
apply across merchant types,
transaction types, and transaction size,
arguing that current variation in
interchange fees is due to market power
rather than true variation in costs or
transaction risks (which, they asserted is
accounted for through chargeback
rules).141 By contrast, several issuers
suggested that the final rule should
allow networks to set interchange fees
based on transaction risk. These
commenters asserted that fraud losses
vary with transaction size, transaction
type, and merchant location.
Merchants suggested that the Board
establish different standards for smallticket sales (under $5) because the
proposed cap likely would result in
higher interchange fees than merchants
currently are paying on those
transactions. Other merchants thought
that variation in transaction risk should
be addressed in the fraud-prevention
adjustment, if addressed anywhere, and
noted that fraud risk exists for both
141 For example, some merchants stated that cardnot-present merchants are experiencing
increasingly low rates of fraud (primarily due to the
merchants’ own investments in fraud prevention),
but are subject to higher interchange rates and
chargeback rates.

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card-present and card-not-present
transactions.
For the reasons stated above, the final
rule permits an ad valorem component
such that the total amount of an
interchange transaction fee does not
exceed the sum of the 21-cent base
component and 5 basis points of the
transaction value (plus the fraudprevention adjustment, if applicable).
Networks are not prohibited from
varying the amount of either
interchange fee component by
transaction type, transaction value, or
merchant type, provided the
interchange fee for any transaction not
exceed the maximum permissible
amounts in § 235.3(b) (plus the fraudprevention adjustment, if the issuer is
eligible to receive the adjustment). See
comment 3(b)–2. The flexibility to vary
the amounts of interchange fee
components below the cap enables
networks to establish interchange fees
that reflect variation in transaction risk
and to account for other factors that
affect a network’s ability to increase its
transaction volume.
IV. Section 235.5 Exemptions 142
The proposed exemptions to the
applicability of the interchange fee
standard in § 235.5 implement the
exemptions set forth in EFTA Section
920(a) for small issuers, governmentadministered payment programs, and
certain reloadable prepaid cards.143
Because an electronic debit
transaction may qualify for more than
one exemption, the Board proposed
comment 5–1 to clarify that an issuer
need qualify for only one of the
exemptions in order to exempt an
electronic debit transaction from the
interchange provisions in §§ 235.3,
235.4, and 235.6 of the proposed rules.
The proposed comment further clarified
that a payment card network
establishing interchange fees need only
satisfy itself that the issuer’s transaction
qualifies for at least one of the
exemptions in order to exempt the
electronic debit transaction from the
interchange fee restrictions. The Board
did not receive any comment on the
clarification, and the substance of
comment 5–1 has been adopted as
proposed with modifications to conform
the language of the comment to other
revisions.
The Board has adopted new comment
5–2 to provide that payment card
networks that plan to allow issuers to
receive interchange fees higher than
142 The companion interim final rule published
separately in the Federal Register adds § 235.4
(Fraud-prevention adjustment).
143 EFTA Section 920(a)(6) and (7).

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43435

those permitted under §§ 235.3 and
235.4 pursuant to one of the exemptions
in § 235.5 must develop their own
processes for identifying issuers and
products eligible for such exemptions.
As discussed in more detail below with
respect to each of the exemptions in
§ 235.5, the Board believes payment
card networks are in the best position to
develop processes for identifying issuers
and products eligible for the various
exemptions. However, to assist payment
card networks in determining which of
the issuers participating in their
networks are subject to the rule’s
interchange fee standards, the Board
will publish lists annually of
institutions above and below the small
issuer exemption asset threshold.
A. Section 235.5(a) Exemption for Small
Issuers
EFTA Section 920(a)(6)(A) provides
an exemption from EFTA Section 920(a)
for any issuer that, together with its
affiliates, has assets of less than $10
billion. EFTA Section 920(a)(6)(B) limits
the term ‘‘issuer’’ for purposes of this
exemption to the person holding the
asset account that is debited through an
electronic debit transaction.144
Proposed § 235.5(a) implemented
EFTA Sections 920(a)(6)(A) and (B) by
providing that §§ 235.3, 235.4, and
235.6 do not apply to an interchange
transaction fee received or charged by
an issuer with respect to an electronic
debit transaction if (i) the issuer holds
the account that is debited; and (ii) the
issuer, together with its affiliates, has
assets of less than $10 billion as of the
end of the previous calendar year.
Proposed comment 5(a)-1 clarified that
an issuer would qualify for this
exemption if its total worldwide
banking and nonbanking assets,
including assets of affiliates, are less
than $10 billion. Furthermore,
consistent with other Board rules, the
Board proposed to designate the end of
the calendar year to measure the assets
of an issuer and its affiliates.145
The Board received numerous
comments from a variety of
commenters, including large and small
issuers, merchants, consumer groups,
members of Congress, and other
financial institution regulatory agencies
expressing concern that the small issuer
144 EFTA Section 920(a)(6)(B). The Board noted in
its supplementary information to its proposed rule
that an issuer of decoupled debit cards, which is
not the institution holding the consumer’s asset
account from which funds are debited when the
card is used, would not qualify for the exemption
under EFTA Section 920(a)(6)(A) given the
definition of ‘‘issuer’’ under EFTA Section
920(a)(6)(B), regardless of the issuer’s asset size.
145 See, e.g., 12 CFR 203.2(e)(1)(i) and 12 CFR
228.20(u).

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exemption would not be effective in
practice.146 Many issuer commenters
stated that they did not believe that
payment card networks would
implement two-tier fee structures (i.e.,
different fee structures for covered
issuers and exempt issuers). Other
issuer commenters stated that although
networks may attempt to implement
two-tier fee structures, market forces
and merchant routing choice will erode
the differences between the two fee
structures until there is only one
interchange fee that all issuers may
charge or very little variation between
the two fees. Some of these commenters
expressed concern that if small issuers
were required to accept the same
interchange fees as covered issuers,
small issuers’ debit card programs might
not be sustainable and that these issuers
could be forced to severely limit or
abolish these programs.
Many issuer commenters also
requested that the Board mandate that
payment card networks implement twotier fee structures. Several issuer
commenters stated that even if payment
card networks were to institute two-tier
fee structures, they believe merchants
would pressure customers or steer
customers through discounts to use
another form of payment or refuse
exempt cards or cards issued by exempt
issuers.
By contrast, merchant commenters
also noted that they believe networks
have an incentive to institute two-tier
fee structures to attract and retain the
business of exempt issuers and issuers
of exempt products. In addition,
merchant commenters, some consumer
group commenters, and a member of
Congress stated that they do not believe
merchants would risk alienating
customers by refusing to accept certain
cards or discriminating against the use
of certain cards through, for example,
the use of differential pricing.
The Board’s final rule provides
exemptions from the interchange fee
standards in accordance with EFTA
Sections 920(a)(6) and (7). The EFTA
does not provide the Board with specific
authority to require networks to
implement these exemptions in any
particular way. The Board notes,
however, that payment card networks
that collectively process more than 80
percent of debit card volume have
indicated that they plan to implement
two-tier fee structures.
146 Although these comments focused on the
effectiveness of the small issuer exemption, the
other exemptions (i.e., debit cards issued pursuant
to certain government payment programs and
certain general-use prepaid cards) raise similar
concerns.

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The Board is taking several steps,
including using the data collection
authority provided in EFTA Section
920(a)(3)(B), to allow the Board to
monitor and report to Congress on the
effectiveness of the exemption for small
issuers. First, the Board plans to publish
annually lists of institutions above and
below the small issuer exemption asset
threshold to assist payment card
networks in determining which of the
issuers participating in their networks
are subject to the rule’s interchange fee
standards.147 Second, the Board plans to
survey payment card networks annually
and publish annually a list of the
average interchange fees each network
provides to its covered issuers and to its
exempt issuers. This list should enable
issuers, including small issuers, and
Congress to more readily understand
whether the provisions of EFTA Section
920 and the implementing rule,
including the small issuer exemption,
are having a meaningful effect.
With respect to comments on
discrimination by merchants, Section
920(b)(2) prohibits payment card
networks from inhibiting the ability of
any person to provide a discount or inkind incentive for payment by the use
of debit cards to the extent that the
discount or in-kind incentive does not
differentiate on the basis of the issuer or
the payment card network. Section
920(b)(4)(A) further provides that no
provision of Section 920(b) shall be
construed to authorize any person to
discriminate between debit cards within
a payment card network on the basis of
the issuer of the debit card.
Moreover, the Board understands that
many payment card networks have rules
that require merchants to accept all
cards of that payment product type
within that network, regardless of
issuer. Merchants also would likely face
negative consequences by refusing to
accept a particular issuer’s debit card.
Unlike credit cards, where customers
may have cards from more than one
issuer, customers are more likely to
have only one debit card. A merchant
refusing a customer’s particular debit
card could cause the customer to use a
credit card, a potentially more
expensive form of payment for the
merchant. Alternatively, the merchant
may lose the sale if the customer does
not have enough cash or another
payment method that would be
acceptable to the merchant.
The Board also received several other
comments on this exemption. Some
issuer commenters and a financial
regulatory agency urged the Board to
147 The lists will be posted on the Board’s public
Web site.

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extend the exemption for small issuers
to the network exclusivity and routing
provisions of § 235.7. Although EFTA
Section 920(a)(6) provides that small
issuers are exempt from the provisions
of EFTA Section 920(a) concerning the
interchange fee standards, the statute
does not extend the exemption to the
network exclusivity and routing
provisions of EFTA Section 920(b).
Some commenters urged the Board to
use the exception authority under EFTA
Section 904(c) to extend the exemption.
The Dodd Frank Act removes this
authority from the Board as of July 21,
2011, however.
A payment card network suggested
that in assessing whether an issuer
qualifies for the exemption in § 235.5(a),
only U.S. assets should be considered.
EFTA Section 920(a)(6) does not specify
that the exemption should be based on
U.S. assets only and nothing in the
purpose or structure of EFTA Section
920 or in practical operation indicates
that the provision should not apply to
issuers with large foreign operations
that also operate in the U.S. Indeed,
applying the statute to apply to
worldwide assets would be consistent
with the principle of national treatment
of foreign firms operating in the U.S.
Therefore, the Board believes that this
measurement should be based on
worldwide assets.
The final rule also clarifies whether
trust assets should be considered in
determining whether an issuer’s assets
fall below the $10 billion exemption
threshold. Trust assets under
management are not considered assets
of the issuer or its affiliates, and are not
reflected on the issuer’s or affiliate’s
balance sheet. Therefore, comment 5(a)–
1 states that an issuer qualifies for the
small issuer exemption if its total
worldwide banking and nonbanking
assets, including assets of affiliates,
other than trust assets under
management, are less than $10 billion.
In the supplementary information to
its proposed rule, the Board noted that
to the extent payment card networks
plan to permit issuers meeting the small
issuer exemption to receive higher
interchange fees than allowed under
§§ 235.3 and 235.4, such networks
should establish a process to identify
small issuers and to provide information
to acquirers and merchant processors to
enable them to determine what
interchange fee applies to each issuer.
The Board requested comment on
whether the rule should establish a
certification process and reporting
period for an issuer to notify a payment
card network and other parties that the
issuer qualifies for the small issuer
exemption.

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Payment card network commenters
suggested that a Board-developed
process would ensure that there is
consistent treatment across the industry
and requested that the Board annually
publish a list of exempt and non-exempt
issuers based on asset size. A merchant
trade group and several processors
suggested that the Board develop a
certification process for small issuers to
notify the Board and the payment card
networks within 90 days of the end of
the preceding calendar year that they
qualify for the exemption. A merchant
trade group commenter also expressed
concerns with networks solely
managing the exemption process.
Another processor commenter suggested
that the payment card networks should
manage the certification process but that
the Board should establish the reporting
period for consistency.
The Board plans to publish annually
lists of institutions above and below the
small issuer exemption asset threshold
and those for which the Board is unable
to make a determination, due to
incomplete or unreliable affiliate
data.148 There may exist a small number
of debit-card issuers that do not appear
on any of these lists.149 The Board will
compile these lists based on data in the
Board’s possession.150 These lists, based
on assets as of December 31, 2010, will
be posted on the Board’s Web site. The
Board has redesignated proposed
§ 235.5(a) as § 235.5(a)(1) and adopting
§ 235.5(a)(2) to provide that a person
may rely on these Board-published lists
to determine whether an issuer, together
with its affiliates, has assets of less than
$10 billion as of the end of a calendar
year. To the extent that an issuer
qualifies for the small issuer exemption
148 The Board has insufficient data to determine
whether every issuer, together with its affiliates, has
assets above or below $10 billion; e.g., the Board
may not have data on affiliates of industrial loan
companies with assets below $10 billion.
149 The lists, for example, would not include
depository institutions without regulatory financial
data reported as of the report date, depository
institutions without federal insurance, and issuers
that are not depository institutions.
150 The Board’s sources of data to compile these
lists include: the Consolidated Financial Statements
for Bank Holding Companies (FR Y–9C; OMB No.
7100–0128), the Consolidated Reports of Condition
and Income (Call Reports) for independent
commercial banks (FFIEC 031 & 041; OMB No.
7100–0036), the Consolidated Reports on Condition
and Income (Call Reports) for Edge and agreement
corporations (FR 2886b; OMB No. 7100–0086), the
Reports of Assets and Liabilities of and for U.S.
branches and agencies of foreign banks (FFIEC 002;
OMB No. 7100–0032), the Thrift Financial Reports
(OTS 1313; OMB No. 1550–0023) for thrift holding
companies and thrift institutions, the Credit Union
Reports of Condition and Income (NCUA 5300/
5300S; OMB No. 3133–0004) for credit unions, and
the Corporate Credit Union Monthly Call Report
(NCUA 5310; OMB No. 3133–0067) for corporate
credit unions.

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but is not included on the Board’s list
of exempt institutions, payment card
networks may institute their own
processes for such issuers to certify their
eligibility for the exemption to the
networks. See comment 5–2.
From year to year, issuers that are
exempt may become covered issuers
based on changes in assets and affiliates.
The Board has added § 235.5(a)(3) (and
comment 5(a)–2) to provide that, if an
issuer no longer qualifies for the small
issuer exemption as of the end of a
calendar year because at that time it,
together with its affiliates, has assets of
$10 billion or more, the newly covered
issuer must begin complying with the
interchange fee standards (§ 235.3), the
fraud-prevention standards (§ 235.4) (to
the extent the issuer wishes to receive
a fraud-prevention adjustment), and the
provisions prohibiting circumvention,
evasion, and net compensation (§ 235.6)
no later than July 1 of the following
year. This date provides time for issuers
and networks to determine the
applicability of the exemption and
implement any necessary system
updates to enable compliance.
B. Section 235.5(b) Exemption for
Government-Administered Programs
EFTA Section 920(a)(7)(A)(i) provides
an exemption for an interchange
transaction fee charged or received with
respect to an electronic debit transaction
made using a debit or general-use
prepaid card that has been provided to
a person pursuant to a Federal, State, or
local government-administered payment
program, in which the person may use
the debit or general-use prepaid card
only to transfer or debit funds, monetary
value, or other assets that have been
provided pursuant to such program. The
Board proposed to implement this
provision in § 235.5(b) with minor nonsubstantive changes to the statutory
language.151 A merchant trade group
commenter suggested that the
exemption for government-administered
payment programs should be temporary.
The statute does not place an expiration
date for the exemption unless certain
limited conditions are met. The final
rule follows the statute.
Issuer commenters asked the Board to
expand the exemption for governmentadministered payment programs to the
network exclusivity provisions in
151 As the Board discussed in its proposed rule,
Section 1075(b) of the Dodd-Frank Act amends the
Food and Nutrition Act of 2008, the Farm Security
and Rural Investment Act of 2002, and the Child
Nutrition of 1966 to clarify that the electronic
benefit transfer or reimbursement systems
established under these acts are not subject to EFTA
Section 920. These amendments are consistent
with, and covered by, the exemption under EFTA
Section 920(a)(7)(i).

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§ 235.7. Although the statute exempts
government-administered payment
programs from the interchange fee
standards, it does not provide an
exemption from the network exclusivity
provisions for these programs, or
specific authority for the Board to grant
an exemption from these provisions.
Thus, the Board has not exempted
government-administered payment
programs from the provisions of § 235.7.
Commenters requested that the Board
provide further clarification on
application of the exemption for
government-administered payment
programs. One depository institution
trade group suggested that the
exemption for government-administered
payment programs be extended to
‘‘multi-purse’’ cards where a debit or
general-use prepaid card may access
funds other than funds provided by a
government-administered payment
program. The Board believes the statute
is clear in stating that the exemption is
available for debit or general-use
prepaid cards in which a person may
use such card only to transfer or debit
funds, monetary, value or other assets
that have been provided pursuant to a
government-administered payment
program. Therefore, the Board has not
made the suggested change.
Another commenter requested that
the Board clarify that the governmentadministered payment programs include
programs in which funds are paid to a
consumer by government agencies, such
as jury-duty fees that are funded to a
prepaid card, and programs
administered by tribal systems. Juryduty programs administered by Federal,
State or local governments, including
the courts, appear clearly covered by the
exemption in EFTA Section 920(a)(7) to
the extent they meet the other
requirements of that section. The Board
has not attempted to list every type of
government program that qualifies for
this exemption and has instead retained
the general language in the statute.
With respect to programs
administered by tribal governments, the
Board notes that the statute refers to
‘‘Federal, State, or local governmentadministered programs.’’ Tribal
governments do not appear to be either
‘‘Federal’’ or ‘‘State’’ governments.
However, unlike other statutes that the
Board has implemented by rule,152
EFTA Section 920 does not limit ‘‘local’’
governments to political subdivisions of
Federal or State governments. Therefore,
the Board believes that the term ‘‘local’’
government would include a tribal
152 See, e.g., the Expedited Funds Availability Act
(12 U.S.C. 4001(24)) and provisions regarding NOW
accounts in 12 U.S.C. 1832(a).

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government and that governmentadministered payment programs would
include programs administered by tribal
governments. The Board has added a
sentence to comment 5(b)–1 to clarify
this interpretation.
A merchant trade group commented
that it does not believe that HSAs, FSAs,
or HRAs are government-administered
payment programs. Certain cards that
access HSAs, FSAs, and HRAs may
qualify for exemptions under § 235.5
depending on how the account is
structured. To the extent such accounts
are offered in connection with a
person’s employment and administered
by or on behalf of a government
employer, the Board believes such
accounts may be considered
government-administered payment
programs. However, a plain reading of
the statute indicates that HSAs, FSAs,
and HRAs administered for nongovernmental entities or individuals by
or on behalf of a non-government
employer are not ‘‘governmentadministered payment programs,’’
which is the language used by the
statute.
The Board proposed comment 5(b)–1
to clarify the meaning of a ‘‘governmentadministered program.’’ The proposed
comment provided that a program is
considered government-administered
regardless of whether a Federal, State, or
local government agency operates the
program itself or outsources some or all
functions to service providers that act
on behalf of the government agency. The
proposed comment 5(b)–1 also stated
that a program may be government
administered even if a Federal, State, or
local government agency is not the
source of funds for the program it
administers. The Board did not receive
comment on proposed comment 5(b)–1,
which is adopted as proposed, with
minor non-substantive wording changes
for clarity.
The Board also requested comment on
whether it should establish a process by
which cards that qualify for the
government-administered payment
program exemption could be identified
and information related to such cards
relayed to payment card networks. Such
a process could assist networks in
establishing a two-tier interchange fee
structure that allows issuers to receive
higher interchange fees than permitted
under §§ 235.3 and 235.4 for
transactions made using debit cards and
general-use prepaid cards issued
pursuant to government-administered
payment programs. Unlike the process
for identifying small issuers that qualify
for the exemption in § 235.5(a),
commenters were split on whether they
thought the Board should develop the

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process for identifying cards that qualify
for the government-administered
payment programs exemption. While a
Board-established system could provide
consistency in the process, the Board
acknowledges that identifying and
certifying card programs is complex and
that the Board may not be in the best
position to specify this process.
Furthermore, as one payment card
network noted, hundreds of new card
programs are introduced each year, and
Board involvement in the process could
delay the timely introduction of these
programs. The Board understands that
payment card networks generally have a
process currently in place to review and
approve new card programs, and that
determining whether such products
would meet the exemption requirements
could be built into existing procedures.
For these reasons, the Board believes
that payment card networks should
have the flexibility to design their own
systems for identifying cards that are
issued pursuant to a Federal, State, or
local government-administered payment
program. Therefore, the final rule does
not specify the process for identifying
these cards, and as provided in
comment 5–2, discussed above, the
Board expects that payment card
networks will have a process for
ensuring that only qualifying card
programs take advantage of this
exemption.
C. Section 235.5(c) Exemption for
Certain Reloadable Prepaid Cards
EFTA Section 920(a)(7)(A)(ii) contains
an exemption from the debit
interchange fee standards for certain
qualifying reloadable, non-gift prepaid
cards. The Board proposed to
implement the exemption set forth in
EFTA Section 920(a)(7)(A)(ii) in
§ 235.5(c)(1) and in the proposed
definition of the term ‘‘general-use
prepaid card’’ in § 235.2(i). Specifically,
EFTA Section 920(a)(7)(A)(ii) provides
an exemption for an interchange
transaction fee charged or received with
respect to an electronic debit transaction
for a plastic card, payment code, or
device that is (i) linked to funds,
monetary value, or assets purchased or
loaded on a prepaid basis; (ii) not issued
or approved for use to access or debit
any account held by or for the benefit
of the cardholder (other than a
subaccount or other method of
recording or tracking funds purchased
or loaded on the card on a prepaid
basis); (iii) redeemable at multiple,
unaffiliated merchants or service
providers, or automated teller machines;
(iv) used to transfer or debit funds,
monetary value, or other assets; and (v)

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reloadable and not marketed or labeled
as a gift card or gift certificate.
The Board received several comments
regarding this exemption. Commenters
expressed concern that issuers may try
to restructure accounts in order to
qualify for the exemption under EFTA
Section 920(a)(7)(A)(ii). One merchant
trade group suggested that the Board
limit the exemption to cards that are
reloadable by means other than ACH
transfer or a check drawn upon an asset
account. A processor commented that
the exemption promotes form-oversubstance manipulation of debit card
programs because certain reloadable
prepaid cards are virtually identical in
function to debit cards. For example, a
reloadable card would function nearly
in the same manner as a debit card if the
funds underlying the card may be
accessed by check, ACH, or wire
transfer, in addition to by use of the
prepaid card.
The Board believes that reloadable
cards that provide access to the funds
underlying the card through check,
ACH, wire transfer or other method
(unless these other means of access were
used solely for a one-time cash-out of
the remaining balance on the card)
would not meet the requirement in
Section 920(a)(7)(A)(ii)(II) that the card
not be issued or approved for use to
access or debit any account held by or
for the benefit of the cardholder (other
than certain sub-accounts). If funds
underlying the card may be accessed by
the customer using alternate payment
methods, the customer would have
access to an account held by the
customer or for the customer’s benefit.
The Board has added new
§ 235.5(c)(1)(iii) to clarify that the
exemption for a general-use prepaid
card applies only if the card is the only
means to access the funds underlying
the card, except when all remaining
funds are provided to the cardholder in
a single transaction. Thus, transactions
using prepaid cards that provide regular
access to funds underlying the card
through check or ACH would be subject
to the interchange fee restrictions.
Comment 6(a)–2 provides examples of
activities that may warrant additional
supervisory scrutiny to determine
whether there has been circumvention
or evasion of the interchange fee
standard. For example, additional
supervisory scrutiny may be warranted
if an issuer replaces its debit cards with
prepaid cards that are linked to its
customers’ transaction accounts and
funds swept from the transaction
accounts to the prepaid accounts as
needed to cover transactions made.
The Board also received many
comments on the interpretation of the

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condition that the exemption in
proposed § 235.5(c)(1) is available only
if a card is not issued or approved for
use to access or debit any account held
by or for the benefit of the cardholder
(other than a subaccount or other
method of recording or tracking funds
purchased or loaded on the card on a
prepaid basis). An issuer and a
merchant group noted that FDIC passthrough insurance is only available for
omnibus accounts for which the
individual participants can be identified
by the accountholder. Based on this
observation, a merchant group stated
that if funds are accorded FDIC
coverage, then the account is considered
to be held ‘‘for the benefit of the
cardholder,’’ and an electronic debit
transaction made using a card that
accesses such funds should not be
eligible for the exemption under
§ 235.5(c)(1).
EFTA Section 920(a)(7)(A)(ii) exempts
a general-use prepaid card only if it is
not issued or approved for use to access
or debit any account held by or for the
benefit of the cardholder (other than a
subaccount or other method of
recording or tracking funds purchased
or loaded on the card on a prepaid
basis). The parenthetical indicates that
if the ‘‘account held * * * for the
benefit of the cardholder’’ is actually a
subaccount or other method of
recording or tracking funds purchased
or loaded on the card on a prepaid basis,
the general-use prepaid card is not
considered to access an account held by
or for the benefit of the cardholder for
purposes of determining whether the
general-use prepaid card is exempt.
General-use prepaid cards that access
funds in an omnibus account that are
identifiable to the cardholder by virtue
of a subaccount (and thus are eligible for
FDIC pass-through insurance) are not
considered general-use prepaid cards
that are issued or approved for use to
access or debit an account held by or for
the benefit of the cardholder and thus
may still qualify for the exemption in
§ 235.5(c)(1).
Commenters also requested that the
Board make a clearer distinction
between account and subaccount. In
response, the Board is adopting new
comment 5(c)–1 to draw a distinction
between an ‘‘account’’ and a
‘‘subaccount.’’ Comment 5(c)–1 states
that a subaccount is an account within
an account, opened in the name of an
agent, nominee, or custodian for the
benefit of two or more cardholders,
where the transactions and balances of
individual cardholders are tracked in
such subaccounts. An account that is
opened solely in the name of a single
cardholder is not a subaccount. This

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clarification is consistent with the way
the Board understands subaccounts are
structured for most prepaid card
programs.
1. Reloadable and Not Marketed or
Labeled as a Gift Card or Gift Certificate
The Board proposed to import
commentary related to the meaning of
reloadable and not marketed or labeled
as a gift card or gift certificate from 12
CFR 205.20 (‘‘Gift Card Rule’’), in which
the Board had previously defined and
clarified the meaning of ‘‘reloadable and
not marketed or labeled as a gift card or
gift certificate.’’ Specifically, proposed
comment 5(c)–1, providing guidance on
when a general-use prepaid card is
‘‘reloadable,’’ was adapted from
comment 20(b)(2)–1 under the Gift Card
Rule. Proposed comment 5(c)–2, which
was adapted from comment 20(b)(2)–2
under the Gift Card Rule, clarified the
meaning of the term ‘‘marketed or
labeled as a gift card or gift certificate.’’
Proposed comment 5(c)–3 provided
examples of what the term ‘‘marketed or
labeled as a gift card or gift certificate’’
includes and does not include that are
identical to the examples in comment
20(b)(2)–3 under the Gift Card Rule.
Proposed comment 5(c)–4, which
addressed issues related to maintaining
proper policies and procedures to
prevent a general-use prepaid card from
being marketed as a gift card or gift
certificate, was adapted from 20(b)(2)–4
under the Gift Card Rule. Finally,
proposed comment 5(c)–5, which
provided guidance relating to online
sales of gift cards, was substantially the
same as comment 20(b)(2)–5 under the
Gift Card Rule.
The Board received few comments on
proposed comments 5(c)–1 through
5(c)–5. One issuer expressed concerns
that the commentary, taken together, is
too prescriptive. The Board believes that
the detail is necessary to provide issuers
with sufficient guidance to determine
whether a prepaid card is considered to
be reloadable and not marketed or
labeled as a gift card or gift certificate.
Furthermore, the Board believes it is
important to maintain consistency with
the Gift Card Rule in interpretation of
what is meant by ‘‘reloadable and not
marketed or labeled as a gift card or gift
certificate.’’ Issuers and other parties
that are involved in the distribution and
sale of prepaid cards are required to
make these determinations with respect
to the Gift Card Rule, and consistent
interpretation across the two rules
should reduce confusion and
compliance burden.
One merchant group commented that
they did not believe HSAs, FSAs, or
HRAs qualified for the exemption in

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43439

§ 235.5(c)(1) because they believe that
cards accessing HSAs, FSAs, and HRAs
are not freely reloadable and may only
be reloaded during designated times.
The statute does not require that, to
qualify for the exemption, a card be
reloadable on a continuous basis, only
that the card be reloadable and not
marketed as a gift card. Accordingly, the
final rule has not been changed to
require that a card be continuously
reloadable to qualify for the exemption
for reloadable cards. Therefore, the
Board is adopting proposed comment
5(c)–1 as comment 5(c)–2 with minor
changes to clarify this point. The Board
is adopting proposed comments 5(c)–2
through 5(c)–5 without change as
comments 5(c)–3 through 5(c)–6.
2. Certification
The Board requested comment on
whether it should establish a process to
identify accounts accessed by cards
eligible for the reloadable prepaid cards
exemption or whether it should permit
payment card networks to develop their
own processes. Comments received on
the process for identifying accounts for
the reloadable prepaid card exemption
were similar to the comments received
on the process for identifying accounts
for the government-administered
payment programs exemption. For the
reasons discussed above with respect to
the government-administered payment
program exemption, the Board believes
that the process should be developed
and administered by the payment card
networks. See comment 5–2. Identifying
accounts is a complex process that the
payment card networks may be better
situated to administer. Furthermore, the
Board is concerned that a Boardadministered process could
unnecessarily delay the introduction of
new card programs.
3. Temporary Cards Issued in
Connection With a General-Purpose
Reloadable Card
Proposed § 235.5(c)(2) provided that
the term ‘‘reloadable’’ includes a
temporary non-reloadable card if it is
issued solely in connection with a
reloadable general-use prepaid card. As
the Board discussed in its proposal, this
treatment of temporary cards issued in
connection with a general-purpose
reloadable card is consistent with its
treatment under the Gift Card Rule.
Proposed comment 5(c)–6, similar to
comment 20(b)(2)–6 under the Gift Card
Rule, provides additional guidance
regarding temporary non-reloadable
cards issued solely in connection with
a general-purpose reloadable card. The
Board did not receive comment on the
proposed § 235.5(c)(2), which is adopted

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as proposed. There were also no
comments on proposed comment 5(c)–
6, which is adopted as comment 5(c)–
7 without change.
4. Cards Accessing HSAs, FSAs, and
HRAs and Qualified Transportation
Benefits
Many issuer commenters urged the
Board to exempt cards accessing HSAs,
FSAs, or HRAs from the interchange fee
restrictions as well as the network
exclusivity and routing provisions.
These commenters also suggested that
cards accessing qualified transportation
benefits should be exempt. In support of
their views, these commenters cited
statements from certain members of
Congress indicating their belief that
cards accessing these types of accounts
should be exempt from these provisions.
The statute does not provide an
exemption for cards accessing HSAs,
FSAs, or HRAs or qualified
transportation benefits. Some of these
cards may nonetheless fall outside the
definitions that establish the scope of
coverage of EFTA Section 920. For
example, § 235.2(a)(2), which defines
‘‘account,’’ does not cover accounts held
under a bona fide trust agreement. The
Board understands that some healthrelated accounts are established as bona
fide trust accounts. Therefore, to the
extent an account is established as a
bona fide trust account, electronic debit
transactions using a card that accesses
such an account would not be covered
by the provisions of this part.
For HSAs, FSAs, or HRAs or qualified
transportation benefits that are not
established as bona fide trust accounts,
cards accessing such accounts may still
meet one of the exemptions under
§ 235.5 from the interchange fee
restrictions, depending on how the
account is structured and the issuer of
the card. The Board addressed specific
comments related to whether electronic
debit transactions made using cards that
access HSAs, FSAs, and HRAs qualify
for the various exemptions from the
interchange fee restrictions in the
supplementary information to § 235.5(b)
and (c) above.
In addition, a number of commenters
agreed that issuers face significant
complications in complying with the
network exclusivity provisions with
respect to certain health care and
employee benefit cards under current
government rules governing these
programs. As discussed further in the
supplementary information related to
§ 235.7(c)(3) and comment 7(c)–1, the
Board is providing a delayed effective
date for electronic debit transactions
using debit cards that use point-of-sale
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substantiation systems for verifying the
eligibility of purchased goods or
services to provide issuers of such cards
additional time to identify and
implement approaches to comply with
the rule’s network exclusivity
provisions.
D. Section 235.5(d) Exception
EFTA Section 920(a)(7)(B) provides
that the exemptions available under
EFTA Sections 920(a)(7)(A)(i) and (ii)
terminate after the end of the one-year
period beginning on the effective date of
the statute if either of the following fees
may be charged: a fee for an overdraft,
including a shortage of funds or a
transaction processed for an amount
exceeding the balance; or a fee imposed
by the issuer for the first withdrawal per
month from an ATM that is part of the
issuer’s designated ATM network.
Proposed § 235.5(d) implemented this
section by providing that the
exemptions in §§ 235.5(b) and (c) are
not available for any interchange
transaction fee received or charged by
an issuer on or after July 21, 2012, with
respect to an electronic debit
transaction, if any of the following fees
may be charged to a cardholder with
respect to the card: (i) A fee or charge
for an overdraft, including a shortage of
funds or a transaction processed for an
amount exceeding the account balance,
unless the fee or charge is imposed for
transferring funds from another asset
account to cover a shortfall in the
account accessed by the card; or (ii) a
fee imposed by the issuer for the first
withdrawal per calendar month from an
automated teller machine that is part of
the issuer’s designated automated teller
machine network.153 The Board’s
proposal clarified that the fee described
in § 235.5(d)(1) does not include a fee or
charge imposed for transferring funds
from another asset account to cover a
shortfall in the account accessed by the
card. Such a fee is not an ‘‘overdraft’’ fee
because the cardholder has a means of
covering a shortfall in the account
connected to the card with funds
transferred from another asset account,
and the fee is charged for making such
a transfer. The Board has determined to
adopt § 235.5(d) as proposed, but is
making some revisions to the
commentary as discussed below.
Several industry commenters
suggested the Board clarify the proposed
exception. One prepaid card processor
requested that the Board make clear that
an issuer with its own proprietary ATM
network, which identifies the issuer’s
name and does not charge a fee for the
153 Section 235.2(g) defines the term ‘‘designated
automated teller machine (ATM) network.’’

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first ATM withdrawal in a calendar
month, does not lose the exemption
because the cards it issues also have
access to a nonproprietary ATM
network that charges fees. Proposed
§ 235.5(d)(2) provides that the
exemptions are not available if a fee is
imposed by the issuer for the first
withdrawal per calendar month from an
ATM that is part of the issuer’s
designated ATM network. Therefore, a
fee may be charged for a withdrawal
from an ATM outside of the issuer’s
designated ATM network without the
issuer losing the exemption. The Board
has adopted comment 5(d)–1 to clarify
this point by providing that an
electronic debit card transaction may
still qualify for the exemption under
§§ 235.5(b) or (c) with a respect to a card
for which a fee may be imposed for a
withdrawal from an ATM that is outside
of the issuer’s designated ATM network
as long as the card complies with the
condition set forth in § 235.5(d)(2) for
withdrawals within the issuer’s
designated ATM network.
An issuer requested that the Board
clarify that the condition in § 235.5(d)(2)
regarding ATM fees would not apply to
cards that do not have ATM access. A
card that does not have ATM access will
not be subject to any fees for
withdrawals from an ATM; therefore,
such a card would not lose the
exemption on the basis of § 235.5(d)(2).
The Board has added a sentence to
comment 5(d)–1 to clarify this point.
The Board also received a comment
from a prepaid card processor
suggesting that the Board provide
alternatives for issuers without their
own proprietary ATM network to meet
the condition set forth in § 235.5(d)(2)
by entering into an arrangement with
either (i) a nonproprietary network
where a fee will not be charged for the
first ATM withdrawal in a calendar
month; or (ii) a local bank, bank agent,
or retail seller to allow for in-branch or
in-store free cash withdrawal per
calendar month using the card,
regardless of whether any ATMs are
available for use. With respect to the
first suggested alternative, the Board
notes that an issuer’s ‘‘designated ATM
network’’ is defined in § 235.2(g) as
including either a network in the name
of the issuer or any network of ATMs
identified by the issuer that provides
reasonable and convenient access to the
issuer’s customers. As a result, the
definition already contemplates the
possibility of an issuer entering into an
arrangement with a nonproprietary
ATM network. With respect to the
second suggested alternative, tellers,
bank agents, and point-of-sale terminals
are not considered ATMs and cannot

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comprise an ATM network. If the card
can be used to access ATMs with an
issuer’s designated ATM network, then
in order for the card to qualify for the
general-use prepaid exemption after July
21, 2012, a fee cannot be imposed by the
issuer for the first withdrawal per
calendar month from an ATM that is
part of the issuer’s designated ATM
network, irrespective of whether a
cardholder can obtain fee-free cash
withdrawals from a branch or a retail
store.
A prepaid card trade group suggested
that the Board permit issuers to meet the
condition in § 235.5(d)(2) by providing
a credit to the cardholder within the
month that a fee for withdrawal from an
ATM is imposed. Although a cardholder
in this scenario would be reimbursed
the fee, and thus have a fee-free ATM
withdrawal, there may be other negative
consequences to the cardholder that
would not occur if the fee for the ATM
withdrawal had not initially been
imposed. For example, the imposition of
such a fee could cause a subsequent
transaction to be declined or returned.
The fact that the fee is later reimbursed
does not reverse the negative
consequence of the fee being imposed in
the first place. Therefore, the final rule
does not permit issuers to meet the
condition in § 235.5(d)(2) by imposing
the fee and providing a subsequent
credit.
Finally, consumer groups were
supportive of the conditions in
§ 235.5(d) and thought the conditions
provided important consumer
protections. However, they believed the
Board should require additional
protections, including extending the
other provisions of Regulation E, such
as error resolution and periodic
statement requirements, to general-use
prepaid cards, and preventing any form
of credit that automatically triggers
repayment of funds deposited on a
general-use prepaid card. The Board
believes that these suggestions fall
outside the scope of this rulemaking and
will not address these issues in this
final rule.
V. Section 235.6 Prohibition on
Circumvention or Evasion
EFTA Section 920 contains two
separate grants of authority to the Board
to address circumvention or evasion of
the restrictions on interchange
transaction fees. First, EFTA Section
920(a)(1) provides the Board with
general authority to prescribe rules to
prevent circumvention or evasion of the
interchange fee standards under EFTA
Section 920(a). In addition, EFTA
Section 920(a)(8) authorizes the Board
to prescribe rules regarding any network

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fees, but such authority is limited to
regulations to ensure that a network fee
(i) ‘‘is not used to directly or indirectly
compensate an issuer with respect to’’
an electronic debit transaction; and (ii)
‘‘is not used to circumvent or evade’’ the
interchange transaction fee restrictions
under EFTA Section 920(a) and this
rule.154 Under EFTA Section
920(a)(8)(B), using a network fee to
directly or indirectly compensate an
issuer with respect to an electronic debit
transaction is a separate prohibition
from using a network fee to circumvent
or evade the interchange fee standards.
The proposed rule contained a general
prohibition against circumventing or
evading the interchange transaction fee
restrictions, as well as a statement that
circumvention or evasion occurs if an
issuer receives net compensation from a
payment card network with respect to
electronic debit transactions.
The final rule adopts the proposed
rule’s general prohibition of
circumvention or evasion. Comment
6(a)–1 clarifies that the determination of
circumvention or evasion will be based
on the particular facts and
circumstances. The final rule also
prohibits an issuer from receiving net
compensation from a payment card
network, excluding interchange
transaction fees received from acquirers.
The commentary to the final rule
includes examples of situations that do
not involve net compensation, but may
nevertheless warrant additional
supervisory scrutiny to determine
whether circumvention or evasion
exists. Finally, the final rule clarifies the
time period over which net
compensation will be measured.
A. Overview of Network Fees, Discounts,
and Incentives
Payment card networks charge
network participants a variety of fees in
connection with electronic debit
transactions. On the issuer side, fees
charged by the network include access
fees for connectivity and fees for
authorizing, clearing, and settling debit
card transactions through the network
(i.e., switch fees). Issuers also pay fees
to the network for the costs of
administering the network, such as
service fees for supporting the network
infrastructure, and membership and
licensing fees. In addition, a network
may charge fees to issuers for optional
services, such as for transaction routing
and processing services provided by the
154 Under EFTA Section 920(a)(1), a network fee
is defined as ‘‘any fee charged and received by a
payment card network with respect to an electronic
debit transaction, other than an interchange
transaction fee.’’

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network or its affiliates or for fraud
detection and risk mitigation services.
On the acquirer and merchant side, a
network similarly charges fees for
accessing the network, as well as fees
for authorizing, clearing, and settling
debit card transactions through the
network. Likewise, networks charge
network administration fees,
membership or merchant acceptance
fees, and licensing or member
registration fees to acquirers and/or
merchants. There are also fees for
various optional services offered by the
network to acquirers or merchants,
including fees for fraud detection and
risk mitigation services.
A fee charged by the network can be
assessed as a flat fee or on a pertransaction basis, and may also vary
based on transaction size, transaction
type, or other network-established
criteria. Issuers and merchants may be
given individualized discounts by a
network relative to its published
network fee based on their transaction
volume.
In addition to discounts, issuers and
merchants may receive incentive
payments or rebates from a network.
These incentives may include upfront
payments to encourage issuers to shift
some or all of their debit card volume
to the network, such as signing bonuses
upon contract execution. Such
payments may help issuers defray the
conversion cost of issuing new cards or
of marketing the network brand. In
addition, issuers may receive incentive
payments upon reaching or exceeding
debit card transaction, percentage share,
or dollar volume threshold amounts.
Discounts and incentives enable
networks to compete for business from
issuers and merchants. Among other
things, these pricing tools help networks
attract new issuers and retain existing
issuers, as well as expand merchant
acceptance to increase the attractiveness
of the network brand. Discounts and
incentives also help networks to
encourage specific processing behavior,
such as the use of enhanced
authorization methods or the
deployment of additional merchant
terminals.
B. Section 235.6(a) Prohibition of
Circumvention or Evasion
A payment card network may
consider a number of factors in
calibrating the appropriate level of
network fees, discounts, and incentives
in order to achieve network objectives.
EFTA Section 920(a) does not directly
regulate the fees that a network may
charge for any of its services. Thus, the
final rule does not seek to set or
establish the amount, type, or level of

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Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations

network fees that a network may
permissibly impose on any network
participant for its services. However, the
statute authorizes the Board to prescribe
rules to prevent circumvention or
evasion of the interchange transaction
fee standards. This authority is both
general with respect to the Board’s
implementation of the interchange
transaction fee standards under EFTA
Section 920(a)(1), as well as specific
with respect to the use of network fees
under EFTA Section 920(a)(8)(B)(ii).
Under the proposed rule, § 235.6(a)
set out a general prohibition against
circumventing or evading the
interchange transaction fee standards in
§§ 235.3 and 235.4. In addition,
proposed § 235.6 expressly prohibited,
as an example of circumvention or
evasion of the interchange transaction
fee standards, an issuer from receiving
net compensation from a payment card
network with respect to electronic debit
transactions because such compensation
could effectively serve as a transfer to
issuers that may be in excess of the
amount of interchange transaction fee
revenue allowed under the standards in
§§ 235.3 and 235.4.
Proposed comment 6–1 further
clarified that any finding of
circumvention or evasion of the
interchange transaction fee standards
will depend on the relevant facts or
circumstances. Proposed comment 6–
1.i. provided an example of net
compensation occurring in violation of
the prohibition on circumvention or
evasion when an issuer receives
payments or incentives in connection
with electronic debit transactions that
exceed the total amount of fees paid by
the issuer to the network for such
transactions. The proposed comment
also included examples of payments or
incentives and fees that would be
included in the net compensation
determination, as well as those that
would not be included. Among the
payments or incentives that would be
considered in the net compensation
analysis were payments or rebates to
issuers for meeting or exceeding certain
transaction volume or dollar amount
thresholds, as well as marketing
incentives and other fixed payments for
‘‘debit card activities.’’
Issuers and depository institution
trade associations generally commented
that the proposed rule appropriately
limited the scope of the net
compensation analysis to payments
made ‘‘with respect to electronic debit
transactions.’’ However, these
commenters further stated that the
proposed commentary interpreting the
rule exceeded the scope of the statutory
prohibition on circumvention or evasion

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in EFTA Section 920(a)(8) by also
considering payments for ‘‘debit cardrelated activities.’’ In the view of these
commenters, the only payments that
should be considered in the net
compensation analysis are payments to
an issuer for its role in an electronic
debit transaction, or more precisely,
payments that vary with the number or
volume of debit card transactions
processed on the network. Accordingly,
issuers asserted that payments made by
networks to issuers for other debit cardrelated purposes, such as for marketing
or to encourage investment in network
infrastructure, should be excluded from
the net compensation analysis. Several
issuer commenters further expressed the
view that inclusion of payments that
were not tied to debit card volume
would unnecessarily inhibit a network’s
ability to attract issuers, promote
investment in the network, or provide
incentives for desirable issuer behavior,
such as enhancing data security
procedures.
Merchant commenters and a member
of Congress stated that the proposed
rule was overly narrow in scope in
limiting circumvention or evasion to
circumstances in which an issuer
receives net compensation from a
network in connection with electronic
debit transactions. These commenters
urged the Board to clarify that net
compensation is not the exclusive test
for circumvention by, for example,
including general anti-circumvention
language in the rule. According to
merchant commenters, such general
anti-circumvention language would
address attempts by networks and
issuers to adjust their pricing policies or
restructure their products to avoid being
subject to the standards set forth in the
rule. Merchants also recommended that
the Board specifically include an
enforcement mechanism to address
occurrences of circumvention or
evasion.
The final rule adopts the general
prohibition on circumvention or evasion
of the interchange transaction fee
standards in §§ 235.3 and 235.4,
substantially as proposed. Comment 6–
1, as in proposed comment 6–3, clarifies
that the prohibition in § 235.6 against
circumventing or evading the
interchange transaction fee standards
does not apply to issuers or products
that qualify for an exemption under
§ 235.5. Thus, for example, § 235.6 does
not apply to an issuer with consolidated
assets below $10 billion holding the
account that is debited in an electronic
debit transaction. The final rule adopts
the comment as proposed, redesignated
as comment 6–1.

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Comment 6(a)–1 is modified from the
language in the proposed commentary
to state more explicitly that
circumvention or evasion may include,
but is not limited to, circumstances in
which an issuer receives net
compensation from a payment card
network with respect to electronic debit
transactions or other debit card related
activity. Although the proposal
established a per se circumstance in
which circumvention or evasion of the
interchange transaction fee standards
occurs (i.e., when an issuer receives net
compensation with respect to electronic
debit card transactions), the Board did
not intend to limit potential findings of
circumvention or evasion to such
circumstances. Rather, as stated in the
supplementary information to the
proposed rule, § 235.6 establishes a
‘‘general prohibition against
circumventing or evading the
interchange transaction fee standards in
§§ 235.3 and 235.4.’’ 155 This concept is
made more explicit in the final rule by
separating the prohibition against
circumvention and evasion and the
prohibition against net compensation
into different subsections. Comment
6(a)–1 to the final rule retains the
provision in the proposed commentary
stating that a finding of circumvention
or evasion ‘‘will depend on all relevant
facts and circumstances.’’
In the proposal, the Board requested
comment on whether increases in fees
charged by the network to merchants or
acquirers coupled with corresponding
decreases in fees charged by the
network to issuers should also be
considered circumvention or evasion of
the interchange fee standards in
§§ 235.3 and 235.4. For example,
following the effective date of this rule,
a network might increase network
switch fees charged to merchants,
acquirers, or processors while
decreasing switch fees paid by issuers
for the same types of electronic debit
transactions. Under these
circumstances, the increase in network
processing fees charged to merchants is
arguably ‘‘passed through’’ to issuers
through corresponding decreases in
processing fees paid by issuers.
Issuers and payment card networks
generally commented that the rule
should not address the level of network
processing fees regardless of any
changes to the proportion of such fees
as applied to issuers and merchants.
These commenters asserted that EFTA
Section 920 is only intended to address
the level of interchange transaction fees
and therefore the statute does not
155 See 75 FR at 81747 (Dec. 28, 2010) (emphasis
added).

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Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations
regulate the structure or amount of noninterchange fees set by networks,
including network processing fees.
Merchant commenters, however, stated
that decreases in network processing
fees charged to issuers and increases in
network processing fees charged to
merchants or acquirers could easily
compensate issuers for reductions in the
level of interchange transaction fees in
circumvention of the interchange
transaction fee standard. Merchants thus
urged the Board to cap the level of
network fees at current levels until the
proposed network exclusivity and
routing provisions were fully
implemented (in particular, Alternative
B) to allow merchants the ability to
discipline network fees through their
routing choices. Merchants also urged
the Board to carefully monitor the
networks’ operating rules for any
changes that shift liability from issuers
to merchants as a way to make up for
lost income from interchange.
Although the Board recognizes that
decreases in issuer fees paid to the
network could have the effect of
offsetting reductions in interchange
transaction fee revenue that will occur
under the interchange transaction fee
standards in §§ 235.3 and 235.4, the
Board continues to believe that such
circumstances would not necessarily
indicate circumvention or evasion of the
interchange transaction fee standards.
Moreover, the Board is concerned that
an outright prohibition on such shifts in
the allocation of network fees would
effectively lock in the current
distribution of network fees between
issuers and merchants, thereby
constraining the ability of networks to
adjust their own sources of revenue in
response to changing market conditions.
Such a prohibition may preclude a
network from adopting a fee structure
similar to that used by a competing
network that obtained a larger
proportion of its fees from the merchant
side of the transaction. Finally, to the
extent that networks alter fees for
issuers that are incorporated into the
interchange fee standard, the
permissible interchange fee under the
standards will adjust to reflect those fee
changes. Accordingly, the final rule
does not treat shifts in the relative
proportion of network processing fees
paid by issuers and merchants as a per
se indication of circumvention or
evasion of the interchange transaction
fee standards. Instead, as discussed
above, individual determinations of
circumvention or evasion would depend
of the particular facts and
circumstances.
New comment 6(a)–2.i thus states that
increases in network fees charged to

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merchants or acquirers and decreases in
network fees charged to issuers do not
by themselves constitute circumvention
or evasion of the interchange transaction
fee standards; however, such action may
warrant additional supervisory scrutiny
to determine whether the facts and
circumstances constitute circumvention
or evasion.156 New comment 6(a)–2.ii
includes another example based on
merchant comments regarding issuers
adjusting their products to avoid the
final rule’s interchange fee limits. The
comment describes a situation where an
issuer replaces its debit cards with
prepaid cards that are exempt from the
interchange fee standards of §§ 235.3
and 235.4. The exempt cards are linked
to its customers’ transaction accounts
and funds are swept from the
transaction accounts to the prepaid
accounts as needed to cover transactions
made. Although this situation may not
constitute per se circumvention or
evasion, it warrants additional
supervisory scrutiny to determine
whether the facts and circumstances
constitute circumvention or evasion.
C. Section 235.6(b) Prohibition of Net
Compensation
The final rule sets out a prohibition
against net compensation in § 235.6(b).
The description of net compensation
contained in proposed comment 6–1.i
has been moved to § 235.6(b) of the final
rule’s regulatory text. As in the
proposed comment, an issuer has
received net compensation from a
payment card network if the total
amount of payments or incentives
received by the issuer from the payment
card network during a calendar year in
connection with electronic debit
transactions or other debit card-related
activity, excluding interchange
transaction fees that are passed through
to the issuer by the network, exceeds the
total of all fees paid by the issuer to the
network for electronic debit transactions
or other debit card related activity
during that calendar year.
The Board notes that the prohibition
in EFTA Section 920(a)(8)(B)(i) is not
limited to direct compensation to an
issuer with respect to electronic debit
156 Merchants also commented that in permitting
networks to raise their network fees for merchants
or to decrease them for issuers (or both) so long as
net compensation is not provided, the Board
contradicted its own reasoning for excluding
network fees as an allowable cost that can be
recovered through the interchange transaction fee
standards, that is, to prevent merchants from having
to pay all processing fees. As discussed above,
however, the final rule permits network processing
fees incurred by issuers to be recovered through the
interchange transaction fee standards as such costs
are incurred to effect an electronic debit card
transaction.

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43443

transactions, but also applies to
circumstances in which network fees
are used to ‘‘indirectly’’ compensate an
issuer with respect to such transactions.
Moreover, EFTA Section 920(a)(8)(B)(ii)
also includes general authority to ensure
that network fees are not used to
circumvent or evade the interchange
transaction fee standards of the rule.
Pursuant to these statutory authorities,
the Board believes that the net
compensation determination should
take into consideration any payments or
incentives paid by a network to an
issuer for debit card-related activities. In
particular, the Board believes that
limiting the payments or incentives to
payments that are directly related to the
number or volume of debit card
transactions on the network would
potentially create a significant loophole
as networks could respond by providing
sizable non-volume based incentive
payments to an issuer for debit card
activities to offset the reduced revenue
from the limitations on interchange
transaction fees in §§ 235.3 and 235.4.
Accordingly, § 235.6(b) in the final rule
states that payments and incentives paid
to an issuer by a network, and fees paid
by an issuer to a network ‘‘with respect
to electronic debit transactions or debit
card-related activities,’’ are not limited
to volume-based or transaction-specific
payments, incentives, or fees, but also
include other payments, incentives, or
fees related to an issuer’s provision of
debit card services. Such payments
could include, for example, bonuses to
convert an issuer’s card base to a new
signature network, or marketing
incentives. Comment 6(b)–2 to the final
rule provides guidance on the payments
or incentives paid by a payment card
network that could be considered in
determining whether an issuer has
received net compensation. Consistent
with the proposal, comment 6(b)–2.i
states that payments or incentives paid
by a payment card network could
include, but are not limited to,
marketing incentives, payments or
rebates for meeting or exceeding a
specific transaction volume, percentage
share, or dollar amount of transactions
processed, or other payments for debit
card-related activities.
As noted above, signing bonuses are
used as a network tool for encouraging
issuers to shift debit card volume to a
network, and for maintaining existing
card volume on the network. For
example, an initial upfront payment
from a network may serve to
compensate the issuer for its costs in
converting its card base to a new
signature debit network. Signing
bonuses may also offset the issuer’s

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Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations

costs in upgrading its internal
processing systems and establishing
connectivity to the new network. In its
proposal, the Board requested comment
on whether signing bonuses should also
be considered as payments or incentives
paid by a network to an issuer for
purposes of the net compensation
determination.
Issuer commenters generally
responded with similar arguments made
in connection with the treatment of
debit card-related payments unrelated to
transaction volume, stating that such
bonuses should not be included in the
determination because they do not
compensate an issuer for the number or
volume of transactions processed on a
network. One payment card network
expressed concern that including
signing bonuses in the net
compensation determination could
reduce a network’s ability to compete
with another payment card network that
also offered products or services
unrelated to their operation of the
network at a discount. This network
stated that if the final rule curtailed
networks’ ability to offer signing
bonuses by including them in the net
compensation calculation, operators of
networks that did not offer additional
products or services would be left at a
competitive disadvantage in their ability
to compete for debit card business.
Some issuers observed that initial
upfront payments and incentives were
likely to exceed the fees charged to the
issuer for the first year. For example, a
network may provide a new issuer an
incentive to participate in the network
to offset the issuer’s costs to reissue
cards, promote the new network brand
to cardholders, and establish network
connectivity. In this regard, because of
the potential size of signing bonuses in
relation to fees paid by an issuer on a
year-to-year basis, several issuers and
one payment card network urged the
Board to clarify that signing bonuses
would be eligible for pro rata treatment
over the term of the contract.
Merchants, two payment card
networks, and a processor with an
affiliated payment card network, by
contrast, believed that signing bonuses
should be included in the net
compensation determination. Some of
these commenters expressed the view
that excluding signing bonuses could
undermine the entire net compensation
approach because networks could create
packages with signing bonuses, funded
by imposing increased network fee on
merchants, without violating the rule.
Comment 6(b)–2.i clarifies that the
determination of whether net
compensation exists must also take into
account signing bonuses paid by a

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network to an issuer to retain or attract
the issuer’s debit card portfolio. Just as
marketing incentives and other nonvolume based payments for debit cardrelated activities could be used by a
network to compensate an issuer for the
issuer’s role in electronic debit
transactions above and beyond the
limits permitted under §§ 235.3 and
235.4, the Board believes that signing
bonuses could similarly be used as a
mechanism to generate payments to an
issuer in excess of the amount permitted
under §§ 235.3 and 235.4, absent
inclusion in the net compensation
calculation. However, as further
provided in comment 6(b)–2.ii, the
Board agrees that it would be
appropriate to allocate such bonuses
over the life of the debit card contract
in calculating the payments or
incentives paid by a network to an
issuer. To the extent an issuer receives
signing bonuses for its entire card
portfolio, including for the issuer’s
credit card business, an appropriate
portion of such bonuses should be
allocated to the issuer’s debit card
business based on the proportion of the
cards or transactions that are debit cards
or electronic debit transactions, as
appropriate to the situation, for
purposes of the net compensation
determination.
Comment 6(b)–2.iii lists types of
payments or incentives that need not be
included in the total payments or
incentives paid by a network to an
issuer for purposes of the net
compensation analysis. Among other
payments that may be received from a
network, issuers may exclude any
interchange transaction fees that are
passed through to the issuer by the
network. The comment also clarifies
that incentives paid by a payment card
network do not include funds received
by an issuer from a payment card
network as a result of chargebacks or
fines paid by merchants or acquirers for
violations of network rules. In response
to issuer comments, the commentary
also clarifies that settlements or
recoveries from merchants or acquirers
to offset the costs of fraudulent
transactions or a data security breach do
not constitute payments or incentives
paid by a payment card network.
The proposed commentary also stated
that fees paid by an issuer could include
fees for optional services provided by
the network. See proposed comment 6–
2.ii. Merchants expressed concern that
the proposed approach created a
loophole that could permit networks to
increase the incentives paid to issuers
without providing net compensation if
fees paid to a network included fees
paid to a third-party processor affiliated

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with the network. In such case, an
issuer would be permitted to recover
those costs from merchants and
acquirers through the interchange fee
standard to the extent such costs were
related to the authorization, clearing, or
settlement of electronic debit
transactions. If those recoverable costs
were also included in the net
compensation test, however, such
processing costs could increase the
amount of incentives that could be
transferred by the network to the issuer.
The network could then fund the
additional incentives by increasing the
network fees paid by merchants or
acquirers.
Merchant commenters proposed two
different approaches to address their
concerns. First, they stated that the
Board could limit the recoverable costs
through the interchange fee standards to
a processor’s actual costs of authorizing,
clearing, and settling an electronic debit
transaction where debit card processing
is outsourced to the third-party
processor. Issuers, however, generally
do not have knowledge of their
processors’ actual costs. Alternatively,
these commenters recommended that
the final rule exclude fees paid by an
issuer for third-party processing from
the total amount of fees paid to a
network for purposes of the net
compensation determination.
The Board agrees that the proposed
approach could enable networks to
substantially increase the incentives
paid to issuers without violating the net
compensation test and has determined
that the test should be based on fees that
are not incorporated into the
interchange fee standard. Therefore, the
Board has excluded from the net
compensation test fees for issuerprocessor services paid by an issuer to
a network or network affiliate. For
similar reasons, the Board has excluded
network processing, or switch, fees from
the net compensation calculation
because under the final rule such fees
are also incorporated in the interchange
fee standard.
New comment 6(b)–3 incorporates the
proposed guidance describing the
examples of fees paid by an issuer to a
payment card network for purposes of
the net compensation determination.
Accordingly, the comment provides that
fees paid by an issuer to a payment card
network include, but are not limited to,
network membership or licensing fees,
and network administration fees. Fees
paid by an issuer could also include fees
for optional services provided by the
network, such as risk management
services.
Comment 6(b)–4 provides an example
of circumstances that do not constitute

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net compensation to the issuer. In the
example, an issuer receives an
additional incentive payment from the
network as a result of increased debit
card transaction volume over the
network during a particular calendar
year. During the same period, however,
the total network fees the issuer pays
the payment card network with respect
to electronic debit transactions also
increase so that the total amount of fees
paid by the issuer to the network
continues to exceed the total amount of
incentive payments received by the
issuer from the network during that
calendar year. Under these
circumstances, the issuer does not
receive net compensation from the
network for electronic debit
transactions. See comment 6(b)–4.i.
A few large issuers and a payment
card network commented that the
prohibition against circumventing or
evading the interchange transaction fee
standards should apply only to
contractual arrangements between a
payment card network and an issuer
that are entered into on or after the date
of enactment of the Dodd-Frank Act,
July 21, 2010. The Board does not
believe that such arrangements should
be grandfathered, but the date on which
such arrangements are entered into
would be included in the facts and
circumstances analysis for
circumvention or evasion. Such
arrangements would, however, be
subject to the prohibition against net
compensation.
D. Additional Uses of Circumvention or
Evasion Authority
As discussed above under § 235.5,
trade associations representing small
issuers, including credit unions, and
one federal banking agency urged the
Board to use its circumvention or
evasion authority to ensure that the
small issuer exemption in EFTA Section
920(a)(6) from the interchange
transaction fee standards is given effect
by the networks. In particular, these
commenters were concerned that absent
an express requirement on networks to
adopt higher tiers of interchange fees for
exempt issuers, such issuers would
experience a significant reduction in
interchange fee revenue,
notwithstanding the exemption.
The Board notes that Section 920(a)
imposes restrictions on the interchange
fees that issuers may charge or receive
and requires the Board to set standards
regarding those fees—it does not confer
authority on the Board to regulate the
activities of networks (other than
regarding the use of network fees to
compensate issuers or to circumvent the
interchange fee standards) or to require

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merchants to pay any particular level of
fees. Moreover, although the statute
provides an exemption from the
interchange transaction fee standards for
issuers with less than $10 billion in
consolidated assets, the statute neither
imposes an affirmative duty on
networks to implement different
interchange transaction fee rates for
covered and non-covered issuers, nor
requires merchants to pay a particular
level of interchange fee revenue that
may be collected by an exempt issuer.
Thus, the Board does not believe that
the circumvention or evasion authority
confers authority on the Board to
require networks to take specific actions
to implement the small issuer exception
(which do not involve the use of
network fees) or merchants to pay
higher interchange fees to small issuers.
As discussed above, however, the
final rule relies on specific authority
granted in Section 920(a)(3)(B) to collect
and publish information from issuers
and networks to separately require
networks to report to the Board the
interchange revenue and related debit
card volumes for exempt and covered
issuers. The Board intends to publish on
an annual basis the average interchange
revenue received by covered and
exempt issuers by network. The Board
anticipates that greater transparency
regarding network interchange policies
will facilitate issuers’ ability to more
easily choose the networks that best
serve their individual requirements,
including the level of interchange
transaction fees that apply to issuers on
the network.
VI. Section 235.7 Limitations on
Payment Card Restrictions
EFTA Section 920(b)(1) directs the
Board to prescribe regulations with
respect to two limitations set out in the
statute regarding transaction processing.
First, the Board must prescribe
regulations prohibiting an issuer or
payment card network from restricting
the number of payment card networks
on which an electronic debit transaction
may be processed to fewer than two
unaffiliated networks (network
exclusivity restrictions).157 Second, the
Board must prescribe regulations that
prohibit an issuer or payment card
network from directly or indirectly
inhibiting any person that accepts debit
cards for payment from directing the
routing of an electronic debit
transaction through any network that
may process that transaction (merchant
routing restrictions).158 Section 235.7

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158 See

EFTA Section 920(b)(1)(A).
EFTA Section 920(b)(1)(B).

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implements these limitations on
payment card network restrictions.
EFTA Sections 920(b)(2) and (3)
impose certain limits on the ability of
payment card networks to restrict
merchants and other persons in
establishing the terms and conditions
under which they may accept payment
cards. Specifically, EFTA Section
920(b)(2) prohibits a payment card
network from establishing rules that
prevent merchants from offering
discounts or in-kind incentives based on
the method of payment tendered to the
extent that such discounts or incentives
do not differentiate on the basis of the
issuer or payment card network. In
addition, EFTA Section 920(b)(3)
prohibits a payment card network from
establishing rules that prevent
merchants from setting minimum
transaction amounts for accepting credit
cards to the extent that such minimums
do not differentiate between issuers and
payment card networks. These two
statutory provisions are self-executing
and are not subject to the Board’s
rulemaking authority.159
EFTA Section 920(b) does not provide
a statutory exemption for small issuers,
government-administered payment
cards, or covered reloadable prepaid
cards. Thus, the exemptions in section
235.5 of the rule do not extend to the
prohibitions on network exclusivity
arrangements and merchant routing
restrictions under EFTA Section 920(b)
implemented in § 235.7. See comment
7–1. As discussed below, however, the
final rule provides a delayed effective
date for certain types of debit cards to
allow issuers to address significant
technological or operational
impediments to an issuer’s ability to
comply with the network exclusivity
and routing provisions of the rule.
A. Section 235.7(a) Prohibition on
Network Exclusivity
EFTA Section 920(b)(1)(A) directs the
Board to prescribe rules prohibiting an
issuer or a payment card network from
directly, or indirectly through any agent,
processor, or licensed member of a
payment card network, restricting the
number of payment card networks on
which an electronic debit transaction
may be processed to fewer than two
unaffiliated payment card networks.
Section 235.7(a) implements the new
requirement and prohibits an issuer or
payment card network from restricting
the number of payment card networks
on which an electronic debit transaction
159 The Board may, however, increase from $10
the minimum value amount that a merchant may
set for credit card acceptance. EFTA Section
920(b)(3)(B).

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may be processed to fewer than two
unaffiliated networks, regardless of the
method of authentication.
Currently, issuers, or in some cases,
networks, control the merchant routing
of electronic debit transactions. For
example, for PIN debit transactions,
current network rules typically allow
issuers to specify routing priorities
among the networks enabled on their
cards.160 These issuer-determined
routing priorities require a transaction
to be performed using an issuer’s
preferred network, even if a merchant
may prefer to perform the transaction
over a lower-cost network that is
available for the transaction. Moreover,
issuers can influence routing by limiting
the networks enabled on their cards. For
example, certain issuers have agreed to
make a payment card network, or group
of affiliated networks, the exclusive
network(s) associated with the issuer’s
debit cards in exchange for certain
benefits.161 In particular, some issuers
have agreed to restrict their cards’
signature debit functionality to a single
signature debit network and their PIN
debit functionality to the PIN debit
network that is affiliated with the
signature debit network. Finally, at least
one commenter raised concerns that
certain signature debit network rules
could be interpreted to prohibit issuers
of debit cards carrying the signature
network brand from enabling other
signature debit networks or certain
competing PIN debit networks on the
same card. Issuers and merchants,
however, have different incentives
regarding the routing of transactions, as
described below.
Issuers may have a number of reasons
to prefer that a particular payment card
network carry their transactions. First,
to the extent that interchange fees vary
across networks, issuers would typically
prefer the network with the highest
interchange fee, all else equal. Second,
in recent years, payment card networks
have increasingly offered issuers other
financial incentives in exchange for
directing a substantial portion of their
debit card transaction volume to their
respective networks. For example, some
160 In other cases, a PIN debit network itself may
require, by rule or contract, that PIN debit
transactions be routed over that network when
multiple PIN networks are available. These issueror network-directed priority rules are generally
unnecessary for signature debit networks as there is
typically only a single payment card network
available per card for processing a signature debit
transaction.
161 Some issuers also negotiate or enroll in
‘‘exclusivity arrangements’’ with payment card
networks for other business purposes. For example,
an issuer may want to limit its participation to one
network (or two affiliated networks) to reduce the
membership and compliance costs associated with
connecting to multiple networks.

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issuers may agree to shift some or all of
their debit card transaction volume to a
network in exchange for higher
incentive payments (such as volumebased payments or marketing support)
or volume-based discounts on network
fees charged to the issuer.
From the merchant perspective, the
availability of multiple card networks
for processing debit card transactions
and the elimination of routing
restrictions are attractive because they
give merchants the flexibility to route
transactions over the network that will
result in the lowest cost to the
merchant, such as through the network
with the lowest interchange fee. This
flexibility may promote direct price
competition for merchants among the
debit card networks that are enabled on
the debit card. Accordingly, restrictions
on this choice, such as network
exclusivity arrangements, limit
merchants’ ability to route transactions
over lower-cost networks and may
reduce network price competition.
From the cardholder perspective,
however, requiring that merchants have
the ability to choose among multiple
payment card networks enabled on
debit cards—particularly multiple
signature debit networks—could have
adverse effects. In particular, such a
requirement could limit the
cardholder’s ability to obtain certain
card benefits. For example, a cardholder
may receive zero liability protection or
enhanced chargeback rights only if a
transaction is processed over a specific
card network. Similarly, insurance
benefits for certain types of transactions
or purchases or the ability to receive
text alerts regarding possible fraudulent
activity may be tied to the use of a
specific network.162 Requiring multiple
unaffiliated payment card networks,
coupled with a merchant’s ability to
route electronic debit transactions over
any of those networks, could reduce the
ability of a cardholder to control the
network over which a transaction would
be routed. Consequently, such a
requirement could reduce the likelihood
that the cardholder would be able to
obtain benefits that are specific to a
particular card network. Moreover, it
may be challenging for issuers or
networks to market a benefit to
cardholders if the issuer has to inform
cardholders that they will receive
certain benefits only if a merchant
chooses to route their transaction over
that particular network. On the other
hand, cardholders and consumers
162 These benefits are often provided for
transactions routed over signature debit networks;
they are less commonly available for PIN debit
transactions.

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generally may benefit to the degree that
routing choice for merchants results in
lower debit interchange fees with
savings that are passed on to consumers
in the form of lower prices for goods
and services.
1. Proposed Rule
In the proposed rule, the Board
requested comment on two alternative
approaches for implementing the
restrictions on debit card network
exclusivity. The first alternative
(Alternative A) would require a debit
card to have at least two unaffiliated
payment card networks available for
processing an electronic debit
transaction. Under this alternative, an
issuer could comply by, for example,
having one payment card network
available for signature debit transactions
and a second, unaffiliated payment card
network available for PIN debit
transactions. The second alternative
(Alternative B) would require a debit
card to have at least two unaffiliated
payment card networks available for
processing an electronic debit
transaction for each method of
authentication available to the
cardholder. For example, a debit card
that can be used for both signature and
PIN debit transactions would be
required to offer at least two unaffiliated
signature debit payment card networks
and at least two unaffiliated PIN debit
payment card networks. The second
alternative recognized in part that PIN
debit is not currently available for a
significant number of merchants, either
because they do not accept PIN debit or
because PIN debit is not generally
feasible in some retail environments,
such as for Internet transactions, or
transactions such as hotel stays and car
rentals, where the final amount of the
transaction cannot be determined at the
time a transaction is authorized.
In the comments received, support for
the two alternative approaches was
divided primarily along issuer and
merchant perspectives, with issuers
strongly in support of Alternative A and
merchants strongly in support of
Alternative B. Payment card networks
also favored Alternative A, while the
one consumer group commenting on the
issue favored Alternative B.
2. Comments Received
Issuers and networks stated that
Alternative A as proposed fully satisfies
the text and intent of the network
exclusivity restrictions in EFTA Section
920(b)(1)(A). Issuers and networks
further asserted that the approach taken
in proposed Alternative B is
unsupported by the statute, which does
not distinguish between transactions by

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the method of cardholder
authentication. Issuers and networks
also noted that Alternative A would be
far less disruptive to the payment
system because many institutions are
already in compliance with Alternative
A and support multiple unaffiliated PIN
networks.
By contrast, issuers and networks
expressed significant concern about the
operational cost and burden of
implementing Alternative B, which in
their view is not currently feasible
because it would require enabling
multiple signature networks on a card.
In particular, issuers, networks, and
card processors noted several changes
that would be required in order to
implement Alternative B. Among these
changes, these commenters stated that
merchants, acquirers, issuer processors,
and issuers would have to replace
routing logic to ensure that
authorization, settlement, dispute
processing, and fraud reporting records
for electronic debit transactions are
routed to the network selected by the
merchant, instead of basing the logic on
the first digit of the account number or
card BIN. These commenters also
suggested that point-of-sale terminals
would have to be re-programmed or
replaced to ensure that transactions can
be routed to the appropriate network.
Issuers also cited the expense of
negotiating contracts with and
participating in additional networks,
including the costs of complying with
multiple network rules, in order to
comply with Alternative B, a burden
that could be particularly onerous for
smaller issuers. Moreover, several
issuers contended that under the
proposed interchange fee standards,
they would be unable to recover the full
costs of their current programs, much
less the additional costs required to
comply with Alternative B.
Issuers and networks also expressed
concern that Alternative B would
discourage investment and innovation
in new authentication technologies. For
example, these commenters argued that
networks and issuers may have less
incentive to develop and deploy new
methods of authentication if they are
required to share that technology with
other parties to ensure that the new
authentication method could be used on
multiple unaffiliated networks.
Several issuers asserted that in many
cases where PIN debit is unavailable, it
is due to a merchant’s choice not to offer
PIN debit. These issuers also cited the
development of alternative technologies
that could facilitate the use of PIN debit
in additional retail environments,
including Internet transactions.

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Finally, many issuers stated their
belief that Alternative B is more likely
to cause consumer confusion and
potentially frustrate consumer choice to
the extent that certain cardholder
benefits, such as zero liability, enhanced
chargeback rights, rewards, or
insurance, are tied to the use of a
particular network. In their view,
Alternative B, with the potential of
requiring four networks on a debit card,
would make it less likely that a
cardholder would receive those benefits
if a merchant opted to route a
transaction over a different network.
Merchants strongly urged the Board to
adopt Alternative B to require debit
cards to carry at least two unaffiliated
networks for each method of
authentication in order to create
network competition for every
transaction. Merchants argued that
Alternative B would give them the
ability to discipline the level of network
processing fees by routing transactions
to the lowest cost network. A consumer
group commenter agreed that
Alternative B was more likely to lead to
greater competition between networks
through lower transaction fees and
better services, which would in turn
benefit consumers through lower prices
for goods and services.
Merchant commenters described a
number of situations in which
Alternative B would provide merchants
with greater routing choice. These
commenters observed that certain retail
environments, such as Internet
transactions, cannot readily accept PIN
debit under current technology. These
commenters further argued that, in other
cases, certain types of debit cards may
not be suited for PIN debit, such as
health care cards that require
specialized transaction qualification or
substantiation systems that currently
operate only on signature debit
networks. In each of these
circumstances, a merchant would not
have any routing options under
Alternative A. Merchants also noted that
under Alternative A, even where both
signature and PIN debit are available, a
merchant’s routing choice would be
limited to a single network once the
consumer has selected his or her
authentication method. Merchants thus
asserted that Alternative B was most
consistent with statutory purpose
because it would not limit merchant
routing choice either by the way a
transaction is authorized or by the type
of transaction.
Finally, merchant commenters
believed that Alternative B was more
likely to foster new entrants offering
signature debit to increase market
competition. These commenters also

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predicted that new PIN debit networks
would enter the market if Alternative B
were adopted. Merchant commenters
thus rejected issuer assertions regarding
the operational burden associated with
Alternative B, arguing that existing
infrastructure already in place to
support multiple PIN networks could be
leveraged to also support multiple
signature debit networks.
3. Section 235.7(a)(1)—General Rule
The final rule adopts Alternative A (at
least two unaffiliated payment card
networks) with respect to the network
exclusivity provisions. The Board
believes that Alternative A is most
consistent with EFTA Section
920(b)(1)(A), which provides that an
issuer and payment card network do not
violate the prohibition against network
exclusivity arrangements as long as the
number of payment card networks on
which an electronic debit transaction
may be processed is not limited to fewer
than two unaffiliated payment card
networks. The plain language of the
statute does not require that there be
two unaffiliated payment card networks
available to the merchant for each
method of authentication. In other
words, the statute does not expressly
require issuers to offer multiple
unaffiliated signature and multiple
unaffiliated PIN debit card network
choices on each card.
The Board has also considered the
compliance burden presented by the
two alternative approaches and the
benefits to consumers of each approach.
The Board understands that many
issuers, particularly small issuers, are
already in compliance with Alternative
A, as they may already have multiple
unaffiliated PIN networks enabled on
their debit cards, or a signature network
and an unaffiliated PIN network. Thus,
Alternative A would minimize the
compliance burden on institutions,
particularly small issuers that might
otherwise be adversely affected by a
requirement to have multiple networks
for each method of debit card
authentication. Alternative A would
also present less logistical burden on the
payment system overall as it would
require little if any re-programming of
routing logic by issuers, networks,
issuer processors, and acquirers.
From the consumer perspective, as
noted above, requiring multiple
payment card networks could limit the
cardholder’s ability to obtain card
benefits that are tied to a particular
network, such as zero liability
protection or the ability to receive text
alerts regarding possible fraud.
Moreover, explaining the circumstances
under which a cardholder may receive

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those benefits could be challenging for
issuers, regardless of the alternative
approach taken in the final rule. The
Board believes that Alternative A would
result in less consumer confusion than
might otherwise result under
Alternative B.
The Board acknowledges that
Alternative A provides merchants fewer
routing options with respect to certain
electronic debit transactions compared
to Alternative B. Nonetheless, under
Alternative A, merchants that currently
accept PIN debit would have routing
choice with respect to PIN debit
transactions in many cases where an
issuer chooses to participate in multiple
PIN debit networks. Moreover, the
Board notes that EFTA Section
920(b)(1)(A) prohibits an ‘‘issuer or
payment card network’’ from restricting
the number of payment card networks
on which an electronic debit transaction
may be processed. To the extent a
merchant has chosen not to accept PIN
debit, the merchant, and not the issuer
or the payment card network, has
restricted the available choices for
routing an electronic debit transaction
under Alternative A. Similarly, where a
consumer selects signature or PIN debit
as the method of payment, the
consumer, and not the issuer or the
payment card network, has restricted
the available routing choices.
The Board further understands that
there exist emerging PIN debit products
and technologies that would allow PIN
debit to be used in additional retail
environments where PIN debit is not
generally offered, such as for online
purchases. Some billers and at least one
online merchant accept transactions that
are routed over PIN debit networks,
without requiring the cardholder to
provide his or her PIN.163 The Board
anticipates that the elimination of
network and issuer-based routing
restrictions may further promote
innovation to facilitate the use of PIN
debit in additional retail environments.
See discussion in relation to § 235.7(b).
Finally, the Board is persuaded that
Alternative B and its requirement to
enable multiple unaffiliated payment
card networks on a debit card for each
method of card authentication could
potentially limit the development and
introduction of new authentication
methods. Although PIN and signature
are the primary methods of debit card
transaction authentication today, new
authentication measures involving
163 A large online merchant is currently
processing some online customer payments as PINless debit transactions. See http://
www.amazon.com/gp/help/customer/display.html/
ref=hp_518224_pinless?ie=UTF8&nodeId=
518224&#pinless

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biometrics or other technologies may, in
the future, be more effective in reducing
fraud. An issuer, however, may be
unable to implement these new methods
of card authentication if the rule
requires that such transactions be
capable of being processed on multiple
unaffiliated networks offering the new
authentication method.
Thus, for the foregoing reasons, the
final rule provides that the network
exclusivity provision in § 235.7(a)(1) is
satisfied as long as an electronic debit
transaction may be processed on at least
two unaffiliated payment card networks.
Comment 7(a)–1 clarifies that
§ 235.7(a)(1) does not require an issuer
to have multiple, unaffiliated networks
available for each method of cardholder
authentication. Under the final rule, it
would be sufficient, for example, for an
issuer to issue a debit card that operates
on one signature-based card network
and on one PIN-based card network, as
long as the two card networks are not
affiliated. Alternatively, an issuer could
issue a debit card that operates on two
or more unaffiliated signature-based
card networks, but is not enabled for
PIN debit transactions, or that operates
on two or more unaffiliated PIN-based
card networks, but is not enabled for
signature debit transactions.
4. Section 235.7(a)(2)–(3) Permitted And
Prohibited Arrangements
Proposed § 235.7(a)(2) described three
circumstances in which an issuer or
payment card network would not satisfy
the general requirement to have at least
two unaffiliated payment networks on
which an electronic debit transaction
may be processed, regardless of which
of the alternatives is adopted. The
proposed provision generally described
circumstances in which a payment card
network that is added to a debit card
would not satisfy the network
exclusivity provisions in § 235.7(a)(1)
due to geographic or merchant coverage
restrictions. See proposed
§§ 235.7(a)(2)(i) and (ii). The proposal
also prohibited, as an impermissible
exclusivity arrangement, contractual
restrictions or limitations set by a
payment card network on an issuer’s
ability to contract with another payment
card network. See proposed
§ 235.7(a)(2)(iii).
The final rule generally adopts the
proposed provisions with modifications
and adjustments in response to
comments. Section 235.7(a)(3) of the
final rule describes prohibited
exclusivity arrangements by networks.
Proposed § 235.7(a)(2)(i) provided that
an issuer would not satisfy the
requirement to have at least two
unaffiliated payment card networks

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enabled on a debit card by adding a
payment card network that is not
accepted on a nationwide basis. Thus,
for example, an issuer could not comply
with the network exclusivity provision
by having a second unaffiliated payment
card network that is accepted in only a
limited geographic region of the
country. The proposal further provided,
however, that an issuer could comply
with proposed § 235.7(a)(1) if, for
example, the debit card operates on one
national network and multiple
geographically limited networks that are
unaffiliated with the first network and
that, taken together, provide nationwide
coverage. The Board also requested
comment on the impact of the proposed
approach on the viability of regional
payment card networks and on small
issuers that are more likely to use
regional networks for their debit cards.
Several issuers objected to the
proposed condition that a payment card
network operate on a nationwide basis,
asserting that the rule should permit
issuers broad discretion to select
unaffiliated networks that serve their
market areas and cardholder needs, and
that a network with coast-to-coast
coverage may not be appropriate for all
issuers. Issuers and a few networks
expressed concern that smaller regional
networks would be affected adversely if
the nationwide coverage requirement
were adopted, because the requirement
would reduce competition between
large and small networks. A few issuers
commented that small issuers that
currently use regional networks would
incur additional costs to add nationwide
PIN networks under the proposed rule,
but would receive little benefit as most
of their card transactions currently take
place within their network’s geographic
coverage area. Moreover, commenters
argued that requiring nationwide
coverage would effectively prevent the
establishment of new networks, which
historically have started in small
geographic markets.
Issuers and networks suggested a
number of alternative approaches to the
proposed rule, including providing that
a network must have general acceptance
availability within the cardholder’s area
of residence; allowing a network to be
added as long as is it accepted at the
nation’s largest retailers; and providing
that a regional network must establish
network connectivity or reciprocal
arrangements with other networks that
would allow a card to have nationwide
coverage by routing transactions to the
regional network via a gateway
arrangement. A few issuers and one
regional network suggested a coverage
test under which a certain percentage of
a debit card’s transactions must take

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place within a network’s geographic
coverage area.
Merchants generally argued that a
network with limited geographic
acceptance would not comply with the
statute because there would be portions
of the United States where merchants
would not have a viable second debit
network option. Merchants further
argued that an issuer could add other
regional networks such that the
networks would collectively provide
merchants the ability to route an
electronic debit transaction over at least
two unaffiliated payment card networks
throughout most of the country. In that
regard, merchants disagreed that the
proposed rule would reduce the
viability of regional networks,
contending that such networks would
likely gain volume if they are enabled
on additional debit cards to comply
with the rule.
The final rule in § 235.7(a)(2)
describes the necessary conditions to
satisfy the requirement to have at least
two unaffiliated payment card networks
available for processing an electronic
debit transaction under § 235.7(a)(1).164
As in the proposal, under the final rule,
an issuer may satisfy the network
exclusivity provisions of § 235.7(a)(1) if
an electronic debit transaction may be
processed on at least two unaffiliated
payment card networks that operate
throughout the United States. Debit
cards that operate on at least two
nationwide payment card networks
would most effectively provide
merchants routing choice regardless of
where a cardholder uses the card.
The Board does not believe, however,
that a payment card network operating
on a nationwide basis should be the sole
means by which an issuer could satisfy
the network exclusivity provisions. An
overly restrictive nationwide coverage
requirement may reduce network choice
for issuers, with little benefit to
merchants, particularly where the vast
majority of debit card transactions by an
issuer’s cardholders may take place
within the network’s geographic
coverage area. Accordingly, the final
rule provides additional flexibility for
issuers by permitting an issuer to
comply with the network exclusivity
provisions by enabling on its debit cards
a network that does not, by rule or
policy, restrict the operation of the
network to a limited geographic area,
specific merchant, or particular type of
merchant or transaction, and that has
164 For clarity, the final rule describes the
geographic coverage and other requirements for
payment card networks that would satisfy the
network exclusivity provisions through positive
requirements, instead of describing payment card
networks that would not satisfy the rule.

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taken steps reasonably designed to
enable the network to be able to process
the electronic debit transactions that the
network reasonably expects will be
routed to it, based on projected
transaction volume. A smaller network
could be used to help satisfy an issuer’s
requirement to enable two unaffiliated
networks if the network was willing to
expand its coverage in response to
increased merchant demand for access
to its network, and the smaller network
meets the other requirements of
§ 235.7(a) for a permitted arrangement.
If, however, the network’s policy or
practice was to limit such expansion, it
would not qualify as one of the two
unaffiliated networks. See comment
7(a)–2.i.
Proposed § 235.7(a)(2)(ii) provided
that adding an unaffiliated payment
card network that is accepted only at a
small number of merchant locations or
for limited merchant types would not
comply with the requirement to have at
least two unaffiliated payment card
networks on a debit card. For example,
an issuer could not solely add, as an
unaffiliated payment card network, a
network that is accepted only at a
limited category of merchants (for
example, at a particular supermarket
chain or at merchants located in a
particular shopping mall). See proposed
comment 7(a)–4.ii.
Merchant comments supported the
proposed prohibition on limited
merchant coverage networks. Issuers
and networks did not object to proposed
§ 235.7(a)(2)(ii). The final rule adopts a
prohibition on networks that are limited
to particular merchants or merchant
types as part of the necessary conditions
set out in § 235.7(a)(2) and expands the
prohibition to include networks that are
limited to particular transaction types.
Proposed comment 7(a)–4.ii is also
adopted, and is redesignated as
comment 7(a)–2.ii in the final rule.
Section 235.7(a)(2) of the final rule
also provides that a payment card
network that has not taken steps
reasonably designed to enable the
network to process the electronic debit
transactions that the network reasonably
expects will be routed to it would not
count towards the issuer’s requirement
to have at least two unaffiliated
payment card networks on which an
electronic debit transaction may be
processed. The new prohibition
responds to merchant comments that
expressed concern that issuers may
respond to the network exclusivity
provisions by adding small, capacityconstrained networks with the
expectation that such networks would
not have the capacity to handle their
additional volume such that

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transactions would default to a larger
payment card network on the card. The
Board agrees that such arrangements
would not meet the intent to provide
merchants with routing choice in those
cases where a network does not take
steps reasonably designed to enable the
network to meet reasonably foreseeable
demand for processing transactions
given the number of cards enabled for
processing over the network and the
general usage patterns of the
cardholders. The new prohibition is not
intended, however, to address the rare
circumstances where a network may be
off-line for technical reasons and an
electronic debit transaction is processed
on a different payment card network on
a stand-by basis or where volume is
unexpected. See comment 7(a)–2.iii.
Proposed § 235.7(a)(2)(iii) prohibited
a payment card network from restricting
or otherwise limiting an issuer’s ability
to contract with any other payment card
network that may process an electronic
debit transaction involving the issuer’s
debit cards. Proposed comment 7(a)–5
provided examples of prohibited
restrictions on an issuer’s ability to
contract with other payment card
networks, including network rules or
guidelines that limited the number or
location of network brands, marks, or
logos that may appear on a debit card.
See proposed comment 7(a)–5.ii. The
prohibition on payment card network
restrictions on an issuer’s ability to
contract with other networks is adopted
with certain revisions for clarity and is
redesignated as § 235.7(a)(3)(i). See also
comment 7(a)–3.
Depository institutions trade
associations commented that the
proposed network contracting
prohibition was overbroad and
impermissibly prohibited all
arrangements between networks and
issuers that in any way restrict the
networks made available on a debit card
for processing a transaction. In their
view, the provision as proposed would
prohibit an issuer from agreeing to limit
the number of networks enabled on its
debit cards to no more than two
networks per method of authentication
even if such restriction would not
violate either Alternative A or B. One
issuer urged the Board to clarify that the
proposed provision is directed at rulesbased, blanket prohibitions against an
issuer enabling a competing network.
The examples in proposed comment
7(a)–5 elicited several comments from
two payment card networks expressing
concern that the proposed examples
conflicted with established principles in
trademark law. In particular, these
commenters argued that the example of
network rules limiting the number or

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location of network brands, marks, or
logos in comment 7(a)–5.ii would
impermissibly restrict their ability to
protect their investment in their marks
or brands and their ability to limit
consumer confusion. These networks
also urged the Board to clarify that the
proposed prohibition is not intended to
change the card design and related
security requirements that networks
may apply to their payment card
products, such as size and location
requirements for the network logo, card
account number, and expiration date, as
well as the location of the magnetic
stripe and card verification number.
One processor affiliated with a payment
card network urged the Board to include
safe harbor language in the final rule to
ensure that a payment card network
could not assert a trademark
infringement or other claim against an
acquirer or network for routing
transactions on that network’s branded
card through competing networks
enabled on the card in order to prevent
merchants from exercising routing
choice as intended under EFTA Section
920(b)(1)(B).
The final rule adopts the prohibition
on payment card network restrictions or
limitations on an issuer’s ability to
contract with other payment card
networks that may process an electronic
debit transaction generally as proposed
with certain revisions in § 235.7(a)(3).
Specifically, § 235.7(a)(3) provides that,
for purposes of the network exclusivity
provisions in § 235.7(a)(1), a payment
card network may not restrict or
otherwise limit an issuer’s ability to
contract with any other payment card
network that may process an electronic
debit transaction involving the issuer’s
debit cards. Thus, for example, the rule
prohibits a network from limiting or
otherwise restricting, by rule, contract,
or otherwise, the other payment card
networks that may be enabled on a
particular debit card. See comment 7(a)–
3.i. The rule would also prohibit a
network from specifying the other
payment card networks that may be
enabled on a particular debit card in
order to comply with § 235.7(a)(1).
Comment 7(a)–3.i includes as an
example of a prohibited rule or contract
any express prohibition on an issuer’s
ability to offer certain specified payment
card networks on the debit card or any
requirement that only certain specified
networks may be offered on the card.
Comment 7(a)–3.ii clarifies that
§ 235.7(a)(3) would also prohibit
network rules or guidelines that allow
only that network’s (or its affiliated
network’s) brand, mark, or logo to be
displayed on a particular debit card, or
that otherwise limit the ability of

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brands, marks, or logos of other
payment card networks to appear on the
debit card. Without this prohibition,
network rules could inhibit an issuer’s
ability to add other payment card
networks to a debit card, particularly if
the other networks also require that
their brand, mark, or logo appear on a
debit card in order for a card to be
offered on that network. Comment 7(a)–
3.ii is revised from the proposed
comment, which would have listed, as
an example of a prohibited network
restriction on an issuer’s ability to
contract with other networks, any limits
on the number or location of network
brands, marks, or logos that may appear
on the card. In the final rule, only
contract provisions limiting the ability
of one or more network brands, marks,
or logos to appear on the debit card are
expressly prohibited, as such
restrictions could prevent a consumer
from knowing the networks that are
enabled on a debit card. Thus, the rule
is not intended to restrict networks from
imposing branding, card-design, or
security requirements on their cards to
promote brand recognition and
consistency across payment card types
or to limit consumer confusion as long
as such requirements do not effectively
limit the ability of other payment card
networks to appear on the debit card,
such as when multiple signature
networks require their logo to appear in
the same location on the card. The final
rule does not, however, otherwise
address other trademark-related issues
raised by commenters as such issues are
outside the scope of the rule.
Notwithstanding the examples in
comment 7(a)–3, comment 7(a)–4 in the
final rule clarifies that nothing in the
rule requires that a debit card display
the brand, mark, or logo of each
payment card network over which an
electronic debit transaction may be
processed. For example, the rule does
not require a debit card that operates on
two or more different unaffiliated
payment card networks to bear the
brand, mark, or logo for each card
network. The Board believes that this
flexibility is necessary to facilitate an
issuer’s ability to add (or remove)
payment card networks to a debit card
without being required to incur the
additional costs associated with the
reissuance of debit cards as networks
are added (or removed). The Board
received one comment supporting
comment 7(a)–6 as proposed and it is
adopted without substantive change,
redesignated as comment 7(a)–4 in the
final rule.
In its proposal, the Board requested
comment as to whether it was necessary
to address in the rule a payment card

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network’s ability to require an issuer to
commit a certain volume, percentage
share, or dollar amount of transactions
over the network given that volume,
percentage share, or dollar amount
commitments generally could only be
given effect through issuer or payment
card network priorities that direct how
a particular debit card transaction
should be routed by a merchant. The
Board noted in the proposal, however,
that such issuer or payment card
network routing priorities could be
prohibited by the proposed limitations
on merchant routing restrictions.
Issuers and one card processor agreed
that the merchant routing provisions in
proposed § 235.7(b) would make
explicit rules relating to volume,
percentage share, or dollar amount
commitments unnecessary given that
merchants would be able to choose the
payment card network for processing a
transaction. Merchants, however,
believed that if the Board were to adopt
Alternative A with respect to the
network exclusivity provisions, it
should prohibit a network’s ability to
impose volume, percentage share, or
dollar amount commitments
notwithstanding the routing provisions
in § 235.7(b). According to these
merchant commenters, if routing
options were reduced to a single
signature debit and a single PIN debit
option, networks and issuers would
continue to be able to reasonably predict
and influence signature debit volumes.
Under the final rule, the issuer’s
ability to influence volume, percentage
share, or dollar amount of transactions
that are processed through any
particular network will be significantly
reduced, given that merchant routing
preferences will take priority over issuer
and network routing preferences (see
discussion of § 235.7(b) below). In
addition, as discussed above, any
network that issuers add to debit cards
to fulfill the requirement for two
unaffiliated networks in § 235.7(a)(1)
must meet the requirements of
§ 235.7(a)(2). The Board recognizes that
issuers may be able to use incentives to
influence cardholders to use a particular
authentication method (signature or
PIN) at the point of sale. At the same
time, however, merchants may also steer
consumers toward a particular
authentication method through, for
example, default settings on transaction
terminals or discounts for choosing
certain payment methods. Given the
issuer’s limited ability to control
volume, percentage share, or dollar
amount of transactions over a particular
network, the Board has determined not
to address this issue in the final rule.

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A few issuers and two payment card
networks opposed the prefatory
language in proposed § 235.7(a)(2)
interpreting EFTA Section 920(b)(1)(A)’s
prohibition on network exclusivity
arrangements as requiring a debit card
‘‘to have at least two unaffiliated
payment card networks on which an
electronic debit transaction may be
processed.’’ These commenters argued
that EFTA Section 920(b)(1)(A) should
only be read as a prohibition on
‘‘restricting’’ the number of payment
card networks on which an electronic
debit transaction may be processed to
fewer than two unaffiliated payment
card networks. In their view, the statute
does not mandate a minimum number
of payment card networks to be enabled
on a debit card as long as an issuer or
a payment card network does not
affirmatively create any impediments to
the addition of unaffiliated payment
card networks on a debit card. Thus,
these commenters argued that the
statute does not prohibit voluntary
arrangements by an issuer to limit the
number of payment card networks on a
card.
EFTA Section 920(b)(1)(A) states that
‘‘an issuer or payment card network
shall not directly or through any agent,
processor, or licensed member of a
payment card network, by contract,
requirement, condition, penalty, or
otherwise, restrict the number of
payment card networks on which an
electronic debit transaction may be
processed’’ to fewer than two
unaffiliated payment card networks.
Thus, by its terms, the statute’s
prohibition on exclusivity arrangements
is not limited to those that are mandated
or otherwise required by a payment card
network. In the Board’s view, individual
issuer decisions to limit the number of
payment card networks enabled on a
debit card to a single network or
affiliated networks are also prohibited
as a ‘‘direct’’ restriction on the number
of such networks in violation of the
statute. The Board believes that to
conclude otherwise would enable an
issuer to eliminate merchant routing
choice for electronic debit transactions
with respect to its cards, contrary to the
overall purpose of EFTA Section 920(b).
Accordingly, the final rule adopts the
substance of proposed comment 7(a)–7
and prohibits voluntary exclusivity
arrangements with respect to debit cards
(now designated as comment 7(a)–5).
The final comment 7(a)–5 provides that
the network exclusivity provision in
§ 235.7(a) requires that debit cards must
be enabled on at least two unaffiliated
payment card networks in all cases,
even if the issuer is not subject to any

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rule of, or contract, arrangement or other
agreement with, a payment card
network requiring that all or a specified
minimum percentage of electronic debit
transactions be processed on the
network or its affiliated networks.
Comment 7(a)–6 (designated 7(a)–8 in
the proposal) clarifies that the network
exclusivity rule does not prevent an
issuer from including an affiliated
payment card network among the
networks that may process an electronic
debit transaction for a particular debit
card, as long as at least two of the
networks that accept the card are
unaffiliated. The Board proposed two
different versions of comment 7(a)–6
based on the appropriate network
exclusivity alternative. No comments
were received under either version and
the final rule adopts the Alternative A
version of the comment as proposed.
The final comment 7(a)–6 clarifies that
an issuer is permitted to offer debit
cards that operate on both a signature
debit network as well as an affiliated
PIN debit network, as long as at least
one other payment card network that is
unaffiliated with either the signature or
PIN debit networks also accepts the
card.
5. Section 235.7(a)(4) Subsequent
Affiliation
Proposed § 235.7(a)(3) addressed
circumstances where previously
unaffiliated payment card networks
subsequently become affiliated as a
result of a merger or acquisition. Under
these circumstances, an issuer that
issues cards with only the two
previously unaffiliated networks
enabled would no longer comply with
§ 235.7(a)(1) until the issuer is able to
add an additional unaffiliated payment
card network to the debit card. The
Board requested comment regarding
whether 90 days after the date on which
the prior unaffiliated payment card
networks become affiliated provides
sufficient time for issuers to add a new
unaffiliated network in order to comply
with the rule.
Several issuers and one processor
stated that the proposed 90-day window
for adding a new network in the event
of a payment network merger was too
short. Some issuers suggested a
transition period of at least one year,
while one large issuer suggested 24
months from the date the merger closes.
The final rule (§ 235.7(a)(4)) requires
issuers to add an additional unaffiliated
payment card network to a debit card
within six months after the date of a
merger or acquisition that causes the
previously unaffiliated payment card
networks enabled on a debit card to
become affiliated. Based on its outreach,

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the Board understands that adding an
additional PIN network to a debit card
can be accomplished in a relatively
short period of time, particularly in
circumstances in which an issuer uses
a processor that is already connected to
several PIN debit networks. The
additional period of time in the final
rule provides issuers more time if
necessary to negotiate new agreements
and establish connectivity with the new
network.
6. Applicability to All Form Factors
New comment 7(a)–7 addresses the
applicability of the network exclusivity
provisions with respect to cards, codes,
or devices that may be issued in a form
factor other than a card. The Board
requested comment on how to apply the
network exclusivity provisions to such
cards, codes, or devices given that they
may be capable of being processed using
only a single authentication method. For
example, a transaction using a mobile
phone embedded with a contactless
chip may be able to be processed only
as a signature debit transaction or only
on certain networks. The Board noted
that under the proposed rule (under
either alternative), the issuer would be
required to add at least a second
unaffiliated signature debit network to
the device to comply with the
requirements of § 235.7(a). The Board
thus requested comment on the effect of
the network exclusivity provisions in
§ 235.7(a) on the development of these
devices in the future.
Some issuers, processors, and
networks commented that requiring new
payment devices or methods to be
processed by multiple networks would
inhibit the development of these
innovations. They further asserted that
it was unnecessary for the Board’s rule
to cover new form factors given that
merchant adoption and acceptance of
these innovations is voluntary. One
payment card network argued that a
consumer’s decision to use an
alternative form factor in a transaction
was analogous to a cardholder’s election
to initiate an electronic debit transaction
by signature or PIN debit at the point of
sale. As an alternative approach, one
processor urged the Board to clarify that
alternative form factors would be
compliant if they are associated with a
‘‘companion card’’ that is compliant,
even if the alternative form factor itself
may only be used to initiate transactions
over a single network.
Merchants and one payment card
network, by contrast, urged the Board to
require the addition of a second
unaffiliated network for any payment
code or device, including cards with
contactless features. In their view,

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current limitations restricting the use of
contactless devices on a network have
been attributable to a desire to limit
competition from PIN networks rather
than technological issues presented by
the PIN networks.
The Board believes the statute is clear
that the network exclusivity provisions
apply to electronic debit transactions
involving any device that meets the
definition of ‘‘debit card’’ under EFTA
Section 920(c)(2). Accordingly,
comment 7(a)–7 of the final rule
provides that the network exclusivity
provisions in § 235.7(a) apply to all
‘‘debit cards,’’ as that term is defined in
EFTA Section 920(c)(2), regardless of
whether the debit card is issued in card
form or in the form of another ‘‘payment
code or device.’’ The final comment
thus clarifies that all debit cards must be
accepted on at least two unaffiliated
payment card networks on which an
electronic debit transaction may be
processed. Moreover, this is the case
even if a supplemental debit card is
issued in connection with a card, code,
or other device that fully complies with
the rule.
B. Section 235.7(b) Prohibition on
Merchant Routing Restrictions
EFTA Section 920(b)(1)(B) requires
the Board to prescribe rules prohibiting
an issuer or payment card network from
directly or indirectly ‘‘inhibit[ing] the
ability of any person who accepts debit
cards for payments to direct the routing
of electronic debit transactions for
processing over any payment card
network that may process such
transactions.’’ The Board is
implementing this restriction in
§ 235.7(b).
As noted above, the rules of certain
PIN debit payment card networks
currently require PIN debit transactions
to be routed based on the card issuer’s
designated preferences when multiple
PIN debit networks are available to
process a particular debit card
transaction. In other cases, the PIN debit
network itself may require, by rule or
contract, that the particular PIN debit
transaction be routed over that network
when multiple PIN networks are
available.165 Such rules or requirements
prevent merchants from applying their
own preferences with respect to routing
the particular debit card transaction to
the PIN debit network that will result in
the lowest cost to the merchant. EFTA
Section 920(b)(1)(B) prohibits these
practices. As a result, in practice, this
165 These issuer- or network-directed priority
rules are generally unnecessary for signature debit
networks as there is only a single payment card
network available for processing a signature debit
transaction.

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means that merchants, not issuers or
networks, will be able to direct the
routing of transactions.
Proposed § 235.7(b) prohibited both
issuers and payment card networks from
inhibiting, directly, or through any
agent, processor, or licensed member of
the network, by contract, requirement,
condition, penalty, or otherwise, a
merchant’s ability to route electronic
debit transactions over any payment
card network that may process such
transactions. Issuers commented
generally that the routing provision
would likely frustrate consumer choice
and their ability to receive cardholder
benefits, such as zero liability and
enhanced chargeback rights, which are
unique to a particular network. Issuers
also expressed concern that the routing
provisions would make it difficult for
them to explain to their customers the
circumstances under which they would
or would not receive such issuerspecific benefits. Issuers and one
payment card network urged the Board
to require merchants to continue to
honor consumer choice for routing of
the electronic debit transaction or, at a
minimum, to require merchants to
inform cardholders of the network that
will carry the transaction before the
transaction is consummated to
minimize consumer confusion regarding
the network that will process the
transaction. By contrast, merchants
strongly supported the proposed
provision.
Section 235.7(b), which tracks the
language of the EFTA Section
920(b)(1)(B), is adopted as proposed.
The final rule does not include any
requirement on merchants to disclose
the network selected to process a
particular electronic debit transaction as
some commenters suggested. EFTA
Section 920(b) does not impose such a
requirement, and the Board believes that
issues regarding merchant card
acceptance practices are best left to the
individual network-merchant
relationship.
In the proposal, the Board did not
interpret EFTA Section 920(b)(1)(B) to
grant a person that accepts debit cards
the ability to process an electronic debit
transaction over any payment card
network of the person’s choosing.
Rather, the Board interpreted the phrase
‘‘any payment card network that may
process such transactions’’ to mean that
a merchant’s choice is limited to the
payment card networks that have been
enabled on a particular debit card.
Accordingly, the Board proposed
comment 7(b)–1 to clarify that the
prohibition on merchant routing
restrictions applies solely to the
payment card networks on which an

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electronic debit transaction may be
processed with respect to a particular
debit card.
Issuers and networks agreed with the
proposed comment providing that a
merchant’s routing choices should
apply only with respect to the networks
that the issuer has enabled to process
transactions for the card. By contrast,
comments of some merchants and a
payments processor stated that the plain
language of the statute indicated that
Congress intended merchants to be able
to process electronic debit transactions
over any payment card network that
may process such transactions. In these
commenters’ view, had Congress
intended to limit the routing choice
mandate to the payment card networks
enabled by the issuer on a particular
debit card, it could have done so by
statute.
The Board continues to believe that
the appropriate reading of the routing
provisions in EFTA Section 920(b)(1)(B)
limits merchant routing choice to the
card networks that an issuer has chosen
to enable on a cardholder’s card. In
particular, the Board notes that allowing
merchants to route transactions over any
network, regardless of the networks
enabled on the debit card, would render
superfluous the requirement in EFTA
Section 920(b)(1)(A) that electronic
debit transactions have the ability to be
processed over at least two unaffiliated
networks. Also, the issuer (or its
processor) must be connected to a
network for that network to be able to
route the transaction information and
data, and the issuer must have an
agreement with the network to settle
transactions cleared over that network.
Accordingly, comment 7(b)–1 is
adopted as proposed with some
revisions to clarify that the rule does not
permit a merchant to route the
transaction over a network that the
issuer did not enable to process
transactions using that debit card.
Proposed comment 7(b)–2 provided
examples of issuer or payment card
network practices that would inhibit a
merchant’s ability to direct the routing
of an electronic debit transaction in
violation of § 235.7(b). The proposed
comment addressed both practices
relating to the sending of transaction
information to the issuer and certain
practices that may affect the network
choices available to the merchant at the
time the transaction is processed. The
final commentary adopts the examples
in 7(b)–2 generally as proposed with
certain adjustments for clarity.
The first example of an impermissible
restriction on a merchant under
proposed comment 7(b)–2 addressed
issuer or card network rules or

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requirements that prohibit a merchant
from ‘‘steering,’’ or encouraging or
discouraging, a cardholder’s use of a
particular method of debit card
authentication. See proposed comment
7(b)–2.i. For example, merchants may
want to encourage cardholders to
authorize a debit card transaction by
entering their PIN, rather than by
providing a signature, because PIN debit
carries a lower risk of fraud than
signature debit. Merchants supported
the proposed example in comment 7(b)–
2.i, stating that any rules that prohibit
steering or that could inhibit merchants’
ability to steer—including antidiscrimination or no-surcharge rules—
should be invalidated by § 235.7(b).
A payment card network and a few
issuers opposed the Board’s statement
in the supplementary information that,
under the proposed example, merchants
would be permitted to block a
consumer’s choice of signature debit.
These commenters expressed concern
that if merchants were permitted to
block the use of signature debit,
consumers could be misled about which
payment networks’ cards the merchant
accepted. In addition, issuer and
payment card network commenters
stated that allowing merchants to block
signature debit would take away
consumers’ ability to limit exposure of
their PIN if they wanted to use their
debit card.
This example is adopted as proposed.
As discussed above under § 235.7(a), an
issuer may comply with the network
exclusivity provisions by enabling a
debit card with a single signature debit
network and a single unaffiliated PIN
debit network. For such cards, a
merchant can influence routing choice
by, for example, determining whether a
debit card is PIN-enabled and, if it is,
prompting the cardholder to input his or
her PIN, rather than asking the
consumer whether the transaction is
‘‘debit’’ or ‘‘credit.’’
The second example of a prohibited
routing restriction is network rules or
issuer-designated priorities that direct
the processing of an electronic debit
transaction over a specified payment
card network or its affiliated networks.
See comment 7(b)–2.ii.) Thus, for
example, if multiple networks were
available to process a particular debit
transaction, neither the issuer nor the
networks could specify the network
over which a merchant would be
required to route the transaction (or be
required to avoid in routing the
transaction). Nothing in comment 7(b)–
2.ii, however, is intended to prevent an
issuer or payment card network from
designating a default network for
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in the event a merchant or its acquirer
or processor does not indicate a routing
preference. In addition, comment 7(b)–
2.ii does not prohibit an issuer or
payment card network from directing
that an electronic debit transaction be
processed over a particular network if
required to do so by state law.166
Although one commenter urged the
Board to preempt state laws that
mandate the routing of electronic debit
transactions to prevent networks or
other parties from securing favorable
state laws requiring routing to a
particular network, the final rule does
not adopt the recommendation because
state laws do not constitute issuer or
network restrictions on merchant
routing that are prohibited by the
statute. Proposed comment 7(b)–2.ii is
adopted as proposed, with the
clarification that issuer and network
practices that direct the processing of a
transaction away from a specified
network or its affiliates is prohibited.
Under the third example, a payment
card network could not require a
specific payment card network based on
the type of access device provided by
the cardholder. See comment 7(b)–2.iii.
For example, a payment card network
would be prohibited from requiring that
an electronic debit transaction that is
initiated using ‘‘contactless’’ or radio
frequency identification device (RFID)
technology be processed over only a
signature debit network. The Board
received one comment from a processor
that supported the example. The Board
is adopting the example with a revision
to clarify that the example applies to
payment card networks rather than
authentication methods.
New comment 7(b)–3 clarifies that the
prohibition on merchant routing
restrictions does not prohibit a payment
card network from offering payments or
incentives to merchants to encourage
the merchant to route electronic debit
card transactions to that network for
processing. The Board believes that a
payment card network does not
impermissibly ‘‘inhibit’’ the merchant’s
ability to route transactions over any
available networks within the scope of
the prohibition in EFTA Section
920(b)(1)(B) by offering such incentives
because it is the merchant itself that has
voluntarily chosen to direct electronic
debit transactions over a particular
network in exchange for consideration
from the network.
Although proposed § 235.7(b)
provides merchants control over how an
electronic debit transaction is routed to
the issuer, the proposed rule did not
require that a merchant make network

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43453

routing decisions on a transaction-bytransaction basis. As stated in the
supplementary information in the
proposal, such a requirement may
necessitate systematic programming
changes and equipment upgrades, may
be operationally infeasible and costprohibitive in the near term, and is not
needed to carry out the purpose of these
provisions.167 Instead, under comment
7(b)–3 as proposed, it is sufficient to
allow a merchant to designate network
routing decisions in a routing table in
advance for its transactions, similar to
the way that issuer-directed priorities
are established today. Alternatively, a
merchant could delegate to its acquirer
or processor the decision of how to
route transactions.
One processor supported the
proposed comment and urged the Board
to further clarify that allowing more
complex routing logic beyond network
choice, such as basing a routing
decision on the transaction amount,
would be discretionary. Merchants did
not oppose the proposed comment, but
urged the Board to mandate that
merchants be given additional
information, including access to the BIN
tables and the effective weighted
average interchange rates that are
applicable to each merchant, at no cost,
to facilitate merchants’ ability to
determine which networks are lower
cost for purposes of directing routing.
Proposed comment 7(b)–3 is adopted
with minor wording changes and
redesignated as comment 7(b)–4 to the
final rule. The comment clarifies that
§ 235.7(b) does not require that the
merchant have the ability to select the
payment card network over which to
route or direct a particular electronic
debit transaction at the time of the
transaction. Thus, under the comment
to the final rule, it would be sufficient
for a merchant and its acquirer or
processor to agree to a pre-determined
set of routing choices that apply to all
electronic debit transactions that are
processed by the acquirer or processor
on behalf of the merchant, or for the
merchant to delegate the routing
decisions to its acquirer or processor.
The final rule does not specify criteria
regarding the routing choices that must
be provided to a merchant by its
acquirer or processor because the Board
believes such determinations are best
left to the individual merchant’s
arrangement with its acquirer or
processor. The final rule also does not
require networks to make BIN tables or
merchant-specific effective average
interchange rates available to merchants
as such a requirement is outside the
167 See

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scope of the statute. Nonetheless, the
Board notes that, pursuant to EFTA
Section 920(a)(3)(B), the Board intends
to periodically publish the average
interchange fee, by network, received by
issuers, which may provide merchants
information regarding relative
interchange rates across networks.
One issuer commented that the Board
should clarify that the payment card
network that a merchant uses to process
the initial purchase transaction for
goods or services must also be used by
the merchant for processing subsequent
transactions related to the original
purchase transaction. The Board has
added new comment 7(b)–5 to clarify
that the rule does not supersede any
network rule that requires the chargeback or return of a transaction to be
processed over the same network as the
original transaction.

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C. Section 235.7(c) Effective Date
The network exclusivity rules in
§ 235.7(a) are generally effective and
compliance is mandatory on April 1,
2012, with respect to issuers. With
respect to payment card networks,
however, the compliance date for the
provisions in §§ 235.7(a)(1) and (a)(3) is
October 1, 2011. In addition, as
described below, the compliance date is
delayed until April 1, 2013 for certain
cards that use transaction qualification
or substantiation systems. Nonreloadable general-use prepaid cards
sold on or after April 1, 2013, must
comply with the rule. Non-reloadable
general-use prepaid cards sold prior to
April 1, 2013, are not subject to the rule.
Reloadable general-use prepaid cards
sold on or after April 1, 2013, must
comply with the rule. With respect to
reloadable general-use prepaid cards
sold and reloaded prior to April 1, 2013,
the compliance date is May 1, 2013.
With respect to reloadable general-use
prepaid cards sold prior to April 1,
2013, and reloaded after April 1, 2013,
the compliance date is 30 days after the
date of reloading.
The merchant routing provisions of
§ 235.7(b) are effective on October 1,
2011. However, issuers and payment
card networks may voluntarily comply
with these rules prior to these dates.
1. Section 235.7(c)(1) and (c)(2)—
General Rule and Effective Date for
Payment Card Networks
The statute does not specify an
effective date for the EFTA Section
920(b) provisions on network
exclusivity and merchant routing
restrictions. The Board requested
comment on the appropriate
implementation time for the network
exclusivity and routing provisions given

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the different proposed alternatives
under § 235.7(a). Specifically, the Board
requested comment on a potential
effective date of October 1, 2011, for the
provisions under § 235.7 if the Board
were to adopt Alternative A under the
network exclusivity provisions.
Recognizing that Alternative B would
require significantly more time to
comply with the rule, the Board
requested comment on an effective date
of January 1, 2013, if Alternative B were
adopted in the final rule.
Several issuers stated that the
proposed effective dates did not allow
sufficient time for compliance under
either proposed alternative. With
respect to Alternative A, issuers and
some payment card networks requested
longer lead times, generally until 2012
or 2013. Many such commenters
observed that a significant number of
issuers will be trying to add unaffiliated
payment card networks at the same time
to comply with the network exclusivity
provisions in § 235.7(a). Consequently,
these commenters were concerned that
simultaneous efforts by numerous
issuers will create a bottleneck at each
network with respect to negotiating new
membership agreements with the
respective networks. These commenters
urged the Board to provide additional
time for compliance to allow for an
orderly transition. Issuer commenters
also noted that time would be needed
for establishing connectivity with new
payment card networks and for
upgrading internal processing systems
to support those networks. Some
issuers, networks, and processors noted
that the proposed time periods were
also unrealistic from acquirers’
perspective as they must implement the
ability for individual merchants to
designate customized transaction
routing rules. Finally, networks and
processors urged the Board to time any
effective dates to coincide with
regularly scheduled industry-wide
changes.
By contrast, merchants, although
recommending the adoption of
Alternative B, urged the Board, if it
adopted Alternative A, to make it
effective promptly in order to void
‘‘exclusivity’’ deals currently in place.
Merchants also expressed the view that
there was little reason issuers could not
comply with Alternative A for all debit
cards by October 1, 2011, given that 70
percent of debit cards already have dual
functionality. Merchants also stated that
Alternative A would not require issuers
to reissue cards to meet the proposed
timeframe, and that issuers could easily
establish the necessary connectivity
through their processors during that
time. A member of Congress also

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commented that the proposed time
periods for the alternatives were
appropriate.
As discussed above, the final rule
adopts Alternative A with respect to the
network exclusivity provisions in
§ 235.7(a). Thus, an issuer generally
could comply with the rule by enabling
a signature debit network and an
unaffiliated PIN debit network on its
debit cards for processing an electronic
debit transaction. Based on comments
received and the Board’s own outreach
and analysis, the final rule in
§ 235.7(c)(1) states that, except as
otherwise provided, the network
exclusivity provisions in § 235.7(a) are
effective for issuers on April 1, 2012.
Many issuers are already in
compliance with the network
exclusivity provisions in § 235.7(a)
because they have multiple unaffiliated
PIN networks enabled on their debit
cards. Based on the Board’s outreach,
the Board understands that adding an
additional PIN network can generally be
accomplished in a matter of months
where an issuer connects to a network
through an issuer processor that has
already established connectivity with
other PIN networks. Thus, the Board
believes that, in most cases, issuers
would be able to comply with
Alternative A by the October 1, 2011,
date originally proposed. Nonetheless,
to relieve the burden on issuers that
may need more time to negotiate new
agreements with networks, establish
connectivity, and revise their internal
processing systems to support the new
networks, the final rule provides an
additional six months to April 1, 2012,
for compliance with the network
exclusivity provisions in § 235.7(a).
The Board believes that issuers
should have the opportunity to begin to
comply with § 235.7(a) in advance of the
effective date, irrespective of any
existing network rules that would
prohibit them from adding an additional
network to their debit cards. Therefore,
in new § 235.7(c)(2), the Board is
making the provisions of § 235.7(a) that
are applicable to payment card networks
effective on October 1, 2011.
Accordingly, as of that date, a network
may not enforce a rule that restricts the
ability of an issuer to add a network to
comply with § 235.7(a).
The final rule maintains the October
1, 2011, effective date for the merchant
routing provisions in § 235.7(b). The
earlier effective date is intended to
allow merchants and acquirers to
implement and exercise the new routing
authority as soon as issuers make
additional networks available on their
debit cards. Thus, for transactions made
using cards of issuers that comply with

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the network exclusivity provisions in
§ 235.7(a) prior to April 1, 2012,
merchants will be able to take advantage
of the new routing flexibility, assuming
their acquirers update the BIN tables to
reflect the new routing priorities
preferred by the merchants.
2. Sections 235.7(c)(3) and (c)(4)
Delayed Compliance Date for Certain
Debit Cards
The final rule also establishes a
delayed compliance date for the
network exclusivity provisions in
§ 235.7(a) in limited circumstances for
certain types of debit cards that present
technological or other operational
impediments to an issuer’s ability to
comply with the rule. Although EFTA
Section 920(b) does not provide the
Board authority to exempt such debit
cards from the network exclusivity
provisions, the Board believes it is
appropriate to establish a delayed
compliance date of April 1, 2013, to
allow issuers additional time to develop
technological solutions to enable
compliance with the rule. The effective
date for the merchant routing provisions
in § 235.7(b) would not be delayed for
these cards to allow merchants to
exercise routing choice once alternative
networks are made available.
In the proposal, the Board noted that
certain debit cards issued in connection
with health flexible spending accounts
and health reimbursement accounts are
required by Internal Revenue Service
(IRS) rules to use certain technologies at
the point of sale to ensure that the
eligibility of a medical expense claim
can be substantiated at the time of the
transaction. The Board further stated its
understanding, however, that PIN debit
networks may not currently offer the
functionality or capability to support
the required technology. The Board
recognized therefore that applying the
network exclusivity prohibition to these
health benefit cards in particular could
require an issuer or plan administrator
to add a second signature debit network
to comply with IRS regulations if PIN
networks were unable to add the
necessary functionality to comply with
those regulations. The Board requested
comment on the appropriate treatment
of these products with respect to the
network exclusivity provisions in
§ 235.7(a).
Issuers and program administrators of
health spending cards generally asserted
that Congress did not intend to cover
healthcare and employee benefit cards
under any of the provisions in EFTA
Section 920, even though the statute did
not include a specific statutory
exemption for such products. These
commenters noted that the Inventory

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Information Approval System (IIAS)
required by the IRS for autosubstantiating medical expenses for
eligibility is not currently supported by
the PIN networks. Thus, commenters
expressed concern that the significant
costs associated with either adding a
second signature network or developing
PIN network support for the IIAS could
limit the viability of such card programs
and cause employers and plan
administrators to return to the
inefficient system of using paper
receipts to verify the eligibility of
transactions. Commenters thus urged
the Board to exempt cards linked to
such health spending accounts from the
network exclusivity and routing
provisions.
Similar requests for exemption were
made by commenters with respect to
other employee benefit cards, such as
cards used to provide transit benefits,
which also require the use of
specialized transaction qualification
systems for verifying the eligibility of
tax-exempt expenses. For transit cards
in particular, commenters also stated
that the time required to enter a PIN ran
counter to the processing-speed
objective of the transit authorities.
Although EFTA Section 920 does not
grant the Board authority to exempt
cards linked to health spending
accounts or other types of debit cards
from the network exclusivity and
routing provisions, the Board has
determined there is good cause to delay
the effective date of the network
exclusivity provisions in § 235.7(a) to
April 1, 2013 for debit cards that use
point-of-sale transaction qualification or
substantiation systems, such as the IIAS,
to verify the eligibility of purchased
goods or services in connection with
health care and employee benefit
accounts in accordance with IRS rules.
See § 235.7(c)(3). The Board believes it
is necessary to provide a longer
compliance period for these cards to
give PIN networks time to develop the
capability to handle transactions using
these cards or to give industry
participants time to modify the manner
in which signature debit routing is
determined, so that these cards can be
enabled on multiple signature debit
networks.
Comment 7(c)–1 provides examples of
debit cards that may qualify for the
delayed effective date in connection
with certain health care or employee
benefit accounts. The comment clarifies
that the delayed effective date for
certain health care or employee benefit
cards also applies to debit cards linked
to health savings accounts that use
transaction substantiation or
qualification authorization systems at

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the point of sale, even if IRS rules do
not require the use of such systems in
connection with verifying the eligibility
of expenses purchased with such cards.
Although not specifically required by
IRS rules, the Board understands that in
virtually all cases health savings
account cards use the same IIAS
systems as do health flexible spending
accounts and health reimbursement
account cards to reduce the
administrative burden for cardholders
associated with sending in paper
receipts for substantiating health-related
expenses.
Several issuers and card program
managers urged the Board to exempt
non-reloadable gift cards from the
network exclusivity provisions. These
commenters noted that single-load
prepaid cards typically run only on the
signature debit networks, and that such
products would be adversely affected by
a requirement to enable or support PIN
debit transactions. In particular, these
commenters stated that the addition of
a PIN debit network could require the
consumer to call a service center to
activate the card and obtain the PIN. By
contrast, signature-only prepaid cards
can be activated at the point of sale, and
used immediately thereafter by the
consumer. Commenters also stated that
PIN access was unnecessary for single
load cards that typically are depleted
over a short period of time, and often
after a single use.
Other issuer commenters urged the
Board to exempt more broadly prepaid
cards that are designed to only support
a single method of authentication by a
cardholder, whether such cards were
reloadable or not. These commenters
stated that many prepaid card programs
do not have PIN capability in order to
limit cash access by cardholders due to
potential money laundering and other
regulatory concerns. One depository
institution trade association stated that
for reloadable prepaid cards, the
network exclusivity provisions should
only apply to cards sold after October 1,
2013, to allow issuers to manage down
their existing card inventories.
The Board believes it is appropriate to
establish various delayed compliance
dates for general-use prepaid cards to
allow issuers time to develop the ability
to enable cardholders to use PIN debit
networks for prepaid card transactions
or to give industry participants time to
modify the manner in which signature
debit transaction routing is determined,
so that these cards can be enabled on
multiple signature debit networks.
Accordingly, the effective date for nonreloadable general-use prepaid cards is
April 1, 2013. Non-reloadable generaluse prepaid cards sold prior to the

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effective date are not subject to the
requirements of § 235.7(a). The
additional time is intended to allow
issuers to draw down existing card
inventories, as well as to modify
systems or develop solutions in order to
comply with § 235.7(a). As noted above,
single-load cards typically are depleted
over a short period of time, and often
after a single use. Instituting a PIN
program for such cards in the short term
would not seem to be beneficial as the
cardholder would be unlikely to use the
PIN option. Issuers of non-reloadable
general-use prepaid cards commonly
may not have the customer
identification information that would be
necessary to mail or otherwise provide
the cardholder with PIN information.
An alternate solution for non-reloadable
cards is to add a second signature
network, similar to prepaid cards with
substantiation requirements. The
delayed effective date provides issuers
and payment card networks additional
lead time before all prepaid cards must
be capable of supporting more than one
network for processing electronic debit
transactions. Moreover, many of these
cards already have been sold to
customers and may be active through
that date, and the issuer likely does not
have the customer identification
information necessary to provide the
cardholder with a PIN. Application of
these provisions to cards that have
already been sold to customers who may
not be known to the issuers may create
difficulties for the issuers, as well as
potential difficulties for the cardholders.
With respect to reloadable general-use
prepaid cards, the effective date is April
1, 2013 (or later, in some
circumstances), and all reloadable
general-use prepaid cards sold on or
after April 1, 2013, must be in
compliance. Reloadable general-use
prepaid cards share many of the
problems as non-reloadable cards.
However, PIN technology appears more
prevalent with reloadable prepaid cards
than with non-reloadable cards. The
Board, therefore, anticipates that issuers
of reloadable general-use prepaid cards
are more likely to add an unaffiliated
PIN network than another signature
network to fulfill their obligations under
§ 235.7(a). Although cardholders of
reloadable prepaid cards may be
provided a PIN at activation, commonly
the issuer does not obtain customer
identification information until the card
is reloaded. Thus, for cards sold before
April 1, 2013, an issuer may not have
the ability to provide the cardholder
with a PIN (if a PIN network is enabled)
until the card is reloaded and the issuer
obtains the necessary customer

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identification information to contact the
cardholder. Accordingly, reloadable
general-use prepaid cards sold prior to
April 1, 2013, are not subject to
§ 235.7(a) unless and until they are
reloaded. With respect to reloadable
general-use prepaid cards that are sold
and reloaded prior to April 1, 2013, the
effective date is May 1, 2013. With
respect to reloadable general-use
prepaid cards sold prior to April 1,
2013, and reloaded after April 1, 2013,
the effective date is 30 days after the
date of reloading. The 30-day period is
intended to ensure that issuers have
sufficient time to provide card holders
with information on the additional
network, such as a PIN, after obtaining
the necessary information to contact the
card holder.
The final rule does not delay the
effective date for the network
exclusivity provisions for debit cards
that are approved or issued for use on
alternative or emerging payment card
networks that do not require a
cardholder’s use of a signature or entry
of a PIN to authenticate an electronic
debit transaction. Issuers were divided
regarding whether the network
exclusivity and routing provisions
should be applied to emerging payment
systems. Payment card networks
commenting on the issue were similarly
divided on the issue.
Those commenters requesting
exemptions from the network
exclusivity and routing provisions
expressed concern that the application
of the rule would stifle innovation and
reduce competition in the payments
market. For example, commenters
requesting an exemption for cards used
on emerging payment systems stated
that competing networks could refuse to
add the emerging network’s debit cards
to limit competition. These commenters
suggested that an exemption for
emerging payment systems would
encourage investment in innovation and
provide sufficient time for the nascent
systems to conduct pilots and achieve
scale. Merchants commenting on the
issue agreed that it would be reasonable
to permit new systems to undertake
pilot programs until such time as they
achieve critical mass.
By contrast, commenters that
supported applying the network
exclusivity and routing provisions to
emerging payment systems stated that
the rule should be equally applied to all
networks to prevent an unlevel playing
field. One such commenter stated that
the Board’s rule should apply based on
whether an emerging payment system
qualifies as a debit card or payment card
network, regardless of whether it

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describes itself as a non-traditional or
emerging network.
The purpose of the network
exclusivity and routing provisions in
EFTA Section 920(b) is to provide
merchants with enhanced routing
choice with respect to the networks
available for processing an electronic
debit transaction. In this regard, more,
not fewer, networks would be desirable.
As new technologies are being
developed, the developers should take
into consideration the provisions of
EFTA Section 920(b). The Board
believes that emerging payments
technologies that meet the definition of
‘‘debit card’’ in the statute should not be
subject to delayed effective dates for the
network exclusivity and routing
provisions.
VII. Section 235.8 Reporting
Requirements and Record Retention
A. Summary of Proposal and Comments
The Board proposed to require issuers
that are subject to §§ 235.3 and 235.4
and payment card networks to submit
reports every two years, or more
frequently as required, to the Board.
Under the proposal, each entity required
to submit a report must do so in a form
prescribed by the Board and must
provide information regarding costs
incurred with respect to electronic debit
transactions, interchange transaction
fees, network fees, fraud-prevention
costs, fraud losses, and any other
information requested by the Board. The
Board proposed that it would publish,
in its discretion, summary or aggregate
information from these reports. The
Board proposed that each entity
required to submit the report to the
Board by March 31 of the year the entity
is required to report. Finally, the Board
requested comment on a requirement
that each entity required to report retain
records of reports submitted to the
Board for five years. Such entities also
would be required to make each report
available upon request to the Board or
the entity’s primary supervisors.
The Board received a few comments
on the proposed reporting requirements.
Some issuers commented that requiring
issuers to report interchange fee revenue
was duplicative, and therefore
unnecessary, because networks already
maintain records of each issuer’s
interchange fee revenue. A few
commenters suggested the Board survey
all interested stakeholders, including
small issuers, merchants of all sizes, and
consumers to determine the impact of
the restrictions on them. One
commenter suggested the Board
establish a process for affected entities
to inform the Board of significant

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changes to previously reported
processing costs and other information.
The Board received one comment
regarding the frequency of reporting in
proposed § 235.8(c). One merchant
commenter asserted that the word ‘‘biannual’’ in EFTA section 920(a)(3)(B)
mandated reporting twice a year,
whereas the Board proposed to require
reporting biennially, or every two years.
This commenter supported the more
frequent, twice-a-year reporting in order
to provide interested parties more
visibility into the costs and fees
received by issuer.

emcdonald on DSK2BSOYB1PROD with RULES2

B. Analysis and Final Rule
EFTA Section 920(a)(3)(B) authorizes
the Board to collect from issuers and
payment card networks information that
is necessary to carry out the provisions
of Section 920(a). In addition, Section
920(a)(3)(B) requires the Board, in
issuing rules on interchange fee
standards and on at least a ‘‘bi-annual’’
basis thereafter, to publish summary or
aggregate information about costs and
interchange transaction fees as the
Board considers appropriate and in the
public interest. As summarized above in
the debit card industry overview section
of this notice, the Board has collected
information from issuers and networks,
as well as acquirers, and is publishing
summary information about debit card
transactions, processing costs,
interchange fees, network fees, fraudprevention costs, and fraud losses in
connection with this final rule. More
detailed summary information is
available on the Board’s Web site.168
1. Section 235.8(a) Entities Required To
Report
The Board has considered the
comments regarding the entities from
which the Board should collect
information and has determined to
adopt § 235.8(a) as proposed—limiting
those entities required to report to
issuers that are not otherwise exempt
under § 235.5(a) and payment card
networks, consistent with EFTA Section
920(a)(3). There are several other
interested types of parties to debit card
transactions, including, but not limited
to, exempt issuers, acquirers, merchants,
and cardholders. These other interested
parties may or may not be able to
provide information regarding costs,
fees, fraud losses, volumes, and values
associated with debit card transactions.
However, EFTA Section 920 does not
confer authority on the Board to compel
all of these parties to provide
information to the Board. EFTA Section
168 http://www.federalreserve.gov/
paymentsystems/files/debitfees_costs.pdf.

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920(a)(3) authorizes the Board to require
only issuers and payment card networks
(and only as necessary to carry out the
provisions of EFTA Section 920(a)) to
provide information; this authority does
not extend to merchants, cardholders, or
others. Moreover, the Board is mindful
of the large reporting burden that could
be imposed on exempt entities through
a request that those entities isolate and
track various debit card costs. The
Board will continue to consider what, if
any, additional information could be
useful in assessing the effects of its final
rule and how such information could be
obtained with minimal burden on the
relevant parties.
2. Section 235.8(b) Report
Proposed § 235.8(b) set forth a nonexhaustive list of the information the
Board may require entities to report, but
did not specify which entities would be
required to report which types of
information. As stated in the proposal,
the Board anticipates using forms
derived from the Interchange
Transaction Fee Surveys (FR 3062; OMB
No. 7100).169 At this time, the Board is
not specifying the information that
issuers and networks will be required to
submit. Section 235.8(b)’s list of
possible information required to be
reported is intended to illustrate the
kind of information the Board will
require. The Board is making revisions
to proposed § 235.8(b) to include
information about transaction value,
volume, and type, in part because the
Board plans to request information from
networks to monitor the extent to which
they have adopted a two-tier
interchange fee structure.170 The Board
intends to request comment on the
reporting forms prior to the first report.
At that time, the Board will consider
whether collecting interchange fee
revenue from both issuers and networks
is necessary. Except for the revisions
discussed in this paragraph, the Board
is adopting § 235.8(b) as proposed.
3. Section 235.8(c) Record Retention
The Board requested comment on a
requirement that each entity required to
report must retain records of reports
submitted to the Board for five years.
Such entities also would be required to
make each report available upon request
to the Board or the entity’s primary
supervisors. The Board did not receive
comments on this provision. Including
a requirement that an issuer retain
records to evidence compliance with the
169 Copies of the survey forms are available on the
Board’s Web site at http://www.federalreserve.gov/
newsevents/reform_meetings.htm.
170 See discussion, above, in relation to § 235.5.

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regulation is important to ensure that
supervisory agencies have the
information required to enforce the rule
and to determine whether the entity has
circumvented or evaded the interchange
fee standard. However, specifying the
precise form in which such evidence
must be maintained is unnecessary. The
issuer and its primary supervisor can
determine in what form records must be
retained to demonstrate compliance, so
long as the information is retrievable
and useable by the agencies.
To minimize the burden on issuers to
retain information after the issuer’s
supervisor has examined the issuer for
compliance, the Board is adopting
§ 235.8(c) to require issuers to retain
records that demonstrate compliance
with the requirements of part 235 for
not less than five years after the end of
the calendar year in which the
electronic debit transaction occurred.
For example, for an electronic debit
transaction that occurred on March 1,
2012, an issuer must maintain records
demonstrating compliance with the
requirements of this part through
December 31, 2017. The issuer’s
primary regulator, however, may
determine that a longer record retention
period is warranted. See § 235.9. Section
235.8(c)(2) sets forth an exception to the
general rule—if an issuer receives actual
notice that it is subject to an
investigation by an enforcement agency,
the issuer shall retain the records until
final disposition of the matter unless an
earlier time is allowed by court or
agency order.
4. Submission Timeframe and
Frequency
The Board proposed to require issuers
that are subject to §§ 235.3 and 235.4
and payment card networks to submit
reports to the Board every two years.
The Board requested comment, under
proposed § 235.8(c), on reserving
discretion to require more frequent
reporting. The Board proposed that
entities required to report submit the
report to the Board by March 31 of the
year they are required to report in order
to provide a reasonable time to compile
the data necessary to complete the
report.
The Board did not receive comments
explicitly regarding the submission
timeframe of required reporting, but did
receive a few comments on a similar
provision—issuer submission of cost
information to networks under proposed
Alternative 1. In relation to that
provision, commenters, although not
necessarily supporting Board-required
certification, supported a March 31
deadline for submission if adopted by
the Board. The Board, however, has

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determined not to mandate a specific
date in the regulatory text in order to
retain flexibility to adjust the reporting
deadline or the reporting period to
provide an appropriate period of time
for institutions to respond. Accordingly,
the Board is not adopting in its final
rule proposed § 235.8(c). Rather, similar
to other reports the Board requires to be
filed, the instructions to the report will
indicate when the report is due.
The Board also expects initially to
require different reporting frequencies
for issuers and payment card networks.
As discussed above in relation to
§ 235.5, the Board plans to gather
information from networks regarding
their interchange fee structures on an
annual basis and from covered issuers
regarding their costs every two years.
The statute requires the Board to
disclose aggregate or summary
information concerning costs and fees
on at least a biannual basis. ‘‘Biannual’’
can mean either twice a year or every
two years.171 The Board believes it is
appropriate to interpret ‘‘biannual’’ as
meaning every two years in the context
of the statute’s disclosure provision,
given the substantial reporting burden
involved in collecting the issuer cost
data. More frequent reporting by
networks or issuers may be warranted in
the future, depending on what the data
collected and other industry practices
reveal. Accordingly, the Board is not
specifying the frequency of required
reporting in the regulatory text in order
to retain flexibility. Similar to other
reporting forms, the Board plans to
indicate with publication of the form
the frequency with which entities are
required to report.
Additionally, the Board is deleting
proposed § 235.8(d), which stated that
the Board may, in its discretion,
disclose aggregate or summary
information reported. This provision
was a restatement of the Board’s
statutory authority to disclose such
information under EFTA Section
920(a)(3) and is not necessary.

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VIII. Section 235.9
Enforcement

Administrative

EFTA Section 920(d) provides that the
requirements of EFTA Section 920 may
be enforced by the relevant Federal
administrative agencies in accordance
with EFTA Section 918. Proposed
§ 235.9 set forth the agencies that may
enforce compliance with part 235. The
Board received no comments explicitly
on proposed § 235.9, but received
171 See Merriam-Webster’s Collegiate Dictionary
(10th edition) defining ‘‘biannual’’ as meaning
‘‘twice a year’’ or ‘‘biennial,’’ which in turn is
defined as occurring every two years.

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comments from some merchants urging
the Board to require ex post verification
by supervisors of issuer compliance
with the fee standards and to enumerate
penalties for failure to comply.172 Any
penalties for non-compliance are subject
to the discretion of an issuer’s or a
network’s primary supervisor.
Accordingly, the Board has not set forth
penalties for non-compliance with this
part. The Board received no other
comments on proposed § 235.9 and has
determined to adopt § 235.9 as
proposed.
IX. Section 235.10 Effective Date
Except as provided in § 235.7
(discussed above), the provisions of this
final rule are effective and compliance
is mandatory beginning October 1,
2011.173 Issuers may voluntarily comply
with these provisions prior to that date.
The Board proposed that the
interchange fee standards would be
effective on July 21, 2011, coinciding
with the effective date of EFTA Section
920(a) (set forth in EFTA Section
920(a)(9)). The Board received
numerous comments regarding the
effective date of the interchange fee
standards, many of which urged the
Board to delay the rule’s effective date.
Several issuers and networks
expressed concern that the proposed
effective date would not allow sufficient
time to make necessary system changes,
under either of the proposed fee
standard alternatives. For example, one
processor stated that, currently, there is
no interchange-fee data field transmitted
with the transaction data at the time the
acquirer or processor makes the routing
decision. This commenter contended
that networks should be responsible for
identifying the specific interchange fee
category to ensure merchants have
interchange fee information available at
the time of the routing decision. Many
of these commenters suggested a
phased-in approach of the new
standards to mitigate the impact of the
standards on market participants. A few
issuers and networks suggested that the
Board deem current interchange rates to
comply with the ‘‘reasonable and
proportional’’ requirement for some
period of time until the industry can
implement new standards (i.e., one to
two years). A few issuers suggested the
172 The Board received one comment suggesting
a mechanism for enforcing compliance with a
proposed network-average interchange fee
approach. The Board has determined not to adopt
a network-average approach to the interchange fee
standards and, therefore, need not address the
suggested approach to enforcement.
173 Section 235.4 and accompanying definitions,
which are added by the interim final rule published
separately in the Federal Register, also are effective
on October 1, 2011.

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Board, in addition to adopting a rule
with a higher safe harbor and/or cap,
study the impact of both the interchange
fee standards and exclusivity and
routing provisions prior to adjusting the
safe harbor and/or cap.
Numerous issuers and networks
contended that an issuer-specific
standard would take longer to
implement than a cap because networks
and issuers would need to time to
calculate their allowable costs and
networks would need time to establish
a process for obtaining this information,
to write and implement new network
rules, and to work with issuers,
acquirers, processors, and merchants to
implement the new interchange fee
structure. A few commenters suggested
specific compliance dates if the Board
implemented proposed Alternative 2.
The earliest suggested date was April
2012. More commonly, commenters
suggested an effective date of one year
from publication, with other
commenters suggesting that
implementation could not be
accomplished until well after July 2013.
One issuer suggested that July 2013
would permit networks to develop twotier interchange fee structures.
Irrespective of the actual effective date,
one commenter suggested a mid-month
effective date for changes to the
interchange fees to align with current
network processes designed to reduce
the financial risk of month-end and
quarter-end processing.
The Dodd-Frank Act does not
specifically provide an effective date for
the Board’s rules implementing EFTA
Section 920(a). The Board is directed to
issue final regulations within nine
months of the Dodd-Frank Act’s
enactment, and EFTA Section 920(a) is
effective one year after enactment,
indicating that Congress intended at
least a three-month implementation
period before the interchange fee
standards become effective. Moreover,
the final rule requires significant
changes to existing interchange fee
practices and systems changes by
issuers and payment card networks. An
October 1 effective date also coincides
with the normal schedule for many
network releases of systems changes.
Additionally, the Congressional Review
Act dictates that the Board’s final rule—
as a major rule—cannot be enforced
until the end of a 60-day Congressional
review period following transmission of
the final rule to Congress.174 For these
reasons, the Board believes that an
October 1, 2011 effective date balances
Congress’s directions of prompt
effectiveness and sufficient time for
174 See

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congressional review and for issuers and
payment networks to bring their systems
and practices into compliance. The
effective date for the provisions
implementing the routing and
exclusivity requirements of EFTA
Section 920(b) are discussed above in
connection with the explanation of the
requirements of § 235.7.
Effects of the Rule on Various Parties

emcdonald on DSK2BSOYB1PROD with RULES2

I. Overview of Comments Received
Comments from issuers, merchants,
payment card networks, and consumers
addressed the benefits and drawbacks of
the current system, the impact of EFTA
Section 920 and the effect of the Board’s
proposed rule on various parties and on
the current system overall, and
alternatives to the proposed rule.
Numerous commenters (primarily
issuers, networks, and some consumer
representatives) stated that the current
interchange fee system has resulted in
the development of a payment system
that provides significant benefits for
merchants, consumers, and issuers.
Many of these commenters stated that
merchants should pay for the benefits
they receive from accepting debit cards,
which they said included cost savings
relative to accepting cash, checks, or
credit cards; faster check-out at the
point of sale; higher consumer
spending; guaranteed payment; avoiding
liability for most fraudulent
transactions; faster settlement; secure
online transactions; and less time and
money spent on collections, billing, and
other administrative matters. Other
commenters stated that the debit card
system enables small merchants to
compete with larger merchants.
Merchant commenters, by contrast,
objected to the current interchange fee
system, noting that although
transactions processing costs have fallen
substantially, interchange fees have not.
These commenters also noted that
merchants often do not know at the time
of purchase the amount of the
interchange fee that will be assessed on
a transaction. In addition, many
merchants objected to networks setting
interchange fees centrally for all
participating issuers, noting that these
centrally determined fees bear no
relation to the costs of individual
issuers.
Merchant commenters explained that
high interchange fees force them either
to accept lower gross margins, raise
prices charged to their customers, or
reduce other costs. These commenters
stated that, as a practical matter, they
cannot discontinue acceptance of debit
cards because of their widespread
adoption by consumers. By contrast,

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numerous non-merchant commenters
asserted that merchants that are
unhappy with current interchange fee
levels could stop accepting debit cards
as a form of payment or could negotiate
with networks and acquirers for lower
interchange fees and merchant
discounts. Some of these commenters
noted that merchants are able to offer
cash discounts in order to encourage
payment by other means. Some
merchant commenters, however, stated
that offering cash discounts was
impractical.175
Numerous commenters recognized
that consumers benefit from debit cards.
Specifically, these commenters asserted
that debit cards provide consumers with
a widely accepted payment method,
increased security (by reducing fraud
liability and the risk associated with
carrying cash), and increased
convenience (by reducing the need to
carry cash). Several of these commenters
stated that the current interchange fee
system benefits consumers through
lower fees for accounts and banking
services, as well as rewards for debit
card purchases. By contrast, several
merchants stated that consumers pay
higher retail prices as a result of
merchants passing on the cost of
interchange fees.
Commenters also stated that issuers
receive benefits from debit cards,
including interchange fee revenue.
Several commenters stated that issuers
use interchange revenue to cover
operating costs and offset fraud losses.
Other commenters noted additional
benefits that debit cards provide for
issuers. For example, these commenters
asserted that debit cards provide a
means for issuers to establish an
account relationship with customers, to
reduce the need for issuers to hold cash
(and to maintain expensive brick-andmortar branches in order to facilitate
withdrawals), and to experience cost
savings from processing fewer checks.
By contrast, one issuer stated that debit
card transactions are more expensive to
process than checks due to processing
fees, cost of inquiries and disputes, and
fraud losses.
Numerous commenters asserted that
the Board’s proposed rule would have
adverse, unintended consequences on
175 Several merchant commenters also objected to
certain other practices, such as processors offering
low rates for an introductory period only, imposing
hidden fees, and delaying availability of funds by
an extra day if the merchant routes the transaction
through a PIN-debit network. One merchant
commenter stated that because EFTA Section
920(b)(2) does not restrict the ability of a payment
card network to prohibit differential pricing on the
basis of the network used, networks would not have
sufficient incentives to reduce fees borne by
merchants.

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issuers, consumers, payment card
networks, and the payment system more
generally. A few commenters asserted
that the Board’s proposed rule would
negatively impact small merchants as
well. Many of these commenters stated
that the Board’s proposed rule should
have included a competitive-impact
analysis required by EFTA Section
904(a) that was performed in accordance
with the Board’s competitive-impact
analysis bulletin.
II. Effects on Consumers
A. Comments Received
A number of commenters, primarily
issuers and networks, asserted that
consumers would be harmed by the
proposed rule, contrary to the statutory
intent. They predicted that the
substantial reduction in interchange fee
revenue resulting from the proposed
rule would lead card issuers to raise fees
charged to deposit account customers,
reduce benefits for users of debit cards
(e.g., rewards or liability protections),
not authorize the use of debit cards for
high-risk or high-value transactions, or
restrict or eliminate the issuance of
debit cards. These commenters argued
that low income consumers would
likely experience the greatest harm, as
they would be unable or unwilling to
incur the higher costs associated with
maintaining deposit accounts, and may
consequently be forced out of the
banking system.
At the same time, these commenters
asserted that consumers would not
experience any benefits from lower
interchange fees because they expect
that merchants would not reduce prices
charged to consumers, given that there
is no statutory requirement for them to
do so.176 They viewed the reduction in
interchange fees as a transfer of revenue
from card-issuing banks to merchants,
with no benefit flowing to consumers.
In addition, some commenters argued
that the exclusivity and routing
provisions would adversely affect
consumers by eliminating the ability of
cardholders to ensure that a transaction
was routed over a network that provides
certain benefits to its cardholders. In
particular, these commenters noted that
certain cardholder benefits, such as zero
liability, enhanced chargeback rights,
rewards, or insurance, are often tied to
the use of a particular network. In their
176 In support of their contentions, these
commenters pointed to the experience of other
countries with regulating interchange fees, most
notably Australia and Canada. Issuers and some
consumers asserted that interchange fee regulation
in other countries demonstrates that merchants will
not pass on savings to consumers at the point of
sale and that issuers will increase per-transaction
fees or other account fees.

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view, requiring unaffiliated networks on
a card with merchant control of routing
would make it less likely that a
cardholder would receive those benefits
if a merchant opted to route a
transaction over the merchant’s
preferred network.
Other commenters, primarily
merchants and some consumer groups,
asserted that consumers would benefit
from the proposed rule. Several
commenters indicated that, currently,
the cost of interchange fees is being
passed on to consumers through higher
retail prices, and therefore consumers
would benefit from a reduction in the
interchange fees. They argued that
merchants would have no choice but to
pass on their cost savings to consumers,
given the competitive environment in
which they operate. They further argued
that low income consumers, who are
currently less likely to use debit cards,
would experience the greatest benefits
from lower prices at the point of sale.
Some commenters suggested that lower
interchange fees could enable merchants
to enhance their operations through, for
example, more stores or improved
customer service, which would benefit
consumers. In addition, they questioned
the claim that lower interchange fees
would lead to higher account fees for
deposit customers, noting that over the
past decade both interchange fees and
other bank fees have increased sharply.
B. Analysis

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The ultimate net effect of the final
rule on consumers will depend on the
behavior of various participants in the
debit card networks. A reduction in
interchange fees would likely lead to a
decrease in merchants’ costs of debit
card acceptance, which could be passed
on to consumers in the form of lower
prices. Merchants operating in highly
competitive markets with low margins
are likely to pass the bulk of these
savings on to consumers, while
merchants operating in less competitive
markets may retain a greater portion of
the savings. Thus, other things equal,
the Board expects the rule to result in
some reduction in prices for goods and
services faced by consumers.177
177 It is not practical, however, to measure the
extent to which lower interchange fees translate
into lower merchant prices, because of the many
other factors that also influence those prices.
Australia has the longest experience with
government limits on interchange fees. Although
the Reserve Bank of Australia acknowledges the
difficulties involved in measuring the effect of the
interchange fee reductions on merchant prices, it
has stated that it is confident that savings are passed
through to consumers, given that in a competitive
market, changes in merchants’ costs are generally
reflected in the prices that merchants charge. See
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However, if issuers encourage
consumers to shift from debit cards to
credit cards, which are more costly to
merchants, overall merchant costs could
rise, despite a reduction in the cost of
accepting debit cards, and these higher
costs could be passed on to consumers.
If merchants continue their current
practice of not varying their prices with
the form of payment, any benefits
associated with price reductions, or
costs associated with price increases,
would likely accrue to all consumers,
regardless of whether they use debit
cards. In addition, lower debit card
interchange fees would likely provide
merchants that currently do not accept
debit cards with a greater economic
incentive to do so, which may benefit
consumers by increasing their ability to
use debit cards.
At the same time, covered issuers are
likely to implement some changes in
response to the reduction in interchange
fee revenue. They may seek alternative
sources of revenue, including higher
fees from debit card users or deposit
account customers more generally, or
may reduce or eliminate debit card
rewards programs. In addition, card
issuers may look for opportunities to
reduce operating costs, which could
involve reducing benefits associated
with deposit accounts or debit cards.
Finally, the exclusivity and routing
provisions of the final rule may limit the
ability of cardholders to determine the
network over which a transaction is
routed and, thus, may limit their ability
to ensure that they receive benefits
associated with certain networks.
Currently, however, consumers are
typically unaware of the network used
to route PIN debit transactions in
situations where multiple PIN networks
are enabled on their cards. Therefore,
the effect on consumers of merchant
routing decisions in such situations may
be minimal. Moreover, under the final
rule, which does not require multiple
unaffiliated networks for each method
of authentication, consumers may still
be able to influence transaction routing
through their choice of authentication
method.
Thus, the effect of the rule on any
individual consumer will depend on a
variety of factors, including the
consumer’s current payment behavior
(e.g., cash user or debit card user),
changes in the consumer’s payment
behavior, the competitiveness of the
merchants from which the consumer
makes purchases, changes in merchant
payment method acceptance, and
changes in the behavior of banks.
review-card-reforms/review-0708-pre-conclusions/
index.html.

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III. Effects on Issuers
A. Comments Received
Numerous commenters discussed the
anticipated effect of the proposed rule
on covered and exempt issuers; some
commenters predicted that any adverse
impact would be minimal, whereas
other commenters predicted that the
adverse impact would be far more
severe. More specifically, merchant
commenters believed that reducing
interchange fees would not have a
significant adverse impact on issuers’
profits (noting that issuers were
profitable before they received
interchange revenue); they also
questioned claims that issuers would
reduce debit card issuance, because they
believe debit cards are a lower-cost
means of access to deposit account
funds compared with checks.
Numerous issuer commenters stated
that the proposed rule’s substantial
reduction in interchange fee revenue
would adversely affect debit card
programs. Many of these issuers stated
that debit cards have become an
essential tool for consumers; therefore,
not offering debit cards is not an option.
Issuers were concerned that a
substantial drop in interchange fees
would adversely affect their financial
condition and raise safety and
soundness concerns. A few issuers
noted that the proposed rule’s adverse
impact would be particularly
burdensome in light of the recent
financial crisis and recent regulatory
changes, including the repeal of the
prohibition on paying interest on
demand deposits, limitations on
overdraft fees, and increases in deposit
insurance fund premiums. Specifically,
these issuers were concerned that they
would be unable to earn sufficient
revenue to attract capital and continue
to invest in fraud prevention,
processing, and other technologies.
Numerous issuers indicated that, if
the Board adopted its proposal, they
may impose or raise debit card or other
account fees, decrease cardholder
rewards and other benefits including
interest, decrease the availability of
debit cards and other banking services
(by, for example, imposing debit card
transaction size limits), or reduce the
scale of their operations. Some
consumer group commenters argued
that, because covered issuers would
simply raise other fees to make up for
lost interchange revenue, the proposed
rule would have little or no effect on
covered issuers. Some issuer
commenters asserted, however, that
they would not be able to recoup all of
the lost interchange fee revenue through
other customer fees, and therefore

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would need to scale back their debit
card programs. One issuer claimed that
the combination of higher customer fees
and reduced program benefits would
put covered issuers at a competitive
disadvantage relative to exempt issuers.
Numerous commenters
(predominantly issuers) noted that
interchange fee revenue currently is
used to offset fraud losses absorbed by
issuers, particularly those related to
signature debit transactions. Several of
these commenters asserted that most of
the losses result from action (or lack of
action) on the merchant side of
transactions. Merchant commenters, by
contrast, believed it was unfair for
merchants to pay for fraud losses that
could be avoided through use of PIN
debit transactions. In addition,
merchants argued that issuer incentives
to card holders to choose signature debit
over PIN debit would be diminished if
fraud losses were not compensated
through interchange fees. In general,
however, commenters disagreed on the
allocation of fraud losses between
merchants/acquirers and issuers.178
As provided by the statute, issuers
with consolidated assets of less than $10
billion are exempt from the rule’s
interchange fee standards, but not from
the network exclusivity and routing
provisions. Some commenters,
primarily issuers and smaller networks,
argued that issuers that are exempt from
the interchange fee standards would be
harmed by the proposed rule because
either (i) the exemption would not be
effective, and exempt issuers would face
reductions in interchange fees that are
similar to those required for covered
issuers; or (ii) the exemption would be
effective, and merchants would
discriminate against the higher-cost
cards issued by exempt banks. These
commenters believed that the
exemption might not be effective
because networks are not required to
establish separate interchange fee
schedules for exempt and covered
issuers. Furthermore, they asserted that
even if networks did establish separate
schedules, market forces would put
downward pressure on exempt issuers’
interchange fees. In part, these
commenters argued that this downward
pressure on interchange fees would
result from the prohibition on network
exclusivity and routing restrictions,
which would allow merchants to route
transactions over networks with lower
178 For example, some issuers assert they cannot
charge back some fraudulent transactions even
when a merchant does not follow network rules.
Other commenters assert that it is difficult for
merchants to prove they followed correct
procedures, and therefore merchants bear much of
the loss.

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interchange fees. In addition, some of
these commenters expressed concern
that the proposed rule’s requirement for
at least two unaffiliated networks on a
card would result in increased costs for
issuers that are exempt from the
interchange fee standards. Some
commenters asserted that the harm to
small issuers might be sufficient to
cause some of them to fail. Some
exempt issuers stated that they did not
believe they would be able to replace
lost revenue as readily as covered
issuers because they have less
diversified product lines than covered
issuers.
Merchant commenters argued that
issuers that are exempt from the
interchange fee standards would not be
harmed by the proposed rule. They
argued that the exemption would be
effective, noting that several networks
have already indicated their intent to
establish separate interchange fee
schedules for covered and exempt
issuers. They also dismissed the idea
that merchants might discriminate
against exempt issuers’ cards, arguing
that (i) merchants cannot practically
implement such discriminatory
practices and have an incentive to avoid
alienating customers who hold cards
issued by exempt issuers, and (ii)
networks have rules requiring a
merchant that accepts any of a
network’s debit cards to accept all of
that network’s debit cards, regardless of
issuer.
B. Analysis
It is not clear how covered issuers
will respond to the reduction in
interchange revenue. Experience in
other countries has shown that the
extent of debit card usage is not
necessarily related to the level of
interchange revenue received by
issuers.179 Issuers may need to provide
debit cards on attractive terms in order
to attract and retain consumer
transaction account balances. Covered
issuers may offset some or all lost
interchange fee revenue through a
combination of customer fee increases
(although competitive forces may limit
their practical ability to do so),
reductions in debit card rewards
programs, and cost reductions.
It is difficult to predict the market
response to the rule, and thus the likely
overall effect of the rule on exempt
issuers. Both the statute and the final
rule permit, but do not require,
networks to establish higher interchange
fees for exempt issuers than would be
179 In Canada, for example, debit card usage is
widespread, despite the absence of an interchange
fee.

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allowable for covered issuers. Networks
that collectively process about 80
percent of debit card volume have
indicated that they will establish two
separate interchange fee schedules
when the rule goes into effect. These
plans likely reflect the incentives
networks have to attract and retain
small issuers, which the Board estimates
account for roughly 30 percent of debit
card transaction volume. Networks will
likely review the appropriateness of
their interchange fee structures and
levels over time as the competitive
landscape continues to evolve.
To the extent that two-tier pricing is
adopted by the networks, the Board
believes that it is unlikely that
merchants would discriminate against
exempt issuers’ cards. First, it would
not appear to be in a merchant’s interest
to steer customers away from using an
exempt issuer’s debit card, because the
cardholder will often not have a
payment option that is more attractive
to the merchant. Although some
merchants have been known to steer
customers who present a high-cost
credit card to a lower-cost credit card,
they have been able to do so because
consumers often carry multiple credit
cards. That is generally not the case
with debit cards; consumers typically
have only one checking account and
hence one debit card. Merchants would
have no incentive to steer customers to
pay by credit card, because credit card
payments generally involve a higher
cost to merchants than do debit card
payments. Moreover, given that fewer
and fewer consumers carry checks or
large amounts of cash, merchants risk
losing the sale entirely if they attempt
to steer customers away from exempt
issuers’ debit cards and towards noncard methods of payment.
In addition, as noted by some
commenters, network rules prohibit
such discrimination. For example, the
honor-all-cards rules of the networks
require a merchant that accepts a
network’s debit cards to accept all of
that network’s debit cards, regardless of
the issuer. Moreover, although EFTA
Section 920(b)(2) provides that a
payment card network cannot restrict
merchant discounts across methods of
payment, it does not limit a network’s
ability to prohibit discounts on the basis
of the issuer.
The network exclusivity and routing
provisions, however, which by statute
apply to issuers that are exempt from
the interchange fee standards, may lead
to higher costs for some exempt issuers.
Moreover, these provisions could put
some downward pressure on
interchange fees overall if merchants are
able to route transactions over lower-

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cost networks. The ultimate effect of any
downward pressure on interchange fees
due to the network exclusivity and
routing provisions depends on the
industry response once those provisions
are in effect. Thus, it is possible that,
even with two-tier interchange fee
schedules, some issuers that are exempt
from the interchange fee standard may
receive less interchange revenue than
they would have absent the rule. The
Board expects, however, that even if
interchange fee revenue received by
small issuers declines, it will remain
above the level they would have
received if they were not exempt from
the interchange fee standard.
As discussed above, the Board is
taking several steps to mitigate any
adverse effect on small issuers. First, it
will publish lists of institutions that fall
above and below the small issuer
exemption asset threshold, to assist
payment card networks in determining
which of the issuers participating in
their networks are subject to the rule’s
interchange fee standards, and plans to
update these lists annually. In addition,
the Board plans to survey payment card
issuers annually and publish a list of the
average interchange fee that each
network provides to its covered issuers
and to its exempt issuers.180 This list
should enable issuers, including small
issuers, to more readily compare the
interchange revenue they would receive
from each network.

B. Analysis

A. Comments Received
Some commenters, primarily issuers
and networks, expected that merchants
would benefit from the rule, as they
would face lower costs associated with
debit card acceptance and would not
pass these savings on to consumers. In
addition, they argued that the
exclusivity and routing provisions,
which give merchants the ability to
direct their transactions over the lowercost network, may further benefit
merchants. However, some of these
commenters argued that small and
medium-sized merchants may be
harmed, as their acquirers would not
necessarily pass on the benefits of lower
interchange fees to them, whereas large
merchants, which have more bargaining
power in dealing with their acquirers,
would benefit from lower interchange
fees and would thereby gain a
competitive advantage relative to
smaller merchants.

As noted above, merchants that
operate in highly competitive markets
with low margins are likely to pass on
most or all of the interchange cost
savings to their customers in the form of
lower prices or improved service; by
contrast, merchants that operate in less
competitive markets may retain a greater
portion of the interchange fee savings.
The merchant-acquiring business,
broadly speaking, is competitive;
therefore, the Board believes that
acquirers would pass on the savings
from lower interchange fees to their
merchant customers, regardless of
merchant size. Consequently, the Board
does not believe that the rule would
adversely affect small and mediumsized merchants.181 Although it is
possible that merchants with a large
proportion of small-ticket transactions
may experience an increase in total
interchange fees, the rule does not
require networks to raise the current
interchange fees for very-small-value
transactions.

180 Under EFTA Section 920(a)(3)(B), the Board
may require any issuer or payment card network to
provide the Board with such information as may be
necessary to carry out the provisions of EFTA
Section 920(a).

181 Certain small and medium-sized merchants
that have entered into long-term contracts with
independent resellers of payment card services may
experience some delay before realizing lower
transaction costs.

IV. Effects on Merchants

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Merchants generally expected the
proposed rule to result in significant
merchant cost savings, which, they
argued, could be the difference between
staying in business and going out of
business. Merchant commenters
supported the proposed rule’s costbased interchange fees and indicated
that the rule would increase
competition among payment card
networks, improve pricing transparency,
and increase innovations by merchants.
Merchants also noted that cost savings
could translate into increased hiring,
more stores, or other enhancements,
such as improved customer service.
However, one merchant group was
concerned that merchants with a high
proportion of small-ticket transactions
may stop accepting debit cards because
the interchange fees for these types of
transactions could increase under the
proposed rule.
A few commenters were skeptical that
competition from the network routing
provisions would place material
downward pressure on interchange fees.
Some commenters expect issuers to
promote use of credit cards over debit
cards, which could result in higher costs
for merchants due to higher credit card
interchange fees.

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V. Effects on Other Parties
A. Comments Received
Many issuer and network commenters
stated that the proposed rule’s reduction
in interchange fee revenue would
adversely affect payment card networks,
as well as the payment system more
generally.182 These commenters stated
that the proposed interchange fee levels
would erode the current beneficial
characteristics of debit cards and stifle
future innovation in the debit card
industry (including the introduction of
alternative payment systems). These
commenters also stated that the
proposal would lead to fewer payment
options for consumers because issuers
would stop offering debit cards (leading
to increased reliance on cash and
checks), promote the use of credit cards,
or both. Promoting the use of credit
cards, these commenters asserted,
would adversely affect consumers
because credit cards do not have the
same debt-management characteristics
as debit cards. Other commenters
asserted that increased reliance on cash
and checks would result in greater
money laundering and tax compliance
risks. By contrast, several merchants
stated that a reduction in interchange
fees would benefit the payment system
by increasing merchant acceptance of
debit cards (which have beneficial debt
management characteristics).
B. Analysis
The effect of the rule on payment card
networks and the payment system more
generally will depend on the market
responses to the rule by the various
payment system participants. Based on
experiences in other countries that have
adopted interchange fee regulations, the
Board does not expect a significant shift
away from debit card payments or any
meaningful degradation of the integrity
of the payment system. The provisions
prohibiting network exclusivity and
routing restrictions could spur
competition among payment card
networks, which may have an overall
positive effect on payment system
efficiency.
EFTA 904(a) Economic Analysis
I. Statutory Requirement
Section 904(a)(2) of the EFTA requires
the Board to prepare an economic
182 Some issuer and network commenters believe
that interchange fee restrictions are unfair because
financial institutions and networks invested in
building the current network infrastructure. In
contrast, some merchant commenters asserted that
issuers and networks have already been more than
compensated for historical investment in the debit
card system. Another commenter stated that
reduced interchange fee revenues would increase
the cost of leasing point-of-sale terminals.

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analysis of the impact of the regulation
that considers the costs and benefits to
financial institutions, consumers, and
other users of electronic fund transfers.
The analysis must address the extent to
which additional paperwork would be
required, the effect upon competition in
the provision of electronic fund transfer
services among large and small financial
institutions, and the availability of such
services to different classes of
consumers, particularly low income
consumers.
II. Cost/Benefit Analysis
The Section-by-Section Analysis
above, as well as the Final Regulatory
Flexibility Analysis and Paperwork
Reduction Act analysis below, contain a
more detailed discussion of the costs
and benefits of various aspects of the
proposal. This discussion is
incorporated by reference in this
section.
As required by Section 920 of the
EFTA (15 U.S.C. 1693o–2), the final
rule, which the Board is implementing
in Regulation II, establishes standards
for assessing whether an interchange
transaction fee received or charged by
an issuer (and charged to the acquirer)
is reasonable and proportional to the
cost incurred by the issuer with respect
to the transaction. Specifically, the final
rule provides that an issuer may not
receive or charge an interchange
transaction fee in excess of the sum of
a 21-cent base component and 5 basis
points of the transaction’s value (the ad
valorem component).
Certain issuers and products are
exempt from the interchange fee
restrictions, including small issuers
that, together with their affiliates, have
less than $10 billion in assets; certain
cards accessing governmentadministered payment programs; and
certain reloadable general-use prepaid
cards that are not marketed or labeled as
a gift certificate or gift card. Payment
card networks may, but are not required
to, differentiate between interchange
fees received by covered issuers and
products versus exempt issuers and
products.
Regulation II also prohibits issuers
and payment card networks from both
restricting the number of payment card
networks over which an electronic debit
transaction may be processed to fewer
than two unaffiliated networks and
inhibiting the ability of a merchant to
direct the routing of an electronic debit
transaction over any payment card
network that may process such
transactions. Under the final rule,
issuers are required to have at least two
unaffiliated payment card networks for
each debit card they issue.

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A. Additional Paperwork
Under the final rule, issuers that do
not qualify for the small issuer
exemption would be required to provide
cost data to the Board. Covered issuers
would also be required to retain records
that demonstrate compliance with the
requirements of Regulation II for not
less than five years after the end of the
calendar year in which the electronic
debit transaction occurred. If an issuer
receives actual notice that it is subject
to an investigation by an enforcement
agency, the issuer must retain the
records until final disposition of the
matter.
In addition, under the Interim Final
Rule, published separately in the
Federal Register, issuers are required to
develop, implement, and update
policies and procedures reasonably
designed to (i) identify and prevent
fraudulent electronic debit transactions;
(ii) monitor the incidence of,
reimbursements received for, and losses
incurred from fraudulent electronic
debit transactions; (iii) respond
appropriately to suspicious electronic
debit transactions so as to limit the
fraud losses that may occur and prevent
the occurrence of future fraudulent
electronic debit transactions; and (iv)
secure debit card and cardholder data.
If an issuer meets these standards and
wishes to receive the adjustment, it
must certify its eligibility to receive the
fraud-prevention adjustment to the
payment card networks in which the
issuer participates.
For smaller institutions that are not
required to submit cost information to
the Board under Regulation II, the
regulation does not impose any
reporting requirements. However, it is
possible small issuers may have
reporting requirements to payment card
networks to certify their exempt status.
As discussed above, for those networks
that choose to implement a two-tier
interchange fee structure that provides
different interchange rates to larger
issuers and exempt small issuers, the
Board plans to publish annually lists of
institutions above and below the small
issuer exemption asset threshold. If a
payment card network decides to
distinguish between large and small
issuers, small issuers that are not on the
Board’s list of institutions that, together
with their affiliates, have less than $10
billion in assets may need to provide
information to the network in order to
take advantage of the exempt fee
structure.

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B. Competition in the Provision of
Services Among Financial Institutions
As discussed in ‘‘Effects of the rule on
various parties’’ above, numerous
commenters discussed the anticipated
effect of the proposed rule on covered
and exempt issuers. The Board
understands that payment card
networks that together process about 80
percent of debit card transaction volume
have indicated their intent to establish
two-tier interchange fee structures. To
the extent payment card networks do
not establish different interchange fee
schedules for exempt and covered
issuers, exempt issuers that participate
in these networks will experience a
decline in their interchange transaction
fees, for transactions routed over these
networks, similar in magnitude to that
experienced by covered issuers. If
exempt issuers have higher costs for
debit card transactions than do covered
issuers, this decline in interchange
revenue may necessitate a larger
adjustment of fees or other account
terms by exempt issuers than by covered
issuers. In addition, if exempt issuers
typically offer narrower product or
service lines than covered issuers, as
suggested by some issuer commenters,
then exempt issuers may adjust fees and
account terms that are closely tied to
their debit card operations or deposit
accounts, whereas covered issuers may
also modify fees and terms for other
complementary or substitute products,
such as credit cards, offered by those
issuers. Under a scenario in which some
networks do not establish different
interchange fee schedules for exempt
and covered issuers, resulting disparate
changes in account fees or terms might
cause a shift of deposit customers from
exempt to covered issuers.
To the extent payment card networks
do establish two-tier fee structures,
covered issuers will likely experience a
greater decline in their interchange
revenue compared to exempt issuers. In
such a situation, covered issuers may
need to adjust fees and account terms in
response to the lower interchange
revenue, whereas exempt issuers may
not. Under this scenario, consumers
may shift their purchases of some
financial services from covered issuers
to exempt issuers in response to changes
in fees and account terms at covered
issuers. However, covered issuers with
diversified product lines may look to
retain customers by promoting
alternative products not covered by the
interchange fee standards, such as credit
cards.
Regardless of whether or not networks
establish two-tier fee structures, the
competitive effects of any changes in

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fees or account terms across covered
and exempt issuers due to a decline in
interchange revenue will depend on the
degree of substitution between small,
exempt issuers and large, covered
issuers. If the cross-price elasticity
between exempt and covered issuers is
large, then substantial shifts in market
share may occur in response to
disproportionate changes in fees and
account terms by exempt versus covered
issuers. Conversely, if substitution
between exempt and covered issuers is
low, then any changes in fees and
account terms by exempt versus covered
issuers may generate small shifts in
market shares across exempt and
covered issuers.
As the previous analysis suggests, the
effect on competition among large and
small financial institutions will depend
on a number of factors, including the
extent to which payment card networks
implement and retain two-tier fee
structures, the differentials in fees
across tiers in such structures, the
product and service lines offered by
large and small financial institutions,
and the substitutability of products and
services across large and small financial
institutions. As noted above, the Board
understands that most debit card
networks have indicated that they
intend to implement two-tier fee
structures; however, these are not
binding commitments, and the level of
interchange fees that will prevail in
such systems is currently not known
and will depend on market responses.
Prior economic research suggests that
competition between large and small
depository institutions is weaker than
competition within either group of
institutions, likely because these
institutions serve different customer
bases.183 For example, large institutions
have tended to attract customers who
desire expansive branch and ATM
networks and a wide variety of financial
instruments; by contrast, smaller
institutions often market themselves as
offering more individualized,
relationship-based service and customer
support to consumers and small
businesses. This evidence suggests that
substitution effects in response to
changes in fees or account terms are
stronger between depository institutions
183 See, e.g., Robert Adams, Kenneth Brevoort,
and Elizabeth Kiser, ‘‘Who Competes with Whom?
The Case of Depository Institutions,’’ Journal of
Industrial Economics, March 2007, v. 55, iss. 1, pp.
141–67; Andrew M. Cohen and Michael J. Mazzeo,
‘‘Market Structure and Competition among Retail
Depository Institutions,’’ Review of Economics and
Statistics, February 2007, v. 89, iss. 1, pp. 60–74;
and Timothy H. Hannan and Robin A. Prager, ‘‘The
Profitability of Small Single-Market Banks in an Era
of Multi-market Banking,’’ Journal of Banking and
Finance, February 2009, v. 33, iss. 2, pp. 263–71.

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of similar sizes than across depository
institutions of different sizes.
III. Availability of Services to Different
Classes of Consumers
‘‘Effects of the rule on various parties’’
above discussed the comments the
Board received regarding the effect the
Board’s proposed regulation may have
on consumers. Furthermore, as
discussed in ‘‘Effects of the rule on
various parties’’, the ultimate net effect
of the final rule on consumers will
depend on the behavior of various
participants in the debit card networks.
Specifically, the effect of the rule on any
individual consumer will depend on a
variety of factors, including the
consumer’s current payment behavior
(e.g., cash user or debit card user),
changes in the consumer’s payment
behavior, the competitiveness of the
merchants from which the consumer
makes purchases, changes in merchant
payment method acceptance, and
changes in the behavior of banks.
For low income consumers, to the
extent that fees and other account terms
become less attractive as a result of the
rule, some low income consumers may
be unwilling or unable to obtain debit
cards and related deposit accounts.
Similarly, less attractive fees and
account terms may cause certain low
income consumers who previously held
debit cards and deposit accounts to
substitute away from those products. At
the same time, however, low income
consumers who currently use cash for
purchases may face lower prices at the
point of sale if retailers that they
frequent set lower prices to reflect lower
costs of debit card transactions.
Therefore, the net effect on low income
consumers will depend on various
factors, including each consumer’s
payment and purchase behavior, as well
as market responses to the rule.
IV. Conclusion
EFTA Section 904(a)(3) states that: ‘‘to
the extent practicable, the Board shall
demonstrate that the consumer
protections of the proposed regulations
outweigh the compliance costs imposed
upon consumers and financial
institutions.’’ Based on the analysis
above and in the Section-by-Section
Analysis, the Board cannot, at this time,
determine whether the benefits to
consumers exceed the possible costs to
financial institutions. As discussed
above and in ‘‘Effects of the rule on
various parties,’’ the overall effects of
the final rule on financial institutions
and on consumers are dependent on a
variety of factors, and the Board cannot
predict the market response to the final
rule.

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Final Regulatory Flexibility Analysis
An initial regulatory flexibility
analysis (IRFA) was included in the
proposal in accordance with Section
3(a) of the Regulatory Flexibility Act, 5
U.S.C. 601 et seq. (RFA). In the IRFA,
the Board requested comments on all
aspects of the IRFA, and, in particular,
comments on the network exclusivity
and routing alternatives (the provisions
of the proposal that apply to small
issuers). The Board also requested
comments on any approaches, other
than the proposed alternatives, that
would reduce the burden on all entities,
including small issuers. Finally, the
Board requested comments on any
significant alternatives that would
minimize the impact of the proposal on
small entities.
The RFA requires an agency to
prepare a final regulatory flexibility
analysis (FRFA) unless the agency
certifies that the rule will not, if
promulgated, have a significant
economic impact on a substantial
number of small entities. Although it is
difficult to quantify the analysis at this
point, the Board believes that the rule,
if promulgated, may have a significant
economic impact on a substantial
number of small entities and,
accordingly, the Board has prepared the
following FRFA pursuant to the RFA.
1. Statement of the need for, and
objectives of, the final rule. As required
by EFTA Section 920, the Board is
adopting new Regulation II to establish
standards for assessing whether an
interchange transaction fee received or
charged by an issuer is reasonable and
proportional to the cost incurred by the
issuer with respect to the transaction.
Additionally, also as required by EFTA
Section 920, new Regulation II prohibits
issuers and payment card networks from
both restricting the number of payment
card networks over which an electronic
debit transaction may be processed to
less than two unaffiliated networks and
inhibiting the ability of a merchant to
direct the routing of an electronic debit
transaction over a particular payment
card network that may process such
transactions.
2. Summary of significant issues
raised by public comments in response
to the Board’s IRFA, the Board’s
assessment of such issues, and a
statement of any changes made as a
result of such comments. The Board
received several comments on the IRFA.
Some commenters contended that the
IRFA should include an analysis of the
effect of the proposed rule on small
entities, including small merchants and
small business debit card holders, as
well as a study of the disparate impact

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of the rule on smaller and larger
businesses. One commenter also
suggested that the IRFA should consider
the effect on small businesses that
receive financial services from small
banks. Some commenters suggested that
the Board’s RFA analysis should take
into consideration the effect of the rule
on consumers, especially consumer
debit card holders and lower income
individuals. Another commenter argued
that the IRFA was not reasonably
complete because the cost survey on
which the Board based its proposal did
not consider small issuers. As noted
above in the sections on ‘‘Effects on
Various Parties’’ and the ‘‘EFTA 904(a)
Economic Analysis,’’ the overall effects
of the final rule on exempt issuers,
small merchants, consumers, and other
parties are dependent on a variety of
factors, and the Board cannot predict
the market response to the final rule.
In addition, numerous commenters
discussed the proposed rule’s impact on
small entities, particularly small issuers.
As discussed in more detail in the
Section-by-Section Analysis, EFTA
Section 920(a)(6)(A) provides an
exemption from the interchange fee
restrictions under EFTA Section 920(a)
for any issuer that, together with its
affiliates, has assets of less than $10
billion. Consequently, the provisions
related to the interchange fee
restrictions in the final rule do not
directly impact small issuers.
Commenters, however, were concerned
that the small issuer exemption would
not be effective in practice if payment
card networks do not implement twotier fee structures. As discussed above
in this notice, trade associations
representing small issuers, including
credit unions, and one federal banking
agency urged the Board to use its
circumvention or evasion authority to
ensure that the small issuer exemption
in EFTA Section 920(a)(6) from the
interchange transaction fee restrictions
is given effect by the networks. In
particular, these commenters were
concerned that absent an express
requirement on networks to adopt
higher tiers of interchange fees for
exempt issuers, such issuers would
experience a significant reduction in
interchange fee revenue,
notwithstanding the exemption.
Although the statute provides an
exemption from the interchange
transaction fee restrictions for issuers
with less than $10 billion in
consolidated assets, the statute neither
imposes an affirmative duty on
networks to implement different
interchange transaction fee rates for
covered and exempt issuers, nor
guarantees a particular level of

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interchange fee revenue that may be
collected by an exempt issuer. As noted
above, however, the Board is taking
steps to respond to this issue in two
ways. First, the Board plans to survey
payment card issuers and networks
annually and publish annually a list of
the average interchange fees each
network provides to its covered issuers
and to its exempt issuers. This
information will provide for more
transparency for issuers, including
small issuers, to more readily compare
the interchange revenue they would
receive from each network. Second, to
facilitate a network’s implementation of
a two-tier fee structure, the Board will
also compile annual lists of institutions
above and below the small issuer
exemption asset threshold. Payment
card networks and issuers may then rely
on such lists to determine which issuers
qualify for the small issuer exemption.
Issuers not appearing on the list of
issuers that, together with their
affiliates, have less than $10 billion in
assets may still be required by payment
card networks in which they participate
to notify the networks that they qualify
for the small issuer exemption. The
Board believes the publication of the
lists will greatly reduce the
administrative burden associated with
identifying small issuers that qualify for
the exemption.
With respect to the network
exclusivity and routing provisions,
some commenters suggested that the
Board exempt small issuers from these
requirements. As explained above in the
Section-by-Section Analysis, the statute
does not provide an exemption for small
issuers for these provisions. In addition,
the exemption authority in EFTA
Section 904(c) is transferred to the
Consumer Financial Protection Bureau
on July 21, 2011.
The Board has discretion, however, in
setting the compliance date for these
provisions. In designating April 1, 2012,
as the date by which most issuers must
comply with the network exclusivity
provisions and October 1, 2011, as the
date by which issuers must comply with
the routing provisions, the Board has
taken into account the concerns of
issuers of all sizes. The technological
options available for issuers generally
will be the same for all issuers,
regardless of asset size. Furthermore, as
discussed in more detail in the Sectionby-Section Analysis, certain debit cards
have a delayed effective date, and
issuers of such cards do not have to
comply with the network exclusivity
provisions for these cards until April 1,
2013.
3. Description and estimate of small
entities affected by the final rule. This

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final rule will apply to small financial
institutions that issue debit cards. A
financial institution generally is
considered small if it has assets of $175
million or less.184 Based on 2010 Call
Report data, approximately 11,000
depository institutions had total
domestic assets of $175 million or less.
The large majority of these institutions
issue debit cards.
The sections above on ‘‘Effects on
Various Parties’’ and the ‘‘EFTA 904(a)
Economic Analysis’’ provide a more
detailed discussion of the direct and
indirect impact of the rule on various
parties.
4. Projected reporting, recordkeeping,
and other compliance requirements.
With respect to the limitations on
interchange transaction fees, the Board’s
final rule does not impose compliance
requirements on small issuers.185 In
accordance with EFTA Section 920 the
Board’s rule exempts from the
limitations on interchange transaction
fees all issuers that, together with
affiliates, have assets of less than $10
billion. The Board’s final rule does not,
however, require payment card
networks to distinguish between issuers
with assets of $10 billion or more and
smaller issuers in setting interchange
rates. If a payment card network decides
to distinguish between large and small
issuers, small issuers that are not on the
Board’s list of institutions that, together
with their affiliates, have less than $10
billion in assets may need to provide
information to the network in order to
take advantage of the exempt fee
structure.
The final rule prohibiting network
exclusivity arrangements will affect
small financial institutions that issue
debit cards if such institutions do not
currently comply with the final rule’s
standards. Under the final rule, a small
issuer, like other issuers, would be
required to have at least two unaffiliated
payment card networks for each debit
card it issues. If the issuer does not have
at least two unaffiliated payment card
networks for each debit card it issues, it
would be required to add an additional
network. This process may require
making a decision as to which
additional network to add to the debit
card, establishing a connection to the
new network, and updating internal
processes and procedures.
184 U.S. Small Business Administration, Table of
Small Business Size Standards Matched to North
American Industry Classification System Codes,
available at http://www.sba.gov/idc/groups/public/
documents/sba_homepage/serv_sstd_tablepdf.pdf.
185 There may be some small financial institutions
that have very large affiliates such that the
institution does not qualify for the small issuer
exemption.

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5. Steps taken to minimize the
economic impact on small entities;
significant alternatives. In its proposed
rule, the Board requested comment on
the impact of the prohibition on
network exclusivity and routing
restrictions on small entities and
solicited comment on any approaches,
other than the proposed alternatives,
that would reduce the burden on all
entities, including small issuers. The
Board received comment suggesting that
small issuers should be exempt from the
network exclusivity and routing
provisions. However, as noted above in
the Section-by-Section Analysis, EFTA
Section 920 does not provide for this
exemption, and the Board does not have
authority to adopt an exemption for
small issuers from these provisions. As
noted above, the Board will publish lists
of institutions above and below the
small issuer exemption asset threshold
to facilitate the implementation of twotier interchange fee structures by
payment card networks. In addition, the
Board plans to publish annually
information regarding the average
interchange fees received by exempt
issuers and covered issuers in each
payment card network; this information
may assist exempt issuers in
determining the networks in which they
wish to participate.
The factual, policy, and legal reasons
for selecting the alternatives adopted in
the final rule regarding each provision
of the rule are discussed above in the
Section-by-Section Analysis regarding
each such provision. In addition, the
reasons for rejecting other significant
alternatives to the final rule considered
by the Board are discussed in those
sections as well.

Use of ‘‘Plain Language’’
Section 722 of the Gramm-LeachBliley Act of 1999 (12 U.S.C. 4809)
requires the Board to use ‘‘plain
language’’ in all final rules published
after January 1, 2000. The Board has
sought to present this final rule in a
simple and straightforward manner. The
Board received no comments on
whether the proposed rule was clearly
stated and effectively organized, or on
how the Board might make the text of
the rule easier to understand.
Text of Final Rule
List of Subjects in 12 CFR Part 235
Banks, banking, Debit card routing,
Electronic debit transactions, and
Interchange transaction fees.
Authority and Issuance
For the reasons set forth in the
preamble, the Board amends Title 12,
Chapter II of the Code of Federal
Regulations by adding a new part 235 to
read as follows:
PART 235—DEBIT CARD
INTERCHANGE FEES AND ROUTING
Sec.
235.1 Authority and purpose.
235.2 Definitions.
235.3 Reasonable and proportional
interchange fees.
235.4 [Reserved]
235.5 Exemptions.
235.6 Prohibition on circumvention,
evasion, or net compensation.
235.7 Limitation on payment card
restrictions.
235.8 Reporting requirements and record
retention.
235.9 Administrative enforcement.
235.10 Effective and compliance dates.

Appendix A to Part 235—Official Board
Commentary on Regulation II

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Paperwork Reduction Act

Authority: 15 U.S.C. 1693o–2.

In accordance with the Paperwork
Reduction Act of 1995 (PRA) (44 U.S.C.
3501–3521; 5 CFR Part 1320 Appendix
A.1), the Board reviewed this final rule
under the authority delegated to the
Board by the Office of Management and
Budget. As mentioned in the preamble,
the Board is seeking comment, via an
interim final rulemaking, on the
provisions required under § 235.4 for
the fraud-prevention adjustment,
published separately in the Federal
Register. No collections of information
pursuant to the PRA are contained in
this final rule. Once the Board develops
a survey to obtain information under
§ 235.8, containing recordkeeping and
reporting requirements, staff will
conduct an analysis under the PRA and
seek public comment in the Federal
Register.

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§ 235.1

Authority and purpose.

(a) Authority. This part is issued by
the Board of Governors of the Federal
Reserve System (Board) under section
920 of the Electronic Fund Transfer Act
(EFTA) (15 U.S.C. 1693o–2, as added by
section 1075 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act, Public Law 111–203, 124 Stat. 1376
(2010)).
(b) Purpose. This part implements the
provisions of section 920 of the EFTA,
including standards for reasonable and
proportional interchange transaction
fees for electronic debit transactions,
standards for receiving a fraudprevention adjustment to interchange
transaction fees, exemptions from the
interchange transaction fee limitations,
prohibitions on evasion and
circumvention, prohibitions on payment

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card network exclusivity arrangements
and routing restrictions for debit card
transactions, and reporting requirements
for debit card issuers and payment card
networks.
§ 235.2

Definitions.

For purposes of this part:
(a) Account (1) Means a transaction,
savings, or other asset account (other
than an occasional or incidental credit
balance in a credit plan) established for
any purpose and that is located in the
United States; and
(2) Does not include an account held
under a bona fide trust agreement that
is excluded by section 903(2) of the
Electronic Fund Transfer Act and rules
prescribed thereunder.
(b) Acquirer means a person that
contracts directly or indirectly with a
merchant to provide settlement for the
merchant’s electronic debit transactions
over a payment card network. An
acquirer does not include a person that
acts only as a processor for the services
it provides to the merchant.
(c) Affiliate means any company that
controls, is controlled by, or is under
common control with another company.
(d) Cardholder means the person to
whom a debit card is issued.
(e) Control of a company means—
(1) Ownership, control, or power to
vote 25 percent or more of the
outstanding shares of any class of voting
security of the company, directly or
indirectly, or acting through one or
more other persons;
(2) Control in any manner over the
election of a majority of the directors,
trustees, or general partners (or
individuals exercising similar functions)
of the company; or
(3) The power to exercise, directly or
indirectly, a controlling influence over
the management or policies of the
company, as the Board determines.
(f) Debit card (1) Means any card, or
other payment code or device, issued or
approved for use through a payment
card network to debit an account,
regardless of whether authorization is
based on signature, personal
identification number (PIN), or other
means, and regardless of whether the
issuer holds the account, and
(2) Includes any general-use prepaid
card; and
(3) Does not include—
(i) Any card, or other payment code
or device, that is redeemable upon
presentation at only a single merchant
or an affiliated group of merchants for
goods or services; or
(ii) A check, draft, or similar paper
instrument, or an electronic
representation thereof.
(g) Designated automated teller
machine (ATM) network means either—

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(1) All ATMs identified in the name
of the issuer; or
(2) Any network of ATMs identified
by the issuer that provides reasonable
and convenient access to the issuer’s
customers.
(h) Electronic debit transaction (1)
Means the use of a debit card by a
person as a form of payment in the
United States to initiate a debit to an
account, and
(2) Does not include transactions
initiated at an ATM, including cash
withdrawals and balance transfers
initiated at an ATM.
(i) General-use prepaid card means a
card, or other payment code or device,
that is—
(1) Issued on a prepaid basis in a
specified amount, whether or not that
amount may be increased or reloaded,
in exchange for payment; and
(2) Redeemable upon presentation at
multiple, unaffiliated merchants for
goods or services.
(j) Interchange transaction fee means
any fee established, charged, or received
by a payment card network and paid by
a merchant or an acquirer for the
purpose of compensating an issuer for
its involvement in an electronic debit
transaction.
(k) Issuer means any person that
authorizes the use of a debit card to
perform an electronic debit transaction.
(l) Merchant means any person that
accepts debit cards as payment.
(m) Payment card network means an
entity that—
(1) Directly or indirectly provides the
proprietary services, infrastructure, and
software that route information and data
to an issuer from an acquirer to conduct
the authorization, clearance, and
settlement of electronic debit
transactions; and
(2) A merchant uses in order to accept
as a form of payment a brand of debit
card or other device that may be used
to carry out electronic debit
transactions.
(n) Person means a natural person or
an organization, including a
corporation, government agency, estate,
trust, partnership, proprietorship,
cooperative, or association.
(o) Processor means a person that
processes or routes electronic debit
transactions for issuers, acquirers, or
merchants.
(p) Route means to direct and send
information and data to an unaffiliated
entity or to an affiliated entity acting on
behalf of an unaffiliated entity.
(q) United States means the States,
territories, and possessions of the
United States, the District of Columbia,
the Commonwealth of Puerto Rico, or
any political subdivision of any of the
foregoing.

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§ 235.3 Reasonable and proportional
interchange transaction fees.

(a) In general. The amount of any
interchange transaction fee that an
issuer may receive or charge with
respect to an electronic debit transaction
shall be reasonable and proportional to
the cost incurred by the issuer with
respect to the electronic debit
transaction.
(b) Determination of reasonable and
proportional fees. An issuer complies
with the requirements of paragraph (a)
of this section only if each interchange
transaction fee received or charged by
the issuer for an electronic debit
transaction is no more than the sum of—
(1) 21 cents and;
(2) 5 basis points multiplied by the
value of the transaction.
§ 235.4

[Reserved]

§ 235.5

Exemptions.

(a) Exemption for small issuers. (1) In
general. Except as provided in
paragraph (a)(3) of this section, §§ 235.3,
235.4, and 235.6 do not apply to an
interchange transaction fee received or
charged by an issuer with respect to an
electronic debit transaction if—
(i) The issuer holds the account that
is debited; and
(ii) The issuer, together with its
affiliates, has assets of less than $10
billion as of the end of the calendar year
preceding the date of the electronic
debit transaction.
(2) Determination of issuer asset size.
A person may rely on lists published by
the Board to determine whether an
issuer, together with its affiliates, has
assets of less than $10 billion as of the
end of the calendar year preceding the
date of the electronic debit transaction.
(3) Change in status. If an issuer
qualifies for the exemption in paragraph
(a)(1) in a particular calendar year, but,
as of the end of that calendar year no
longer qualifies for the exemption
because at that time it, together with its
affiliates, has assets of $10 billion or
more, the issuer must begin complying
with §§ 235.3, 235.4, and 235.6 no later
than July 1 of the succeeding calendar
year.
(b) Exemption for governmentadministered programs. Except as
provided in paragraph (d) of this
section, §§ 235.3, 235.4, and 235.6 do
not apply to an interchange transaction
fee received or charged by an issuer
with respect to an electronic debit
transaction if—
(1) The electronic debit transaction is
made using a debit card that has been
provided to a person pursuant to a
Federal, State, or local governmentadministered payment program; and

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(2) The cardholder may use the debit
card only to transfer or debit funds,
monetary value, or other assets that
have been provided pursuant to such
program.
(c) Exemption for certain reloadable
prepaid cards—(1) In general. Except as
provided in paragraph (d) of this
section, §§ 235.3, 235.4, and 235.6 do
not apply to an interchange transaction
fee received or charged by an issuer
with respect to an electronic debit
transaction using a general-use prepaid
card that is—
(i) Not issued or approved for use to
access or debit any account held by or
for the benefit of the cardholder (other
than a subaccount or other method of
recording or tracking funds purchased
or loaded on the card on a prepaid
basis);
(ii) Reloadable and not marketed or
labeled as a gift card or gift certificate;
and
(iii) The only means of access to the
underlying funds, except when all
remaining funds are provided to the
cardholder in a single transaction.
(2) Temporary cards. For purposes of
this paragraph (c), the term ‘‘reloadable’’
includes a temporary non-reloadable
card issued solely in connection with a
reloadable general-use prepaid card.
(d) Exception. The exemptions in
paragraphs (b) and (c) of this section do
not apply to any interchange transaction
fee received or charged by an issuer on
or after July 21, 2012, with respect to an
electronic debit transaction if any of the
following fees may be charged to a
cardholder with respect to the card:
(1) A fee or charge for an overdraft,
including a shortage of funds or a
transaction processed for an amount
exceeding the account balance, unless
the fee or charge is imposed for
transferring funds from another asset
account to cover a shortfall in the
account accessed by the card; or
(2) A fee imposed by the issuer for the
first withdrawal per calendar month
from an ATM that is part of the issuer’s
designated ATM network.
§ 235.6 Prohibition on circumvention,
evasion, and net compensation.

(a) Prohibition of circumvention or
evasion. No person shall circumvent or
evade the interchange transaction fee
restrictions in §§ 235.3 and 235.4.
(b) Prohibition of net compensation.
An issuer may not receive net
compensation from a payment card
network with respect to electronic debit
transactions or debit card-related
activities within a calendar year. Net
compensation occurs when the total
amount of payments or incentives
received by an issuer from a payment

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card network with respect to electronic
debit transactions or debit card-related
activities, other than interchange
transaction fees passed through to the
issuer by the network, during a calendar
year exceeds the total amount of all fees
paid by the issuer to the network with
respect to electronic debit transactions
or debit card-related activities during
that calendar year. Payments and
incentives paid by a network to an
issuer, and fees paid by an issuer to a
network, with respect to electronic debit
transactions or debit card related
activities are not limited to volumebased or transaction-specific payments,
incentives, or fees, but also include
other payments, incentives or fees
related to an issuer’s provision of debit
card services.

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§ 235.7 Limitations on payment card
restrictions.

(a) Prohibition on network
exclusivity—(1) In general. An issuer or
payment card network shall not directly
or through any agent, processor, or
licensed member of a payment card
network, by contract, requirement,
condition, penalty, or otherwise, restrict
the number of payment card networks
on which an electronic debit transaction
may be processed to less than two
unaffiliated networks.
(2) Permitted arrangements. An issuer
satisfies the requirements of paragraph
(a)(1) of this section only if the issuer
allows an electronic debit transaction to
be processed on at least two unaffiliated
payment card networks, each of which
does not, by rule or policy, restrict the
operation of the network to a limited
geographic area, specific merchant, or
particular type of merchant or
transaction, and each of which has
taken steps reasonably designed to
enable the network to process the
electronic debit transactions that the
network would reasonably expect will
be routed to it, based on expected
transaction volume.
(3) Prohibited exclusivity
arrangements by networks. For purposes
of paragraph (a)(1) of this section, a
payment card network may not restrict
or otherwise limit an issuer’s ability to
contract with any other payment card
network that may process an electronic
debit transaction involving the issuer’s
debit cards.
(4) Subsequent affiliation. If
unaffiliated payment card networks
become affiliated as a result of a merger
or acquisition such that an issuer is no
longer in compliance with paragraph (a)
of this section, the issuer must add an
unaffiliated payment card network
through which electronic debit
transactions on the relevant debit card

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may be processed no later than six
months after the date on which the
previously unaffiliated payment card
networks consummate the affiliation.
(b) Prohibition on routing restrictions.
An issuer or payment card network
shall not, directly or through any agent,
processor, or licensed member of the
network, by contract, requirement,
condition, penalty, or otherwise, inhibit
the ability of any person that accepts or
honors debit cards for payments to
direct the routing of electronic debit
transactions for processing over any
payment card network that may process
such transactions.
(c) Compliance dates—(1) General.
Except as otherwise provided in
paragraphs (c)(2), (c)(3), and (c)(4) of
this section, the compliance date of
paragraph (a) of this section is April 1,
2012.
(2) Restrictions by payment card
networks. The compliance date of
paragraphs (a)(1) and (a)(3) of this
section for payment card networks is
October 1, 2011.
(3) Debit cards that use transaction
qualification or substantiation systems.
Issuers shall comply with the
requirements of paragraph (a) of this
section by April 1, 2013, for electronic
debit transactions using debit cards that
use point-of-sale transaction
qualification or substantiation systems
for verifying the eligibility of purchased
goods or services.
(4) General-use prepaid cards. Issuers
shall comply with the requirements of
paragraph (a) of this section with
respect to general-use prepaid cards as
set out below.
(i) With respect to non-reloadable
general-use prepaid cards, the
compliance date is April 1, 2013. Nonreloadable general-use prepaid cards
sold prior to April 1, 2013 are not
subject to paragraph (a) of this section.
(ii) With respect to reloadable generaluse prepaid cards, the compliance date
is April 1, 2013. Reloadable general-use
prepaid cards sold prior to April 1, 2013
are not subject to paragraph (a) of this
section unless and until they are
reloaded, in which case the following
compliance dates apply:
(A) With respect to reloadable
general-use prepaid cards sold and
reloaded prior to April 1, 2013, the
compliance date is May 1, 2013.
(B) With respect to reloadable generaluse prepaid cards sold prior to April 1,
2013, and reloaded on or after April 1,
2013, the compliance date is 30 days
after the date of reloading.

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§ 235.8 Reporting requirements and record
retention.

(a) Entities required to report. Each
issuer that is not otherwise exempt from
the requirements of this part under
§ 235.5(a) and each payment card
network shall file a report with the
Board in accordance with this section.
(b) Report. Each entity required to file
a report with the Board shall submit
data in a form prescribed by the Board
for that entity. Data required to be
reported may include, but may not be
limited to, data regarding costs incurred
with respect to an electronic debit
transaction, interchange transaction
fees, network fees, fraud-prevention
costs, fraud losses, and transaction
value, volume, and type.
(c) Record retention. (1) An issuer
subject to this part shall retain evidence
of compliance with the requirements
imposed by this part for a period of not
less than five years after the end of the
calendar year in which the electronic
debit transaction occurred.
(2) Any person subject to this part
having actual notice that it is the subject
of an investigation or an enforcement
proceeding by its enforcement agency
shall retain the records that pertain to
the investigation, action, or proceeding
until final disposition of the matter
unless an earlier time is allowed by
court or agency order.
§ 235.9

Administrative enforcement.

(a) (1) Compliance with the
requirements of this part shall be
enforced under—
(i) Section 8 of the Federal Deposit
Insurance Act, by the appropriate
Federal banking agency, as defined in
section 3(q) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q)), with
respect to—
(A) National banks, federal savings
associations, and federal branches and
federal agencies of foreign banks;
(B) Member banks of the Federal
Reserve System (other than national
banks), branches and agencies of foreign
banks (other than federal branches,
federal Agencies, and insured state
branches of foreign banks), commercial
lending companies owned or controlled
by foreign banks, and organizations
operating under section 25 or 25A of the
Federal Reserve Act;
(C) Banks and state savings
associations insured by the Federal
Deposit Insurance Corporation (other
than members of the Federal Reserve
System), and insured state branches of
foreign banks;
(ii) The Federal Credit Union Act (12
U.S.C. 1751 et seq.), by the
Administrator of the National Credit
Union Administration (National Credit

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Union Administration Board) with
respect to any federal credit union;
(iii) The Federal Aviation Act of 1958
(49 U.S.C. 40101 et seq.), by the
Secretary of Transportation, with
respect to any air carrier or foreign air
carrier subject to that Act; and
(iv) The Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.), by the
Securities and Exchange Commission,
with respect to any broker or dealer
subject to that Act.
(2) The terms used in paragraph (a)(1)
of this section that are not defined in
this part or otherwise defined in section
3(s) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(s)) shall have the
meaning given to them in section 1(b) of
the International Banking Act of 1978
(12 U.S.C. 3101).
(b) Additional powers. (1) For the
purpose of the exercise by any agency
referred to in paragraphs (a)(1)(i)
through (a)(1)(iv) of this section of its
power under any statute referred to in
those paragraphs, a violation of this part
is deemed to be a violation of a
requirement imposed under that statute.
(2) In addition to its powers under
any provision of law specifically
referred to in paragraphs (a)(1)(i)
through (a)(1)(iv) of this section, each of
the agencies referred to in those
paragraphs may exercise, for the
purpose of enforcing compliance under
this part, any other authority conferred
on it by law.
(c) Enforcement authority of Federal
Trade Commission. Except to the extent
that enforcement of the requirements
imposed under this title is specifically
granted to another government agency
under paragraphs (a)(1)(i) through
(a)(1)(iv) of this section, and subject to
subtitle B of the Consumer Financial
Protection Act of 2010, the Federal
Trade Commission has the authority to
enforce such requirements. For the
purpose of the exercise by the Federal
Trade Commission of its functions and
powers under the Federal Trade
Commission Act, a violation of this part
shall be deemed a violation of a
requirement imposed under the Federal
Trade Commission Act. All of the
functions and powers of the Federal
Trade Commission under the Federal
Trade Commission Act are available to
the Federal Trade Commission to
enforce compliance by any person
subject to the jurisdiction of the Federal
Trade Commission with the
requirements of this part, regardless of
whether that person is engaged in
commerce or meets any other
jurisdictional tests under the Federal
Trade Commission Act.

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§ 235.10

Effective and compliance dates.

Except as provided in § 235.7, this
part becomes effective and compliance
is mandatory on October 1, 2011.
Appendix A to Part 235—Official Board
Commentary on Regulation II
Introduction
The following commentary to Regulation II
(12 CFR part 235) provides background
material to explain the Board’s intent in
adopting a particular part of the regulation.
The commentary also provides examples to
aid in understanding how a particular
requirement is to work.
Section 235.2

Definitions

2(a) Account
1. Types of accounts. The term ‘‘account’’
includes accounts held by any person,
including consumer accounts (i.e., those
established primarily for personal, family or
household purposes) and business accounts.
Therefore, the limitations on interchange
transaction fees and the prohibitions on
network exclusivity arrangements and
routing restrictions apply to all electronic
debit transactions, regardless of whether the
transaction involves a debit card issued
primarily for personal, family, or household
purposes or for business purposes. For
example, an issuer of a business-purpose
debit card is subject to the restrictions on
interchange transaction fees and is also
prohibited from restricting the number of
payment card networks on which an
electronic debit transaction may be processed
under § 235.7.
2. Bona fide trusts. This part does not
define the term bona fide trust agreement;
therefore, institutions must look to state or
other applicable law for interpretation. An
account held under a custodial agreement
that qualifies as a trust under the Internal
Revenue Code, such as an individual
retirement account, is considered to be held
under a trust agreement for purposes of this
part.
3. Account located in the United States.
This part applies only to electronic debit
transactions that are initiated to debit (or
credit, for example, in the case of returned
goods or cancelled services) an account
located in the United States. If a cardholder
uses a debit card to debit an account held
outside the United States, then the electronic
debit transaction is not subject to this part.
2(b) Acquirer
1. In general. The term ‘‘acquirer’’ includes
only the institution that contracts, directly or
indirectly, with a merchant to provide
settlement for the merchant’s electronic debit
transactions over a payment card network
(referred to as acquiring the merchant’s
electronic debit transactions). In some
acquiring relationships, an institution
provides processing services to the merchant
and is a licensed member of the payment
card network, but does not settle the
transactions with the merchant (by crediting
the merchant’s account) or with the issuer.
These institutions are not ‘‘acquirers’’
because they do not provide credit to the
merchant for the transactions or settle the

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merchant’s transactions with the issuer.
These institutions are considered processors
and in some circumstances may be
considered payment card networks for
purposes of this part (See §§ 235.2(m),
235.2(o), and commentary thereto).
2(c) Affiliate
1. Types of entities. The term ‘‘affiliate’’
includes any bank and nonbank affiliates
located in the United States or a foreign
country.
2. Other affiliates. For commentary on
whether merchants are affiliated, see
comment 2(f)–7.
2(d) Cardholder
1. Scope. In the case of debit cards that
access funds in transaction, savings, or other
similar asset accounts, ‘‘the person to whom
a card is issued’’ generally will be the named
person or persons holding the account. If the
account is a business account, multiple
employees (or other persons associated with
the business) may have debit cards that can
access the account. Each employee that has
a debit card that can access the account is a
cardholder. In the case of a prepaid card, the
cardholder generally is either the purchaser
of the card or a person to whom the
purchaser gave the card, such as a gift
recipient.
2(e) Control [Reserved]
2(f) Debit Card
1. Card, or other payment code or device.
The term ‘‘debit card’’ as defined in § 235.2(f)
applies to any card, or other payment code
or device, even if it is not issued in a
physical form. Debit cards include, for
example, an account number or code that can
be used to access funds in an account to
make Internet purchases. Similarly, the term
‘‘debit card’’ includes a device with a chip
or other embedded mechanism, such as a
mobile phone or sticker containing a
contactless chip that links the device to
funds stored in an account, and enables an
account to be debited. The term ‘‘debit card,’’
however, does not include a one-time
password or other code if such password or
code is used for the purposes of
authenticating the cardholder and is used in
addition to another card, or other payment
code or device, rather than as the payment
code or device.
2. Deferred debit cards. The term ‘‘debit
card’’ includes a card, or other payment code
or device, that is used in connection with
deferred debit card arrangements in which
transactions are not immediately posted to
and funds are not debited from the
underlying transaction, savings, or other
asset account upon settlement of the
transaction. Instead, the funds in the account
typically are held and made unavailable for
other transactions for a period of time
specified in the issuer-cardholder agreement.
After the expiration of the time period, the
cardholder’s account is debited for the value
of all transactions made using the card that
have been submitted to the issuer for
settlement during that time period. For
example, under some deferred debit card
arrangements, the issuer may debit the
consumer’s account for all debit card

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transactions that occurred during a particular
month at the end of the month. Regardless of
the time period between the transaction and
account posting, a card, or other payment
code or device, that is used in connection
with a deferred debit arrangement is
considered a debit card for purposes of the
requirements of this part.
3. Decoupled debit cards. Decoupled debit
cards are issued by an entity other than the
financial institution holding the cardholder’s
account. In a decoupled debit arrangement,
transactions that are authorized by the card
issuer settle against the cardholder’s account
held by an entity other than the issuer,
generally via a subsequent ACH debit to that
account. The term ‘‘debit card’’ includes any
card, or other payment code or device, issued
or approved for use through a payment card
network to debit an account, regardless of
whether the issuer holds the account.
Therefore, decoupled debit cards are debit
cards for purposes of this part.
4. Hybrid cards.
i. Some cards, or other payment codes or
devices, may have both credit- and debit-like
features (‘‘hybrid cards’’). For example, these
cards may enable a cardholder to access a
line of credit, but select certain transactions
for immediate repayment (i.e., prior to the
end of a billing cycle) via a debit to the
cardholder’s account, as the term is defined
in § 235.2(a), held either with the issuer or
at another institution. If a card permits a
cardholder to initiate transactions that debit
an account or funds underlying a prepaid
card, the card is considered a debit card for
purposes of this part. Not all transactions
initiated by such a hybrid card, however, are
electronic debit transactions. Rather, only
those transactions that debit an account as
defined in this part or funds underlying a
prepaid card are electronic debit
transactions. If the transaction posts to a line
of credit, then the transaction is a credit
transaction.
ii. If an issuer conditions the availability of
a credit or charge card that permits preauthorized repayment of some or all
transactions on the cardholder maintaining
an account at the issuer, such a card is
considered a debit card for purposes of this
part.
5. Virtual wallets. A virtual wallet is a
device (e.g., a mobile phone) that stores
several different payment codes or devices
(‘‘virtual cards’’) that access different
accounts, funds underlying the card, or lines
of credit. At the point of sale, the cardholder
may select from the virtual wallet the virtual
card he or she wishes to use for payment.
The virtual card that the cardholder uses for
payment is considered a debit card under
this part if the virtual card that initiates a
transaction meets the definition of debit card,
notwithstanding the fact that other cards in
the wallet may not be debit cards.
6. General-use prepaid card. The term
‘‘debit card’’ includes general-use prepaid
cards. See § 235.2(i) and related commentary
for information on general-use prepaid cards.
7. Store cards. The term ‘‘debit card’’ does
not include prepaid cards that may be used
at a single merchant or affiliated merchants.
Two or more merchants are affiliated if they
are related by either common ownership or

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by common corporate control. For purposes
of the ‘‘debit card’’ definition, franchisees are
considered to be under common corporate
control if they are subject to a common set
of corporate policies or practices under the
terms of their franchise licenses.
8. Checks, drafts, and similar instruments.
The term ‘‘debit card’’ does not include a
check, draft, or similar paper instrument or
a transaction in which the check is used as
a source of information to initiate an
electronic payment. For example, if an
account holder provides a check to buy goods
or services and the merchant takes the
account number and routing number
information from the MICR line at the bottom
of a check to initiate an ACH debit transfer
from the cardholder’s account, the check is
not a debit card, and such a transaction is not
considered an electronic debit transaction.
Likewise, the term ‘‘debit card’’ does not
include an electronic representation of a
check, draft, or similar paper instrument.
9. ACH transactions. The term ‘‘debit card’’
does not include an account number when it
is used by a person to initiate an ACH
transaction that debits that person’s account.
For example, if an account holder buys goods
or services over the Internet using an account
number and routing number to initiate an
ACH debit, the account number is not a debit
card, and such a transaction is not
considered an electronic debit transaction.
However, the use of a card to purchase goods
or services that debits the cardholder’s
account that is settled by means of a
subsequent ACH debit initiated by the card
issuer to the cardholder’s account, as in the
case of a decoupled debit card arrangement,
involves the use of a debit card for purposes
of this part.
2(g) Designated Automated Teller Machine
(ATM) Network
1. Reasonable and convenient access
clarified. Under § 235.2(g)(2), a designated
ATM network includes any network of ATMs
identified by the issuer that provides
reasonable and convenient access to the
issuer’s cardholders. Whether a network
provides reasonable and convenient access
depends on the facts and circumstances,
including the distance between ATMs in the
designated network and each cardholder’s
last known home or work address, or if a
home or work address is not known, where
the card was first issued.
2(h) Electronic Debit Transaction
1. Debit an account. The term ‘‘electronic
debit transaction’’ includes the use of a card
to debit an account. The account debited
could be, for example, the cardholder’s asset
account or the account that holds the funds
used to settle prepaid card transactions.
2. Form of payment. The term ‘‘electronic
debit transaction’’ includes the use of a card
as a form of payment that may be made in
exchange for goods or services, as a
charitable contribution, to satisfy an
obligation (e.g., tax liability), or for other
purposes.
3. Subsequent transactions. The term
‘‘electronic debit transaction’’ includes both
the cardholder’s use of a debit card for the
initial payment and any subsequent use by

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the cardholder of the debit card in
connection with the initial payment. For
example, the term ‘‘electronic debit
transaction’’ includes using the debit card to
return merchandise or cancel a service that
then results in a debit to the merchant’s
account and a credit to the cardholder’s
account.
4. Cash withdrawal at the point of sale.
The term ‘‘electronic debit transaction’’
includes a transaction in which a cardholder
uses the debit card both to make a purchase
and to withdraw cash (known as a ‘‘cashback transaction’’).
5. Geographic limitation. This regulation
applies only to electronic debit transactions
that are initiated at a merchant located in the
United States. If a cardholder uses a debit
card at a merchant located outside the United
States to debit an account held in the United
States, the electronic debit transaction is not
subject to this part.
2(i) General-Use Prepaid Card
1. Redeemable upon presentation at
multiple, unaffiliated merchants. A prepaid
card is redeemable upon presentation at
multiple, unaffiliated merchants if such
merchants agree to honor the card.
2. Selective authorization cards. Selective
authorization cards, (e.g., mall cards) are
generally intended to be used or redeemed
for goods or services at participating retailers
within a shopping mall or other limited
geographic area. Selective authorization
cards are considered general-use prepaid
cards, regardless of whether they carry the
mark, logo, or brand of a payment card
network, if they are redeemable at multiple,
unaffiliated merchants.
2(j) Interchange Transaction fee
1. In general. Generally, the payment card
network is the entity that establishes and
charges the interchange transaction fee to the
acquirers or merchants. The acquirers then
pay to the issuers any interchange transaction
fee established and charged by the network.
Acquirers typically pass the interchange
transaction fee through to merchantcustomers.
2. Compensating an issuer. The term
‘‘interchange transaction fee’’ is limited to
those fees that a payment card network
establishes, charges, or receives to
compensate the issuer for its role in the
electronic debit transaction. By contrast,
payment card networks generally charge
issuers and acquirers fees for services the
network performs. Such fees are not
interchange transaction fees because the
payment card network is charging and
receiving the fee as compensation for services
it provides.
3. Established, charged, or received.
Interchange transaction fees are not limited
to those fees for which a payment card
network sets the value. A fee that
compensates an issuer is an interchange
transaction fee if the fee is set by the issuer
but charged to acquirers by virtue of the
network determining each participant’s net
settlement position.
2(k) Issuer
1. In general. A person issues a debit card
by authorizing the use of debit card by a

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cardholder to perform electronic debit
transactions. That person may provide the
card directly to the cardholder or indirectly
by using a third party (such as a processor,
or a telephone network or manufacturer) to
provide the card, or other payment code or
device, to the cardholder. The following
examples illustrate the entity that is the
issuer under various card program
arrangements. For purposes of determining
whether an issuer is exempted under
§ 235.5(a), however, the term issuer is limited
to the entity that holds the account being
debited.
2. Traditional debit card arrangements. In
a traditional debit card arrangement, the bank
or other entity holds the cardholder’s funds
and authorizes the cardholder to use the
debit card to access those funds through
electronic debit transactions, and the
cardholder receives the card directly or
indirectly (e.g., through an agent) from the
bank or other entity that holds the funds
(except for decoupled debit cards, discussed
below). In this system, the bank or entity
holding the cardholder’s funds is the issuer.
3. BIN-sponsor arrangements. Payment
card networks assign Bank Identification
Numbers (BINs) to member-institutions for
purposes of issuing cards, authorizing,
clearing, settling, and other processes. In
exchange for a fee or other financial
considerations, some members of payment
card networks permit other entities to issue
debit cards using the member’s BIN. The
entity permitting the use of its BIN is referred
to as the ‘‘BIN sponsor’’ and the entity that
uses the BIN to issue cards is often referred
to as the ‘‘affiliate member.’’ BIN sponsor
arrangements can follow at least two different
models:
i. Sponsored debit card model. In some
cases, a community bank or credit union may
provide debit cards to its account holders
through a BIN sponsor arrangement with a
member institution. In general, the bank or
credit union will authorize its account
holders to use debit cards to perform
electronic debit transactions that access
funds in accounts at the bank or credit union.
The bank or credit union’s name typically
will appear on the debit card. The bank or
credit union may directly or indirectly
provide the cards to cardholders. Under these
circumstances, the bank or credit union is the
issuer for purposes of this part. If that bank
or credit union, together with its affiliates,
has assets of less than $10 billion, then that
bank or credit union is exempt from the
interchange transaction fee restrictions.
Although the bank or credit union may
distribute cards through the BIN sponsors,
the BIN sponsor does not enter into the
agreement with the cardholder that
authorizes the cardholder to use the card to
perform electronic debit transactions that
access funds in the account at the bank or
credit union, and therefore the BIN sponsor
is not the issuer.
ii. Prepaid card model. A member
institution may also serve as the BIN sponsor
for a prepaid card program. Under these
arrangements, a program manager distributes
prepaid cards to the cardholders and the BINsponsoring institution generally holds the
funds for the prepaid card program in an

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omnibus or pooled account. Either the BIN
sponsor or the prepaid card program manager
may keep track of the underlying funds for
each individual prepaid card through
subaccounts. While the cardholder may
receive the card directly from the program
manager or at a retailer, the BIN sponsor
authorizes the cardholder to use the card to
perform electronic debit transactions that
access the funds in the pooled account and
the cardholder’s relationship generally is
with the BIN sponsor. Accordingly, under
these circumstances, the BIN sponsor, or the
bank holding the pooled account, is the
issuer.
4. Decoupled debit cards. In the case of
decoupled debit cards, an entity other than
the bank holding the cardholder’s account
enters into a relationship with the cardholder
authorizing the use of the card to perform
electronic debit transactions. The entity
authorizing the use of the card to perform
electronic debit transaction typically arranges
for the card to be provided directly or
indirectly to the cardholder and has a direct
relationship with the cardholder with respect
to the card. The bank holding the
cardholder’s account has agreed generally to
permit ACH debits to the account, but has
not authorized the use of the debit card to
access the funds through electronic debit
transactions. Under these circumstances, the
entity authorizing the use of the debit card,
and not the account-holding institution, is
considered the issuer. An issuer of a
decoupled debit card is not exempt under
§ 235.5(a), even if, together with its affiliates,
it has assets of less than $10 billion, because
it is not the entity holding the account to be
debited.
2(l) Merchant [Reserved]
2(m) Payment Card Network
1. In general. An entity is a considered a
payment card network with respect to an
electronic debit transaction for purposes of
this rule if it routes information and data to
the issuer from the acquirer to conduct
authorization, clearance, and settlement of
the electronic debit transaction. By contrast,
if an entity receives transaction information
and data from a merchant and authorizes and
settles the transaction without routing the
information and data to another entity (i.e.,
the issuer or the issuer’s processor) for
authorization, clearance, or settlement, that
entity is not considered a payment card
network with respect to the electronic debit
transaction.
2. Three-party systems. In the case of a
three-party system, electronic debit
transactions are processed by an entity that
acts as system operator and issuer, and may
also act as the acquirer. The entity acting as
system operator and issuer that receives the
transaction information from the merchant or
acquirer also holds the cardholder’s funds.
Therefore, rather than directing the
transaction information to a separate issuer,
the entity authorizes and settles the
transaction based on the information
received from the merchant. As these entities
do not connect (or ‘‘network’’) multiple
issuers and do not route information to
conduct the transaction, they are not
‘‘payment card networks’’ with respect to
these transactions.

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3. Processors as payment card networks. A
processor is considered a payment card
network if, in addition to acting as processor
for an acquirer and issuer, the processor
routes transaction information and data
received from a merchant or the merchant’s
acquirer to an issuer. For example, if a
merchant uses a processor in order to accept
any, some, or all brands of debit cards and
the processor routes transaction information
and data to the issuer or issuer’s processor,
the merchant’s processor is considered a
payment card network with respect to the
electronic debit transaction. If the processor
establishes, charges, or receives a fee for the
purpose of compensating an issuer, that fee
is considered an interchange transaction fee
for purposes of this part.
4. Automated clearing house (ACH)
operators. An ACH operator is not
considered a payment card network for
purposes of this part. While an ACH operator
processes transactions that debit an account
and provides for interbank clearing and
settlement of such transactions, a person
does not use the ACH system to accept as a
form of payment a brand of debit card.
5. ATM networks. An ATM network is not
considered a payment card network for
purposes of this part. While ATM networks
process transactions that debit an account
and provide for interbank clearing and
settlement of such transactions, a cash
withdrawal from an ATM is not a payment
because there is no exchange of money for
goods or services, or payment made as a
charitable contribution, to satisfy an
obligation (e.g., tax liability), or for other
purposes.
2(n) Person [Reserved]
2(o) Processor
1. Distinction from acquirers. A processor
may perform all transaction-processing
functions for a merchant or acquirer, but if
it does not acquire (that is, settle with the
merchant for the transactions), it is not an
acquirer. The entity that acquirers electronic
debit transactions is the entity that is
responsible to other parties to the electronic
debit transaction for the amount of the
transaction.
2. Issuers. A processor may perform
services related to authorization, clearance,
and settlement of transactions for an issuer
without being considered to be an issuer for
purposes of this part.
2(p) Route
1. An entity routes information if it both
directs and sends the information to an
unaffiliated entity (or affiliated entity acting
on behalf of the unaffiliated entity). This
other entity may be a payment card network
or processor (if the entity directing and
sending the information is a merchant or an
acquirer) or an issuer or processor (if the
entity directing and sending the information
is a payment card network).

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2(q) United States [Reserved]
Section 235.3 Reasonable and Proportional
Interchange Transaction Fees
3(a) [Reserved]
3(b) Determining Reasonable and
Proportional Fees
1. Two components. The standard for the
maximum permissible interchange
transaction fee that an issuer may receive
consists of two components: a base
component that does not vary with a
transaction’s value and an ad valorem
component. The amount of any interchange
transaction fee received or charged by an
issuer may not exceed the sum of the
maximum permissible amounts of each
component and any fraud-prevention
adjustment the issuer is permitted to receive
under § 235.4 of this part.
2. Variation in interchange fees. An issuer
is permitted to charge or receive, and a
network is permitted to establish,
interchange transaction fees that vary in their
base component and ad valorem component
based on, for example, the type of transaction
or merchant, provided the amount of any
interchange transaction fee for any
transaction does not exceed the sum of the
maximum permissible base component of 21
cents and 5 basis points of the value of the
transaction.
3. Example. For a $39 transaction, the
maximum permissible interchange
transaction fee is 22.95 cents (21 cents plus
5 basis points of $39). A payment card
network may, for example, establish an
interchange transaction fee of 22 cents
without any ad valorem component.

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Section 235.4

[Reserved]

Section 235.5 Exemptions for Certain
Electronic Debit Transactions
1. Eligibility for multiple exemptions. An
electronic debit transaction may qualify for
one or more exemptions. For example, a
debit card that has been provided to a person
pursuant to a Federal, State, or local
government-administered payment program
may be issued by an entity that, together with
its affiliates, has assets of less than $10
billion as of the end of the preceding
calendar year. In this case, an electronic debit
transaction made using that card may qualify
for the exemption under § 235.5(a) for small
issuers or for the exemption under § 235.5(b)
for government-administered payment
programs. A payment card network
establishing interchange fees for transactions
that qualify for more than one exemption
need only satisfy itself that the issuer’s
transactions qualify for at least one of the
exemptions in order to exempt the electronic
debit transaction from the interchange fee
restrictions.
2. Certification process. Payment card
networks that plan to allow issuers to receive
higher interchange fees than permitted under
§§ 235.3 and 235.4 pursuant to one of the
exemptions in § 235.5 could develop their
own processes for identifying issuers and
products eligible for such exemptions.
Section 235.5(a)(2) permits payment card
networks to rely on lists published by the
Board to help determine eligibility for the

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small issuer exemption set forth in
§ 235.5(a)(1).
5(a) Exemption for Small Issuers
1. Asset size determination. An issuer
would qualify for the small-issuer exemption
if its total worldwide banking and
nonbanking assets, including assets of
affiliates, other than trust assets under
management, are less than $10 billion, as of
December 31 of the preceding calendar year.
2. Change in status. If an exempt issuer
becomes covered based on its and its
affiliates assets at the end of a calendar year,
that issuer must begin complying with the
interchange fee standards (§ 235.3), the fraudprevention adjustment standards (to the
extent the issuer wishes to receive a fraudprevention adjustment) (§ 235.4), and the
provisions prohibiting circumvention,
evasion, and net compensation (§ 235.6) no
later than July 1.
5(b) Exemption for GovernmentAdministered Payment Programs
1. Government-administered payment
program. A program is considered
government-administered regardless of
whether a Federal, State, or local government
agency operates the program or outsources
some or all functions to third parties so long
as the program is operated on behalf of the
government agency. In addition, a program
may be government-administered even if a
Federal, State, or local government agency is
not the source of funds for the program it
administers. For example, child support
programs are government-administered
programs even though a Federal, State, or
local government agency is not the source of
funds. A tribal government is considered a
local government for purposes of this
exemption.
5(c) Exemption for Certain Reloadable
Prepaid Cards
1. Subaccount clarified. A subaccount is an
account within an account, opened in the
name of an agent, nominee, or custodian for
the benefit of two or more cardholders, where
the transactions and balances of individual
cardholders are tracked in such subaccounts.
An account that is opened solely in the name
of a single cardholder is not a subaccount.
2. Reloadable. A general-use prepaid card
is ‘‘reloadable’’ if the terms and conditions of
the agreement permit funds to be added to
the general-use prepaid card at any time after
the initial purchase or issuance. A generaluse prepaid card is not ‘‘reloadable’’ merely
because the issuer or processor is technically
able to add functionality that would
otherwise enable the general-use prepaid
card to be reloaded.
3. Marketed or labeled as a gift card or gift
certificate. i. Electronic debit transactions
made using a reloadable general-use prepaid
card are not exempt from the interchange fee
restrictions if the card is marketed or labeled
as a gift card or gift certificate. The term
‘‘marketed or labeled as a gift card or gift
certificate’’ means directly or indirectly
offering, advertising or otherwise suggesting
the potential use of a general-use prepaid
card as a gift for another person. Whether the
exclusion applies generally does not depend
on the type of entity that makes the

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promotional message. For example, a card
may be marketed or labeled as a gift card or
gift certificate if anyone (other than the
purchaser of the card), including the issuer,
the retailer, the program manager that may
distribute the card, or the payment network
on which a card is used, promotes the use
of the card as a gift card or gift certificate. A
general-use prepaid card is marketed or
labeled as a gift card or gift certificate even
if it is only occasionally marketed as a gift
card or gift certificate. For example, a
network-branded general purpose reloadable
card would be marketed or labeled as a gift
card or gift certificate if the issuer principally
advertises the card as a less costly alternative
to a bank account but promotes the card in
a television, radio, newspaper, or Internet
advertisement, or on signage as ‘‘the perfect
gift’’ during the holiday season.
ii. The mere mention of the availability of
gift cards or gift certificates in an
advertisement or on a sign that also indicates
the availability of exempted general-use
prepaid cards does not by itself cause the
general-use prepaid card to be marketed as a
gift card or a gift certificate. For example, the
posting of a sign in a store that refers to the
availability of gift cards does not by itself
constitute the marketing of otherwise
exempted general-use prepaid cards that may
also be sold in the store along with gift cards
or gift certificates, provided that a person
acting reasonably under the circumstances
would not be led to believe that the sign
applies to all cards sold in the store. (See,
however, comment 5(c)–4.ii.)
4. Examples of marketed or labeled as a
gift card or gift certificate.
i. The following are examples of marketed
or labeled as a gift card or gift certificate:
A. Using the word ‘‘gift’’ or ‘‘present’’ on
a card or accompanying material, including
documentation, packaging and promotional
displays;
B. Representing or suggesting that a card
can be given to another person, for example,
as a ‘‘token of appreciation’’ or a ‘‘stocking
stuffer,’’ or displaying a congratulatory
message on the card or accompanying
material;
C. Incorporating gift-giving or celebratory
imagery or motifs, such as a bow, ribbon,
wrapped present, candle, or a holiday or
congratulatory message, on a card,
accompanying documentation, or
promotional material;
ii. The term does not include the following:
A. Representing that a card can be used as
a substitute for a checking, savings, or
deposit account;
B. Representing that a card can be used to
pay for a consumer’s health-related
expenses—for example, a card tied to a
health savings account;
C. Representing that a card can be used as
a substitute for travelers checks or cash;
D. Representing that a card can be used as
a budgetary tool, for example, by teenagers,
or to cover emergency expenses.
5. Reasonable policies and procedures to
avoid marketing as a gift card. The
exemption for a general-use prepaid card that
is reloadable and not marketed or labeled as
a gift card or gift certificate in § 235.5(c)
applies if a reloadable general-use prepaid

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Federal Register / Vol. 76, No. 139 / Wednesday, July 20, 2011 / Rules and Regulations
card is not marketed or labeled as a gift card
or gift certificate and if persons involved in
the distribution or sale of the card, including
issuers, program managers, and retailers,
maintain policies and procedures reasonably
designed to avoid such marketing. Such
policies and procedures may include
contractual provisions prohibiting a
reloadable general-use prepaid card from
being marketed or labeled as a gift card or gift
certificate, merchandising guidelines or plans
regarding how the product must be displayed
in a retail outlet, and controls to regularly
monitor or otherwise verify that the generaluse prepaid card is not being marketed as a
gift card. Whether a general-use prepaid card
has been marketed as a gift card or gift
certificate will depend on the facts and
circumstances, including whether a
reasonable person would be led to believe
that the general-use prepaid card is a gift card
or gift certificate. The following examples
illustrate the application of § 235.5(c):
i. An issuer or program manager of prepaid
cards agrees to sell general-purpose
reloadable cards through a retailer. The
contract between the issuer or program
manager and the retailer establishes the terms
and conditions under which the cards may
be sold and marketed at the retailer. The
terms and conditions prohibit the generalpurpose reloadable cards from being
marketed as a gift card or gift certificate, and
require policies and procedures to regularly
monitor or otherwise verify that the cards are
not being marketed as such. The issuer or
program manager sets up one promotional
display at the retailer for gift cards and
another physically separated display for
exempted products under § 235.5(c),
including general-purpose reloadable cards,
such that a reasonable person would not
believe that the exempted cards are gift cards.
The exemption in § 235.5(c) applies because
policies and procedures reasonably designed
to avoid the marketing of the general-purpose
reloadable cards as gift cards or gift
certificates are maintained, even if a retail
clerk inadvertently stocks or a consumer
inadvertently places a general-purpose
reloadable card on the gift card display.
ii. Same facts as in comment 5(c)–5.i,
except that the issuer or program manager
sets up a single promotional display at the
retailer on which a variety of prepaid cards
are sold, including store gift cards and
general-purpose reloadable cards. A sign
stating ‘‘Gift Cards’’ appears prominently at
the top of the display. The exemption in
§ 235.5(c) does not apply with respect to the
general-purpose reloadable cards because
policies and procedures reasonably designed
to avoid the marketing of exempted cards as
gift cards or gift certificates are not
maintained.
iii. Same facts as in comment 5(c)–5.i,
except that the issuer or program manager
sets up a single promotional multi-sided
display at the retailer on which a variety of
prepaid card products, including store gift
cards and general-purpose reloadable cards
are sold. Gift cards are segregated from
exempted cards, with gift cards on one side
of the display and exempted cards on a
different side of a display. Signs of equal
prominence at the top of each side of the

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display clearly differentiate between gift
cards and the other types of prepaid cards
that are available for sale. The retailer does
not use any more conspicuous signage
suggesting the general availability of gift
cards, such as a large sign stating ‘‘Gift
Cards’’ at the top of the display or located
near the display. The exemption in § 235.5(c)
applies because policies and procedures
reasonably designed to avoid the marketing
of the general-purpose reloadable cards as
gift cards or gift certificates are maintained,
even if a retail clerk inadvertently stocks or
a consumer inadvertently places a generalpurpose reloadable card on the gift card
display.
iv. Same facts as in comment 5(c)–5.i,
except that the retailer sells a variety of
prepaid card products, including store gift
cards and general-purpose reloadable cards,
arranged side-by-side in the same checkout
lane. The retailer does not affirmatively
indicate or represent that gift cards are
available, such as by displaying any signage
or other indicia at the checkout lane
suggesting the general availability of gift
cards. The exemption in § 235.5(c) applies
because policies and procedures reasonably
designed to avoid marketing the generalpurpose reloadable cards as gift cards or gift
certificates are maintained.
6. On-line sales of prepaid cards. Some
web sites may prominently advertise or
promote the availability of gift cards or gift
certificates in a manner that suggests to a
consumer that the web site exclusively sells
gift cards or gift certificates. For example, a
web site may display a banner advertisement
or a graphic on the home page that
prominently states ‘‘Gift Cards,’’ ‘‘Gift
Giving,’’ or similar language without mention
of other available products, or use a web
address that includes only a reference to gift
cards or gift certificates in the address. In
such a case, a consumer acting reasonably
under the circumstances could be led to
believe that all prepaid products sold on the
web site are gift cards or gift certificates.
Under these facts, the web site has marketed
all such products as gift cards or gift
certificates, and the exemption in § 235.5(c)
does not apply to any products sold on the
web site.
7. Temporary non-reloadable cards issued
in connection with a general-use reloadable
card. Certain general-purpose prepaid cards
that are typically marketed as an account
substitute initially may be sold or issued in
the form of a temporary non-reloadable card.
After the card is purchased, the cardholder
is typically required to call the issuer to
register the card and to provide identifying
information in order to obtain a reloadable
replacement card. In most cases, the
temporary non-reloadable card can be used
for purchases until the replacement
reloadable card arrives and is activated by
the cardholder. Because the temporary nonreloadable card may only be obtained in
connection with the reloadable card, the
exemption in § 235.5(c) applies so long as the
card is not marketed as a gift card or gift
certificate.
5(d) Exception
1. Additional ATM access. Some debit
cards may be used to withdraw cash from

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ATMs that are not part of the issuer’s
designated ATM network. An electronic
debit card transaction may still qualify for
the exemption under §§ 235.5(b) or (c) with
a respect to a card for which a fee may be
imposed for a withdrawal from an ATM that
is outside of the issuer’s designated ATM
network as long as the card complies with
the condition set forth in § 235.5(d)(2) for
withdrawals within the issuer’s designated
ATM network. The condition with respect to
ATM fees does not apply to cards that do not
provide ATM access.
Section 235.6 Prohibition on
Circumvention, Evasion, and Net
Compensation
1. No applicability to exempt issuers or
electronic debit transactions. The prohibition
against circumventing or evading the
interchange transaction fee restrictions or
against net compensation does not apply to
issuers or electronic debit transactions that
qualify for an exemption under § 235.5 from
the interchange transaction fee restrictions.
6(a) Prohibition of Circumvention or Evasion
1. Finding of circumvention or evasion. A
finding of evasion or circumvention will
depend on all relevant facts and
circumstances. Although net compensation
may be one form of circumvention or evasion
prohibited under § 235.6(a), it is not the only
form.
2. Examples of circumstances that may
constitute circumvention or evasion.
The following examples do not constitute
per se circumvention or evasion, but may
warrant additional supervisory scrutiny to
determine whether the totality of the facts
and circumstances constitute circumvention
or evasion:
i. A payment card network decreases
network processing fees paid by issuers for
electronic debit transactions by 50 percent
and increases the network processing fees
charged to merchants or acquirers with
respect to electronic debit transactions by a
similar amount. Because the requirements of
this subpart do not restrict or otherwise
establish the amount of fees that a network
may charge for its services, the increase in
network fees charged to merchants or
acquirers and decrease in fees charged to
issuers is not a per se circumvention or
evasion of the interchange transaction fee
standards, but may warrant additional
supervisory scrutiny to determine whether
the facts and circumstances constitute
circumvention or evasion.
ii. An issuer replaces its debit cards with
prepaid cards that are exempt from the
interchange limits of §§ 235.3 and 235.4. The
exempt prepaid cards are linked to its
customers’ transaction accounts and funds
are swept from the transaction accounts to
the prepaid accounts as needed to cover
transactions made. Again, this arrangement is
not per se circumvention or evasion, but may
warrant additional supervisory scrutiny to
determine whether the facts and
circumstances constitute circumvention or
evasion.

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6(b) Prohibition of Net Compensation
1. Net compensation. Net compensation to
an issuer through the use of network fees is
prohibited.
2. Consideration of payments or incentives
provided by the network in net compensation
determination.
i. For purposes of the net compensation
determination, payments or incentives paid
by a payment card network to an issuer with
respect to electronic debit transactions or
debit card related activities could include,
but are not limited to, marketing incentives;
payments or rebates for meeting or exceeding
a specific transaction volume, percentage
share, or dollar amount of transactions
processed; or other payments for debit card
related activities. For example, signing
bonuses paid by a network to an issuer for
the issuer’s debit card portfolio would also be
included in the total amount of payments or
incentives received by an issuer from a
payment card network with respect to
electronic debit transactions. A signing bonus
for an entire card portfolio, including credit
cards, may be allocated to the issuer’s debit
card business based on the proportion of the
cards or transactions that are debit cards or
electronic debit transactions, as appropriate
to the situation, for purposes of the net
compensation determination.
ii. Incentives paid by the network with
respect to multiple-year contracts may be
allocated over the life of the contract.
iii. For purposes of the net compensation
determination, payments or incentives paid
by a payment card network with respect to
electronic debit transactions or debit cardrelated activities do not include interchange
transaction fees that are passed through to
the issuer by the network, or discounts or
rebates provided by the network or an
affiliate of the network for issuer-processor
services. In addition, funds received by an
issuer from a payment card network as a
result of chargebacks, fines paid by
merchants or acquirers for violations of
network rules, or settlements or recoveries
from merchants or acquirers to offset the
costs of fraudulent transactions or a data
security breach do not constitute incentives
or payments made by a payment card
network.
3. Consideration of fees paid by an issuer
in net compensation determination.
i. For purposes of the net compensation
determination, fees paid by an issuer to a
payment card network with respect to
electronic debit transactions or debit card
related activities include, but are not limited
to, membership or licensing fees, network
administration fees, and fees for optional
network services, such as risk management
services.
ii. For purposes of the net compensation
determination, fees paid by an issuer to a
payment card network with respect to
electronic debit transactions or debit cardrelated activities do not include network
processing fees (such as switch fees and
network connectivity fees) or fees paid to an
issuer processor affiliated with the network
for authorizing, clearing, or settling an
electronic debit transaction.
4. Example of circumstances not involving
net compensation to the issuer. The

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following example illustrates circumstances
that would not indicate net compensation by
the payment card network to the issuer:
i. Because of an increase in debit card
transactions that are processed through a
payment card network during a calendar
year, an issuer receives an additional
volume-based incentive payment from the
network for that period. Over the same
period, however, the total network fees (other
than processing fees) the issuer pays the
payment card network with respect to debit
card transactions also increase so that the
total amount of fees paid by the issuer to the
network continue to exceed incentive
payments by the network to the issuer. Under
these circumstances, the issuer does not
receive net compensation from the network
for electronic debit transactions or debit card
related activities.
Section 235.7 Limitations on Payment Card
Restrictions
1. Application of small issuer, governmentadministered payment program, and
reloadable card exemptions to payment card
network restrictions. The exemptions under
§ 235.5 for small issuers, cards issued
pursuant to government-administered
payment programs, and certain reloadable
prepaid cards do not apply to the limitations
on payment card network restrictions. For
example, debit cards for governmentadministered payment programs, although
exempt from the restrictions on interchange
transaction fees, are subject to the
requirement that electronic debit transactions
made using such cards must be capable of
being processed on at least two unaffiliated
payment card networks and to the
prohibition on inhibiting a merchant’s ability
to determine the routing for electronic debit
transactions.
7(a) Prohibition on Network Exclusivity
1. Scope of restriction. Section 235.7(a)
requires a debit card subject to the regulation
to be enabled on at least two unaffiliated
payment card networks. This paragraph does
not, however, require an issuer to have two
or more unaffiliated networks available for
each method of cardholder authentication.
For example, it is sufficient for an issuer to
issue a debit card that operates on one
signature-based card network and on one
PIN-based card network, as long as the two
card networks are not affiliated.
Alternatively, an issuer may issue a debit
card that is accepted on two unaffiliated
signature-based card networks or on two
unaffiliated PIN-based card networks. See
also, comment 7(a)–7.
2. Permitted networks. i. A smaller
payment card network could be used to help
satisfy the requirement that an issuer enable
two unaffiliated networks if the network was
willing to expand its coverage in response to
increased merchant demand for access to its
network and it meets the other requirements
for a permitted arrangement, including taking
steps reasonably designed to enable it to
process the electronic debit transactions that
it would reasonably expect to be routed to it.
If, however, the network’s policy or practice
is to limit such expansion, it would not
qualify as one of the two unaffiliated
networks.

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ii. A payment card network that is
accepted only at a limited category of
merchants (such as a particular grocery store
chain, merchants located in a particular
shopping mall, or a single class of merchants,
such as grocery stores or gas stations) would
not satisfy the rule.
iii. One of the steps a network can take to
form a reasonable expectation of transaction
volume is to consider factors such as the
number of cards expected to be issued that
are enabled on the network and expected
card usage patterns.
3. Examples of prohibited network
restrictions on an issuer’s ability to contract.
The following are examples of prohibited
network restrictions on an issuer’s ability to
contract with other payment card networks:
i. Network rules or contract provisions
limiting or otherwise restricting the other
payment card networks that may be enabled
on a particular debit card, or network rules
or contract provisions that specify the other
networks that may be enabled on a particular
debit card.
ii. Network rules or guidelines that allow
only that network’s (or its affiliated
network’s) brand, mark, or logo to be
displayed on a particular debit card, or that
otherwise limit the ability of brands, marks,
or logos of other payment card networks to
appear on the debit card.
4. Network logos or symbols on card not
required. Section 235.7(a) does not require
that a debit card display the brand, mark, or
logo of each payment card network over
which an electronic debit transaction may be
processed. For example, this rule does not
require a debit card that is enabled for two
or more unaffiliated payment card networks
to bear the brand, mark, or logo for each card
network.
5. Voluntary exclusivity arrangements
prohibited. Section 235.7(a) requires the
issuance of debit cards that are enabled on
at least two unaffiliated payment card
networks, even if the issuer is not subject to
any rule of, or contract or other agreement
with, a payment card network requiring that
all or a specified minimum percentage of
electronic debit transactions be processed on
the network or its affiliated networks.
6. Affiliated payment card networks.
Section 235.7(a) does not prohibit an issuer
from including an affiliated payment card
network among the networks that may
process an electronic debit transaction with
respect to a particular debit card, as long as
at least two of the networks that are enabled
on the card are unaffiliated. For example, an
issuer may offer debit cards that are accepted
on a payment card network for signature
debit transactions and on an affiliated
payment card network for PIN debit
transactions as long as those debit cards may
also be accepted on another unaffiliated
payment card network.
7. Application of rule regardless of form
factor. The network exclusivity provisions in
§ 235.7(a) require that all debit cards be
enabled on at least two unaffiliated payment
card networks for electronic debit
transactions, regardless of whether the debit
card is issued in card form. This applies to
any supplemental device, such as a fob or
token, or chip or application in a mobile

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phone, that is issued in connection with a
plastic card, even if that plastic card fully
complies with the rule.

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7(b) Prohibition on Routing Restrictions
1. Relationship to the network exclusivity
restrictions. An issuer or payment card
network is prohibited from inhibiting a
merchant’s ability to route or direct an
electronic debit transaction over any of the
payment card networks that the issuer has
enabled to process an electronic debit
transaction for that particular debit card. This
rule does not permit a merchant to route the
transaction over a network that the issuer did
not enable to process transactions using that
debit card.
2. Examples of prohibited merchant
restrictions. The following are examples of
issuer or network practices that would
inhibit a merchant’s ability to direct the
routing of an electronic debit transaction that
are prohibited under § 235.7(b):
i. Prohibiting a merchant from encouraging
or discouraging a cardholder’s use of a
particular method of debit card
authorization, such as rules prohibiting
merchants from favoring a cardholder’s use
of PIN debit over signature debit, or from
discouraging the cardholder’s use of
signature debit.
ii. Establishing network rules or
designating issuer priorities directing the
processing of an electronic debit transaction
on a specified payment card network or its
affiliated networks, or directing the
processing of the transaction away from a

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specified network or its affiliates, except as
a default rule in the event the merchant, or
its acquirer or processor, does not designate
a routing preference, or if required by state
law.
iii. Requiring a specific payment card
network based on the type of access device
provided to the cardholder by the issuer.
3. Merchant payments not prohibited. A
payment card network does not restrict a
merchant’s ability to route transactions over
available payment card networks in violation
of § 235.7(b) by offering payments or other
incentives to encourage the merchant to route
electronic debit card transactions to the
network for processing.
4. Real-time routing decision not required.
A merchant need not make network routing
decisions on a transaction-by-transaction
basis. A merchant and its acquirer or
processor may agree to a pre-determined set
of routing choices that apply to all electronic
debit transactions that are processed by the
acquirer or processor on behalf of the
merchant.
5. No effect on network rules governing the
routing of subsequent transactions. Section
235.7 does not supersede a network rule that
requires a chargeback or return of an
electronic debit transaction to be processed
on the same network that processed the
original transaction.
7(c) Effective Date
1. Health care and employee benefit cards.
Section 235.7(c)(1) delays the effective date
of the network exclusivity provisions for

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certain debit cards issued in connection with
a health care or employee benefit account to
the extent such cards use (even if not
required) transaction substantiation or
qualification authorization systems at point
of sale to verify that the card is only used for
eligible goods and services for purposes of
qualifying for favorable tax treatment under
Internal Revenue Code requirements. Debit
cards that may qualify for the delayed
effective date include, but may not be limited
to, cards issued in connection with flexible
spending accounts established under section
125 of the Internal Revenue Code for health
care related expenses and health
reimbursement accounts established under
section 105 of the Internal Revenue Code.
Section 235.8 Reporting Requirements and
Record Retention
[Reserved]
Section 235.9

Administrative Enforcement

[Reserved]
Section 235.10
Dates

Effective and Compliance

[Reserved]
By order of the Board of Governors of the
Federal Reserve System, June 30, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011–16861 Filed 7–19–11; 8:45 am]
BILLING CODE 6210–01–P

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