Federal Reserve Issues Final Rule Regulating Debit
Interchange Fees and Network Exclusivity
June 29, 2011
Today, the Board of Governors of the Federal Reserve System (the “Board”) approved, with one
objection, its final rule regulating debit interchange fees and network exclusivity and routing
pursuant to Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act(“Dodd-Frank”). After receiving over 11,000 comments, the Board made significant changes toits proposed rule, including a substantial increase in allowable interchange fees.
The Board’s final rule requires interchange fees to be “reasonable and proportional” by:Capping the maximum debit interchange fee that an issuer may receive per transaction
at the sum of 21 cents, plus 5 basis points (multiplied by the transaction amount) toaccount for fraud losses. While an improvement over the 12 cent cap provided in the
proposed rule, the new rate structure will reduce interchange rates for covered
institutions by more than 40 percent;Including as an interim final rule an allowance for fraud prevention equal to anadditional 1 cent per transaction, conditioned on the issuer adopting fraud prevention
procedures established under the regulation; and

Exempting from rate caps, consistent with statutory requirements, small issuers withless than $10 billion in assets and certain general purpose prepaid cards.

Additionally, the final rule provides that an issuer or payment card network must enable atleast two unaffiliated payment card networks. Under this provision, it is 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. The final rule also adopts the statutoryprohibition on routing restrictions.
The rule defines “payment card networks” to exclude three-party networks, such as American
Express, and ATM networks.
The restrictions on interchange fees and routing restrictions will take effect on October 1, 2011
(including, on an interim basis, the fraud prevention adjustment). The prohibitions on network
exclusivity take effect on October 1, 2011 for payment card networks and April 1, 2012 forissuers. A delayed effective date of April 1, 2013 applies to certain cards with particulartechnological challenges, such as health benefit and certain other prepaid cards.
The Board’s final rule and interim final rule are available on the Federal Reserve website.
For more information, please contact Lee Meyerson (lmeyerson@stblaw.com), Stacie McGinn(smcginn@stblaw.com), Gary Rice (grice@stblaw.com), Mark Chorazak(mchorazak@stblaw.com), or any other member of Simpson Thacher’s Financial Institutions
Group (212-455-2000).

Memorandum – June 29, 2011

This memorandum is for general informational purposes and should not be regarded as legal advice. Furthermore,
the information contained in this memorandum does not represent, and should not be regarded as, the view of any
particular client of Simpson Thacher & Bartlett LLP. Please contact your relationship partner if we can be ofassistance regarding these important developments. The names and office locations of all of our partners, as well as
additional memoranda, can be obtained from our website, www.simpsonthacher.com.

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Memorandum – June 29, 2011

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