81722 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

1Section 920 is codified in 15 U.S.C. 1693o–2. As 

discussed in more detail below, interchange 

transaction fees (or ‘‘interchange fees’’) are fees 

established by a payment card network, charged to 

the merchant acquirer and received by the card 

issuer for its role in transaction. 

2Electronic debit transaction (or ‘‘debit card 

transaction’’) means the use of a debit card, 

including a general-use prepaid card, by a person 

as a form of payment in the United States. 

FEDERAL RESERVE SYSTEM 

12 CFR Part 235 

[Regulation II; Docket No. R–1404] 

RIN 7100–AD63 

Debit Card Interchange Fees and 

Routing 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Board is requesting 

public comment on proposed new 

Regulation II, Debit Card Interchange 

Fees and Routing, which: establishes 

standards for determining whether an 

interchange fee received or charged by 

an issuer with respect to an electronic 

debit transaction is reasonable and 

proportional to the cost incurred by the 

issuer with respect to the transaction; 

and prohibits issuers and networks from 

restricting the number of networks over 

which an electronic debit transaction 

may be processed and from inhibiting 

the ability of a merchant to direct the 

routing of an electronic debit 

transaction to any network that may 

process such transactions. With respect 

to the interchange fee standards, the 

Board is requesting comment on two 

alternatives that would apply to covered 

issuers: an issuer-specific standard with 

a safe harbor and a cap; or a cap 

applicable to all such issuers. The 

proposed rule would additionally 

prohibit circumvention or evasion of the 

interchange fee limitations (under both 

alternatives) by preventing the issuer 

from receiving net compensation from 

the network (excluding interchange fees 

passed through the network). The Board 

also is requesting comment on possible 

frameworks for an adjustment to 

interchange fees for fraud-prevention 

costs. With respect to the debit-card 

routing rules, the Board is requesting 

comment on two alternative rules 

prohibiting network exclusivity: one 

alternative would require at least two 

unaffiliated networks per debit card, 

and the other would require at least two 

unaffiliated networks for each type of 

transaction authorization method. 

Under both alternatives, the issuers and 

networks would be prohibited from 

inhibiting a merchant’s ability to direct 

the routing of an electronic debit 

transaction over any network that may 

process such transactions. 

DATES: Comments must be submitted by 

February 22, 2011. 

ADDRESSES: You may submit comments, 

identified by Docket No. R–1404 and 

RIN No. 7100 AD63, by any of the 

following methods: 

Agency Web site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

Federal eRulemaking Portal:http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

E-mail: 

regs.comments@federalreserve.gov. 

Include the docket number in the 

subject line of the message. 

Fax: (202) 452–3819 or (202) 452– 

3102. 

Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available 

from the Board’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

unless modified for technical reasons. 

Accordingly, your comments will not be 

edited to remove any identifying or 

contact information. 

Public comments may also be viewed 

electronically or in paper in Room MP– 

500 of the Board’s Martin Building (20th 

and C Streets, NW.) between 9 a.m. and 

5 p.m. on weekdays. 

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, Mark 

Manuszak, Senior Economist (202/721– 

4509), Division of Research & Statistics, 

or Ky Tran-Trong, Counsel (202/452– 

3667), Division of Consumer & 

Community Affairs; for users of 

Telecommunications Device for the Deaf 

(TDD) only, contact (202/263–4869); 

Board of Governors of the Federal 

Reserve System, 20th and C Streets, 

NW., Washington, DC 20551. 

SUPPLEMENTARY INFORMATION

Background 

I. Section 1075 of the Dodd-Frank Act— 

Overview 

The Dodd-Frank Wall Street Reform 

and Consumer Protection Act (the 

‘‘Dodd-Frank Act’’) (Pub. L. 111–203, 

124 Stat. 1376 (2010)) was enacted on 

July 21, 2010. 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.1

EFTA Section 920 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.2 That section 

authorizes the Board to prescribe 

regulations regarding any interchange 

transaction fee that an issuer may 

receive or charge with respect to an 

electronic debit transaction and 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, the Board 

may allow for an adjustment to an 

interchange transaction fee to account 

for an issuer’s costs in preventing fraud, 

provided the issuer complies with the 

standards to be established by the Board 

relating to fraud-prevention activities. 

EFTA Section 920 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 and is not used to circumvent or 

evade the restrictions on interchange 

transaction fees. 

EFTA Section 920 exempts 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 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 

government-administered payment 

programs and reloadable, general-use 

prepaid cards not marketed or labeled as 

a gift card or certificate. EFTA Section 

920 provides, however, that beginning 

July 21, 2012, the exemptions from the 

interchange transaction fee restrictions 

will not apply for transactions made 

using debit cards provided pursuant to 

a government-administered payment 

program or made using certain 

reloadable, general-use prepaid cards if 

the cardholder may be charged either an 

overdraft fee or a fee for the first 


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3Third-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. A summary of the 

2010 Federal Reserve Payments Study is available 

at http://www.frbservices.org/files/communications/ 

pdf/press/2010_payments_study.pdf. 

4 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.’’ 

5 ‘‘Covered issuers’’ are those issuers that, together 

with affiliates, have assets of $10 billion or more. 

6 Industry participants sometimes refer to fourparty systems as ‘‘open loop’’ systems and threeparty systems as ‘‘closed loop’’ systems. 

7Throughout this proposed rule, the term ‘‘bank’’ 

often is used to refer to depository institutions. 

8The term ‘‘four-party system’’ is something of a 

misnomer because the network is, in fact, a fifth 

party involved in a transaction. 

9Specialized payment processors may carry out 

some functions between the merchant and the 

network or between the network and the issuer. 

withdrawal each month from ATMs in 

the issuer’s designated ATM network. 

In addition to rules regarding 

restrictions on interchange transaction 

fees, EFTA Section 920 also requires the 

Board to prescribe certain rules related 

to the routing of debit card transactions. 

First, EFTA Section 920 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. 

EFTA Section 920 requires the Board 

to establish interchange fee standards 

and rules prohibiting circumvention or 

evasion no later than April 21, 2011. 

These interchange transaction fee rules 

will become effective on July 21, 2011. 

EFTA Section 920 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 

rules. 

II. Overview of the Debit Card Industry 

Over the past several decades, there 

have been significant changes in the 

way consumers make payments in the 

United States. The use of checks has 

been declining since the mid-1990s 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). Debit card usage, in 

particular, has increased markedly 

during that same period. After a long 

period of slow growth during the 1980s 

and early 1990s, debit card transaction 

volume began to grow very rapidly in 

the mid-1990s. 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. Debit cards are 

accepted at about 8 million merchant 

locations in the United States. In 2009, 

debit card transactions represented 

almost half of total third-party debits to 

deposit accounts, while approximately 

30 percent of total third-party debits to 

deposit accounts were made by checks.3

In general, there are two types of debit 

card transactions: PIN (personal 

identification number)-based and 

signature-based.4 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 one 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. In the current 

environment, certain transactions 

cannot readily be accommodated on 

PIN-based, single-message systems, such 

as transactions for hotel stays or car 

rentals, where the exact amount of the 

transaction is not known at the time of 

authorization. In addition, PIN debit 

transactions generally are not accepted 

for Internet transactions. Overall, 

roughly one-quarter of the merchant 

locations in the United States that 

accept debit cards have the capability to 

accept PIN-based debit transactions. 

According to the Board’s survey of 

covered card issuers, roughly 70 percent 

of debit cards outstanding (including 

prepaid cards) support both PIN- and 

signature-based transactions (87 

percent, excluding prepaid cards).5

Networks that process debit card 

transactions exhibit two main 

organizational forms, often referred to as 

three-party and four-party systems.6 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).7 The 

network coordinates the transmission of 

information between the issuing and 

acquiring sides of the market 

(authorization and clearing) and the 

interbank monetary transfers 

(settlement).8

In a typical three-party system, the 

network itself acts as both issuer and 

acquirer. Thus, the three parties 

involved in a transaction are the 

cardholder, the merchant, and the 

network. Three-party systems are also 

referred to as ‘‘closed,’’ because the 

issuer and acquirer are generally the 

same institution—they have, thus, 

tended to be closed to outside 

participants. The three-party model is 

used for some prepaid card transactions, 

but not for other debit card transactions. 

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 

enters a PIN. An electronic 

authorization request for a specific 

dollar amount and the cardholder’s 

account information is sent from the 

merchant to the acquirer to the network, 

which forwards the request to the cardissuing institution.9 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 authorizing (or 

declining) the transaction is returned to 

the merchant via the reverse path. 

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 cardholders’ 

accounts based on these clearing 

messages. The network calculates and 

communicates to each issuer and 

acquirer its net debit or credit position 

to settle the day’s transactions. The 

interbank settlement generally is 

effected through a settlement account at 

a commercial bank, or through 

automated clearinghouse (ACH) 

transfers. The acquirer credits the 

merchant for the value of its 

transactions, less the merchant 

discount, as discussed below. 

There are various fees associated with 

debit card transactions. The interchange 

fee is set by the relevant network and 

paid by the merchant acquirer to the 

issuer. Switch fees are charged by the 

network to acquirers and issuers to 

compensate the network for its role in 


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10A variety of other network fees may be 

collected by the network from the issuer or 

acquirer. 

11 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. 

12 Debit Card Directory (1995–1999). See also, 

Fukimo Hayashi, Richard Sullivan, & Stuart E. 

Weiner, ‘‘A Guide to the ATM and Debit Card 

Industry’’ (Federal Reserve Bank of Kansas City 

2003). 

13Card-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. 

14This decline followed the settlement of 

litigation surrounding signature debit cards. See In 

re: Visa Check/MasterMoney Antitrust Litigation, 

192 F.R.D. 68 (F.D.N.Y. 2000). 

15The meeting summaries and written 

submissions are available on the Regulatory Reform 

section of the Board’s Web site, available at 

http://www.federalreserve.gov/newsevents/ 

reform_meetings.htm. 

16 Documentation and forms for the card issuer, 

payment card network, and merchant acquirer 

surveys are respectively available at http:// 

www.federalreserve.gov/newsevents/files/ 

card_issuer_survey_20100920.pdf, http:// 

www.federalreserve.gov/newsevents/files/ 

payment_card_network_survey_20100920.pdf, and 

http://www.federalreserve.gov/newsevents/files/ 

merchant_acquirer_survey_20100920.pdf. 

17These institutions include bank and thrift 

holding companies with assets of at least $10 

billion; independent commercial banks, thrifts, and 

credit unions with assets of at least $10 billion; and 

FDIC-insured U.S. branches and agencies of foreign 

banking organizations with worldwide assets of at 

least $10 billion. Assets were computed 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 

processing the transaction.10 The 

merchant acquirer charges the merchant 

a merchant discount—the difference 

between the face value of a transaction 

and the amount the merchant 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 

large fraction of the merchant discount 

for a card transaction. 

When PIN debit networks were first 

introduced, some of them structured 

interchange fees in a manner similar to 

ATM interchange fees.11 For ATM card 

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, all PIN debit 

interchange fees were paid by acquirers 

to card issuers.12

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 type of 

merchant (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 fixed component 

fees, ad valorem fees, and caps on these 

fees. By 2010, some networks had 

removed per-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, the 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 card-not-present 

transactions) 13 to gain increased 

acceptance in those markets. Until 2003, 

signature debit interchange fees were 

generally around the same level as 

credit card interchange fees and have 

generally been significantly higher than 

those for PIN debit card transactions. 

PIN debit fees began to increase in the 

early 2000s, while signature debit fees 

declined in late 2003 and early 2004.14

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 the 

network rules explicitly govern the 

issuers and acquirers, merchants and 

processors also may be required to 

comply with the network 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. 

III. Outreach and Information 

Collection 

A. Summary of Outreach 

Since enactment of the Dodd-Frank 

Act, Board staff has held numerous 

meetings with debit card issuers, 

payment card networks, merchant 

acquirers, merchants, industry trade 

associations, and consumer groups. In 

general, those parties provided 

information regarding electronic debit 

transactions, including processing flows 

for electronic debit transactions, 

structures and levels of current 

interchange transaction fees and other 

fees charged by the networks, fraudprevention activities performed by 

various parties to an electronic debit 

transaction, fraud losses related to 

electronic debit transactions, routing 

restrictions, card-issuing arrangements, 

and incentive programs for both 

merchants and issuers. Interested 

parties also provided written 

submissions.15

B. Surveys 

On September 13, 2010, the Board 

distributed three surveys to industry 

participants (an issuer survey, a network 

survey, and a merchant acquirer survey) 

designed to gather information to assist 

the Board in developing this proposal. 

Industry participants, including 

payment card networks, trade groups 

and individual firms from both the 

banking industry and merchant 

community, commented on preliminary 

versions of the issuer and network 

surveys, through both written 

submissions and a series of drop-in 

calls. In response to the comments, the 

two surveys were modified, as 

appropriate, and an additional survey of 

merchant acquirers was developed.16

The card issuer survey was 

distributed to 131 financial 

organizations that, together with 

affiliates, have assets of $10 billion or 

more.17 The Board received 89 


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structure of banking organizations was established 

using the FFIEC’s National Information Center 

structure database. 

18These data do not include ATM transactions. 

Responding issuers accounted for approximately 60 

percent of total debit and prepaid card transactions 

in 2009. The acquirers surveyed handled about 95 

percent of these total transactions. 

19Of these 37.7 billion transactions, 22.5 billion 

were signature debit transactions, with a total value 

of $837 billion and an average value of $37.15 per 

transaction; 14.1 billion were PIN debit transactions 

with a total value of $584 billion and an average 

value of $41.34 per transaction; and 1.0 billion were 

prepaid card transactions, with a total value of $33 

billion and an average value of $32.54 per 

transactions. Of the 37.7 billion transactions, 90 

percent were card-present transactions. Eighty-six 

percent of signature debit and 97 percent of PIN 

debit transactions were card-present transactions. 

20The recently released 2010 Federal Reserve 

Payments Study reported 6.0 billion prepaid card 

transactions in 2009, of which 1.3 billion were 

general purpose prepaid card transactions and 4.7 

billion were private label prepaid card and 

electronic benefit transfer card transactions that 

were not included in the Board survey. 

21These numbers differ from the estimates that 

were otherwise provided to the Board by major 

payment card networks, card issuers, and merchant 

acquirers. 

22Of the $16.2 billion in 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 

responding issuers reported receiving $11.0 billion, 

or about 68 percent of total interchange fees. 

23The network survey also requested information 

on historical interchange fees. Not all networks 

reported historical interchange fees back to 1990. 

However, from 1990 to 2009, it appears that 

interchange fees for signature debit transactions 

generally were around 1.5 percent of transaction 

value. Based on other industry resources, 

interchange fees on PIN debit transactions in the 

late 1990s were about 7 cents per transaction (Debit 

Card Directory, 1995–1999). Therefore, it appears 

that these fees rose significantly during the 2000s. 

24Unlike other statistics in this discussion, the 

Board discusses cost information using percentiles 

within this Federal Register Notice to avoid having 

summary measures distorted by extreme values in 

the sample cost data. 

25By transaction type, the median total pertransaction processing cost was 13.7 cents for 

signature debit, 7.9 cents for PIN debit and 63.6 

cents for prepaid cards. 

26By transaction type, the median variable pertransaction processing cost was 6.7 cents for 

signature debit, 4.5 cents for PIN debit, and 25.8 

cents for prepaid cards. 

27By transaction type, the median per-transaction 

network processing fees were 4.7 cents for signature 

debit, 2.1 cents for PIN debit, and 6.9 cents for 

prepaid cards. 

responses to the survey. An additional 

13 organizations informed the Board 

that they do not have debit card 

programs. Three organizations that 

issued a small number of cards declined 

to participate in the survey. The Board 

did not receive any communication 

from the other 26 organizations. The 

network survey was distributed to the 

14 networks believed to process debit 

card transactions, all of which provided 

responses. The merchant acquirer 

survey was distributed to the largest 

nine merchant acquirers/processors, all 

of whom responded to the survey. 

Information Requested and Summary 

Results 

In general, the surveys requested 

information on signature debit, PIN 

debit and prepaid card operations and, 

for each card type, the costs associated 

with those card types, interchange fees 

and other fees established by networks, 

fraud losses, fraud-prevention and datasecurity activities, network exclusivity 

arrangements and debit-card routing 

restrictions. The Board compiled the 

survey responses in a central database, 

and reviewed the submissions for 

completeness, consistency, and 

anomalous responses. As indicated 

above, the response rates for the three 

surveys were high; however, 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 granularity requested in the surveys. 

In addition, there were inconsistencies 

in some data that were reported within 

individual responses and across 

responses. Therefore, each of the 

summary statistics reported below may 

be based on a subset of the responses 

received for each of the three surveys. 

The reporting period for each survey 

was calendar year 2009, unless 

otherwise noted. 

Card use. The networks reported that 

there were approximately 37.7 billion 

debit and prepaid card transactions in 

2009, valued at over $1.45 trillion, with 

an average value of $38.58 per 

transaction.18 19 20 Responding issuers 

reported that, on average, they had 174 

million debit cards and 46 million 

prepaid cards outstanding during 2009. 

Eighty-seven percent of debit cards and 

25 percent of prepaid cards were 

enabled for use on both signature and 

PIN networks. Four percent of debit 

cards and 74 percent of prepaid cards 

were enabled for use on signature 

networks only. Finally, 9 percent of 

debit cards and 1 percent of prepaid 

cards were enabled for use on PIN 

networks only. Responding acquirers 

reported that 6.7 million merchant 

locations were able to accept signature 

debit cards and 1.5 million were able to 

accept PIN debit cards.21

Interchange fees. Networks reported 

that debit and prepaid interchange fees 

totaled $16.2 billion in 2009.22 The 

average interchange fee for all debit 

transactions was 44 cents per 

transaction, or 1.14 percent of the 

transaction amount. The average 

interchange fee for a signature debit 

transaction was 56 cents, or 1.53 percent 

of the transaction amount. The average 

interchange fee for a PIN debit 

transaction was significantly lower than 

that of a signature debit transaction, at 

23 cents per transaction, or 0.56 percent 

of the transaction amount. Prepaid card 

interchange fees were similar to those of 

signature debit, averaging 50 cents per 

transaction, or 1.53 percent of the 

transaction amount.23

Processing costs. Issuers reported 

their per-transaction processing costs, 

which are those costs related to 

authorization, clearance, and settlement 

of a transaction.24 The median pertransaction total processing cost for all 

types of debit and prepaid card 

transactions was 11.9 cents.25 The 

median per-transaction variable 

processing cost was 7.1 cents for all 

types of debit and prepaid card 

transactions.26 The median pertransaction network processing fees 

were 4.0 cents for all types of debit and 

prepaid card transactions.27

Network fees. Networks reported 

charging two types of per-transaction 

fees: processing and non-processing 

fees. Networks also reported charging 

fees other than on a per-transaction 

basis. Networks charged issuers a total 

of $2.3 billion in fees and charged 

acquirers a total of $1.9 billion in fees. 

In general, the proportion of fees paid 

by each party varied by network type. 

Aggregating these fees across all debit 

and prepaid card transactions, the 

average network fee attributable to each 

transaction was 6.5 cents for issuers and 

5.0 cents for acquirers. The average 

network fee attributable to each 

signature debit transaction was 8.4 cents 

for issuers and 5.7 cents for acquirers. 

Thus, about 60 percent of signature 

debit network fees were paid by issuers 

and 40 percent by acquirers. For PIN 

debit transactions, the average network 

fee attributable to each transaction was 

2.7 cents for issuers and 3.7 cents for 

acquirers. Thus, about 42 percent of PIN 

debit network fees were paid by issuers 

and 58 percent by acquirers. As noted 

above, these fees include per-transaction 

processing fees and non-processing fees, 

as well as other fees. Based on data 

reported by responding issuers, 

signature debit network processing fees 

were 3.0 cents per transaction on 

average and PIN debit network 

processing fees were 1.6¢ per 

transaction on average. 

Networks also reported providing 

discounts and incentives to issuers and 

acquirers/merchants. Issuers were 

provided discounts and incentives 

totaling $0.7 billion, or an average of 2.0 

cents per transaction, while acquirers 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
81726 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

28Net network fees paid by issuers and acquirers 

were calculated by subtracting incentives and 

discounts provided from network fees paid. 

were provided discounts and incentives 

of $0.3 billion, or an average of 0.9 cents 

per transaction. Signature debit 

networks provided average incentives 

and discounts of 2.6 cents per 

transaction to issuers and 1.2 cents per 

transaction to acquirers. Thus, 69 

percent of signature debit network 

incentives and discounts were provided 

to issuers and 31 percent to acquirers. 

PIN debit networks provided average 

incentives and discounts of 0.7 cents 

per transaction to issuers and 0.5 cents 

per transaction to acquirers. Thus, 61 

percent of PIN debit network incentives 

and discounts were provided to issuers 

and 39 percent to acquirers. 

Discounts and incentives effectively 

reduce the per-transaction amount of 

network fees each party pays. After 

adjusting for discounts and incentives, 

the average net network fee per 

transaction is 4.5 cents for issuers and 

4.1 cents for acquirers.28 For signature 

debit transactions, the average net 

network fee per transaction is 5.9 cents 

for issuers and 4.5 cents for acquirers. 

Thus, 57 percent of net network fees on 

signature networks were paid by issuers 

and 43 percent by acquirers. For PIN 

debit networks, the average net network 

fee per transaction is 1.9 cents for 

issuers and 3.2 cents for acquirers. 

Thus, 37 percent of net network fees on 

PIN debit networks were paid by issuers 

and 63 percent by acquirers. 

Fraud data. Survey responses on 

fraud occurrence, fraud losses, and 

fraud-prevention and data-security costs 

are discussed in section IV of this 

notice. 

Exclusivity arrangements and routing 

restrictions. The surveys also included a 

number of questions about exclusivity 

arrangements and transaction routing 

procedures. Respondents reported that 

there are arrangements, either rulesbased or contractual, under which 

transactions must be routed exclusively 

over specific networks or that commit 

issuers to meet certain volume and 

dollar thresholds for transactions on 

those networks. Respondents also 

reported that they receive incentives 

under these arrangements, which for 

issuers take the form lower network 

fees, signing bonuses, and marketing 

and development funds. For acquirers, 

the incentives typically take the form of 

lower network fees. 

Summary of Proposal 

Reasonable and proportional fees. 

The Board is requesting 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. Alternative 1 adopts issuerspecific standards with a safe harbor 

and a cap. In contrast, Alternative 2 

adopts a cap that is applicable to all 

covered issuers. 

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 any 

interchange fee in excess of its 

allowable costs through any network. 

An issuer’s allowable costs would be 

those costs that are attributable to the 

issuer’s role in authorization, clearance, 

and settlement of the transaction and 

that 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 

on the amount of any interchange fee an 

issuer could receive or charge, 

regardless of the issuer’s allowable cost 

calculation. The Board proposes to set 

this cap at an initial level of 12 cents per 

transaction. 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, in which case the issuer would 

not need to determine its maximum 

interchange fee based on allowable 

costs. The Board proposes to set the safe 

harbor amount at an initial level of 7 

cents per transaction. Therefore, under 

Alternative 1, each payment card 

network would have the option of 

setting interchange fees either (1) at or 

below the safe harbor or (2) at an 

amount for each issuer such that the 

interchange fee for that issuer does not 

exceed the issuer’s allowable costs, up 

to the cap. 

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. 

Fraud-prevention adjustment. The 

Board’s proposal requests comment on 

two general approaches to the fraudprevention adjustment framework and 

asks several questions related to the two 

alternatives. One approach focuses on 

implementation of major innovations 

that would likely result in substantial 

reductions in total, industry-wide fraud 

losses. The second approach focuses 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. At this time, the Board is not 

proposing a specific adjustment to the 

amount of an interchange fee for an 

issuer’s fraud-prevention costs. After 

considering the comments received, the 

Board expects to develop a specific 

proposal on the fraud adjustment for 

public comment. 

Exemptions. The Board’s proposed 

rule exempts issuers that, together with 

affiliates, have assets of less than $10 

billion. The Board’s proposed rule also 

exempts electronic debit transactions 

made using debit cards issued under 

government-administered programs or 

made using certain reloadable prepaid 

cards. These exempt issuers or 

transactions would not be subject to the 

interchange transaction fee restrictions. 

The exemptions do not apply to the 

proposed rule’s provisions regarding 

network exclusivity and routing 

restrictions. 

Prohibition on circumvention or 

evasion. In order to prevent 

circumvention or evasion of the limits 

on the amount of interchange fees that 

issuers receive from acquirers, the 

proposed rule would 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 per-transaction 

rebates, incentives or payments, could 

not exceed the total amount of fees paid 

by the issuer to the network. 

Limitation on debit card restrictions. 

The Board is requesting comment on 

two alternative approaches to 

implement 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 

carried 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 

PIN-based network, provided the 

networks are not affiliated. Under 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81727 

29The rule’s interchange fee standard could 

become a constraint in the future if ATM 

interchange fees begin to flow in the same direction 

as point-of-sale debit card transactions, as was the 

case for interchange fees of certain PIN debit 

networks in the 1990s. 

30 In addition, under a three-party system, outside 

processors generally are not authorized by the 

network to acquire transactions from merchants. 

Although outside processors may provide some 

processing services to the merchant, the network is 

ultimately the acquirer for every transaction. 

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 

carried to less than two unaffiliated 

networks for each method of 

authorization the cardholder may select. 

Under this alternative, an issuer that 

used both signature- and PIN-based 

authorization would have to enable its 

debit cards with two unaffiliated 

signature-based networks and two 

unaffiliated PIN-based networks. 

Transaction routing. The Board 

proposes 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. 

Scope of Rule 

In general, the Board’s proposed rule 

covers debit card transactions (not 

otherwise exempt) that debit an 

account. The Board’s proposed rule also 

covers both three-party and four-party 

systems. Throughout the proposal, the 

Board generally describes the 

interchange fee standards and the 

network exclusivity and routing rules in 

a manner that most readily applies to 

debit card transactions initiated at the 

point of sale for the purchase of goods 

and services and debit card transactions 

carried over four-party networks. The 

scope of the proposed rule, however, 

covers three-party networks and could 

cover ATM transactions and networks. 

The Board requests comment on the 

application of the proposed rule to ATM 

transactions and ATM networks, as well 

as to three-party networks. 

Coverage of ATM transactions and 

networks. The Board requests comment 

on whether ATM transactions and ATM 

networks should be included within the 

scope of the rule. Although the statute 

does not expressly include ATM 

transactions within its scope, EFTA 

Section 920’s definitions of ‘‘debit card,’’ 

‘‘electronic debit transaction,’’ and 

‘‘payment card network’’ could be read 

to bring ATM transactions within the 

coverage of the rule. Specifically, most 

ATM cards can be used to debit an asset 

account. It could also be argued that an 

ATM operator accepts the debit card as 

form of payment to carry out the 

transaction, so the ATM network could 

be covered by the statutory definition of 

a ‘‘payment card network.’’ 

Under EFTA Section 920(c)(8), the 

term ‘‘interchange transaction fee’’ is 

defined as a fee charged ‘‘for the purpose 

of compensating an issuer.’’ 

Traditionally, however, the interchange 

fee for ATM transactions is paid by the 

issuer and flows to the ATM operator. 

Thus, the proposed interchange 

transaction fee standards would not 

apply to ATM interchange fees and 

would not constrain the current level of 

such fees.29

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. As discussed below, in point-ofsale transactions, these provisions 

improve the ability of a merchant to 

select the network that minimizes its 

cost (particularly the cost associated 

with interchange fees) and otherwise 

provides the most advantageous terms. 

In the case of ATM transactions, 

however, the exclusivity and routing 

provisions would give the ATM 

operator, which is receiving the ATM 

interchange fee, the ability to select the 

network that maximizes that fee. 

Therefore, coverage of ATM networks 

under the rule may result in very 

different economic incentives than 

coverage of point-of-sale debit card 

networks. 

If ATM networks and ATM 

transactions are included within the 

scope of the rule, the Board requests 

comment on how to implement the 

network exclusivity provision. For 

example, if the Board requires two 

unaffiliated networks for each 

authorization method, should it 

explicitly require an issuer to ensure 

that ATM transactions may be routed 

over at least two unaffiliated networks? 

Should the Board state that one pointof-sale debit network and one ATM-only 

network would not satisfy the 

exclusivity prohibition under either 

proposed alternative? The Board also 

specifically requests comment on the 

effect of treating ATM transactions as 

‘‘electronic debit transactions’’ under the 

rule on small issuers, as well as the 

cardholder benefit, if any, of such an 

approach. 

Coverage of three-party systems. The 

Board also requests comment on the 

appropriate application of the 

interchange fee standards to electronic 

debit transactions carried over threeparty systems. In a three-party payment 

system, the payment card network 

typically serves both as the card issuer 

and the merchant acquirer for purposes 

of accepting payment on the network.30

In this system, there is no explicit 

interchange fee. Instead, the merchant 

directly pays a merchant discount to the 

network. The merchant discount 

typically is equivalent to the sum of the 

interchange fee, the network switch fee, 

other acquirer costs, and an acquirer 

markup that would typically be 

imposed in a four-party system. 

Both the statutory and proposed 

definition of ‘‘interchange transaction 

fee’’ would cover the part of the 

merchant discount in a three-party 

system that is used to compensate the 

network for its role as issuer. If a threeparty network apportioned its entire 

merchant discount to its roles as 

network or merchant acquirer, however, 

the interchange fee would, in effect, be 

zero. This outcome, coupled with the 

fact the statute does not restrict fees an 

acquirer charges a merchant, may 

present practical difficulties in limiting 

the amount of a merchant discount 

charged in a three-party network. The 

Board requests comment on the 

appropriate way to treat three-party 

networks and on any specific 

clarifications with respect to such fees 

that should be provided in the 

regulation. 

In addition, the Board requests 

comment on how the network 

exclusivity and routing provisions 

should be applied to three-party 

systems. If the limitations on payment 

card network restrictions under § 235.7 

were applied to a three-party system, 

debit cards issued by the network would 

be required to be capable of being 

routed 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. For example, under 

Alternative A for the network 

exclusivity provisions, the payment 

card network would be required to add 

an unaffiliated network and arrange for 

the unaffiliated debit network to carry 

debit transactions, for ultimate routing 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
81728 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

31 15 U.S.C. 1693a. 

32See 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). 

to the contracting network, which may 

result in more circuitous routing that 

would otherwise be the case. Under 

Alternative B, which requires at least 

two unaffiliated payment card networks 

for each method of authorization, the 

payment card network would be 

required to add at least one unaffiliated 

signature debit network for a signatureonly debit card. In addition, if the debit 

card had PIN debit functionality, the 

card would also have to be accepted on 

at least two unaffiliated PIN debit 

networks. 

The Board recognizes 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. Nonetheless, the 

statute does not provide any apparent 

basis for excluding three-party systems 

from the scope of the provisions of 

EFTA Section 920(b). The Board 

requests comment on all aspects of 

applying the proposed rule to threeparty payment systems, including on 

any available alternatives that could 

minimize the burden of compliance on 

such systems. 

Section-by-Section Analysis 

I. Sec. 235.1 Authority and purpose 

This section sets forth the authority 

and purpose for the proposed rule. 

II. Sec. 235.2 Definitions 

The proposed rule provides 

definitions for many of the terms used 

in the rule. As noted throughout this 

section, many of the definitions follow 

the EFTA’s definitions. The proposed 

rule also provides definitions for terms 

not defined in EFTA Section 920. Some 

of these definitions are based on 

existing statutory or regulatory 

definitions, while others are based on 

terminology in the debit card industry. 

The Board requests comment on all of 

the terms and definitions set out in this 

section. In particular, the Board requests 

comment on any terms used in the 

proposed rule that a commenter believes 

are not sufficiently clear or defined. 

A. Sec. 235.2(a) Account 

EFTA Section 920(c) defines the term 

‘‘debit card’’ in reference to a card, or 

other payment code or device, that is 

used ‘‘to debit an asset account 

(regardless of the purpose for which the 

account is established) * * *.’’ That 

section, however, does not define the 

terms ‘‘asset account’’ or ‘‘account.’’ 

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 end 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 term does not 

include an account held by a financial 

institution pursuant to a bona fide trust 

agreement.’’ 31

Similar to EFTA Section 903(2), 

proposed § 235.2(a) defines ‘‘account’’ to 

include a transaction account (which 

includes a demand deposit), savings, or 

other asset account. The proposed 

definition, however, differs from EFTA 

Section 903(2) because EFTA Section 

920(c) does not restrict the term debit 

card to those cards, or other payment 

codes or devices, that debit accounts 

established for a particular purpose. 

Accordingly, the proposed definition 

includes both an account established 

primarily for personal, family, or 

household purposes and an account 

established for business purposes. For 

the same reason, the proposed 

definition of ‘‘account’’ includes an 

account held by a financial institution 

under a bona fide trust arrangement. 

These distinctions from the EFTA 

Section 903(2)’s definition are clarified 

in proposed comment 2(a)–1. 

The proposed definition of ‘‘account’’ 

is limited to accounts that are located in 

the United States. The Board does not 

believe it is appropriate to apply EFTA 

Section 920’s limitations to foreign 

issuers or accounts, absent a clear 

indication from Congress to do so. 

B. Sec. 235.2(b) Acquirer 

Proposed § 235.2(b) defines the term 

‘‘acquirer.’’ Within the debit card 

industry, there are numerous models for 

acquiring transactions from merchants, 

and the term ‘‘acquirer’’ may not always 

be used to refer to the entity that holds 

a merchant’s account. In some acquiring 

relationships, an institution performs all 

the functions of the acquirer (e.g., 

signing up and underwriting merchants, 

processing payments, receiving and 

providing settlement for the merchants’ 

transactions, and other account 

maintenance). In other acquiring 

relationships, an institution performs all 

the functions of the acquirer except for 

settling the merchant’s transactions with 

both the merchant and the network. 

The Board is proposing to limit the 

term ‘‘acquirer’’ to entities that ‘‘acquire’’ 

(or buy) the electronic debit transactions 

from the merchant. Proposed § 235.2(b) 

defines ‘‘acquirer’’ as a person that 

‘‘contracts directly or indirectly with a 

merchant to receive and provide 

settlement for the merchant’s electronic 

debit transactions over a payment card 

network.’’ Proposed § 235.2(b) limits the 

term to those entities serving a financial 

institution function with respect to the 

merchant, as distinguished from a 

processor function, by stipulating that 

the entity ‘‘receive and provide 

settlement for the merchant’s’’ 

transactions. Proposed § 235.2(b) also 

explicitly excludes entities that solely 

process transactions for the merchant 

from the term ‘‘acquirer.’’ 

Proposed § 235.2(b), however, takes 

into consideration the fact that the 

degree of involvement of the entity 

settling with the merchant varies under 

different models by defining ‘‘acquirer’’ 

as a person that ‘‘contracts directly or 

indirectly with a merchant.’’ See 

proposed comment 2(b)–1. 

C. Sec. 235.2(c) Affiliate and § 235.2(e) 

Control 

Proposed §§ 235.2(c) and (e) define 

the terms ‘‘affiliate’’ and ‘‘control.’’ EFTA 

Section 920(c)(1) defines the term 

‘‘affiliate’’ as ‘‘any company that 

controls, is controlled by, or is under 

common control with another 

company.’’ The proposed rule 

incorporates the EFTA’s definition of 

‘‘affiliate.’’ 

Although the EFTA’s definition of 

affiliate is premised on control, the 

EFTA does not define that term. The 

Board is proposing to adopt a definition 

of ‘‘control’’ that is consistent with 

definitions of that term in other Board 

regulations.32

D. Sec. 235.2(d) Cardholder 

Proposed § 235.2(d) defines the term 

‘‘cardholder’’ as the person to whom a 

debit card is issued. Proposed comment 

2(d) clarifies that if an issuer issues a 

debit card for use to debit a transaction, 

savings, or other similar asset account, 

the cardholder usually will be the 

account holder. In some cases, however, 

such as with a business account, there 

may be multiple persons who have been 

issued debit cards and are authorized to 

use those debit cards to debit the same 

account. Each employee issued a card 

would be considered a cardholder. In 

the case of a prepaid card, the 

cardholder is the person that purchased 

the card or a person who received the 

card from the purchaser. See proposed 

comment 2(d)–1. 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81729 

33See EFTA Section 915(a)(2)(A). 

34The issuer’s ability to maintain the hold 

assumes that the issuer has received a settlement 

record for the transaction within the time period 

required under card network rules. 35EFTA Section 913(1); 12 CFR 205.10(e)(1). 

F. Sec. 235.2(f) Debit Card and § 235.2(i) 

General-Use Prepaid Card 

Debit Card (§ 235.2 (f)) 

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, 

or other means.’’ The term includes a 

general-use prepaid card, as that term 

was previously defined by the gift card 

provisions of the Credit Card 

Accountability, Responsibility and 

Disclosure Act of 2009 (Credit Card 

Act).33 The statute excludes paper 

checks from the definition of ‘‘debit 

card.’’ 

Proposed § 235.2(f) defines the term 

‘‘debit card’’ and generally tracks the 

definition set forth in EFTA Section 

920. Thus, proposed § 235.2(f)(1) 

generally 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 account, regardless of whether 

authorization is based on signature, 

personal identification number (PIN), or 

other means.’’ In addition, the term 

applies regardless of whether the issuer 

holds the underlying account. This is 

consistent with the statutory definition 

of ‘‘debit card’’ which does not require 

that an issuer also hold the account 

debited by the card, code, or device. 

Proposed § 235.2(f)(2) further provides 

that ‘‘debit card’’ includes a ‘‘general-use 

prepaid card.’’ See proposed comment 

2(f)–4. 

Proposed comment 2(f)–1 clarifies 

that the requirements of this part 

generally apply to any card, or other 

payment code or device, even if it is not 

issued in card form. That is, the rule 

applies even if a physical card is not 

issued or if the device is issued with a 

form factor other than a standard-sized 

card. For example, an account number 

or code that could be used to access 

underlying funds in an account would 

be considered a debit card under the 

rule (except when used to initiate an 

ACH transaction). Similarly, the term 

‘‘debit card’’ would include a device 

with a chip or other embedded 

mechanism that links the device to 

funds held in an account, such as a 

mobile phone or sticker containing a 

contactless chip that enables the 

cardholder to debit an account. 

Proposed comments 2(f)–2 and –3 

address deferred and decoupled debit 

cards, two types of card products that 

the Board believes fall within the 

statutory definition of ‘‘debit card’’ 

notwithstanding that they may share 

both credit and debit card-like 

attributes. Under a deferred debit 

arrangement, transactions are not 

immediately posted to a cardholder’s 

account when the card transaction is 

received by the account-holding 

institution for settlement, but instead 

the funds in the account are held and 

made unavailable for other transactions 

for a specified period of time.34 Upon 

expiration of the time period, the 

cardholder’s account is debited for the 

amount of all transactions made using 

the card which were submitted for 

settlement during that period. For 

example, under some deferred debit 

arrangements involving consumer 

brokerage accounts (whether held at the 

issuer or an affiliate), the issuer agrees 

not to post the card transactions to the 

brokerage account until the end of the 

month. Regardless of the time period 

chosen by the issuer for deferring the 

posting of the transactions to the 

cardholder’s account, deferred debit 

cards would be considered debit cards 

for purposes of the requirements of this 

part. Deferred debit card arrangements 

do not refer to arrangements in which a 

merchant defers presentment of 

multiple small dollar card payments, 

but aggregates those payments into a 

single transaction for presentment, or 

where a merchant requests placement of 

a hold on certain funds in an account 

until the actual amount of the 

cardholder’s transaction is known. See 

proposed comment 2(f)–2. 

Proposed comment 2(f)–3 addresses 

decoupled debit arrangements in which 

the issuer is not the institution that 

holds the underlying account that will 

be debited. That is, the issuercardholder relationship is ‘‘decoupled’’ 

from the cardholder’s relationship with 

the institution holding the cardholder’s 

account. In these ‘‘decoupled debit’’ 

arrangements, transactions are not 

posted directly to the cardholder’s 

account when the transaction is 

presented for settlement with the card 

issuer. Instead, the issuer must send an 

ACH debit instruction to the accountholding institution in the amount of the 

transaction in order to obtain the funds 

from the cardholder’s account. As noted 

above, the term ‘‘debit card’’ includes a 

card, or other payment code or device, 

that debits an account, regardless of 

whether the issuer holds the account. 

Accordingly, the Board believes it is 

appropriate to treat decoupled debit 

cards as debit cards subject to the 

requirements of this part. 

Moreover, the Board understands that 

there may be incentives for some issuers 

to design or offer products with ‘‘creditlike’’ features in an effort to have such 

products fall outside the scope of the 

interchange fee restrictions to be 

implemented by this rulemaking. For 

example, an issuer may offer a product 

that would allow the cardholder the 

option at the time of the transaction to 

choose when the cardholder’s account 

will be debited for the transaction. Any 

attempt to classify such a product as a 

credit card is limited by the prohibition 

against compulsory use under the EFTA 

and Regulation E. Specifically, the 

EFTA and Regulation E provide that no 

person may condition the extension of 

credit to a consumer on such 

consumer’s repayment by means of 

preauthorized electronic fund 

transfers.35 Thus, an issuer of a charge 

or credit card is prohibited from 

requiring a consumer’s repayment by 

preauthorized electronic fund transfers 

from a deposit account held by the 

consumer as a condition of opening the 

charge or credit card account. The Board 

solicits comment on whether additional 

guidance is necessary to clarify that 

deferred and decoupled debit, or any 

similar products, qualify as debit cards 

for purposes of this rule. 

The proposed rule also sets forth 

certain exclusions from the term ‘‘debit 

card’’ in § 235.2(f)(3) to clarify the 

definition. Proposed § 235.2(f)(3)(i) 

clarifies that retail gift cards that can be 

used only at a single merchant or 

affiliated group of merchants are not 

subject to the requirements of this part. 

The Board believes that by including an 

explicit reference to general-use prepaid 

cards in the statutory definition of 

‘‘debit card,’’ Congress did not intend the 

interchange fee restrictions to apply to 

other types of prepaid cards that are 

accepted only at a single merchant or an 

affiliated group of merchants. These 

cards are generally used in a closed 

environment at a limited number of 

locations and are not issued for general 

use. See § 235.7(a), discussed below. 

Proposed comment 2(f)–5 clarifies 

that two or more merchants are 

affiliated if they are related by either 

common ownership or common 

corporate control. For purposes of the 

definition of ‘‘debit card,’’ the Board 

views franchisees 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. Accordingly, gift 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
81730 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

36However, a decoupled debit card issued by a 

merchant that can be used only at that merchant or 

its affiliate(s) may qualify for the separate exclusion 

under proposed § 235.2(f)(3)(i). 

37See EFTA Section 920(c)(2)(B). 

38See also 12 CFR 205.20(a)(3). 

39For example, under the gift card provisions of 

the Credit Card Act, general-use prepaid cards do 

not include cards that are not marketed to the 

general public or cards issued in paper form only. 

See EFTA Section 915(a)(2)(D)(iv) and (v). 

40The Board further notes that had Congress 

intended to apply the exclusions in EFTA Section 

915(a)(2)(D) to the definition of ‘‘general-use 

prepaid card’’ for purposes of this rule, it would 

have been unnecessary to separately create an 

exemption for certain reloadable prepaid cards that 

are not marketed or labeled as a gift card. See EFTA 

Section 920(a)(7)(ii). 

cards that are redeemable solely at 

franchise locations would be excluded 

from the definition of debit card for 

cards, or other payment codes or 

devices, usable only at a single 

merchant or affiliated group of 

merchants, from the definition of ‘‘debit 

card.’’ 

Proposed § 235.2(f)(3)(ii) expands the 

statutory exclusion for paper checks to 

exempt any ‘‘check, draft, or similar 

paper instrument, or electronic 

representation thereof’’ from the 

definition of ‘‘debit card.’’ This 

adjustment is proposed because in many 

cases paper checks may be imaged and 

submitted electronically for 

presentment to the paying bank. 

Proposed comment 2(f)–6 further 

clarifies that a check that is provided as 

a source of information to initiate an 

ACH debit transfer in an electronic 

check conversion transaction is not a 

debit card. 

Finally, proposed § 235.2(f)(iii) would 

generally exclude ACH transactions 

from the requirements of this part. 

Specifically, the proposed exclusion 

provides that an account number is not 

a debit card when used to initiate an 

ACH transaction from a person’s 

account. The Board believes that this 

exclusion is necessary to clarify that 

ACH transactions initiated by a person’s 

provision of a checking account number 

are not ‘‘electronic debit transactions’’ 

for purposes of the network exclusivity 

and routing provisions under § 235.7. 

However, this exclusion is not intended 

to cover a card, or other payment code 

or device, that is used to directly or 

indirectly initiate an ACH debit from a 

cardholder’s account, for example, 

under a decoupled debit arrangement.36

Proposed comment 2(f)–7 sets forth this 

guidance. 

General-Use Prepaid Cards (§ 235.2(i)) 

The statutory definition of ‘‘debit 

card’’ includes a ‘‘general-use prepaid 

card’’ as that term is defined under 

EFTA Section 915(a)(2)(A).37 Proposed 

§ 235.2(i) defines ‘‘general-use prepaid 

card’’ as 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 or 

service providers for goods or services, 

or usable at ATMs. 

The proposed definition of ‘‘generaluse prepaid card’’ generally tracks the 

definition as it appears under EFTA 

Section 915(a)(2)(A), with modifications 

to simplify and clarify the definition.38

For example, the proposed rule refers to 

cards issued in a ‘‘specified’’ amount to 

capture a card, or other payment code 

or device, whether it is issued in a 

predenominated amount or in an 

amount requested by a cardholder in a 

particular transaction. 

The inclusion of general-use prepaid 

cards in the definition of ‘‘debit card’’ 

under EFTA Section 920(c)(2)(B) refers 

only to the term ‘‘general-use prepaid 

card’’ as it is defined in EFTA Section 

915(a)(d)(A), and does not incorporate 

the separate exclusions to that term that 

are set forth in the gift card provisions 

of the Credit Card Act.39 Thus, for 

purposes of this proposed rule, the 

definition of ‘‘general-use prepaid card’’ 

would include the cards, or other 

payment codes or devices, listed under 

EFTA Section 915(a)(2)(D) to the extent 

they otherwise meet the definition of 

‘‘general-use prepaid card.’’ 40

Proposed comment 2(i)–1 clarifies 

that a card, or other payment code or 

device, is ‘‘redeemable upon 

presentation at multiple, unaffiliated 

merchants’’ if, for example, the 

merchants agree, pursuant to the rules 

of the payment network, to honor the 

card, or other payment code or device, 

if it bears the mark, logo, or brand of a 

payment network. (See, however, 

proposed comment 2(f)–5, discussed 

above, clarifying that franchises subject 

to a common set of corporate policies or 

practices are considered to be affiliated.) 

Proposed comment 2(i)–2 provides 

that a mall gift card, which is generally 

intended to be used or redeemed at 

participating retailers located within the 

same shopping mall or in some cases, 

within the same shopping district, 

would be considered a general-use 

prepaid card if it is also networkbranded, which would permit the card 

to be used at any retailer that accepts 

that card brand, including retailers 

located outside the mall. 

In some cases, a group of unaffiliated 

merchants may jointly offer a prepaid 

card that is only redeemable at the 

participating merchants. For example, 

‘‘selective authorization’’ cards may be 

offered to encourage sales within a 

shopping mall or district or at 

merchants located in the same resort. 

Selective authorization cards generally 

are issued by a financial institution or 

member of a card network, rather than 

a program sponsor as in the case of 

many retail gift card programs. 

Transactions made using such cards are 

authorized and settled over the payment 

card networks just like other general-use 

prepaid cards. In addition, interchange 

transaction fees may be charged in 

connection with these cards because 

they are processed over a payment card 

network. 

Selective authorization programs 

enable a merchant to offer gift cards to 

its customers and ensure that card funds 

are spent only within the participating 

merchant(s) without incurring the costs 

of setting up a separate program. There 

may be little difference between these 

programs and closed-loop retail gift card 

programs operated by a single retailer, 

but for the fact that these cards are 

accepted at merchants that are 

unaffiliated. However, requiring these 

selective authorization cards to comply 

with the network exclusivity and 

routing restrictions could be 

problematic and costly for the 

participating merchants with little 

corresponding benefit. Accordingly, 

comment is requested on whether a 

prepaid card that is accepted at a 

limited number of unaffiliated 

participating merchants and does not 

carry a network brand should also be 

considered a ‘‘general-use prepaid card’’ 

under the rule. 

G. Sec. 235.2(g) Designated automated 

teller machine network (Designated 

ATM network) 

EFTA Section 920(a)(7)(C) defines a 

‘‘designated automated teller machine 

network’’ as either (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. Proposed § 235.2(g) 

implements this definition substantially 

as set forth in the statute. 

The Board is also proposing to clarify 

the meaning of ‘‘reasonable and 

convenient access,’’ as that term is used 

in § 235.2(g)(2). Proposed comment 

2(g)–1 provides that an issuer provides 

reasonable and convenient access, for 

example, if, for each person to whom a 

card is issued, the issuer provides 

access to an 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, 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81731 

41See U.S. Census Bureau for information on 

MSAs, available at http://www.census.gov/ 

population/www/metroareas/metroarea.html. 

where the card was first purchased or 

issued, in order to access an ATM in the 

network. The purpose of this comment 

is to clarify that if an issuer does not 

have its own network of proprietary 

ATMs, as provided in § 235.2(g)(1), that 

the network the issuer identifies as its 

designated ATM network is one in 

which a person using a debit card can 

access an ATM with relative ease. The 

Board believes that having to travel a 

substantial distance from where the 

person is located, as determined by the 

last known address of the person to 

whom the card is issued, for an ATM in 

the network is neither reasonable nor 

convenient. The MSA is a common, 

well-known way of defining a 

community.41 Therefore, the Board is 

proposing the MSA as a proxy for a 

reasonable distance from the person’s 

location. 

Furthermore, because a debit card 

includes a general-use prepaid card, for 

which the issuer may not have the 

address of the person using the card, the 

proposed comment provides that the 

issuer may use the location of where the 

card was first purchased or issued. The 

issuer of a general-use prepaid card may 

not have address information because 

either the person to whom the card is 

issued is not the ultimate user of the 

card, such as in the case of a gift card, 

or the issuer does not collect address 

information for the product. In these 

instances, the only location known to 

the issuer is the place where the card 

was first purchased or issued, and the 

issuer may assume that the person using 

the card is located in that same area. 

The Board also requests comment on 

whether additional clarification or 

guidance is needed for how an issuer 

may identify a network of automated 

teller machines that provides reasonable 

and convenient access to the issuer’s 

cardholders. 

H. Sec. 235.2(h) Electronic debit 

transaction 

EFAT section 920(c)(5) defines the 

term ‘‘electronic debit transaction’’ as ‘‘a 

transaction in which a person uses a 

debit card.’’ The Board’s proposed 

definition in § 235.2(h) adds two 

clarifying provisions. 

First, proposed § 235.2(h) clarifies 

that the term ‘‘electronic debit 

transaction’’ is a transaction in which a 

person uses a debit card as ‘‘a form of 

payment.’’ The statute defines payment 

card network, in part, as a network a 

person uses to accept a debit card as a 

form of payment. For clarity, the Board 

proposes to incorporate that 

requirement into the definition of 

electronic debit transaction. 

Second, the statutory definition is 

silent as to whether use of the debit card 

must occur within the United States. 

Proposed § 235.2(h) limits electronic 

debit transactions to those transactions 

where a person uses a debit card for 

payment in the United States. The 

Board found no indication in the statute 

that Congress meant to apply the 

interchange provisions extraterritorially. 

Moreover, if a person uses a debit card 

outside the United States, even if such 

use is to debit an account located in the 

United States, the amount of the 

interchange transaction fees the issuer 

may receive often is determined by the 

network rules for cross-border 

transactions or the laws or regulations of 

the country in which the merchant is 

located. Therefore, electronic debit 

transactions subject to the proposed rule 

are those that occur at a merchant 

located within the United States. 

Proposed comment 2(h)–1 explains 

that the term ‘‘electronic debit 

transaction’’ includes transactions in 

which a person uses a debit card other 

than for the initial purchase of goods or 

services. For example, after purchasing 

goods or services, a person may decide 

that such goods and services are 

unwanted or defective. If permitted by 

agreement with the merchant, that 

person may return the goods or cancel 

the services and receive a credit using 

the same debit card used to make the 

original purchase. Proposed § 235.2(h) 

covers such transactions. The Board 

understands, however, that issuers 

typically do not receive interchange fees 

for these transactions. Proposed 

comment 2(h)–2 clarifies that 

transactions in which a person uses a 

debit card to purchase goods or services 

and also receives cash back from the 

merchant are electronic debit 

transactions. 

I. Sec. 235.2(j) Interchange transaction 

fee 

Proposed § 235.2(j) generally 

incorporates the EFTA Section 

920(c)(8)’s definition of ‘‘interchange 

transaction fee’’ that defines the term 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.’’ A payment card network 

may determine interchange transaction 

fees according to a schedule that is 

widely applicable, but also may permit 

bilateral negotiation of fees between 

issuers and acquirers or merchants, as 

well as specialized interchange 

transaction fee arrangements. 

As discussed above, interchange 

transaction fees today are used to 

reimburse issuers for their involvement 

in electronic debit transactions by 

transferring value between acquirers 

and issuers. In general, payment card 

networks establish the interchange 

transaction fees, although the issuers are 

receiving the fees by reducing the 

amount remitted for a particular 

transaction by the amount of that 

transaction’s interchange transaction 

fee. Therefore, the merchants or 

acquirers are paying the amount of the 

interchange transaction fee. The 

proposed definition, however, clarifies 

that interchange transaction fees are 

paid by merchants or acquirers. See 

proposed comment 2(j)–1. 

Proposed comment 2(j)–2 restates the 

rule that interchange fees are limited to 

those fees established, charged or 

received by a payment card network for 

the purpose of compensating the issuer, 

and not for other purposes, such as to 

compensate the network for its services 

to acquirers or issuers. 

J. Sec. 235.2(k) Issuer 

Proposed § 235.2(k) incorporates the 

statute’s definition of ‘‘issuer’’ that 

defines the term as ‘‘any person who 

issues a debit card or the agent of such 

person with respect to the card.’’ 

Proposed § 235.2(k) follows the 

statutory definition, but removes the 

phrase ‘‘or the agent of such person with 

respect to the card.’’ Because agents are, 

as a matter of law, held to the same 

restrictions with respect to the agency 

relationship as their principals, the 

Board does not believe that removing 

this clause will have a substantive 

effect. 

Issuing a debit card is the process of 

providing a debit card to a cardholder. 

The issuing process generally includes 

establishing a direct contractual 

relationship with the cardholder with 

respect to the card and providing the 

card directly or indirectly to the 

cardholder. The debit card provided 

may or may not have the issuer’s name 

on the card. For example, a prepaid card 

may be issued by a bank that has 

partnered with another entity (e.g., a 

retail store) and the other entity’s name 

may be on the prepaid card. Further, as 

discussed below, the issuer is not 

necessarily the institution that holds the 

cardholder’s account that will be 

debited. 

Similar to merchant-acquirer 

relationships, the issuer-cardholder 

relationship varies. Proposed comments 

2(k)–2 through 2(k)–5 clarify which 

entity is the issuer in the most prevalent 

issuing arrangements. In the simple 

four-party system, the financial 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
81732 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

42See discussion of proposed § 235.5(a) in the 

section-by-section analysis. 

institution that holds the account is the 

issuer because that is the institution that 

directly or indirectly provides the debit 

card to the cardholder, holds the 

cardholder’s account and has the direct 

contractual relationship with the 

cardholder with respect to the card. If 

the debit card is a prepaid card, the 

cardholder may receive the card from a 

merchant or other person, and thus may 

not receive the card directly from the 

issuing bank, which is the entity that 

holds the account that pools together 

the funds for many prepaid cards. See 

proposed comment 2(k)–2. 

In contrast, in a three-party system, 

the network typically provides the debit 

card or prepaid card directly to the 

cardholder or through an agent. 

Generally, the network also has a direct 

contractual relationship with the 

cardholder. Notwithstanding the other 

roles the network may have with respect 

to the transaction, the network is 

considered an issuer under proposed 

§ 235.2(k) because it provides the card 

to the cardholder, and may also be the 

account-holding institution. See 

proposed comment 2(k)–3. 

A variation of the issuer relationship 

within the four-party and three-party 

systems involves the licensing or 

assignment of Bank Identification 

Numbers (BINs), which are numbers 

assigned to financial institutions by the 

payment card networks for purposes of 

issuing cards. Some members of 

payment card networks permit other 

entities that are not members to issue 

debit cards using the member’s BIN. The 

entity permitting such use is referred to 

as the ‘‘BIN sponsor.’’ The entity using 

the BIN sponsor’s BIN (‘‘affiliate 

member’’) typically holds the account of 

the cardholder and directly or indirectly 

provides the cardholder with the debit 

card. The cardholder’s direct 

relationship is with the affiliate 

member. Proposed comment 2(k)–4.i 

and .ii describes two circumstances 

involving BIN sponsorship 

arrangements and provides guidance on 

the entity that would be considered to 

be the issuer in those circumstances. 

Another variant of the issuer 

relationship within the four-party and 

three-party systems is the decoupled 

debit card arrangement. In a decoupled 

debit card arrangement, a third-party 

service provider (which may or may not 

be a financial institution) issues a debit 

card to the cardholder and enters into a 

contractual relationship with the 

cardholder with respect to the 

decoupled debit card. Therefore, 

proposed comment 2(k)–5 clarifies that 

the entity directly or indirectly 

providing the cardholder with the card 

is considered the issuer under proposed 

§ 235.2(k). 

Some issuers outsource to a third 

party some of the functions associated 

with issuing cards and authorizing, 

clearing, and settling debit card 

transactions. A third party that performs 

certain card-issuance functions on 

behalf of an issuer would be subject to 

the same restrictions as the issuer in the 

performance of those functions. An 

issuer that outsources certain issuing 

functions retains the underlying 

relationship with the cardholder and 

should retain responsibility for 

complying with the rule’s requirements 

as they pertain to issuers. Therefore, the 

Board’s proposed definition of ‘‘issuer’’ 

does not include the phrase ‘‘or agent of 

the issuer with respect to such card.’’ 

The Board requests comment on 

whether there are circumstances in 

which an agent of an issuer also should 

be considered to be an issuer within the 

rule’s definition. 

Proposed § 235.2(k)’s definition of 

‘‘issuer’’ applies throughout this part, 

except for the provisions exempting 

small issuers.42 For purposes of that 

exemption, EFTA Section 920 limits the 

term ‘‘issuer’’ to the person holding the 

account that is debited through the 

electronic debit transaction. For 

example, issuers of decoupled debit 

cards are not considered issuers for 

purposes of the small issuer exemption 

because they do not hold the account 

being debited. 

The Board requests comment on all 

aspects of the issuer definition. The 

Board specifically requests comment on 

whether the appropriate entity is 

deemed to be the issuer in relation to 

the proposed examples. 

L. Sec. 235.2(l) Merchant 

The statute does not define the term 

‘‘merchant.’’ The term is used 

throughout the proposed rule, and the 

Board is proposing to define a merchant 

as a person that accepts a debit card as 

payment for goods or services. 

M. Sec. 235.2(m) Payment card network 

EFTA Section 920(c)(11) defines the 

term ‘‘payment card network’’ as (1) 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 (2) that a person uses in order to 

accept as a form of payment a brand of 

debit card, credit card, or other device 

that may be used to carry out debit or 

credit transactions. Proposed § 235.2(m) 

follows this definition, with revisions 

for clarity. 

Under the proposed rule, a payment 

card network is generally defined as an 

‘‘entity that directly or indirectly 

provides the proprietary services, 

infrastructure, and software for 

authorization, clearance, and settlement 

of electronic debit transactions.’’ 

Because the interchange fee restrictions 

and network exclusivity and merchant 

routing provisions of the Dodd-Frank 

Act do not apply to credit card 

transactions, the Board believes it is 

appropriate to exclude from the 

proposed definition the reference to 

credit cards in the statutory definition to 

avoid unnecessary confusion. No 

substantive change is intended. 

Likewise, the Board does not believe its 

necessary to state that a payment card 

network is an entity that a person uses 

in order to accept debit cards as a form 

of payment, because proposed § 235.2(h) 

defines the term ‘‘electronic debit 

transaction,’’ as use of a debit card ‘‘as 

a form of payment.’’ 

In addition, the term ‘‘payment card 

network,’’ as defined in EFTA Section 

920, could be interpreted broadly to 

include any entity that is involved in 

processing an electronic debit 

transaction, including the acquirer, 

third-party processor, payment gateway, 

or software vendor that programs the 

electronic terminal to accept and route 

debit card transactions. Each of these 

entities arguably provide ‘‘services, 

infrastructure, and software’’ that are 

necessary for authorizing, clearing, and 

settling electronic debit transactions. 

However, the Board does not believe 

that this is the best interpretation in 

light of the statute’s objectives. Instead, 

the Board believes that the better 

interpretation is that in general, the term 

‘‘payment card network’’ only applies to 

an entity that establishes the rules, 

standards, or guidelines that govern the 

rights and responsibilities of issuers and 

acquirers involved in processing debit 

card transactions through the payment 

system. Accordingly, proposed 

§ 235.2(m)(2) makes this clarification. 

The rules, standards, or guidelines may 

also govern the rights and 

responsibilities of participants other 

than issuers and acquirers. See 

proposed comment 2(m)–1. 

In certain cases, such as in a threeparty system, the same entity may serve 

multiple roles, including that of the 

payment card network, the issuer, and 

the acquirer. Proposed comment 2(m)– 

1 clarifies that the term ‘‘payment card 

network’’ would also cover such entities 

to the extent that their rules, standards, 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81733 

43Regulation Z (Truth in Lending Act), 12 CFR 

226.2(a)(22); Regulation CC (Availability of Funds 

and Collections of Checks), 12 CFR 229.2(yy); 44Several public utility rate-setting statutes 

require ‘‘just and reasonable’’ rates. See, e.g., Natural 

Gas Act, 15 U.S.C. 717 et seq. In the public utility 

rate-setting context, a ‘‘just and reasonable’’ rate 

requires that the public utility be able ‘‘to operate 

successfully, to maintain financial integrity, to 

attract capital, and to compensate its investors for 

the risk assumed.’’ Duquense Light Co. v. Barash, 

488 U.S. 299 (1989). The Board believes that the 

similarities between these statutes and Section 920, 

however, are limited. Public utility rate-setting 

involves unique circumstances, none of which are 

present in the case of setting standards for 

interchange transaction fees. Issuers are unlike 

public utilities, which, in general, are required to 

make their services regularly available to the public. 

In addition, unlike in the case of public utilities 

where the utility’s only source of revenue is the fees 

charged for the service or commodity, issuers have 

other sources, besides interchange fees, from which 

they can receive revenue to cover their costs of 

operations and earn a profit. 

45See 75 FR 37526, 37531–32 (June 29, 2010), 

Black’s Law Dictionary at 1272 (7th ed. 

1999)(defining ‘‘reasonable’’) and Merriam Webster’s 

Collegiate Dictionary at 936 (10th ed. 1995) 

(defining ‘‘proportional’’). 

or guidelines also cover their activities 

in their role(s) of issuer and/or acquirer. 

Proposed comment 2(m)–1 further 

clarifies that the term ‘‘payment card 

network’’ would generally exclude 

acquirers, issuers, third-party 

processors, payment gateways, or other 

entities that may provide services, 

equipment, or software that may be used 

in authorizing, clearing, or settling 

electronic debit transactions, unless 

such entities also establish guidelines, 

rules, or procedures that govern the 

rights and obligations of issuers and 

acquirers involved in processing an 

electronic debit transactions through the 

network. For example, an acquirer is not 

considered to be a payment card 

network due to the fact that it 

establishes particular transaction format 

standards, rules, or guidelines that 

apply to electronic debit transactions 

submitted by a merchant that uses the 

acquirer’s services, because such 

standards, rules, or guidelines would 

apply only to the merchant using the 

acquirer’s services, and not to other 

entities that may also be involved in 

processing those transactions, such as 

the card issuer. 

The Board requests comment on 

whether other non-traditional or 

emerging payment systems would be 

covered by the statutory definition of 

‘‘payment card network.’’ For example, 

consumers may use their mobile phone 

to send payments to third parties to 

purchase goods or services with the 

payment amount billed to their mobile 

phone account or debited directly from 

the consumer’s bank account. In 

addition, consumers may use a third 

party payment intermediary, such as 

PayPal, to pay for Internet purchases, 

using the consumer’s funds that may be 

held by the intermediary or in the 

consumer’s account held at a different 

financial institution. In both examples, 

the system or network used to send the 

payment arguably provide the 

‘‘proprietary services, infrastructure, and 

software for authorization, clearance, 

and settlement of electronic debit 

transactions.’’ Transactions involving 

these methods of payment typically are 

subject to rules and procedures 

established by the payment system. If 

such systems are not covered, the Board 

requests specific comment how it 

should appropriately distinguish these 

payment systems from traditional debit 

card payment systems that are subject to 

the rule. 

N. Sec. 235.2(n) Person 

The term ‘‘person’’ is not defined in 

the EFTA. The proposed definition 

incorporates the definition of the term 

in existing Board regulations.43

O. Sec. 235.2(o) Processor 

EFTA Section 920 uses the term 

‘‘processor’’ but does not define the 

term. Proposed § 235.2(o) defines the 

term ‘‘processor’’ as a person that 

processes or routes electronic debit 

transactions for issuers, acquirers, or 

merchants. 

P. Sec. 235.2(p) United States 

Proposed § 235.2(p) defines the term 

‘‘United States.’’ The proposed 

definition is modified from the EFTA’s 

definition of ‘‘State.’’ (15 U.S.C. 

1693a(10)). 

III. Sec. 235.3 Reasonable and 

proportional interchange transaction 

fees 

Proposed § 235.3 sets forth 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. 

A. Statutory Considerations 

1. Reasonable and Proportional to Cost 

As noted above, EFTA Section 920 

requires the Board to establish standards 

for assessing whether the amount of any 

interchange transaction fee 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. EFTA Section 920 does 

not define ‘‘reasonable’’ or 

‘‘proportional.’’ The Board has found 

only limited examples of other statutory 

uses of the terms ‘‘reasonable’’ or 

‘‘proportional’’ with respect to fees.44

One example is Section 149 of the Truth 

in Lending Act (TILA), which limits 

credit card penalty fees for violations of 

the cardholder agreement to fees that are 

reasonable and proportional to the 

violation. In implementing standards 

under TILA Section 149, the Board 

relied on the commonly accepted legal 

definition of ‘‘reasonable’’ (‘‘fair, proper, 

or moderate’’) and the commonly 

accepted definition of ‘‘proportional’’ 

(‘‘corresponding in degree, size, or 

intensity’’ or ‘‘having the same or 

constant ratio’’).45

Although the Board believes the 

previously relied upon definitions can 

inform this rulemaking, the Board notes 

that reasonableness and proportionality 

have different connotations in the 

context of interchange transaction fees 

than in the context of penalty fees. The 

TILA provision related to the 

reasonableness and proportionality of 

the fees charged when a violation of the 

account terms occurred. TILA required 

the Board to consider the costs incurred 

by issuers as a result of violations and 

other factors, including the need to 

deter violations. In considering whether 

an interchange fee is reasonable, the 

Board proposes to consider whether the 

fee is fair or proper in relation to both 

the individual issuer’s costs as well as 

the costs incurred by other issuers. As 

discussed further below, the Board 

believes it may determine that certain 

fee levels are reasonable based on 

overall issuer cost experience, even if 

the individual issuer’s costs are above 

(or below) that fee level. 

Similarly, in considering whether an 

interchange fee is proportional to the 

issuer’s costs, the Board does not 

believe that proportionality must be 

interpreted to require identical cost-tofee ratios for all covered issuers 

(although a constant cost-to-fee ratio 

would result from the issuer-specific 

standard discussed below for issuers 

with allowable costs below the cap). 

Rather, if the Board were to adopt a safe 

harbor or a fee cap (discussed further 

below) that it determined to be 

reasonable, the cost-to-fee ratio of any 

issuer that received fees at or below the 

safe harbor or cap would be deemed to 

meet the proportionality standard. 

2. Considerations for Standards 

In EFTA Section 920, Congress set 

forth certain factors that the Board is 

required to consider when establishing 

standards for determining whether 

interchange transaction fees are 

reasonable and proportional to the cost 


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46For checks exchanged through a clearing 

house, both the payor’s bank and the payee’s bank 

must be members of or participate in the clearing 

house. 

47Uniform Commercial Code 4–301 and 4–302. 

48Sec. 920(a)(3). 

incurred by the issuer. Specifically, 

EFTA Section 920 requires the Board to 

(1) consider the functional similarity 

between electronic debit transactions 

and checks, which are required to clear 

at par through the Federal Reserve 

System and (2) distinguish between the 

incremental cost of authorization, 

clearance, and settlement of a particular 

transaction, which shall be considered, 

and other costs that are not specific to 

a particular transaction, which shall not 

be considered. Although Section 920 

requires only the consideration of these 

factors, the Board believes that they are 

indicative of Congressional intent with 

respect to the implementation of Section 

920, and therefore provide a useful 

measure for which costs should and 

should not be included in ‘‘the cost 

incurred * * * with respect to the 

transaction.’’ 

Similarities to Check 

There are a number of similarities 

between the debit card and check 

payment systems. Both are payment 

instruments that result in a debit to the 

payor’s asset account. Debit card 

payments are processed electronically, 

and while historically check processing 

has been paper-based, today virtually all 

checks are processed and collected 

electronically. Further, depository 

institutions have begun to offer their 

depositors remote deposit capture 

services to enable merchants to deposit 

their checks electronically. For both 

debit card and check payments, 

merchants pay fees to banks, processors, 

or intermediaries to process the 

payments. Settlement time frames are 

roughly similar for both payment types, 

with payments settling within one or 

two days of deposit. 

However, there are also differences 

between debit card and check payment 

systems. 

Open versus closed systems. Debit 

card networks are closed systems that 

both issuing and acquiring banks must 

join in order to accept and make 

payments. To accept debit card 

payments, issuing and acquiring banks 

must decide which debit card networks 

to join, establish a relationship with 

those networks, and agree to abide by 

those networks’ rules. In contrast, the 

check system is an open system in 

which 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 merchant’s bank need 

not join a network in order to collect a 

check. 

Payment authorization. Payment 

authorization is an integral part of the 

processing of a transaction on a debit 

card network. As part of the payment 

authorization process, a card issuer 

determines, among other things, 

whether the card is valid and whether 

there are sufficient funds to cover the 

payment. In contrast, payment 

authorization is not an inherent part of 

the check acceptance process, and 

therefore a merchant does not know 

whether the check will be returned 

unpaid at the time the merchant accepts 

the check. However, a merchant that 

wants to better manage its risks 

associated with unpaid checks can 

purchase value-added check verification 

and guarantee services from various 

third-party service providers. 

Processing and collection costs. In the 

check system, the payee’s bank (which 

is analogous to the merchant-acquiring 

bank for debit cards) either incurs costs 

to present a check directly to the payor’s 

bank (which is analogous to the cardissuing bank) or pays fees to 

intermediaries to collect and present the 

check to the payor’s bank. In either case, 

the payor’s bank does not incur fees to 

receive check presentments unless it has 

agreed to pay a fee to receive its 

presentments electronically. In debit 

card systems, the merchant-acquiring 

and card-issuing banks both pay fees to 

the network to process payments for 

their respective customers. 

Par clearing. In the check system, 

payments clear at par. When a payee’s 

bank presents a check to the payor’s 

bank, the payor’s bank pays and the 

payee’s bank receives the face value of 

the check. As discussed above, a payee’s 

bank may pay fees to an intermediary 

for check collection services; however, 

check payments are cleared and settled 

for the full face value of the checks. The 

payee’s bank is not required to pay a fee 

to the payor’s bank to receive the 

settlement for the full value of the 

checks presented. In contrast, in the 

debit card system, because interchange 

fees represent fees paid by the 

merchant-acquiring bank to card-issuing 

banks, the merchant-acquiring bank 

receives less than the full value of debit 

card payments. 

Routing. In the check system, the 

payee’s bank decides the avenue 

through which it collects checks. 

Checks can be presented directly to the 

payor’s bank, collected through an 

intermediary for a fee, or exchanged 

through a clearing house.46 The decision 

is often based on the avenue that offers 

the lowest clearing cost. For a debit card 

payment, the merchant’s choice with 

regard to routing is limited to the set of 

networks whose cards the merchant 

accepts and that are also available to 

process a transaction for its customer’s 

card. Merchant payment routing may be 

further limited if the card issuer has 

designated routing preferences that 

must be honored when a customer 

presents a card that can be used for 

payment on multiple (typically PIN) 

networks. Such preferences may result 

in a transaction being routed to a 

network that imposes a higher fee on the 

merchant’s bank (and hence the 

merchant) than if the payment were 

processed on another available network. 

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, a check must be returned 

by the ‘‘midnight deadline,’’ which is 

midnight of the banking day after the 

check was presented to the payor’s bank 

for payment. After the midnight 

deadline passes, a payor’s bank can no 

longer return the payment through the 

check payment system, although it may 

have legal remedies in the event of a 

dispute or financial loss.47 In contrast, 

in the debit card system, the time period 

within which a transaction may be 

reversed is not as limited. Typically, 

many disputes can be addressed 

through network chargeback processes 

without having to rely on legal 

remedies. These chargebacks and 

disputes can be handled through the 

network with procedures that are 

delineated in network rules. 

Activity Costs To Be Considered 

As noted above, the statute provides 

that, in establishing standards for 

assessing whether an interchange fee is 

reasonable and proportional to ‘‘the cost 

incurred by the issuer with respect to 

the transaction,’’ the Board shall 

consider the incremental cost of 

authorizing, clearing, and settling a 

particular transaction and shall not 

consider other costs that are not specific 

to a particular transaction.48 The statute 

is silent with respect to costs that are 

specific to a particular transaction other 

than incremental costs incurred by an 

issuer for authorizing, clearing, and 

settling the transaction. 

After considering several options for 

the costs that may be taken into account 

in setting interchange transaction fees 

(‘‘allowable costs’’), the Board proposes 

such costs be limited to those associated 

with authorization, clearing, and 

settlement of a transaction. This 

formulation includes only those costs 


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49These fees do not include processing fees paid 

by an issuer to a network in its role as processor 

(i.e., a role equivalent to that of an issuer’s thirdparty processor). 

50Such an arrangement would be similar to 

traditional paper-check processing where the 

payee’s bank typically pays all of the processing 

costs, while the payor’s bank typically pays no 

processing fees. However, this arrangement would 

be consistent with electronic check collection 

systems where both the payor’s bank and payee’s 

bank generally pay processing fees. 

51Baumol, William J., John C. Panzar, and Robert 

D. Willig (1982), Contestable Markets and the 

Theory of Industry Structure. New York: Harcourt 

Brace Jovanovich. This definition involves any 

fixed or variable costs that are specific to the entire 

production run of the good and would be avoided 

if the good were not produced at all. Notably, this 

measurement excludes any common costs across 

goods that a firm produces, such as common fixed 

overhead costs, as those costs would still be 

incurred if production of the good of interest were 

ceased. 

52Fundamentally, none of these definitions 

correspond to a per-transaction measure of 

incremental cost that could be applied to any 

particular transaction, regardless of the particular 

transaction used for such a definition. 

that are specifically mentioned for 

consideration in the statute. If an issuer 

outsources its authorization, clearance, 

and settlement activities, allowable 

costs would include fees paid to a 

processor for authorization, clearance, 

and settlement services. 

In the definition of allowable costs, 

the Board proposes to exclude network 

processing fees (i.e., switch fees) paid by 

issuers.49 Card issuers pay such fees to 

payment card networks for each 

transaction processed over those 

networks. Although these network fees 

typically are not associated with one 

specific component of authorization, 

clearance, or settlement of the 

transaction, a particular transaction 

cannot be authorized, cleared, and 

settled through a network unless the 

issuer pays its network processing fees. 

The Board proposes that network 

processing fees be excluded from 

allowable costs, because the Board 

recognizes that if network processing 

fees were included in allowable costs, 

acquirers (and, by extension, merchants) 

might be in the position of effectively 

paying all network fees associated with 

debit card transactions. That is, an 

acquirer would pay its own network 

processing fees directly to the network 

and would indirectly pay the issuer’s 

network processing fees through the 

allowable costs included in the 

interchange fee standard.50

The Board considered including other 

costs associated with a particular 

transaction that are not incurred by the 

issuer for its role in authorization, 

clearing, and settlement of that 

transaction. Such costs might include, 

for example, cardholder rewards that are 

paid by the issuer to the cardholder for 

each transaction. The Board does not 

view the costs of cardholder rewards 

programs as appropriate for 

consideration within the context of the 

statute. Other costs associated with a 

particular debit transaction might also 

include costs associated with providing 

customer service to cardholders for 

particular transactions, such as dealing 

with cardholder inquiries and 

complaints about a transaction. Given 

the statute’s mandate to consider the 

functional similarities between debit 

transactions and check transactions, the 

Board proposes that allowable costs be 

limited to those that the statute 

specifically allows to be considered, and 

not be expanded to include additional 

costs that a payor’s bank in a check 

transaction would not recoup through 

fees from the payee’s bank. 

The Board requests comment on 

whether it should allow recovery 

through interchange fees of other costs 

of a particular transaction beyond 

authorization, clearing, and settlement 

costs. If so, the Board requests comment 

on what other costs of a particular 

transaction, including network fees paid 

by issuers for the processing of 

transactions, should be considered 

allowable costs. The Board also requests 

comment on any criteria that should be 

used to determine which other costs of 

a particular transaction should be 

allowable. 

The Board considered limiting the 

allowable costs to include only those 

costs associated with the process of 

authorizing a debit card transaction, 

because this option may be viewed as 

consistent with a comparison of the 

functional similarity of electronic debit 

transactions and check transactions. 

Among the most prominent differences 

between debit cards and checks is the 

existence of authorization for a debit 

card transaction where the deposit 

account balance is checked at the time 

of the transaction to ensure that the 

account has sufficient funds to cover the 

transaction amount. Clearing and 

settlement occur for both debit cards 

and checks, but for checks there is 

nothing analogous to an interchange fee 

to reimburse the issuer for the cost of 

clearing and settling a transaction. 

However, because the statute instructs 

the Board to also consider the costs of 

clearance and settlement, the Board 

proposes to include those costs. The 

Board requests comment on whether it 

should limit allowable costs to include 

only the costs of authorizing a debit 

card transaction. 

Cost Measurement 

As noted above, the statute 

specifically requires consideration of 

the ‘‘incremental’’ cost of authorization, 

clearance, and settlement of a particular 

transaction. There is no single, 

generally-accepted definition of the 

term ‘‘incremental cost.’’ One 

commonly-used economic definition of 

‘‘incremental cost’’ refers to the 

difference between the cost incurred by 

a firm if it produces a particular 

quantity of a good and the cost incurred 

by that firm if it does not produce the 

good at all.51 Other definitions of 

incremental cost consider the cost of 

producing some increment of output 

greater than a single unit but less than 

the entire production run. However, 

under any of these definitions, the 

increment of production is larger than 

the cost of any particular transaction 

(and, in the first definition, as large as 

the entire production run in the first 

case).52 As a result, the Board believes 

that these definitions of incremental 

cost do not appropriately reflect the 

incremental cost of a particular 

transaction to which the statute refers. 

The Board proposes that the 

interchange fee standard allow for the 

inclusion of the per-transaction value of 

costs that vary with the number of 

transactions (i.e., average variable cost) 

within the reporting period. This cost 

calculation yields the cost of a typical 

or average transaction. This measure of 

per-transaction cost does not consider 

costs that are shared with other 

products of an issuer, such as common 

fixed or overhead costs, which would 

still be incurred in the absence of debit 

card transactions. For example, the 

Board does not believe that other costs 

of deposit accounts or, more generally, 

depository institutions, which cannot be 

attributable to debit card transactions, 

are appropriate to include in allowable 

costs. While a debit card program may 

not exist if certain costs are not 

incurred, such as account set-up costs or 

corporate overhead costs, it does not 

follow that those costs would be 

avoided in the absence of a debit card 

program. 

However, if variable costs of 

authorizing, clearing, and settling debit 

card transactions are shared with credit 

card operations, the Board believes that 

some portion of such costs should be 

allocated to debit card transactions. For 

example, these costs may be recorded 

jointly in internal cost accounting 

systems or not separated on third-party 

processing invoices. These costs should 

be allocated to debit cards based on the 

proportion of debit card transactions to 

total card transactions. 


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53 In particular, if marginal cost is constant, then 

average variable cost equals marginal cost. More 

generally, average variable cost equals the average 

marginal cost across all transactions. 

54See, Turvey, Ralph ‘‘What are Marginal Costs 

and How to Estimate Them?’’ University of Bath 

School of Management, Centre for the Study of 

Regulated Industries, Technical Paper 13(2000). 55See Sec. 920(a)(2) of the EFTA. 

56This rule would not require a payment card 

network to set an interchange fee above the safe 

harbor. Whether a network would implement an 

issuer-specific interchange fee is the network’s 

prerogative. 

57Under this option, if a network planned to 

establish interchange fees on a per-issuer basis 

above the safe harbor, an issuer would report its 

maximum allowable interchange fee to the network. 

This measure would not consider 

costs that are common to all debit card 

transactions and could never be 

attributed to any particular transaction 

(i.e., fixed costs), even if those costs are 

specific to debit card transactions as a 

whole. Such fixed costs of production 

could not be avoided by ceasing 

production of any particular transaction 

(except perhaps the first). 

The Board recognizes that, by 

distinguishing variable costs from fixed 

costs, this standard imposes a burden on 

issuers by requiring issuers to segregate 

costs that vary with the number of 

transactions from those that are largely 

invariant to the number of transactions, 

within the reporting period. The Board 

also acknowledges that differences in 

cost accounting systems across 

depository institutions may complicate 

enforcement by supervisors. Finally, the 

Board recognizes that excluding fixed 

costs may prevent issuers from 

recovering through interchange fees 

some costs associated with debit card 

transactions. However, as noted above, 

the Board also recognizes that issuers 

have other sources, besides interchange 

fees, from which they can receive 

revenue to help cover the costs of debit 

card operations. Moreover, such costs 

are not recovered from the payee’s bank 

in the case of check transactions. 

The Board also considered a cost 

measurement in terms of marginal cost 

or, in other words, the cost of an 

additional transaction. However, 

marginal cost can be different for each 

unit of output, and it is unclear which 

unit of output’s cost should be 

considered, although often it is assumed 

to be the last unit. Notably, if marginal 

cost does not vary materially over the 

relevant volume range, then average 

variable cost will provide a close 

approximation to marginal cost for any 

particular transaction.53 In addition, 

average variable cost is more readily 

measurable than marginal cost for 

issuers and supervisors. Specifically, 

marginal cost for a given issuer cannot 

be calculated from cost accounting data; 

instead, it must be identified and 

estimated based on assumptions about 

costs that would have been incurred if 

an issuer’s transaction volume had 

differed from that which actually 

occurred.54

The Board requests comment on 

whether it should include fixed costs in 

the cost measurement, or alternatively, 

whether costs should be limited to the 

marginal cost of a transaction. If the 

latter, the Board requests comment on 

how the marginal cost for that 

transaction should be measured. 

B. Proposed Interchange Fee Standards 

The statute requires that 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.’’ 55 Proposed 

§ 235.3 sets forth two alternatives 

(referred to as ‘‘Alternative 1’’ and 

‘‘Alternative 2’’) for determining the 

level of the allowable interchange fee. 

Alternative 1 proposes an issuer-specific 

approach combined with a safe harbor 

and a cap. Under Alternative 1, an 

issuer may receive or charge interchange 

transaction fees at or below the safe 

harbor amount or based on a 

determination of its allowable costs, up 

to a cap. Alternative 2 proposes a standalone cap. The Board proposes to adopt 

only one of the alternatives and requests 

comment on each, as well as on any 

other alternatives that could be applied. 

1. Alternative 1—Issuer-Specific up to a 

Cap, With a Safe Harbor 

Under Alternative 1, an issuer could 

comply with the regulatory standard for 

interchange fees by calculating 

allowable per-transaction cost, based on 

the allowable costs described by the 

Board, and ensuring that it did not 

receive an interchange fee for any 

transaction in excess of its allowable 

per-transaction cost. Proposed § 235.3(c) 

sets forth an issuer’s allowable costs. As 

discussed above, these are the issuer’s 

costs that are attributable to its role in 

authorization, clearance, and settlement 

of electronic debit transactions and that 

vary, up to existing capacity limits 

within a reporting period, with the 

number of electronic debit transactions 

sent to the issuer. Network fees paid by 

the issuer are excluded from allowable 

costs. Proposed § 235.3(b)(2) limits the 

amount of any interchange fee that an 

issuer may receive to no more than the 

allowable costs divided by the number 

of electronic debit transactions on 

which the issuer received or charged an 

interchange transaction fee in the 

calendar year. 

Alternative 1 also provides for a cap 

of 12 cents per transaction (proposed 

§ 235.3(b)(2)). An issuer could not 

receive an interchange fee above the cap 

regardless of its allowable cost 

calculation. In addition, Alternative 1 

would deem any interchange fee at or 

below a safe harbor level of 7 cents per 

transaction to be in compliance with the 

regulatory standard (proposed 

§ 235.3(b)(1)), regardless of the issuer’s 

allowable per-transaction cost. 

Under Alternative 1, each payment 

card network could set interchange fees 

for each issuer (1) at or below the safe 

harbor 56 or (2) at a level for the issuer 

that would not exceed the issuer’s 

allowable per-transaction costs up to the 

cap.57 A network would be permitted to 

set fees that vary with the value of the 

transaction (ad valorem fees), as long as 

the maximum amount of the 

interchange fee received by an issuer for 

any electronic debit transaction was not 

more than that issuer’s maximum 

permissible interchange fee. A network 

would also be permitted to establish 

different interchange fees for different 

types of transactions (e.g., card-present 

and card-not-present) or types of 

merchants, as long as each of those fees 

satisfied the relevant limits of the 

standard. Each issuer’s supervisor 

would verify that the amount of any 

interchange fee received by an issuer is, 

in fact, commensurate with the safe 

harbor, the issuer’s allowable pertransaction costs, or the cap, as 

appropriate. Each of the three elements 

of this alternative, the issuer-specific 

determination, the cap, and the safe 

harbor, are discussed in more detail 

below. 

Issuer-Specific Determination 

EFTA Section 920(a)(2) requires that 

‘‘the amount of any interchange 

transaction fee that an issuer may 

receive or charge * * * be reasonable 

and proportional to the cost incurred by 

the issuer with respect to the 

transaction.’’ One reading of that 

provision is that the use of the definite 

article ‘‘the’’ in the second half of the 

standard suggests that the interchange 

fee limitation should be determined 

separately for each issuer and each 

transaction presented to that issuer. As 

discussed below, however, such an 

approach would be impractical and 

difficult to administer and enforce, and 

would introduce undesirable economic 

incentives. 

Measuring the allowable cost of each 

transaction would be highly 

impracticable due to the volume of 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81737 

58 Joskow, Paul L. (2008), ‘‘Incentive Regulation 

and its Application to Electricity Networks,’’ Review 

of Network Economics, Vol. 7, Issue 4, pp. 547–60. 

Kahn, Alfred E. (1988), The Economics of 

Regulation: Principles and Institutions, Cambridge: 

MIT Press. 

59This value corresponds to the aggregate pertransaction cost for all covered issuers. 

transactions and the fact that the cost of 

each transaction is likely not known 

when the interchange fee is charged. 

The Board believes that the average 

variable cost, as discussed above, 

provides a reasonable approximation of 

an issuer’s per-transaction cost for its 

role in authorization, clearance, and 

settlement. The Board believes that a 

maximum interchange fee determined 

on an issuer-specific basis as provided 

in Alternative 1 is both reasonable, in 

that it reflects only those allowable costs 

identified by the Board (up to a cap, 

discussed further below), and is directly 

proportional to the issuer’s actual costs. 

From an economic perspective, an 

issuer-specific determination directly 

links the compensation through 

interchange fees for each issuer to that 

issuer’s specific costs. A major 

drawback of this approach is that it 

would not provide incentives for issuers 

to control their costs. In particular, an 

issuer that is eligible to recoup its costs 

under an issuer-specific determination 

with no cap would face no penalty for 

having high costs. Conversely, because 

a reduction in costs would lead to a 

reduction in an issuer’s interchange fee, 

an issuer would receive no reward for 

reducing its costs (in the absence of a 

safe harbor). As a result, issuers would 

have no incentive to minimize their 

costs and may incur higher costs than 

they would otherwise. An issuerspecific determination might also 

encourage over-reporting of costs by an 

issuer because any inflation of the 

reported costs would be directly 

rewarded with a higher interchange fee 

for the issuer. Such undesirable 

incentive properties have generally led 

economists to advocate the 

abandonment of cost-of-service 

regulation in regulated industries in 

favor of approaches that yield better 

incentives to the regulated entities.58

An issuer-specific determination, on 

its own, would also place a significant 

implementation and administration 

burden on industry participants and 

supervisors. Each issuer would have to 

account for its costs in a manner that 

enables it to segregate allowable costs 

that could be recovered through the 

interchange fee from its other costs, 

tabulate those costs on an ongoing basis, 

and report them to the networks in 

which it participates. A network that set 

issuer-specific fees would need to 

incorporate such fees into its fee 

schedules, including the operational 

ability to distinguish among many 

different issuers in order to apply 

different rates to each of those issuers’ 

transactions. The issuers’ supervisors 

would need to evaluate each issuer’s 

reported costs and verify that each 

issuer’s interchange fees appropriately 

reflect those reported costs. 

Cap 

To address, at least in part, the 

incentive problems discussed above 

with respect to a purely issuer-specific 

determination, the Board proposes to 

place a ceiling on the amount of any 

issuer-specific determination by 

specifying a cap of 12 cents per 

transaction. With an issuer-specific 

determination and a cap, the Board 

would deem any interchange fee that 

was equal to an issuer’s allowable costs 

to be reasonable and proportional to the 

issuer’s costs if it is at or below the cap. 

Some issuers that are subject to the 

interchange fee limitations have debit 

card programs with substantially higher 

per-transaction costs than others. These 

unusually high costs might be due to 

small programs targeted at high-networth customers or newer start-up 

programs that have not yet achieved 

economies of scale. In comparing 

reported per-transaction costs to current 

interchange transaction fee levels, the 

Board believes it is unlikely that these 

issuers currently are recovering their 

per-transaction costs through 

interchange transaction fees. The Board 

does not believe it is reasonable for the 

interchange fee to compensate an issuer 

for very high per-transaction costs. The 

Board believes that setting the cap at 12 

cents per transaction will be sufficient 

to allow all but the highest-cost issuers 

discussed above to recover through 

interchange transaction fees the costs 

incurred for authorizing, clearing, and 

settling electronic debit transactions. 

The Board notes that even the highestcost issuers have sources of revenue in 

addition to interchange fees, such as 

cardholder fees, to help cover their 

costs. 

A cap would eliminate some of the 

negative incentives of a purely issuerspecific determination. An issuer with 

costs above the cap would not receive 

interchange fees to cover those higher 

costs. As a result, a high-cost issuer 

would have an incentive to reduce its 

costs in order to avoid this penalty. The 

Board would re-examine the cap 

periodically (to coincide with the 

reporting requirements in proposed 

§ 235.8) to ensure that the cap continues 

to reflect a reasonable fee. 

To determine an appropriate value for 

a cap, the Board used data from 

responses to the card issuer survey 

described earlier. The Board used data 

on transaction volumes and the variable 

cost of authorization, clearing, and 

settlement (the allowable costs under an 

issuer-specific determination) to 

compute an issuer’s per-transaction 

cost. These data were used to compute 

various summary measures of pertransaction variable costs for issuers, 

generally. For this sample of issuers, the 

Board estimated that the per-transaction 

variable costs, averaged across all 

issuers, were approximately 13 cents 

per transaction. Average per-transaction 

variable costs were approximately 4 

cents per transaction when each issuer’s 

costs are weighted by the number of its 

transactions.59 The 50th percentile of 

estimated per-transaction variable costs 

was approximately 7 cents. 

The Board proposes a cap of 12 cents 

per transaction because, while it 

significantly reduces interchange fees 

from current levels (approximately 44 

cents per transaction, on average, based 

on the survey of payment card 

networks), it allows for the recovery of 

per-transaction variable costs for a large 

majority of covered issuers 

(approximately 80 percent). The 

proposed cap does not differentiate 

between different types of electronic 

debit transactions (e.g., signature-based, 

PIN-based, or prepaid). From the survey 

results, the Board found some evidence 

of differences in allowable costs across 

signature and PIN debit transactions. In 

particular, the mean and median values 

of allowable costs for signature debit 

transactions were approximately 2 cents 

higher per transaction than the 

analogous figures for PIN debit 

transactions, while the 80th percentile 

was approximately 1 cent higher per 

transaction for signature debit 

transactions. However, because these 

estimates are based on a sample of data, 

and because the variation among the 

individual issuers’ costs was large, the 

ability to reliably infer a statistically 

significant difference from the data is 

limited. As a result, the Board does not 

propose to distinguish initially between 

the cap value for signature and PIN 

debit transactions, for either Alternative 

1 or Alternative 2. For the same reasons, 

as described below, the Board does not 

propose to allow the safe harbor value 

to vary initially by authorization 

method. The Board requests comment 

on whether it should allow for such 

differences in the cap or safe harbor 

values. 

The Board notes that issuers reported 

higher costs for authorizing, clearing, 

and settling prepaid card transactions 


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81738 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

60The Board notes that prepaid cards do not 

currently have different interchange fees than other 

debit cards despite any potential differences in 

costs across the two types of cards. 

61 In no case does the standard prevent a network 

from setting interchange fees below the established 

amount. Instead, the standard describes the 

maximum appropriate interchange fee. 

(many of which are likely to be exempt 

from the interchange fee restrictions). 

The Board believes that issuers reported 

higher prepaid costs for one or more of 

the following reasons. First, many 

prepaid programs use stand-alone 

components, such as processing 

infrastructure, that are unable to exploit 

economies of scale that result from a 

large number of prepaid transactions or 

other debit card transactions. Second, 

because of the stand-alone components, 

all costs are allocated to prepaid card 

programs. Third, many prepaid issuers 

outsource almost all prepaid activity to 

third-party processors that include fixed 

costs and a mark-up in per-transaction 

fees. Finally, the cost data reported to 

the Board include information for both 

non-exempt and exempt cards. Exempt 

cards may have higher costs than nonexempt cards due to differences in the 

functionality of exempt cards, such as 

the need to verify the eligibility of 

transactions under certain government 

benefits programs. In light of the higher 

reported prepaid card costs, the Board 

specifically requests comment on 

whether the Board should initially have 

separate standards for debit card 

transactions and prepaid card 

transactions, and what those different 

standards should be.60

Safe Harbor 

To further address the incentive and 

administrative burden problems 

discussed above, the Board proposes to 

provide a safe harbor for issuers as an 

alternative to the issuer-specific 

determination. Alternative 1 provides 

that, regardless of an issuer’s pertransaction allowable cost, an 

interchange fee that is less than or equal 

to 7 cents per transaction is deemed to 

be reasonable and proportional to the 

issuer’s cost of the electronic debit 

transaction. Thus, issuers would have 

an incentive to reduce their pertransaction costs below the safe harbor. 

In determining the proposed safe 

harbor amount, the Board considered 

allowable issuer costs identified in 

responses to its card issuer survey. 

Using the issuer cost data described 

above, the Board proposes that 7 cents 

per transaction is an appropriate safe 

harbor value for the interchange fee. 

This value represents the approximate 

median in the distribution of estimated 

per-transaction variable costs. Like the 

cap discussed above, the Board 

proposes one safe harbor for all 

electronic debit transactions (i.e., 

signature, PIN and prepaid). The Board 

recognizes that issuers’ costs may 

change over time, and the Board 

proposes to re-examine the safe harbor 

amount periodically in light of changing 

issuer costs. 

Overall, this approach reduces 

administrative burden on those issuers 

that choose to rely on the safe harbor, 

rather than determine their allowable 

costs, and allows issuers with costs 

above the safe harbor to receive an 

interchange fee directly linked to their 

costs, up to the level of the cap. At the 

same time, for an issuer with costs 

below the safe harbor value, this 

approach provides a reward for efficient 

production while also encouraging cost 

reductions to maximize the spread 

between the issuer’s costs and the safe 

harbor value. 

2. Alternative 2—Stand-Alone Cap 

Under Alternative 2, the Board would 

use information about issuer costs to 

determine an appropriate maximum 

interchange fee, or a cap, that would 

apply uniformly to all issuers. That is, 

each issuer could receive interchange 

fees up to the cap, regardless of that 

specific issuer’s actual allowable costs. 

Alternative 2 provides that an 

interchange transaction fee is reasonable 

and proportional to an issuer’s cost only 

if it is no more than 12 cents per 

transaction. As in Alternative 1, a 

network would be permitted to set fees 

that vary with the value of the 

transaction (ad valorem fees) or with the 

type of transaction or type of merchant, 

but only such that the maximum 

amount of the interchange fee for any 

transaction was not more than the cap 

of 12 cents. The Board proposes the 

same cap of 12 cents per transaction in 

Alternative 2 as in Alternative 1 for the 

reasons stated in the discussion of 

Alternative 1. Each issuer’s supervisor 

would verify that an issuer does not 

receive interchange revenue in excess of 

the cap. The Board recognizes that 

issuers’ costs may change over time, and 

the Board proposes to conduct periodic 

surveys of covered issuers and reexamine the cap amount periodically in 

light of changing issuer costs. 

As in Alternative 1, a stand-alone cap 

would encourage high-cost issuers to 

reduce their costs. In addition, an issuer 

with costs below the cap would receive 

a markup reflecting the spread between 

its costs and the cap value. Because the 

magnitude of the spread increases with 

the difference between the issuer’s costs 

and the cap, all issuers, including lowcost issuers, would have an incentive to 

improve the efficiency of their 

operations. Finally, a cap reduces 

somewhat the incentive for an issuer to 

inflate its reported costs because no 

issuer would receive direct 

compensation for higher costs. These 

incentives have motivated authorities in 

other contexts to set price caps in many 

regulated industries, including, for 

example, the Reserve Bank of Australia 

in its intervention in the Australian 

credit and debit card markets. 

In comparison to Alternative 1, 

administration and implementation of 

this approach places less administrative 

burden on industry participants. 

Although the issuer would have to 

report its costs to the Board every two 

years in accordance with § 235.8, an 

issuer would not have to calculate or 

report to the networks its maximum 

allowable interchange transaction fee. 

Similarly, a payment card network 

would not need to incorporate issuerspecific fees into its fee schedule, as the 

cap would apply uniformly to all 

covered issuers in that network. 

3. Application of the Interchange Fee 

Standard 

Under both Alternative 1 and 

Alternative 2, the limitations on 

interchange fees would apply on a pertransaction basis. Under both 

alternatives, no electronic debit 

transaction presented to an issuer could 

carry an interchange fee that exceeds the 

interchange fee standard for that 

issuer.61 As noted above, supervisory 

review would be necessary to verify that 

an issuer does not receive interchange 

fee payments in excess of the maximum 

permitted by the rule. 

This approach generally follows the 

statutory provisions discussed above 

that refer to ‘‘the’’ issuer and ‘‘the’’ 

transaction. The Board recognizes, 

however, that this approach restricts 

flexibility in setting interchange fees to 

reflect differences in risk, among other 

things. If the interchange fee standard 

must hold strictly for all transactions, 

then an issuer would be unable to 

receive a higher interchange fee for 

relatively high-risk transactions offset 

by lower interchange fees on relatively 

low-risk transactions. 

The Board has identified two other 

potential methods for implementing the 

interchange fee standards and requests 

comment on each. The first approach 

would allow flexibility in interchange 

fees with respect to a particular issuer. 

Under this approach, the issuer could 

comply with the rule as long as it meets 

the interchange fee standard, on 

average, for all of its electronic debit 


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Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 81739 

transactions over a particular network 

during a specified period. In other 

words, some interchange fees above the 

amount of the standard would be 

permitted as long as those were offset by 

other fees below the standard. The 

second approach would allow an issuer 

to comply with the rule with respect to 

transactions received over a particular 

network as long as, on average, over a 

specified period, all covered issuers on 

that network meet the fee standard 

given the network’s mix of transactions. 

In other words, compliance with the 

interchange fee standard would be 

evaluated at the network level, rather 

than at the level of each individual 

issuer. 

Both of these approaches would 

provide flexibility in setting interchange 

fees to incorporate considerations such 

as differences in risk across 

transactions. However, both of these 

approaches would introduce the 

possibility that any particular set of fees, 

set ex ante given assumptions about an 

issuer’s or a network’s expected mix of 

transactions, would result in an average 

fee for the actual transactions 

experienced that exceeded the 

regulatory standard. Moreover, network 

and issuer efforts to manage transactions 

and fees to stay within established 

limits could become very complex. 

Therefore, if the Board were to adopt 

either of these approaches, it may also 

need to deem an issuer to be in 

compliance with the standard as long as 

the interchange fees were set based on 

the issuer’s or the network’s transaction 

mix over a previous, designated, period 

of time, regardless of the actual 

transaction experience during the time 

period the fee is in effect. 

The Board requests comment on 

whether either of these approaches is 

appropriate. If so, the Board requests 

comment about whether and how it 

should adopt standards with respect to 

a permissible amount of variation from 

the benchmark for any given 

interchange transaction fee. 

4. Proposed Regulatory Language 

Proposed § 235.3(a) restates the 

statutory requirement that the amount of 

any interchange transaction an issuer 

charges or receives with respect to a 

transaction must be reasonable and 

proportional to the cost incurred by the 

issuer with respect to the transaction. 

Proposed § 235.3(a) is the same for both 

Alternatives 1 and 2. 

Alternative 1. Alternative 1 is 

contained in proposed §§ 235.3(b) 

through (e) of the alternative. 

Interchange fee determination. 

Proposed § 235.3(b) sets forth the 

exclusive standards for determining 

whether the amount of any interchange 

fee is reasonable and proportional to the 

issuer’s cost. Proposed § 235.3(b) sets 

the safe harbor amount and the issuerspecific approach, up to the cap, 

described above. Except during the 

transition period, the amount of any 

interchange fee must comply with the 

standards from October 1 of any given 

calendar year through September 30 of 

the following calendar year. See 

proposed comments 3(b)–1 through –4. 

Proposed § 235.3(c) sets forth an 

exclusive list of allowable costs for 

purposes of the issuer-specific 

approach. Specifically, as discussed 

above, an issuer may include only those 

costs that are attributable to the issuer’s 

role in authorization, clearance, and 

settlement of the transaction. Proposed 

§ 235.3(c)(1) describes activities that 

comprise the issuer’s role in 

authorization, clearance, and settlement 

and limits the types of costs that may be 

included to those that vary with the 

number of transactions sent to the 

issuer. Proposed § 235.3(c)(2) specifies 

that fees charged by a payment card 

network with respect to an electronic 

debit transaction are not included in the 

allowable costs. See also proposed 

comment 3(c)–1. 

Proposed comment 3(c)–2 describes 

in more detail the issuer’s role in 

authorization, clearance, and settlement 

of a transaction. Proposed comment 

3(c)–2 also specifies the types of costs 

that an issuer is considered to incur for 

authorization, clearance, and settlement 

of a transaction. With respect to 

authorization, an issuer may include the 

costs of activities such as data 

processing, voice authorization 

inquiries and referral requests. See 

proposed comment 3(c)–2.i. With 

respect to clearance, proposed 

comments 3(c)–2.ii and 3(c)–2.iii clarify 

that an issuer’s costs for clearance of 

routine and non-routine transactions 

include costs of data processing, to the 

extent the issuer incurs additional such 

costs for clearance. An issuer’s 

clearance costs also include the costs of 

reconciling clearing message 

information, initiating the chargeback 

message, and data processing and 

reconciliation expenses specific to 

receiving representments and error 

adjustments. Finally, with respect to 

settlement, an issuer may include costs 

of interbank settlement through a net 

settlement service, ACH, or Fedwire®

and the cost of posting the transactions 

to the cardholders’ accounts. See 

proposed comment 3(c)–2.iv. 

Proposed § 235.3(c)(1) limits 

allowable costs to those that vary with 

the number of electronic debit 

transactions sent to the issuer during a 

calendar year. Proposed comment 3(c)– 

3.i describes, and provides examples of, 

the distinction between allowable, 

variable costs (those costs that vary, up 

to existing capacity limits, with the 

number of transactions sent to the issuer 

over the calendar year) and 

unallowable, fixed costs (those costs 

that do not vary, up to existing capacity 

limits, with the number of transactions 

sent to the issuer over the calendar 

year). 

Proposed § 235.3(c)(2) states that 

allowable costs do not include the fees 

an issuer pays to a network for 

processing transactions. Proposed 

comment 3(c)–3.ii clarifies that switch 

fees are an example of fees that are not 

an allowable cost. Proposed comment 

3(c)–3.ii further explains that fees an 

issuer pays to a network when the 

network acts as the issuer’s third-party 

processor are allowable costs. 

As clarified in proposed comment 

3(c)–3–iii, an issuer would not be 

permitted to include costs that are 

common to other products offered by 

the issuer, except insofar as those costs 

are allowable costs that are shared with 

other payment card products and vary 

with the number of debit transactions. 

Proposed comment 3(c)–3–iv clarifies 

that proposed § 235.3(c) sets forth an 

exhaustive list of allowable costs, and 

provides examples of costs that may not 

be included, such as the costs of 

rewards programs. The Board requests 

comment on whether additional 

clarification of allowable costs is 

needed. 

Disclosure to payment card network. 

Each issuer must ensure that it is in 

compliance with proposed § 235.3(a) by 

receiving or charging interchange 

transaction fees at or below the safe 

harbor amount or as determined by its 

allowable costs up to the cap. Because 

payment card networks, not issuers, 

establish interchange fees, issuers must 

provide networks with information 

sufficient to ensure the issuers’ 

compliance. Proposed § 235.3(d) 

requires an issuer to report the 

maximum amount of an interchange 

transaction fee it may receive or charge 

to a network, but only if the issuer will 

be receiving or charging an interchange 

fee above the safe harbor amount. 

In establishing the conditions for 

reporting, the Board recognizes that not 

all networks likely will establish 

individualized interchange transaction 

fees. If a network does not establish 

individualized interchange transaction 

fees above the safe harbor amount, the 

Board believes it is not necessary to 

require an issuer to report its maximum 

allowable interchange transaction fee to 

networks through which it receives 


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81740 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

62 In describing Section 1075 of the Dodd-Frank 

Act, Senator Durbin stated: ‘‘Further, any fraud 

prevention cost adjustment would be made on an 

issuer-specific basis, as each issuer must 

individually demonstrates that it complies with the 

standards established by the Board, and as the 

adjustment would be limited to what is reasonably 

necessary to make allowance for fraud-prevention 

costs incurred by that particular issuer.’’ 156 Cong. 

Rec. S5925 (July 15, 2010). 

63This definition derives from the EFTA’s 

definition of ‘‘unauthorized electronic fund 

transfer.’’ 15 U.S.C. 1693a(11). 64Respondents were not asked to provide data on 

ATM fraud. 65For more information, see the previous 

discussion regarding the survey process. 

66 Industry-wide fraud losses were extrapolated 

from data reported in the issuer and network 

surveys. Of the 89 issuers who responded to the 

issuer survey, 38 issuers provided data on total 

fraud losses related to their electronic debit card 

transactions. These issuers reported $719 million in 

total fraud losses to all parties of card transactions 

and represented 53 percent of the total transactions 

reported by networks. 

electronic debit transactions. See 

proposed comment 3(d)–1. The Board 

requests comment on whether this 

reporting requirement is necessary to 

enable networks to set issuer-specific 

interchange fees. 

The Board proposes that an issuer 

report its maximum allowable 

interchange fee to each payment card 

network through which it processes 

transactions by March 31 of each year 

(based on the costs of the previous 

calendar year) to ensure compliance 

with the standard beginning on October 

1 of that same year. See proposed 

comment 3(d)–2. The Board specifically 

requests comment on whether 

prescribing the deadline by rule is 

necessary. If necessary, the Board 

requests comment on whether March 31 

is an appropriate deadline or whether a 

different deadline is appropriate. 

Transition period. As noted above, the 

Board is proposing to allow three 

months after year-end for an issuer to 

determine and report its maximum 

allowable interchange transaction fee, if 

its payment card networks establish 

individualized interchange fees above 

the safe harbor amount. The new 

interchange fee standards will be 

effective July 21, 2011, and are proposed 

to be based on 2009 costs. The Board 

believes that establishing new 

interchange fees based on calendar year 

2010 costs on September 30, 2011 

(approximately two months after the 

effective date) will impose an 

unnecessary burden on issuers, payment 

card networks, and acquirers. 

Accordingly, the Board proposes to 

allow issuers to rely on calendar year 

2009 costs until September 30, 2012. 

After that date, issuers must determine 

compliance based on calendar year 2011 

costs. 

Alternative 2. Alternative 2 is 

contained in proposed § 235.3(b). That 

section prohibits an issuer from 

receiving or charging any interchange 

transaction fee greater than 12 cents. See 

proposed comment 3(b)–1 under 

Alternative 2. 

IV. Section 235.4 Adjustment for FraudPrevention Costs 

Section 920(a)(5) of the statute 

provides that the Board may allow for 

an adjustment to the interchange fee 

amount received or charged by an issuer 

if (1) such adjustment is reasonably 

necessary to make allowance for costs 

incurred by the issuer in preventing 

fraud in relation to electronic debit card 

transactions involving that issuer, and 

(2) the issuer complies with fraudprevention standards established by the 

Board.62 Those standards must be 

designed to ensure that any adjustment 

is limited to the issuer’s fraudprevention costs for electronic debit 

transactions; takes into account any 

fraud-related reimbursements received 

from consumers, merchants, or payment 

card networks in relation to electronic 

debit transactions involving the issuer; 

and requires issuers to take effective 

steps to reduce the occurrence of, and 

costs from, fraud in relation to 

electronic debit transactions, including 

through the development and 

implementation of cost-effective fraudprevention technology. 

In issuing the standards and 

prescribing regulations for the 

adjustment, the Board must consider (1) 

The nature, type, and occurrence of 

fraud in electronic debit transactions; 

(2) the extent to which the occurrence 

of fraud depends on whether the 

authorization in an electronic debit 

transaction is based on a signature, PIN, 

or other means; (3) the available and 

economical means by which fraud on 

electronic debit transactions may be 

reduced; (4) the fraud-prevention and 

data-security costs expended by each 

party involved in the electronic debit 

transactions (including consumers, 

persons who accept debit cards as a 

form of payment, financial institutions, 

retailers, and payment card networks); 

(5) the costs of fraudulent transactions 

absorbed by each party involved in such 

transactions (including consumers, 

persons who accept debit cards as a 

form of payment, financial institutions, 

retailers, and payment card networks); 

(6) the extent to which interchange 

transaction fees have in the past 

reduced or increased incentives for 

parties involved in electronic debit 

transactions to reduce fraud on such 

transactions; and (7) such other factors 

as the Board considers appropriate. 

For the reasons set forth below, the 

Board has not proposed specific 

regulatory provisions to implement an 

adjustment for fraud-prevention costs to 

the interchange transaction fee. The 

Board, however, sets forth two 

approaches—a technology-specific 

approach and a non-prescriptive 

approach—to designing the adjustment 

framework and requests comment on 

several questions related to these 

approaches. The Board plans to 

consider the comments in developing a 

specific proposal for further public 

comment. 

A. Background and Survey Results 

Although the statute authorizes the 

Board to allow an adjustment to an 

interchange fee for fraud-prevention 

costs, the statute does not define the 

term ‘‘fraud.’’ In considering whether to 

allow an adjustment, the Board believes 

that fraud in the debit card context 

should be defined as the use of a debit 

card (or information associated with a 

debit card) by a person, other than the 

cardholder, to obtain goods, services, or 

cash without authority for such use.63

Two primary steps are involved in 

making fraudulent purchases using a 

debit card. The first is stealing the 

cardholder account data. The second is 

using the stolen card or account data to 

make the fraudulent transaction. A thief 

may steal the card or the account 

information in several ways. For 

example, a card may be lost or stolen, 

and a thief may simply use the card to 

make purchases. Alternatively, a thief 

could obtain card account data by 

breaching the data-security systems of 

any entity that maintains records of 

debit card data. A thief might use the 

card account data to create a counterfeit 

card. The stolen card or account data 

may also be used to make unauthorized 

card-not-present transactions via the 

Internet, phone, or mail-order 

purchases. 

As part of its survey of debit card 

issuers, payment card networks, and 

merchant acquirers, the Board gathered 

information about the nature, type, and 

occurrence of fraud in electronic debit 

transactions at the point of sale, and the 

losses due to fraudulent transactions 

absorbed by parties involved in such 

transactions.64 Respondents were asked 

to report this information separately for 

signature and PIN debit card 

programs.65 From the surveys, the Board 

estimates that industry-wide fraud 

losses to all parties of a debit card 

transaction were approximately $1.36 

billion in 2009.66 About $1.15 billion of 

these losses arose from signature debit 


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67The higher losses for signature debit card 

transactions result from both a higher rate of fraud 

and higher transaction volume for signature debit 

card transactions. 

68Networks’ information regarding fraud losses 

may not be as complete as that of issuers because 

fraud losses absorbed by the issuers would 

generally not flow through the networks as 

chargebacks and may not be fully reported to the 

networks. Acquirers would generally not have 

knowledge about issuer losses. 

69Among other things, information on the card 

includes the card number, the cardholder’s name, 

and the cardholder’s signature. 

70Although some recent innovations attempt to 

facilitate PIN entry for Internet transactions, use of 

these technologies is still very limited. 

71This comparison is based on survey responses 

from those issuers that differentiated card-present 

and card-not-present fraud losses for both signature 

and PIN transactions. These respondents represent 

about half of the transaction volume reported by all 

issuer respondents. The ratio of card-present fraud 

losses for signature and PIN debit networks is not 

comparable to the ratio of total fraud losses noted 

above because they are based on different subsets 

of issuer respondents. 

72The EFTA limits consumer liability for 

unauthorized electronic fund transfers. See 15 

U.S.C. 1693g and 12 CFR 205.6. 

73The Board does not believe that the issuers 

participated in 130 unique fraud-prevention 

activities. Rather, the Board believes that the listed 

activities refer to many of the same activities under 

differing descriptions. 

74Similar to the fraud-prevention information, 

the Board does not believe that issuers engaged in 

a total of 50 unique activities. 

75On average, by transaction type, issuers 

incurred 2.2¢ per signature-debit transaction for 

fraud-prevention and data-security activities and 

1.2¢ per PIN-debit transaction. Similarly, networks 

incurred 0.7¢ per signature-debit transaction for 

fraud-prevention and data-security activities and 

0.6¢ per PIN-debit transaction. Finally, acquirers 

incurred 0.4¢ per signature-debit transaction for 

fraud-prevention and data-security activities and 

0.3¢ per PIN-debit transaction. 

76The Payments Cards Industry (PCI) Security 

Standards Council was founded in 2006 by five 

Continued 

card transactions and about $200 

million arose from PIN debit card 

transactions.67

The surveys also solicited information 

about respondents’ fraud-prevention 

and data-security activities and the costs 

of these activities. The surveys did not 

capture analogous activities and costs 

for merchants (or cardholders). The data 

presented below derive from the survey 

of debit card issuers, which has the 

most complete information about fraud 

losses.68 The data are estimates given 

the variability in reporting across 

issuers about fraud types, associated 

fraud losses, and fraud-prevention and 

data-security activities and costs. 

Issuers that provided data on total 

fraud losses relating to their electronic 

debit card transactions reported $719 

million in total debit card fraud losses 

to all parties, averaging 0.041 percent of 

transaction volume and 9.4 basis points 

of transaction value. These fraud losses 

were generally associated with 10 

different types of fraud. The most 

commonly reported fraud types were 

counterfeit card fraud, lost and stolen 

card fraud, and card-not-present fraud. 

Issuers reported that total signature 

and PIN debit card fraud losses to all 

parties averaged 13.1 and 3.5 basis 

points, respectively. This represents, on 

a per-dollar basis, signature debit fraud 

losses 3.75 times PIN-debit fraud losses. 

These different fraud rates reflect, in 

part, differences in the ease of fraud 

associated with the two authorization 

methods. A signature debit card 

transaction requires information that is 

typically contained on the card itself in 

order for card and cardholder 

authentication to take place. Therefore, 

a thief only needs to steal information 

on the card in order to commit fraud.69

In contrast, a PIN debit card transaction 

requires not only information contained 

on the card itself, but also something 

only the cardholder should know, 

namely the PIN. In this case, a thief 

needs both the information on the card 

and the cardholder’s PIN to commit 

fraud. 

Signature debit card transactions 

exhibit a higher fraud rate than that of 

PIN debit card transactions. Debit cards 

used to make purchases over the 

Internet and in other card-not-present 

environments are routed almost 

exclusively over signature debit card 

networks.70 Although card-not-present 

transactions have a higher fraud rate 

than card-present transactions, the 

average signature debit fraud loss for 

card-present transactions is nonetheless 

more than 4 times that for PIN debit 

transactions.71

In terms of losses to the various 

parties in a transaction, almost all of the 

reported fraud losses associated with 

debit card transactions fall on the 

issuers and merchants. In particular, 

across all types of transactions, 57 

percent of reported fraud losses were 

borne by issuers and 43 percent were 

borne by merchants. In contrast, most 

issuers reported that they offer zero or 

very limited liability to cardholders, in 

addition to regulatory protections 

already afforded to consumers, such that 

the fraud loss borne by cardholders is 

negligible.72 Payment card networks 

and merchant acquirers also reported 

very limited fraud losses for themselves. 

The distribution of fraud losses 

between issuers and merchants 

depends, in part, on the authorization 

method used in a debit card transaction. 

Issuers and payment card networks 

reported that nearly all the fraud losses 

associated with PIN debit card 

transactions (96 percent) were borne by 

issuers. In contrast, reported fraud 

losses were distributed much more 

evenly between issuers and merchants 

for signature debit card transactions. 

Specifically, issuers and merchants bore 

55 percent and 45 percent of signature 

debit fraud losses, respectively. 

In general, merchants are subject to 

greater liability for fraud in card-notpresent transactions than in cardpresent transactions. As noted above, 

signature-based authorization is 

currently the primary means to perform 

such transactions. According to the 

survey data, merchants assume 

approximately 76 percent of signature 

debit card fraud for card-not-present 

transactions. 

Based on the card issuer survey data, 

issuers engage in a variety of fraudprevention activities. Issuers identified 

approximately 130 fraud-prevention 

activities and reported the costs 

associated with these activities as they 

relate to debit card transactions.73 Some 

of these activities were broadly related 

to fraud detection and included 

activities such as transaction monitoring 

and fraud risk scoring systems that may 

trigger an alert or call to the cardholder 

in order to confirm the legitimacy of a 

transaction. Issuers also reported a 

number of fraud mitigation activities, 

such as merchant-blocking and accountblocking. Some issuers included costs 

related to customer servicing associated 

with fraudulent transactions and 

personnel costs for fraud investigation 

teams or other staffing costs. When all 

fraud-prevention activities reported by 

issuers are included, the overall amount 

spent by respondents was 

approximately 1.6 cents per transaction, 

which also corresponds to the median 

amount spent by those firms. 

The survey also asked issuers to 

report their data-security activities and 

costs. Issuers identified approximately 

50 data-security activities and reported 

the allocated costs to debit card 

programs.74 Many of these activities 

were associated with information and 

system security. For all data-security 

costs reported by issuers in the card 

issuer survey, the overall amount spent 

by respondents was approximately 0.2 

cents per transaction, which 

corresponds to the median amount 

spent by those firms.75

Merchants also have fraud-prevention 

and data-security costs, including costs 

related to compliance with payment 

card industry data-security standards 

(PCI–DSS) and other tools to prevent 

fraud, such as address verification 

services or internally developed fraud 

screening models, particularly for cardnot-present transactions.76 The Board’s 


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card networks—Visa, Inc., MasterCard Worldwide, 

Discover Financial Services, American Express, and 

JCB International. These card brands share equally 

in the governance of the organization, which is 

responsible for the development and management 

of PCI Data Security Standards (PCI DSS). PCI DSS 

is a set of security standards that all payment 

system participants, including merchants and 

processors, are required to meet in order to 

participate in payment card systems. 

77The Board understands, however, that in 

countries with broad chip and PIN adoption, fraud 

levels are not necessarily lower than those 

experienced in the U.S. because fraud has migrated 

to less secure channels, for example to Internet 

transactions where PIN authentication is not yet a 

common option. 

78For example, Section 615(e) of the Fair Credit 

Reporting Act requires a number of federal agencies 

to develop identity theft prevention guidelines and 

regulations. The implementing regulations require 

that covered institutions adopt an identity theft 

prevention program designed to identify, detect, 

and respond to relevant identity theft red flags, but 

does not require consideration of specific red flags 

or mandate the use of specific fraud-prevention 

solutions. Rather, the accompanying guidelines 

provide factors that institutions should ‘‘consider.’’ 

The supplement to the guidelines lists examples of 

red flags. See e.g., Regulation V (Fair Credit 

Reporting), 12 CFR 222.90(d). 

79An issuer’s fraud losses would not be 

considered a cost that would be considered in 

setting the fraud adjustment. EFTA limits any fraud 

adjustment to an amount that ‘‘is reasonably 

necessary to make allowance for costs incurred by 

the issuer in preventing fraud in relation to 

electronic debit transactions * * *’’ EFTA Section 

920(a)(5)(A)(i) (emphasis added). 

surveys were not comprehensive 

enough to adequately capture merchant 

activities nor did they provide a way to 

determine whether issuers’ fraudprevention and data-security activities 

directly benefit merchants by reducing 

their debit card fraud losses. 

B. Board’s Consideration of an 

Adjustment for Fraud-Prevention Costs 

As previously described, issuers, 

merchant acquirers, and networks listed 

a variety of fraud-prevention and datasecurity activities in their survey 

responses. In designing an adjustment 

framework for fraud-prevention costs, 

the Board is considering how an 

adjustment should be implemented, 

what fraud-prevention costs such an 

adjustment should cover, and what 

standards the Board should prescribe for 

issuers to meet as a condition of 

receiving the adjustment. 

Technology-specific approach. One 

approach to an adjustment for fraudprevention costs would be to allow 

issuers to recover costs incurred for 

implementing major innovations that 

would likely result in substantial 

reductions in fraud losses. This 

approach would establish technologyspecific standards that an issuer must 

meet to be eligible to receive the 

adjustment to the interchange fee. 

Under this approach, the Board would 

identify the paradigm-shifting 

technology(ies) that would reduce debit 

card fraud in a cost-effective manner. 

The adjustment would be set to 

reimburse the issuer for some or all of 

the costs associated with implementing 

the new technology, perhaps up to a 

cap; therefore, covered issuers and the 

Board would need to estimate the costs 

of implementing the new technology in 

order to set the adjustment correctly. 

Industry representatives have 

highlighted several fraud-prevention 

technologies or activities, such as endto-end encryption, tokenization, chip 

and PIN, and the use of dynamic data 

that they believe have the potential to 

substantially reduce fraud losses. These 

technologies are not broadly used in the 

United States at this time.77

This approach to implementing the 

adjustment has the potential to spur 

implementation of major security 

enhancements in the debit card market 

that have not yet gained substantial 

market adoption. Specifically, the 

adjustment could serve as an incentive 

for debit card industry participants to 

coordinate in the adoption of 

technologies that the Board determines 

would be effective in reducing fraud 

losses. The drawback of adopting 

technology-specific standards is the risk 

that it would cause issuers to underinvest in other innovative new 

technologies, not included in the 

Board’s standards, that may be more 

effective and less costly than those 

identified in the standards. 

Non-prescriptive approach. An 

alternative approach is to establish a 

more general standard that an issuer 

must meet to be eligible to receive an 

adjustment for fraud-prevention costs. 

Such a standard could require issuers to 

take steps reasonably necessary to 

maintain an effective fraud-prevention 

program but not prescribe specific 

technologies that must be employed as 

part of the program.78 This approach 

would ensure that the Board’s standards 

give flexibility in responding to 

emerging and changing fraud risks. 

Under this approach, the adjustment 

would be set to reimburse the issuer for 

some or all of the costs of its current 

fraud-prevention and data-security 

activities and of research and 

development for new fraud-prevention 

techniques, perhaps up to a cap. This 

approach would shift some or all of the 

issuers’ ongoing fraud-prevention costs 

to merchants, even though many 

merchants already bear substantial cardrelated fraud-prevention costs, 

particularly for signature debit 

transactions.79 Such a shift in cost 

provides issuers with additional 

incentives to invest in fraud-prevention 

measures. Financial institutions make 

investments today, however, to reduce 

the risk of fraud in non-card forms of 

payment, without reimbursement of 

those costs from the counterparty to the 

payment. 

Request for Comment 

The Board requests comment on how 

to implement an adjustment to 

interchange fees for fraud-prevention 

costs. In particular, the Board is 

interested in commenters’ input on the 

following questions: 

1. Should the Board adopt 

technology-specific standards or nonprescriptive standards that an issuer 

must meet in order to be eligible to 

receive an adjustment to its interchange 

fee? What are the benefits and 

drawbacks of each approach? Are there 

other approaches to establishing the 

adjustment standards that the Board 

should consider? 

2. If the Board adopts technologyspecific standards, what technology or 

technologies should be required? What 

types of debit-card fraud would each 

technology be effective at substantially 

reducing? How should the Board assess 

the likely effectiveness of each fraudprevention technology and its cost 

effectiveness? How could the standards 

be developed to encourage innovation 

in future technologies that are not 

specifically mentioned? 

3. If the Board adopts nonprescriptive standards, how should they 

be set? What type of framework should 

be used to determine whether a fraudprevention activity of an issuer is 

effective at reducing fraud and is costeffective? Should the fraud-prevention 

activities that would be subject to 

reimbursement in the adjustment 

include activities that are not specific to 

debit-card transactions (or to card 

transactions more broadly)? For 

example, should know-your-customer 

due diligence performed at account 

opening be subject to reimbursement 

under the adjustment? If so, why? Are 

there industry-standard definitions for 

the types of fraud-prevention and datasecurity activities that could be 

reimbursed through the adjustment? 

How should the standard differ for 

signature- and PIN-based debit card 

programs? 

4. Should the Board consider 

adopting an adjustment for fraudprevention costs for only PIN-based 

debit card transactions, but not 

signature-based debit card transactions, 

at least for an initial adjustment, 

particularly given the lower incidence 

of fraud and lower chargeback rate for 

PIN-debit transactions? To what extent 


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80Some merchant representatives have advocated 

that the fraud adjustment not be used to perpetuate 

signature-based networks, which they believe are 

inherently less secure than PIN networks and for 

which they incur significantly more chargebacks. 

These merchants believe that, if the Board allows 

a fraud adjustment, it should be designed to steer 

the industry from signature debit to PIN debit, or 

possibly to other more secure means of authorizing 

transactions. As noted earlier, the survey data 

indicate that signature debit fraud losses are higher 

than PIN debit fraud losses and that merchants bear 

a very small proportion of loss associated with PIN 

debit transactions. 

81EFTA Section 920(a)(6) and (7) (15 U.S.C. 

1693r(a)(6) and 7). 

82EFTA Section 920(a)(6)(B) (15 U.S.C. 

1693r(a)(6)(B)). The Board notes that an issuer of 

decoupled debit cards, which are debit cards where 

the issuer 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. 

83See, e.g., 12 CFR 203.2(e)(1)(i) and 12 CFR 

228.20(u). 

would an adjustment applied to only 

PIN-based debit card transactions (1) 

satisfy the criteria set forth in the statute 

for establishing issuer fraud-prevention 

standards, and (2) give appropriate 

weight to the factors for consideration 

set forth in the statute? 80

5. Should the adjustment include only 

the costs of fraud-prevention activities 

that benefit merchants by, for example, 

reducing fraud losses that would be 

eligible for chargeback to the 

merchants? If not, why should 

merchants bear the cost of activities that 

do not directly benefit them? If the 

adjustment were limited in this manner, 

is there a risk that networks would 

change their rules to make more types 

of fraudulent transactions subject to 

chargeback? 

6. To what extent, if at all, would 

issuers scale back their fraud-prevention 

and data-security activities if the cost of 

those activities were not reimbursed 

through an adjustment to the 

interchange fee? 

7. How should allowable costs that 

would be recovered through an 

adjustment be measured? Do covered 

issuers’ cost accounting systems track 

costs at a sufficiently detailed level to 

determine the costs associated with 

individual fraud-prevention or datasecurity activities? How would the 

Board determine the allowable costs for 

prospective investments in major new 

technologies? 

8. Should the Board adopt the same 

implementation approach for the 

adjustment that it adopts for the 

interchange fee standard, that is, either 

(1) an issuer-specific adjustment, with a 

safe harbor and cap, or (2) a cap? 

9. How frequently should the Board 

review and update, if necessary, the 

adjustment standards? 

10. EFTA Section 920 requires that, in 

setting the adjustment for fraudprevention costs and the standards that 

an issuer must meet to be eligible to 

receive the adjustment, the Board 

should consider the fraud-prevention 

and data-security costs of each party to 

the transaction and the cost of 

fraudulent transactions absorbed by 

each party to the transaction. How 

should the Board factor these 

considerations into its rule? How can 

the Board effectively measure fraudprevention and data-security costs of the 

8 million merchants that accept debit 

cards in the United States? 

V. Sec. 235.5 Exemptions 

EFTA Section 920(a) sets forth several 

exemptions to the applicability of the 

interchange fee restriction provisions. 

Specifically, the statute contains 

exemptions for small issuers as well as 

government-administered payment 

programs and certain reloadable prepaid 

cards.81 The Board proposes to 

implement these exemptions in § 235.5, 

as discussed below. 

Under the proposed rule, an 

electronic debit transaction may qualify 

for more than one exemption. For 

example, an electronic debit transaction 

made using a debit card that has been 

provided to a person pursuant to a 

Federal, State, or local governmentadministered payment program may be 

issued by an issuer that, together with 

its affiliates, has assets of less than $10 

billion as of the end of the previous 

calendar year. Proposed comment 5–1 

clarifies that an issuer only needs to 

qualify for 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 clarifies that a 

payment card network establishing 

interchange fees 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. 

A. Sec. 235.5(a) Exemption for Small 

Issuers 

Section 920(a)(6)(A) of the EFTA 

provides that EFTA Section 920(a) does 

not apply to any issuer that, together 

with its affiliates, has assets of less than 

$10 billion. For purposes of this 

provision, the term ‘‘issuer’’ is limited to 

the person holding the asset account 

that is debited through an electronic 

debit transaction.82

Proposed § 235.5(a)(1) combines the 

statutory language in EFTA Sections 

920(a)(6)(A) and (B) to implement the 

exemption with some minor 

adjustments for clarity and consistency. 

Therefore, § 235.5(a)(1) provides 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 clarifies 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. 

For consistency, the proposed rule 

assesses an issuer’s asset size for 

purposes of the small issuer exemption 

at a single point in time. Although the 

asset size of an issuer and its affiliates 

will fluctuate over time, for purposes of 

determining an issuer’s eligibility for 

this exemption, the Board believes the 

relevant time for determining the asset 

size of the issuer and its affiliates for 

purposes of this exemption should be 

the end of the previous calendar year. 

The Board has used the calendar yearend time frame in other contexts for 

determining whether entities meet 

certain dollar thresholds.83

To the extent that a payment card 

network permits issuers meeting the 

small issuer exemption to receive higher 

interchange fees than allowed under 

§§ 235.3 and 235.4, payment card 

networks, as well as merchant acquirers 

and processors, may need a process in 

place to identify such issuers. Thus, the 

Board requests comment on whether the 

rule should establish a consistent 

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. For example, the rule could 

require an issuer to notify the payment 

card network within 90 days of the end 

of the preceding calendar year in order 

to be eligible for an exemption for the 

next rate period. The Board also 

requests comment on whether it should 

permit payment card networks to 

develop their own processes for making 

this determination. 

B. Sec. 235.5(b) Exemption for 

Government-Administered Programs 

Under EFTA Section 920(a)(7)(A)(i), 

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 


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Federal, State, or local governmentadministered payment program is 

generally exempt from the interchange 

fee restrictions. However, the exemption 

applies as long as a person may only use 

the debit or general-use prepaid card to 

transfer or debit funds, monetary value, 

or other assets that have been provided 

pursuant to such program. The Board 

proposes to implement this provision in 

§ 235.5(b)(1) with minor nonsubstantive changes to the statutory 

language. 

Proposed comment 5(b)–1 clarifies the 

meaning of a government-administered 

program. The proposed comment states 

that 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 service providers that act 

on behalf of the government agency. The 

Board understands that for many 

government-administered programs, the 

government agency outsources the 

administration of the card program to 

third parties. The proposed comment 

makes clear that a governmentadministered program will still be 

deemed government-administered 

regardless of the government agency’s 

choice to use a third party for any and 

all aspects of the program. 

Furthermore, proposed comment 

5(b)–1 provides 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. For example, 

the Board understands that for child 

support programs, a Federal, State, or 

local government agency is not the 

source of funds, but such programs are 

nevertheless administered by State 

governments. As such, the Board 

believes that cards distributed in 

connection with such programs would 

fall under the exemption. 

The Board notes that 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 the 

exemption under EFTA Section 

920(a)(7)(i). Because proposed 

§ 235.5(b)(1), which implements EFTA 

Section 920(a)(7)(i), covers these and 

other government-administered systems, 

neither the proposed regulation nor 

commentary specifically references such 

programs. 

Payment card networks that allow 

issuers to charge higher interchange fees 

than permitted under §§ 235.3 and 235.4 

for transactions made using a debit card 

that meets the exemption for 

government-administered payment 

programs will need a means to identify 

the card accounts that meet the 

exemption. As with the small issuer 

exemption in § 235.5(a), the Board 

requests comment on whether it should 

establish a certification process or 

whether it should permit payment card 

networks to develop their own 

processes. 

The operational aspects of certifying 

on an account-by-account basis may be 

more complex than certifying on an 

issuer-by-issuer basis. Therefore, if the 

Board is to establish a certification 

process, the Board requests comment on 

how to structure this process, including 

the time periods for reporting and what 

information may be needed to identify 

accounts to which the exemption 

applies. For example, the Board 

understands that certain cards issued 

under a government-administered 

payment program may be distinguished 

by the BIN or BIN range. 

C. Sec. 235.5(c) Exemption for Certain 

Reloadable Prepaid Cards 

EFTA Section 920(a)(7)(A)(ii) 

establishes an exemption for an 

interchange transaction fee charged or 

received with respect to an electronic 

debit transaction for a plastic card, or 

other 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) reloadable and not marketed or 

labeled as a gift card or gift certificate. 

For clarity, the proposed rule refers to 

‘‘general-use prepaid card,’’ which 

incorporates certain of the conditions 

for obtaining the exemption in EFTA 

Section 920(a)(7)(A)(ii). See proposed 

§ 235.2(i). Proposed § 235.5(c)(1) thus 

implements the remaining conditions 

concerning the ability of the card to be 

used to access an 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) and whether the card is 

reloadable and not marketed or labeled 

as a gift card or gift certificate. 

Typically, issuers structure prepaid 

card programs so that the funds 

underlying each prepaid card in the 

program are held in an omnibus 

account, and the amount attributable to 

each prepaid card is tracked by 

establishing subaccounts or by other 

recordkeeping means. However, certain 

issuers structure prepaid card programs 

differently such that the funds 

underlying each card are attributed to 

separate accounts established by the 

issuer. 

The condition in EFTA Section 

920(a)(7)(A)(ii)(II) makes clear that an 

exempt card may not be issued or 

approved for use to access or debit an 

account held by or for the benefit of the 

cardholder (other than a subaccount or 

other method recording or tracking 

funds purchased or loaded on the card 

on a prepaid basis). Therefore, issuers 

that structure prepaid card programs 

such that the funds underlying each 

card are attributed to separate accounts 

do not qualify for the exemption based 

on the conditions set forth under the 

statute. These issuers may argue that 

there is little difference between their 

prepaid programs and others that are 

constructed so that the funds are part of 

an omnibus account. However, an 

argument can be made that prepaid 

cards that access separate accounts are 

not significantly different from debit 

cards that access demand deposit 

accounts, which are covered by the 

interchange fee restrictions in EFTA 

Section 920(a). The Board’s proposal is 

based on the view that prepaid cards 

where the underlying funds are held in 

separate accounts do not qualify for the 

exemption. 

Reloadable and Not Marketed or 

Labeled as a Gift Card or Gift Certificate 

The Board has previously defined and 

clarified the meaning of ‘‘reloadable and 

not marketed or labeled as a gift card or 

gift certificate’’ in the context of a rule 

restricting the fees and expiration dates 

for gift cards under 12 CFR 205.20 (‘‘Gift 

Card Rule’’). In order to maintain 

consistency, the Board proposes to 

import commentary related to the 

meaning of reloadable and not marketed 

or labeled as a gift card or gift certificate 

from the Gift Card Rule. 

Proposed comment 5(c)–1 provides 

that 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 

after the initial purchase or issuance. 

The comment further states that a 

general-use prepaid card is not 

‘‘reloadable’’ merely because the issuer 

or processor is technically able to add 

functionality that would otherwise 


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84As the Board discussed in connection with the 

issuance of the Gift Card Rule, a card is not deemed 

to be marketed or labeled as a gift card or gift 

certificate as a result of actions by the consumerpurchaser. For example, if the purchaser gives the 

card to another consumer as a ‘‘gift,’’ or if the 

primary cardholder contacts the issuer and requests 

a secondary card to be given to another person for 

his or her use, such actions do not cause the card 

to be marketed as a gift card or gift certificate. 85See 75 FR 16580 at 16594 (April 1, 2010). 

enable the general-use prepaid card to 

be reloaded. The comment is similar to 

comment 20(b)(2)–1 under the Gift Card 

Rule. 

Proposed comment 5(c)–2, which has 

been adapted from comment 20(b)(2)–2 

under the Gift Card Rule, clarifies the 

meaning of the term ‘‘marketed or 

labeled as a gift card or gift certificate.’’ 

The proposed comment provides that 

the term means directly or indirectly 

offering, advertising, or otherwise 

suggesting the potential use of a generaluse prepaid card as a gift for another 

person. The proposed comment also 

states that whether the exclusion 

applies does not depend on the type of 

entity that is making the promotional 

message. Therefore, under the proposed 

comment, a general-use prepaid card is 

deemed to be marketed or labeled as a 

gift card or gift certificate if anyone 

(other than the consumer-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.84

The proposed comment also states 

that a certificate or card could be 

deemed to be marketed or labeled as a 

gift card or gift certificate even if it is 

primarily marketed for another purpose. 

Thus, for example, a reloadable 

network-branded card would be 

considered to be marketed or labeled as 

a gift card or gift certificate even 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. 

Proposed comment 5(c)–2 further 

clarifies that the mere mention that gift 

cards or gift certificates are available 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. 

The Board also proposes examples of 

what the term ‘‘marketed or labeled as 

a gift card or gift certificate’’ includes 

and does not include in proposed 

comment 5(c)–3; these examples are 

similar to those in comment 20(b)(2)–3 

under the Gift Card Rule. Thus, under 

the proposed comment, examples of 

marketing or labeling as a gift card or 

gift certificate include displaying the 

word ‘‘gift’’ or ‘‘present,’’ displaying a 

holiday or congratulatory message, and 

incorporating gift-giving or celebratory 

imagery or motifs on the card, certificate 

or accompanying material, such as 

documentation, packaging and 

promotional displays. See proposed 

comment 5(c)–3.i. 

The proposed comment further states 

that a general-use prepaid card is not 

marketed or labeled as a gift card or gift 

certificate if the issuer, seller, or other 

person represents that the card can be 

used as a substitute for a checking, 

savings, or deposit account, as a 

budgetary tool, or to cover emergency 

expenses. Similarly, the proposed 

comment provides that a card is not 

marketed as a gift card or gift certificate 

if it is promoted as a substitute for 

travelers checks or cash for personal 

use, or promoted as a means of paying 

for a consumer’s health-related 

expenses. See proposed comment 5(c)– 

3.ii. 

As the Board discussed in connection 

with the issuance of the Gift Card Rule, 

there are several different models for 

how prepaid cards may be distributed 

from issuers to consumers.85 These 

models vary in the amount of control 

the issuer has in terms of how these 

products may be marketed to 

consumers. Therefore, an issuer that 

does not intend to market a particular 

general-use prepaid card as a gift card 

or gift certificate could find its intent 

thwarted by the manner in which a 

retailer displays the card in its retail 

outlets. 

The Board issued comment 20(b)(2)– 

4 under the Gift Card Rule to address 

these issues. Specifically, comment 

20(b)(2)–4 provides that a product is not 

marketed or labeled as a gift card or gift 

certificate if persons subject to the Gift 

Card Rule, 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 

card, or other payment code or device, 

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 card, or 

other payment code or device, is not 

being marketed as a gift card or gift 

certificate. The comment further states 

that whether a person has marketed a 

reloadable card, or other payment code 

or device, as a gift card or gift certificate 

will depend on the facts and 

circumstances, including whether a 

reasonable consumer would be led to 

believe that the card, or other payment 

code or device, is a gift card or gift 

certificate. The comment also included 

examples. The Board is proposing a 

similar comment 5(c)–4 to address 

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. 

Proposed comment 5(c)–4 also contains 

similar examples as set forth in 

comment 20(b)(2)–4 under the Gift Card 

Rule. 

Proposed comment 5(c)–5 provides 

guidance relating to online sales of gift 

cards that is substantially the same as in 

comment 20(b)(2)–5 under the Gift Card 

Rule. As discussed in connection with 

the issuance of the Gift Card Rule, the 

Board believes that a Web site’s display 

of a banner advertisement or a graphic 

on its home page that prominently 

displays ‘‘Gift Cards,’’ ‘‘Gift Giving,’’ or 

similar language without mention of 

other available products, or inclusion of 

the terms ‘‘gift card’’ or ‘‘gift certificate’’ 

in its web address, creates the same 

potential for consumer confusion as a 

sign stating ‘‘Gift Cards’’ at the top of a 

prepaid card display. Because a 

consumer acting reasonably under these 

circumstances may be led to believe that 

all prepaid products sold on the Web 

site are gift cards or gift certificates, the 

Web site is deemed to have marketed all 

such products, including any generalpurpose reloadable cards that may be 

sold on the Web site, as gift cards or gift 

certificates. Proposed comment 5(c)–5 

provides that products sold by such 

Web sites would not be eligible for the 

exemption. 

Certification 

As with the exemption for 

government-administered payment 

programs, payment card networks, as 

well as merchant acquirers and 

processors, will need a process to 

identify accounts accessed by reloadable 

general-use prepaid cards that are not 

marketed or labeled as a gift card or gift 

certificate if such networks permit 

issuers of such accounts to charge 

interchange fees in excess of the amount 

permitted under §§ 235.3 and 235.4. The 

Board seeks comment on whether it 

should establish a certification process 

for the reloadable prepaid cards 

exemption or whether it should permit 

payment card networks to develop their 

own processes. The Board also requests 

comment on how it should structure the 

certification process if it were to 

establish a process, including the time 


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86See 75 FR 16580 at 16596 (April 1, 2010). 

87Under 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.’’ 

88Network fees associated with authorizing, 

clearing, and settling debit card transactions are not 

included in the allowable costs under the 

interchange standard. 

periods for reporting and what 

information may be needed to identify 

accounts to which the exemption 

applies. 

Temporary Cards Issued in Connection 

With a General-Purpose Reloadable 

Card 

As the Board discussed in connection 

with the Gift Card Rule, some generalpurpose reloadable cards may be sold 

initially as a temporary non-reloadable 

card. These cards are usually marketed 

as an alternative to a bank account (or 

account substitute). After the card is 

purchased, the cardholder may call the 

issuer to register the card. Once the 

issuer has obtained the cardholder’s 

personal information, a new 

personalized, reloadable card is sent to 

the cardholder to replace the temporary 

card. 

The Board decided to permit 

temporary non-reloadable cards issued 

solely in connection with a generalpurpose reloadable card to be treated as 

general-purpose reloadable cards under 

the Gift Card Rule despite the fact that 

such cards are not reloadable. As it 

discussed in connection with the Gift 

Card Rule, the Board was concerned 

that covering temporary non-reloadable 

cards under the Gift Card Rule would 

create regulatory incentives that would 

unduly restrict issuers’ ability to 

address potential fraud. Some issuers 

issue temporary cards in non-reloadable 

form to encourage consumers to register 

the card and provide customer 

identification information for Bank 

Secrecy Act purposes. A rule that 

provides that the exemption is only 

available if the temporary card is 

reloadable would therefore limit issuers’ 

options without a corresponding 

benefit.86

For similar reasons, the Board is 

proposing that interchange fees charged 

or received with respect to transactions 

using a temporary non-reloadable card 

issued solely in connection with a 

general-purpose reloadable card would 

also qualify for the exemption under 

EFTA Section 920(a)(7)(A)(ii), provided 

such cards are not marketed or labeled 

as a gift card or gift certificate. 

Therefore, proposed § 235.5(c)(2) 

provides that the term ‘‘reloadable’’ also 

includes a temporary non-reloadable 

card if it is issued solely in connection 

with a reloadable general-use prepaid 

card. 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. 

D. Sec. 235.5(d) Exception 

EFTA Section 920(a)(7)(B) provides 

that after the end of the one-year period 

beginning on the effective date of the 

statute, the exemptions available under 

EFTA Sections 920(a)(7)(A)(i) and (ii) 

become subject to an exception. The 

statute provides that the exemptions are 

not available if any of the following fees 

may be charged to a person with respect 

to the card: (i) An overdraft fee, 

including a shortage of funds or a 

transaction processed for an amount 

exceeding the account balance; and (ii) 

a fee charged by the issuer for the first 

withdrawal per month from an ATM 

that is part of the issuer’s designated 

ATM network. The Board proposes to 

implement this exception to the 

exemptions in § 235.5(d), substantially 

as presented in the statute with one 

minor clarification. 

Specifically, the Board proposes to 

clarify that the fee described in 

§ 235.5(d)(1) does not include a fee or 

charge charged 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. 

VI. Sec. 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)(8) authorizes the Board to 

prescribe rules to ensure that network 

fees are not used ‘‘to directly or 

indirectly compensate an issuer with 

respect to an electronic debit 

transaction’’ and ‘‘to circumvent or 

evade’’ the interchange transaction fee 

restrictions under the statute and this 

proposed rule.87 In addition, EFTA 

Section 920(a)(1) provides the Board 

authority to prescribe rules to prevent 

other forms of circumvention or 

evasion. Pursuant to both of these 

authorities, the Board is proposing to 

prohibit circumvention or evasion of the 

interchange transaction fee restrictions 

in §§ 235.3 and 235.4. Circumvention or 

evasion would occur under the 

proposed rule if an issuer receives net 

compensation from a payment card 

network, not considering interchange 

transaction fees received from acquirers. 

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.88

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 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 on 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. For a closedloop or three-party payment network, 

network fees are bundled into the 

merchant discount rate charged by the 

network in its capacity as the merchant 

acquirer. 

A fee charged by the network can be 

assessed as a flat fee or on a per 

transaction basis, and may also vary 

based on transaction size, transaction 

type or other network-established 

criteria. While interchange fee rates 

generally do not vary across issuers or 

acquirers for the same types of debit 

card transactions, fees charged by the 

network are often set on an issuer-byissuer or merchant-by-merchant basis. 

For example, issuers and merchants 

may be given individualized discounts 

relative to a published network fee or 

rate based on their transaction volume 

increases. 

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 


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upon contract execution or renewal. 

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 among 

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 the network to 

encourage specific processing behavior, 

such as the use of enhanced 

authorization methods or the 

deployment of additional merchant 

terminals. 

There are a number of factors that a 

network may consider in calibrating the 

appropriate level of network fees, 

discounts, and incentives in order to 

achieve network objectives. However, 

EFTA Section 920(a) authorizes the 

Board to prescribe rules to ensure that 

such pricing mechanisms are not used 

to circumvent or evade the interchange 

transaction fee restrictions. This 

authority is both specific with respect to 

the use of network fees under EFTA 

Section 920(a)(8), as well as general 

with respect to the Board’s 

implementation of the interchange 

transaction fee restrictions under EFTA 

Section 920(a)(1). 

As an initial matter, the Board notes 

that the statute does not directly 

regulate the amount of network fees that 

a network may charge for any of its 

services. Thus, the proposed rule does 

not seek to set or establish the level of 

network fees that a network may 

permissibly impose on any network 

participant for its services. Instead, the 

proposed rule is intended to ensure that 

network fees, discounts, and incentives 

do not, in effect, circumvent the 

interchange transaction fee restrictions. 

Accordingly, proposed § 235.6 contains 

a general prohibition against 

circumventing or evading the 

interchange transaction fee restrictions 

in §§ 235.3 and 235.4. In addition, 

proposed § 235.6 would expressly 

prohibit an issuer from receiving net 

compensation from a payment card 

network with respect to electronic debit 

transactions. The Board believes that 

such compensation would effectively 

serve as a transfer to issuers in excess 

of the amount of interchange transaction 

fee revenue allowed under the standards 

in §§ 235.3 and 235.4. 

The Board also considered whether 

increases in fees charged by the network 

on merchants or acquirers coupled with 

corresponding decreases in fees charged 

by the network on 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. 

The Board recognizes that such 

decreases in issuer fees could have the 

effect of offsetting reductions in 

interchange transaction fee revenue that 

will occur under the proposed 

restrictions in §§ 235.3 and 235.4. 

Nonetheless, the Board believes that 

such circumstances would not 

necessarily indicate circumvention or 

evasion of the interchange transaction 

fee restrictions because, absent net 

payments to the issuer from the 

network, an issuer would not receive 

net compensation from the network for 

electronic debit transactions. Moreover, 

the Board is concerned that prohibiting 

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. 

The Board requests comment on the 

proposed approach, as well as on any 

other approaches that may be necessary 

and appropriate to address concerns 

about circumvention or evasion of the 

interchange fee standards. 

Proposed comment 6–1 provides that 

any finding of circumvention or evasion 

of the interchange transaction fee 

restrictions will depend on the relevant 

facts or circumstances. The proposed 

comment also provides an example of a 

circumstance indicating circumvention 

or evasion. In the example, 

circumvention or evasion occurs if the 

total amount of payments or incentives 

received by an issuer from a payment 

card network during a calendar year in 

connection with electronic debit 

transactions, 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 

during that year. In this circumstance, 

an issuer impermissibly receives net 

compensation from the payment card 

network in addition to the interchange 

transaction fees permitted under 

§§ 235.3 and 234.4. See proposed 

comment 6–1.i. 

Proposed comment 6–1.ii clarifies 

that payments or incentives paid by a 

payment card network 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 fixed 

payments for debit card related 

activities. Payments or incentives paid 

by a payment card network to an issuer 

do not include any interchange 

transaction fees that are passed through 

to the issuer by the network. Incentives 

paid by a payment card network also do 

not include funds received by an issuer 

from a payment card network as a result 

of chargebacks or violations of network 

rules or requirements by a third party. 

The proposed comment further clarifies 

that fees paid by an issuer to a payment 

card network include, but are not 

limited to, network processing, or 

switch, fees paid for each transaction, as 

well as fees charged to issuers that are 

not particular to a transaction, such as 

membership or licensing fees and 

network administration fees. Fees paid 

by an issuer could also include fees for 

optional services provided by the 

network. 

Proposed comment 6–2 provides 

examples of circumstances that do not 

evade or circumvent the interchange 

transaction fee restrictions. In the first 

proposed 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 year. 

However, because of the additional 

debit card activity, the aggregate switch 

fees paid by the issuer to the network 

also increase. Assuming 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, no circumvention or 

evasion of the interchange transaction 

fee restrictions has occurred. See 

proposed comment 6–2.i. 

In the second example, an issuer 

receives a rate reduction for network 

processing fees due to an increase in 

debit card transactions during a 

calendar year that reduces the total 

amount of network processing fees paid 

by the issuer during the year. However, 

the total amount of all fees paid to the 

network by the issuer continues to 

exceed the total amount of incentive 

payments received by the issuer from 

the network. Under these 

circumstances, the issuer does not 

circumvent or evade the interchange 


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81748 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

89The 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). 

90See EFTA Section 920(b)(1)(A). 

91See EFTA Section 920(b)(1)(B). 

transaction fee restrictions. See 

proposed comment 6–2.ii. 

Proposed comment 6–3 clarifies that 

the prohibition in § 235.6 against 

circumventing or evading the 

interchange transaction fee restrictions 

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. 

Comment is requested regarding how 

the rule should address signing bonuses 

that a network may provide to attract 

new issuers or to retain existing issuers 

upon the execution of a new agreement 

between the network and the issuer. 

Such bonuses arguably do not 

circumvent or evade the interchange 

transaction fee restrictions because they 

do not serve to compensate issuers for 

electronic debit transactions that have 

been processed over the network. 

Moreover, if such payments were 

considered in assessing whether 

network-provided incentives during a 

calendar year impermissibly exceeded 

the fees paid by an issuer during that 

year, it could constrain a network’s 

ability to grow the network and achieve 

greater network efficiencies by 

potentially removing a significant tool 

for attracting new issuers. However, if 

such signing bonuses are not taken into 

account in determining whether an 

issuer receives net compensation for 

electronic debit transactions, a network 

could provide significant upfront 

incentive payments during the first year 

of a contract or space out incentive 

payments over several years to offset the 

limitations on interchange transaction 

fees that could be received by the issuer 

over the course of the contract. 

The Board also requests comment on 

all aspects of the proposed prohibition 

against circumvention or evasion, 

including whether the rule should 

provide any additional examples to 

illustrate the prohibition against 

circumvention or evasion of the 

interchange transaction fee restrictions. 

VII. Sec. 235.7 Limitations on 

Payment Card Restrictions 

EFTA Section 920(b) sets forth 

provisions limiting the ability of issuers 

and payment card networks to restrict 

merchants and other persons from 

establishing the terms and conditions 

under which they may accept payment 

cards. For example, EFTA Section 

920(b) prohibits an issuer or payment 

card network from establishing rules 

that prevent merchants from offering 

discounts based on the method of 

payment tendered. In addition, the 

statute prohibits an issuer or payment 

card network from establishing rules 

preventing merchants from setting 

minimum and maximum transaction 

amounts for accepting credit cards. 

These two statutory provisions are selfexecuting and are not subject to the 

Board’s rulemaking authority.89

However, the Board is directed to 

prescribe implementing regulations 

with respect to two additional 

limitations set forth in the statute. First, 

the Board must issue rules prohibiting 

an issuer or payment card network from 

restricting the number of payment card 

networks on which an electronic debit 

transaction may be processed (network 

exclusivity restrictions).90 Second, the 

Board must issue rules 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).91 Proposed § 235.7 

implements these additional limitations 

on payment card network restrictions. 

The statutory exemptions for small 

issuers, government-administered 

payment cards, and certain reloadable 

prepaid cards under EFTA Section 920 

apply only to the restrictions on 

interchange transaction fees in EFTA 

Section 920(a). See proposed § 235.5, 

discussed above. Thus, these 

exemptions do not apply to the 

limitations on payment card network 

restrictions under EFTA Section 920(b), 

including the prohibitions on network 

exclusivity arrangements and merchant 

routing restrictions implemented in 

proposed § 235.7. See proposed 

comment 7–1. 

A. Sec. 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 restricting, through 

any agent, processor, or licensed 

member of a payment card network, the 

number of payment card networks on 

which an electronic debit transaction 

may be processed to fewer than two 

unaffiliated payment card networks. 

Proposed § 235.7(a) implements the new 

requirement. 

In recent years, payment card 

networks have increasingly offered 

issuers financial incentives in exchange 

for committing a substantial portion of 

their debit card transaction volume to 

the network. For example, some issuers 

may agree to shift some or all of their 

debit card transaction volume to the 

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. In many 

cases, issuers have agreed to make the 

payment card network, or affiliated 

networks, the exclusive network(s) 

associated with the issuer’s debit cards. 

For example, some issuers have agreed 

to restrict their cards’ signature debit 

functionality to a single signature debit 

network and PIN debit functionality to 

the PIN debit network that is affiliated 

with the signature debit network. 

Certain signature debit network rules 

also prohibit issuers of debit cards 

carrying the signature network brand 

from offering other signature debit 

networks or certain competing PIN debit 

networks on the same card. See 

proposed comments 7(a)–1 and –2 

describing the terms PIN and signature 

debit. 

Some issuers also negotiate or enroll 

in ‘‘exclusivity arrangements’’ with 

payment card networks for other 

business purposes. For example, an 

issuer may want to shift a substantial 

portion or all of its debit card volume 

to a particular network to reduce core 

processing costs through economies of 

scale; to control fraud and enhance data 

security by limiting the points for 

potential compromise; or to eliminate or 

reduce the membership and compliance 

costs associated with connecting to 

multiple networks. 

From the merchant perspective, the 

availability of multiple card networks 

on a debit card is attractive because it 

gives merchants the flexibility to route 

transactions over the network that will 

result in the lowest cost to the 

merchant. This flexibility may promote 

direct price competition among the 

debit card networks that are enabled on 

the debit card. Thus, debit card network 

exclusivity arrangements limit 

merchants’ ability to route transactions 

over lower-cost networks and may 

reduce price competition. 

From the cardholder perspective, 

however, requiring multiple payment 

card 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 

carried over a specific card network. 

Similarly, insurance benefits for certain 

types of transactions or purchases or the 


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92These benefits are often provided for 

transactions routed over signature debit networks; 

they are less commonly available for PIN-debit 

transactions. 

ability to receive text alerts regarding 

possible fraudulent activity may be tied 

to the use of a specific network.92

Requiring multiple unaffiliated payment 

card networks, coupled with a 

merchant’s ability to route electronic 

debit transactions over any of the 

networks, could reduce the ability of a 

cardholder to control, and perhaps even 

to know, over which network 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 

explain to the cardholders that they will 

receive certain benefits only if a 

merchant chooses to route their 

transaction over that particular network. 

In the proposed rule, the Board 

requests 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, for example, by 

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 

authorization 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. 

Alternative A 

EFTA Section 920(b)(1)(A) 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 less than two 

unaffiliated payment card networks. 

Nothing in EFTA Section 920(b)(1)(A) 

specifically requires that there must be 

two unaffiliated payment card networks 

available to the merchant once the 

method of debit card authorization has 

been determined. 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. 

In addition, requiring multiple 

unaffiliated payment card networks on 

a debit card for each method of card 

authorization could potentially limit the 

development and innovation of new 

authorization methods. Although PIN 

and signature are the primary methods 

of debit card transaction authorization 

today, new authentication measures 

involving biometrics or other 

technologies may, in the future, be more 

effective in reducing fraud. However, an 

issuer may be unable to implement 

these new methods of card 

authorization if the rule requires that 

such transactions be capable of being 

processed on multiple unaffiliated 

networks. Moreover, the Board 

understands that enabling the ability to 

process a debit card transaction over 

multiple signature debit networks may 

not be feasible in the near term. 

Specifically, enabling multiple signature 

debit networks on a debit card could 

require the replacement or 

reprogramming of millions of merchant 

terminals as well as substantial changes 

to software and hardware for networks, 

issuers, acquirers, and processors in 

order to build the necessary systems 

capability to support multiple signature 

debit networks for a particular debit 

card transaction. 

Finally, the Board recognizes that 

small debit card issuers could be 

disproportionately affected by a 

requirement to have multiple networks 

for each method of debit card 

authorization. See proposed comment 

7(a)–7, discussed below. Alternative A 

would minimize the overall compliance 

costs for these issuers. 

For these reasons, Alternative A 

would provide that the network 

exclusivity prohibition could be 

satisfied as long as an electronic debit 

transaction may be processed on at least 

two unaffiliated payment card networks. 

See § 235.7(a)(1) (Alternative A). 

Proposed comment 7(a)–3 under 

Alternative A clarifies that Alternative 

A does not require an issuer to have 

multiple, unaffiliated networks 

available for each method of cardholder 

authorization. Under Alternative A, 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. 

Alternative B 

The Board also recognizes that the 

effectiveness of the rule promoting 

network competition could be limited in 

some circumstances if an issuer can 

satisfy the requirement simply by 

having one payment card network for 

signature debit transactions and a 

second unaffiliated payment card 

network for PIN debit transactions. In 

particular, the Board understands that 

only about 2 million of the 8 million 

merchant locations in the United States 

that accept debit cards have the 

capability to accept PIN debit 

transactions. Thus, in those locations 

that accept only signature debit, 

potentially under Alternative A only a 

single payment card network would be 

available to process electronic debit 

transactions. 

In addition, PIN debit functionality 

generally is not available in certain 

merchant categories or for certain types 

of transactions. For example, the Board 

understands that PIN debit typically 

cannot be used for hotel stays or car 

rentals for which a merchant obtains an 

authorization for an estimated 

transaction amount, but the actual 

transaction amount is not known until 

later, when the cardholder checks out of 

the hotel or returns the rental car. 

Because PIN debit transactions are 

single-message transactions that 

combine the authorization and clearing 

instructions, the Board understands that 

it is currently not feasible to use PIN 

debit in circumstances where the final 

transaction amount differs from the 

authorized transaction amount. PIN 

debit is also not currently available for 

Internet purchase transactions in most 

cases. Thus, for these transaction types, 

the unavailability of PIN debit as an 

alternative method of authorization 

effectively means that only a single card 

network would be available to process 

an electronic debit transaction if 

Alternative A is adopted in the final 

rule. 

Finally, the Board notes that 

Alternative A could limit the 

effectiveness of the separate prohibition 

on merchant routing restrictions under 

new EFTA Section 920(b)(1)(B), 

discussed below, if an issuer elected to 

enable only one signature debit network 

and one unaffiliated PIN network on a 

particular debit card. This is because 

once the cardholder has authorized the 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
81750 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

transaction using either a signature or 

PIN entry, the merchant would have 

only a single network available for 

routing the transaction. 

Under Alternative B, an issuer or 

payment card network would be 

prohibited from directly or indirectly 

restricting the number of payment card 

networks on which an electronic debit 

transaction may be processed to less 

than two unaffiliated networks ‘‘for each 

method of authorization that may be 

used by the cardholder.’’ This means 

that an issuer would not comply with 

the proposed rule for a signature and 

PIN-enabled debit card unless there 

were at least two unaffiliated signature 

debit networks and at least two 

unaffiliated PIN debit networks enabled 

on the card. 

Proposed comment 7(a)–3 under 

Alternative B clarifies that under this 

alternative, each electronic debit 

transaction, regardless of the method of 

authorization, must be able to be 

processed on at least two unaffiliated 

payment card networks. For example, if 

a cardholder authorizes an electronic 

debit transaction using a signature, that 

transaction must be capable of being 

processed on at least two unaffiliated 

signature-based payment card networks. 

Similarly, if a cardholder authorizes an 

electronic debit transaction using a PIN, 

that transaction must be capable of 

being processed on at least two 

unaffiliated PIN-based payment card 

networks. This comment would also 

clarify that the use of contactless or 

radio-frequency identification (RFID) 

technology would not constitute a 

separate method of authorization as the 

Board understands that such 

transactions are generally processed 

over either a signature debit network or 

a PIN debit network. 

The Board requests comment on both 

proposed alternatives for implementing 

the prohibition on network exclusivity 

arrangements under EFTA Section 

920(b)(1)(A). Comment is requested on 

the cost and benefits of each alternative, 

including for issuers, merchants, 

cardholders, and the payments system 

overall. In particular, the Board requests 

comment on the cost of requiring 

multiple payment card networks for 

signature-based debit card transactions, 

and the time frame necessary to 

implement such a requirement. 

Proposed § 235.7(a)(2) describes 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. 

First, proposed § 235.7(a)(2)(i) 

addresses payment card networks that 

operate in a limited geographic 

acceptance area. Specifically, the 

proposed rule provides that adding an 

unaffiliated payment card network that 

is not accepted throughout the United 

States would not satisfy the requirement 

to have at least two unaffiliated 

payment card networks enabled on a 

debit card. 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. However, an issuer would be in 

compliance 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. Proposed comment 7(a)–4.i 

provides an example to illustrate the 

provision regarding limited geographic 

acceptance networks. The proposed 

comment also clarifies that a payment 

card network is considered to have 

sufficient geographic reach even though 

there may be limited areas in the United 

States that it does not serve. For 

example, a national network that has no 

merchant acceptance in Guam or 

American Samoa may nonetheless meet 

the geographic reach requirement. 

The Board requests comment on the 

impact of the proposed approach to 

networks with limited geographic 

acceptance on the viability of regional 

payment card networks, and whether 

other approaches may be appropriate, 

including, but not limited to, requiring 

that a particular debit card be accepted 

on at least two unaffiliated payment 

card networks (under either alternative) 

in States where cardholders generally 

use the card. If the Board permitted a 

regional network by itself to satisfy the 

requirement, what standard should be 

used for determining whether that 

network provides sufficient coverage for 

the issuer’s cardholders’ transactions? 

The Board also requests comment on the 

potential impact, and particularly the 

cost impact, on small issuers from 

adding multiple payment card networks 

in order to ensure that a debit card is 

accepted on a nationwide basis on at 

least two unaffiliated payment card 

networks. 

Second, proposed § 235.7(a)(2)(ii) 

provides that adding an unaffiliated 

payment card network that is accepted 

only at a limited number of merchant 

locations or for limited merchant types 

or transaction 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 

only accepted 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. The 

Board requests comment on whether 

additional guidance regarding networks 

that have limited merchant acceptance 

is necessary. 

Third, the proposed rule would 

prohibit 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. See 

proposed § 235.7(a)(2)(iii). Proposed 

comment 7(a)–5 provides examples of 

prohibited restrictions on an issuer’s 

ability to contract with other payment 

card networks. For example, a payment 

card network would be prohibited from 

limiting or otherwise restricting, by rule, 

contract, or otherwise, the other 

payment card networks that may be 

enabled on a particular debit card, such 

as by expressly prohibiting an issuer 

from offering certain specified payment 

card networks on the debit card or by 

limiting the payment card networks that 

may be offered on a card to specified 

networks. See proposed comment 7(a)– 

5.i. 

Proposed § 235.7(a)(2)(iii) 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 

number or location of network brands, 

marks, or logos that may appear on the 

debit card. See proposed comment 7(a)– 

5.ii. Such rules or guidelines may 

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. 

Proposed comment 7(a)–6 provides, 

however, that nothing in the rule 

requires that a debit card identify the 

brand, mark, or logo of each payment 

card network over which an electronic 

debit transaction may be processed. For 

example, a debit card that operates on 

two or more different unaffiliated 

payment card networks need not 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 


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reissuance of debit cards as networks 

are added (or removed). 

Proposed § 235.7(a) does not 

expressly prohibit debit card issuers 

from committing to a certain volume, 

percentage share, or dollar amount of 

transactions to be processed over a 

particular network. However, these 

volume, percentage share, or dollar 

amount commitments 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. As 

discussed below under proposed 

§ 235.7(b), these issuer or payment card 

network routing priorities would be 

prohibited by the proposed limitations 

on merchant routing restrictions. The 

Board requests comment on whether it 

is necessary to address volume, 

percentage share, or dollar amount 

requirements in the exclusivity 

provisions, and whether other types of 

arrangements should be addressed 

under the rule. 

Proposed comment 7(a)–7 clarifies 

that the requirements of § 235.7(a) apply 

equally to voluntary arrangements in 

which a debit card issuer participates 

exclusively in a single payment card 

network or affiliated group of payment 

card networks by choice, rather than 

due to a specific network rule or 

contractual commitment. For example, 

although an issuer may prefer to offer a 

single payment card network (or the 

network’s affiliates) on its debit cards to 

reduce its processing costs or for 

operational simplicity, the statute’s 

exclusivity provisions do not allow that. 

Thus, the proposed comment clarifies 

that all issuers must issue cards enabled 

with at least two unaffiliated payment 

card networks, even if the issuer is not 

subject to any rule of, or contract, 

arrangement, or any 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. 

Proposed comment 7(a)–8 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 proposed comment 

under Alternative A 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. The Board is also proposing a 

corresponding comment that would 

apply to Alternative B. 

Proposed § 235.7(a)(3) addresses 

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 

proposed rule requires issuers in these 

circumstances to add an additional 

unaffiliated debit card network no later 

than 90 days after the date on which the 

prior unaffiliated payment card 

networks become affiliated. The Board 

requests comment on whether 90 days 

provides sufficient time for issuers to 

negotiate new agreements and add 

connectivity with the additional 

networks in order to comply with the 

rule. 

Additional Requests for Comment 

The Board understands that some 

institutions may wish to issue a card, or 

other payment code or device, that 

meets the proposed definition of ‘‘debit 

card,’’ but that may be capable of being 

processed using only a single 

authorization method. For example, a 

key fob or mobile phone embedded with 

a contactless chip may be able to be 

processed only as a signature debit 

transaction or only on certain networks. 

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 

requests comment on whether this 

could inhibit the development of these 

devices in the future and what steps, if 

any, the Board should take to avoid any 

such impediments to innovation. 

As noted above under proposed 

comment 7–1, the statutory exemptions 

for small issuers, governmentadministered payment cards, and 

certain reloadable prepaid cards do not 

apply to the limitations on payment 

card network restrictions under EFTA 

Section 920(b). Thus, for example, 

government-administered payment 

cards and reloadable prepaid cards, 

including health care and other 

employee benefit cards, would be 

subject to the prohibition on the use of 

exclusive networks under EFTA Section 

920(b)(1). The Board understands that in 

many cases, issuers do not permit PIN 

functionality on prepaid cards in order 

to prevent cash access in response to 

potential money laundering or other 

regulatory concerns. In addition, in the 

case of debit cards issued in connection 

with health flexible spending accounts 

and health reimbursement accounts, 

Internal Revenue Service (IRS) rules 

require the use of certain sophisticated 

technology at the point-of-sale to ensure 

that the eligibility of a medical expense 

claim can be substantiated at the time of 

the transaction. However, PIN-debit 

networks may not currently offer the 

functionality or capability to support 

the required technology. Thus, 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 do not add 

the necessary functionality to comply 

with those regulations. The Board 

requests comment on any alternatives, 

consistent with EFTA Section 920, that 

could minimize the impact of the 

proposed requirements on these prepaid 

products. 

B. Sec. 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 that 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 proposing to 

implement this restriction in § 235.7(b). 

Specifically, proposed § 235.7(b) would 

prohibit 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. 

In practice, this means that 

merchants, not issuers or networks, 

must be able to designate preferences for 

the routing of transactions, and that the 

merchant’s preference must take priority 

over the issuer’s or network’s 

preference. The rules of certain PIN 

debit payment card networks today 

require merchants to route PIN debit 

transactions based on the card issuer’s 

designated preferences. This is the case 

even where 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 


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81752 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

93These 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. 

routed over that network when there are 

multiple PIN networks available.93 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. Neither of these 

practices would be permitted under the 

proposed rule. 

The Board does 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 

interprets 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. Moreover, 

allowing merchants to route 

transactions over any network, 

regardless of the networks enabled on 

the debit card, would render 

superfluous the requirement to have at 

least two unaffiliated payment cards 

enabled on a particular debit card. 

Accordingly, proposed comment 7(b)–1 

clarifies that the prohibition on 

merchant routing restrictions applies 

solely to the payment card networks on 

which an electronic debit transaction 

may be processed with respect to a 

particular debit card. 

Proposed comment 7(b)–2 provides 

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). Although routing 

generally refers to sending the 

transaction information to the issuer, 

the Board notes that the statute broadly 

directs the Board to prescribe the rules 

that prohibit issuer or payment card 

network practices that ‘‘inhibit’’ a 

person’s ability to direct the routing of 

the transaction. Accordingly, the Board 

believes it is appropriate also to address 

certain practices that may affect the 

network choices available to the 

merchant at the time the transaction is 

processed. 

The first example addresses issuer or 

card network rules or requirements that 

prohibit a merchant from ‘‘steering,’’ or 

encouraging or discouraging, a 

cardholder’s use of a particular method 

of debit card authorization. For 

example, merchants may want to 

encourage cardholders to authorize a 

debit card transaction by entering their 

PIN, rather than by providing a 

signature, if PIN debit carries a lower 

interchange rate than signature debit. 

Under proposed § 235.7(b) and 

comment 7(b)–2.i, merchants may not 

be inhibited from encouraging the use of 

PIN debit by, for example, setting PIN 

debit as a default payment method or 

blocking the use of signature debit 

altogether. 

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 proposed comment 7(b)–2.ii. Thus, 

for example, if multiple networks are 

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. 

Nothing in proposed comment 7(b)–2.ii, 

however, is intended to prevent an 

issuer or payment card network from 

designating a default network for 

routing an electronic debit transaction 

in the event a merchant or its acquirer 

or processor does not indicate a routing 

preference. In addition, proposed 

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. See, e.g., Iowa Code Sec. 

527.5. 

As noted above, if issuer- or networkdirected priorities are prohibited, 

issuers will, as a practical matter, be 

unable to guarantee or otherwise agree 

to commit a specified volume, 

percentage share, or dollar amount of 

debit card transactions to a particular 

debit card network. Accordingly, the 

Board believes it is unnecessary to 

separately address volume, percentage 

share, or dollar amount commitments of 

debit card transactions as prohibited 

forms of network exclusivity 

arrangements under proposed § 235.7(a). 

Under the third example, a payment 

card network could not require a 

particular method of debit card 

authorization based on the type of 

access device provided by the 

cardholder. See proposed 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 

may only be processed over a signature 

debit network. The Board requests 

comment on whether there are other 

circumstances that the commentary 

should include as examples of 

prohibited routing restrictions. 

Although proposed § 235.7 provides 

merchants control over how an 

electronic debit transaction is routed to 

the issuer, the proposed rule does not 

impose a requirement that a merchant 

be able to select the payment card 

network over which to route or direct a 

particular electronic debit transaction in 

real time, that is, at the time of the 

transaction. The Board believes that 

requiring real-time merchant routing 

decision-making could be operationally 

infeasible and cost-prohibitive in the 

short term as it would require 

systematic programming changes and 

equipment upgrades. Today, for 

example, transaction routing is 

relatively straightforward once the 

cardholder has chosen to authorize a 

debit card transaction using his or her 

PIN. Once the PIN is entered, card 

information for the transaction is 

transmitted to the merchant’s acquirer 

or processor and the transaction is then 

generally routed over a pre-determined 

network based upon issuer or payment 

network routing priorities for that card. 

Under proposed § 235.7(b), however, 

issuer and network routing priorities 

would no longer be permitted, except 

under limited circumstances. See 

proposed comment 7(b)–2.ii, discussed 

above. Instead, merchants would be free 

to make the routing decision. Although 

merchant-directed routing tables 

administered by the acquirer or 

processor could be somewhat more 

complex than issuer-directed routing 

tables given the larger number of 

merchants, such a system could still be 

administered in the straightforward 

manner they are administered today 

with the routing decisions determined 

in advance for a particular merchant. 

Accordingly, proposed comment 7(b)–3 

provides that it is 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 on behalf of 

the merchant. 

C. Effective Date 

Although EFTA Section 920 requires 

that the restrictions on the amount of 

interchange transaction fees become 

effective on July 21, 2011, the statute 

does not specify an effective date for the 

separate provisions on network 

exclusivity and merchant routing 

restrictions. As discussed above, the 

new provisions provide that at least two 

unaffiliated payment card networks 

must be available for processing any 

electronic debit transaction, and 

prohibit issuers and payment card 


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94Copies of the survey forms are available on the 

Board’s Web site at http://www.federalreserve.gov/ 

newsevents/reform_meetings.htm. 

networks from inhibiting merchants 

from directing how electronic debit 

transactions may be routed based upon 

the available choices. In order to 

implement these new requirements, 

certain system changes will be required. 

For example, before a debit card may be 

enabled for an additional payment card 

network, connectivity will have to be 

established with the new network and 

internal processing systems upgraded to 

support that network. In some cases, 

new cards may have to be issued to 

cardholders. Acquirers and processors 

will have to be notified of the new 

network assignments for each debit card 

program and their routing tables 

updated for each issuer and card 

program. Payment card networks will 

have to ensure that they have sufficient 

processing capacity to support any 

necessary changes. 

If Alternative B is adopted in the final 

rule and multiple signature debit 

networks are required for each debit 

card, the Board anticipates that 

significantly more time will be needed 

to enable issuers and networks to 

comply with the rule. The Board 

requests 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, or 

alternatively, an effective date of 

January 1, 2013 if Alternative B were 

adopted in the final rule. 

The Board requests comment on all 

aspects of implementing the proposed 

limitations on network exclusivity and 

merchant routing restrictions under 

§ 235.7, including the specific changes 

that will be required and the entities 

affected. The Board also requests 

comment on other, less burdensome 

alternatives that may be available to 

carry out the proposed restrictions 

under § 235.7 to reduce the necessary 

cost and implementation time period. 

Sec. 235.8 Reporting Requirements 

Section 920 authorizes the Board to 

collect from issuers and payment card 

networks information that is necessary 

to carry out the provisions of this 

section and requires the Board to 

publish, if appropriate, summary 

information about costs and interchange 

transaction fees every two years. 

Summary information from information 

collections conducted prior to this 

proposed rulemaking is discussed 

above. The Board anticipates using 

forms derived from the Interchange 

Transaction Fee Surveys (FR 3062; OMB 

No. 7100), but with a narrower scope, 

for purposes of these proposed reporting 

requirements.94 At this time, however, 

the Board is not publishing specific 

forms for comment. The Board does not 

anticipate requiring the first report to be 

submitted before March 31, 2012. Prior 

to that time, the Board will provide an 

opportunity for comment on the specific 

reporting forms and reporting burden. 

The Board, however, is seeking 

comment on the reporting requirements 

as laid out generally in proposed 

§ 235.8. 

Consistent with the statutory 

information collection authority, the 

Board proposes to require issuers that 

are subject to §§ 235.3 and 235.4 and 

payment card networks to submit 

reports to the Board. Each entity 

required to submit a report would 

submit the form prescribed by the 

Board. The forms would request 

information regarding costs incurred 

with respect to electronic debit 

transactions, interchange transaction 

fees, network fees, and fraud-prevention 

costs. Similar to the surveys conducted 

in connection with this proposed 

rulemaking, the Board may publish 

summary or aggregate information. 

The Board proposes that each entity 

would be required to report biennially, 

consistent with the Board’s statutory 

publication requirement. The Board 

anticipates that circumstances may 

develop that require more frequent 

reporting. Accordingly, under proposed 

§ 235.8(c), the Board reserves the 

discretion to require more frequent 

reporting. 

For the years an entity is required to 

report, the Board proposes that such 

entity must submit the report to the 

Board by March 31 of that year. The 

Board believes that permitting three 

months following the end of the 

calendar-year reporting period provides 

a reasonable time to determine the costs 

that need to be reported and complete 

the report. The Board is requesting 

comment on whether the three-month 

time frame is appropriate. 

Proposed § 235.8(e) would require 

entities that are required to report under 

this section to retain records of reports 

submitted to the Board for five years. 

Further, such entities would be required 

to make each report available upon 

request to the Board or the entity’s 

primary supervisors. The Board believes 

that the record retention requirement 

will facilitate administrative 

enforcement. 

Sec. 235.9 Administrative 

Enforcement 

The interchange transaction fee 

requirements and the network 

exclusivity and routing rules are 

enforced under EFTA Section 918 (15 

U.S.C. 1693o), which sets forth the 

administrative agencies that enforce the 

requirements of the EFTA. Unlike other 

provisions in the EFTA, the 

requirements of Section 920 are not 

subject to EFTA Section 916 (civil 

liability) and Section 917 (criminal 

liability). Further, the Dodd-Frank Act 

amends the current administrative 

enforcement provision of the EFTA. 

Therefore, proposed § 235.9 sets forth 

the administrative enforcement agencies 

under EFTA Section 918 as amended by 

the Dodd-Frank Act. 

Form of Comment Letters 

Comment letters should refer to 

Docket No. R–1404 and, when possible, 

should use a standard typeface with a 

font size of 10 or 12; this will enable the 

Board to convert text submitted in paper 

form to machine-readable form through 

electronic scanning, and will facilitate 

automated retrieval of comments for 

review. Comments may be mailed 

electronically to 

regs.comments@federalreserve.gov. 

Solicitation of Comments Regarding Use 

of ‘‘Plain Language’’ 

Section 772 of the Gramm-LeachBliley Act of 1999 (12 U.S.C. 4809) 

requires the Board to use ‘‘plain 

language’’ in all proposed and final rules 

published after January 1, 2000. The 

Board invites comment on whether the 

proposed rule is clearly stated and 

effectively organized, and how the 

Board might make the text of the rule 

easier to understand. 

Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act (PRA) of 1995 (44 U.S.C. 

3506; 5 CFR part 1320 Appendix A.1), 

the Board reviewed this proposed rule 

under the authority delegated to the 

Board by the Office of Management and 

Budget. The Board will conduct an 

analysis under the Paperwork Reduction 

Act and seek public comment when it 

develops surveys to obtain information 

under § 235.8. Any additional burden 

associated with the reporting 

requirement in proposed § 235.3(d) 

(under Alternative 1) for issuers that 

wish to receive an interchange fee in 

excess of the safe harbor is considered 

negligible. Thus no new collections of 

information pursuant to the PRA are 

contained in the proposed rule. 


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95U.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. 

96 Id. 

97There may be some small financial institutions 

that have very large affiliates such that the 

institution does not qualify for the small issuer 

exemption. 

Regulatory Flexibility Act 

In accordance with Section 3(a) of the 

Regulatory Flexibility Act, 5 U.S.C. 601 

et. seq. (RFA), the Board is publishing 

an initial regulatory flexibility analysis 

for the proposed new Regulation II 

(Debit Card Interchange Fees and 

Routing). The RFA requires an agency to 

provide an initial regulatory flexibility 

analysis with the proposed rule or to 

certify that the proposed rule will not 

have a significant economic impact on 

a substantial number of small entities. 

The Board welcomes comment on all 

aspects of the initial regulatory 

flexibility analysis. A final regulatory 

flexibility analysis will be conducted 

after consideration of comments 

received during the public comment 

period. 

1. Statement of the objectives of the 

proposal. As required by Section 920 of 

the EFTA (15 U.S.C. 1693r), the Board 

is proposing new Regulation II to 

establish standards for assessing 

whether an interchange transaction fee 

received or charged by an issuer (and 

charged to the merchant or acquirer) is 

reasonable and proportional to the cost 

incurred by the issuer with respect to 

the transaction. Additionally, proposed 

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 and 

inhibiting the ability of a merchant to 

direct the routing of an electronic debit 

transaction over a particular payment 

card network. 

2. Small entities affected by the 

proposal. This proposal may have an 

effect predominantly on two types of 

small entities—financial institutions 

that either issue debit cards or acquire 

transactions from merchants and the 

merchants themselves. A financial 

institution generally is considered small 

if it has assets of $175 million or less.95

Based on 2010 Call Report data, 

approximately 11,000 depository 

institutions had total domestic assets of 

$175 million or less. Of this number, 

however, it is unknown how many of 

these institutions issue debit cards. 

Whether a merchant is a small entity is 

determined by the asset size or the 

number of employees.96 Of the 8 million 

merchant locations that accept debit 

cards, the number of merchants that are 

considered small entities is unknown. 

3. Compliance requirements. With 

respect to the limitations on interchange 

transaction fees, the Board’s proposed 

rule does not affect most such entities 

directly.97 In accordance with Section 

920 of the EFTA, the Board’s proposed 

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 

proposed rule does not require payment 

card networks to distinguish between 

issuers with assets of more than $10 

billion and smaller issuers. If a payment 

card network decides to distinguish 

between large and small issuers, a 

payment card network may require a 

smaller issuer to submit information to 

it. The proposed rule, however, does not 

impose reporting requirements on 

smaller issuers. As discussed in other 

sections of the preamble, the proposed 

interchange transaction fee standards 

are expected to reduce the amount of 

interchange transaction fees charged to 

merchants and acquirers. Accordingly, 

the Board expects any economic impact 

on small merchants and acquirers to be 

positive. 

The proposed rule prohibiting 

network exclusivity arrangements may 

affect small financial institutions that 

issue debit cards if such institutions do 

not currently comply with the Board’s 

proposed standards. Under one 

alternative, a small issuer, like other 

issuers, would be required to have at 

least two unaffiliated payment card 

networks on each debit card it issues. If 

the issuer does not do so already, it 

would be required to add an additional 

network. This process may require 

making a decision as to which 

additional network to put on a card, 

establishing a connection to the new 

network, or updating internal processes 

and procedures. Under the second 

alternative, a small issuer, like all 

issuers, would be required to issue debit 

cards with at least two unaffiliated 

networks for each method of 

authorization a cardholder could select. 

The actions that may be necessary to 

add additional networks under the 

second alternative are the same as those 

under the first alternative. An issuer, 

however, would incur greater costs as 

the number of networks it adds 

increases. In contrast, like all merchants 

that accept debit cards, smaller 

merchants will be provided with greater 

routing choice. Therefore, the smaller 

merchants will be able to route 

electronic debit transactions over the 

lowest-cost path. Accordingly, the 

Board expects any economic impact on 

merchants to be positive. 

4. Other Federal rules. The Board 

believes that no Federal rules duplicate, 

overlap, or conflict with proposed 

Regulation II. 

5. Significant alternatives to the 

proposed rule. As discussed above, the 

Board has requested comment on the 

impact of the network exclusivity and 

routing alternatives (the provisions of 

the proposal that apply to small issuers) 

on small entities and has solicited 

comment on any approaches, other than 

the proposed alternatives, that would 

reduce the burden on all entities, 

including small issuers. The Board 

welcomes comment on any significant 

alternatives that would minimize the 

impact of the proposal on small entities. 

List of Subjects in 12 CFR Part 235 

Electronic debit transactions, 

interchange transaction fees, and debit 

card routing. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Board is proposing to add 

new 12 CFR 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 transaction fees. 

235.4 [Reserved] 

235.5 Exemptions. 

235.6 Prohibition on circumvention or 

evasion. 

235.7 Limitations on payment card 

restrictions. 

235.8 Reporting requirements. 

235.9 Administrative enforcement. 

Appendix A—Official Board 

Commentary on Regulation II 

Authority: 15 U.S.C. 1693r. 

§ 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. 1693r, 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, 

exemptions from the interchange 

transaction fee limitations, prohibitions 

on evasion and circumvention, 


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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. 

§ 235.2 Definitions. 

(a) Account 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. 

(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 an institution 

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. 

(3) The term ‘‘debit card’’ 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; 

(ii) A check, draft, or similar paper 

instrument, or an electronic 

representation thereof; or 

(iii) An account number, when used 

to initiate an ACH transaction to debit 

a person’s account. 

(g) Designated automated teller 

machine (ATM) network means either— 

(1) All automated teller machines 

identified in the name of the issuer; or 

(2) Any network of automated teller 

machines identified by the issuer that 

provides reasonable and convenient 

access to the issuer’s customers. 

(h) Electronic debit transaction means 

the use of a debit card by a person as 

a form of payment in the United States. 

(i) General-use prepaid card means a 

card, or other payment code or device, 

that is— 

(1) Issued on a prepaid basis, 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, or usable at 

automated teller machines. 

(j) Interchange transaction fee means 

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. 

(k) Issuer means any person that 

issues a debit card. 

(l) Merchant means any person that 

accepts debit cards as payment for 

goods or services. 

(m) Payment card network means an 

entity that— 

(1) Directly or indirectly provides the 

services, infrastructure, and software for 

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. 

(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) 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. 

§ 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. 

Alternative 1 (Issuer-Specific 

Standard With Safe Harbor and Cap): 

(b) Determination of reasonable and 

proportional fees. Except as provided in 

paragraph (e) of this section, an issuer 

complies with the requirements of 

paragraph (a) of this section only if, 

during an implementation period of 

October 1 of any calendar year through 

September 30 of the following calendar 

year, each interchange transaction fee it 

receives or charges is no more than the 

greater of— 

(1) Seven cents per transaction; or 

(2) The costs described in paragraph 

(c) of this section incurred by the issuer 

with respect to electronic debit 

transactions during the calendar year 

preceding the start of the 

implementation period, divided by the 

number of electronic debit transactions 

on which the issuer charged or received 

an interchange transaction fee during 

that calendar year, but no higher than 

twelve cents per transaction. 

(c) Allowable costs. For purposes of 

paragraph (b) of this section, the costs 

incurred by an issuer for electronic 

debit transactions— 

(1) Are only those costs that vary with 

the number of transactions sent to the 

issuer and that are attributable to— 

(i) Receiving and processing requests 

for authorization of electronic debit 

transactions; 

(ii) Receiving and processing 

presentments and representments of 

electronic debit transactions; 

(iii) Initiating, receiving, and 

processing chargebacks, adjustments, 

and similar transactions with respect to 

electronic debit transactions; and 

(iv) Transmitting or receiving funds 

for interbank settlement of electronic 

debit transactions; and posting 

electronic debit transactions to 

cardholder accounts; and 

(2) Do not include fees charged by a 

payment card network with respect to 

an electronic debit transaction. 

(d) Disclosure to payment card 

network. If, during an implementation 

period of October 1 of any given 

calendar year through September 30 of 

the following calendar year, an issuer 

subject to this section will receive or 

charge an interchange transaction fee in 

excess of seven cents per transaction 

under paragraph (b)(2) of this section, 

the issuer must report, by March 31 of 

the same calendar year as the start of the 

implementation period, to each 

payment card network through which 

its electronic debit transactions may be 

routed the amount of any interchange 

transaction fee it may receive or charge 

under paragraph (b)(2). 

(e) Transition. From July 21, 2011 

through September 30, 2012, an issuer 

complies with the requirements of 

paragraph (a) of this section if any 


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81756 Federal Register / Vol. 75, No. 248 / Tuesday, December 28, 2010 / Proposed Rules 

interchange transaction fee it receives or 

charges is no more than the greater of— 

(1) Seven cents per transaction; or 

(2) The costs described in subsection 

(c) of this section incurred by the issuer 

for electronic debit transactions during 

the 2009 calendar year, divided by the 

number of electronic debit transactions 

on which the issuer received or charged 

an interchange transaction fee during 

the 2009 calendar year, but no higher 

than twelve cents per transaction. 

Alternative 2 (Cap): 

(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 twelve cents 

per transaction. 

§ 235.4 [Reserved] 

§ 235.5 Exemptions. 

(a) Exemption for small issuers. 

Sections 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 issuer holds the account that 

is debited; and 

(2) The issuer, together with its 

affiliates, has assets of less than $10 

billion as of the end of the previous 

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 

(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 if the electronic debit 

transaction is made 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); and 

(ii) Reloadable and not marketed or 

labeled as a gift card or gift certificate. 

(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 charged for 

transferring funds from another asset 

account to cover a shortfall in the 

account accessed by the card; or 

(2) A fee charged 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. 

§ 235.6 Prohibition on circumvention or 

evasion. 

(a) Prohibition on circumvention or 

evasion. No person shall circumvent or 

evade the interchange transaction fee 

restrictions in §§ 235.3 and 235.4. 

Circumvention or evasion of the 

interchange fee restrictions under 

§§ 235.3 and 235.4 occurs if an issuer 

receives net compensation from a 

payment card network with respect to 

electronic debit transactions. 

§ 235.7 Limitations on payment card 

restrictions. 

(a) Prohibition on network exclusivity. 

(1) In general. 

Alternative A: 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. 

Alternative B: 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 for each method 

of authorization that may be used by the 

cardholder. 

(2) Prohibited exclusivity 

arrangements. For purposes of 

paragraph (a)(1) of this section, an issuer 

or payment card network does not 

satisfy the requirement to have at least 

two unaffiliated payment card networks 

on which an electronic debit transaction 

may be processed if— 

(i) The unaffiliated network(s) that is 

added to satisfy the requirements of this 

paragraph does not operate throughout 

the United States, unless the debit card 

is accepted on a nationwide basis on at 

least two unaffiliated payment card 

networks when the network(s) with 

limited geographic acceptance is 

combined with one or more other 

unaffiliated payment card networks that 

also accept the card. 

(ii) The unaffiliated network(s) that is 

added to satisfy the requirements of this 

paragraph is accepted only at a small 

number of merchant locations or at 

limited types of merchants; or 

(iii) The payment card network 

restricts or otherwise limits 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. 

(3) 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 this 

paragraph (a), the issuer must add an 

unaffiliated payment card network 

through which electronic debit 

transactions on the relevant debit card 

may be processed no later than 90 days 

after the date on which the prior 

unaffiliated payment card networks 

become affiliated. 

(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. 

§ 235.8 Reporting requirements. 

(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 


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reported may include, but is not limited 

to, data regarding costs incurred with 

respect to an electronic debit 

transaction, interchange transaction 

fees, network fees, fraud-prevention and 

data-security costs, and fraud losses. 

(c) Timing. (1) Each entity shall 

submit the data in a form prescribed by 

the Board biennially. 

(2) Each entity shall submit the report 

to the Board by March 31 of the year the 

entity is required to report. 

(3) The first report shall be submitted 

to the Board by March 31, 2012. 

(d) Disclosure. The Board may, in its 

discretion, disclose aggregate or 

summary information reported under 

this section. 

§ 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 

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 (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 (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 (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. 

Appendix A—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. 

Sec. 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 a business-purpose debit card. 

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. The term ‘‘account’’ also 

includes bona fide trust arrangements. 

2. Account located in the United States. 

This part applies only to electronic debit 

transactions that are initiated to debit (or 

credit 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 at a bank 

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 the network. 

These institutions are not ‘‘acquirers’’ because 

they do not provide credit for transactions or 

settle to the merchant’s transactions with the 

merchant. These institutions that only 

process or route transactions are considered 

processors for purposes of this part (See 

§ 235.2(o) and commentary thereto). 

2(c) Affiliate 

1. Types of entities. The term ‘‘affiliate’’ 

includes both bank and nonbank affiliates. 

2. Other affiliates. For commentary on 

whether merchants are affiliated, see 

comment 2(f)–5. 

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’’ is the 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 


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be used to access underlying funds. See, 

however, § 235.2(f)(3)(iii). Similarly, the term 

‘‘debit card’’ includes a device with a chip or 

other embedded mechanism that links the 

device to funds stored in an account, such as 

a mobile phone or sticker containing a 

contactless chip that enables an account to be 

debited. 

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 

are held and made unavailable for other 

transactions for a specified period of time. 

After the expiration of the applicable 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 

transactions that occurred during a particular 

month at the end of the month. Regardless of 

the time period chosen by the issuer, 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. 

Deferred debit card arrangements do not refer 

to arrangements in which a merchant defers 

presentment of multiple small-dollar card 

payments, but aggregates those payments into 

a single transaction for presentment, or 

where a merchant requests placement of a 

hold on funds in an account until the actual 

amount of the cardholder’s transaction is 

known and submitted for settlement. 

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 via a 

subsequent ACH debit to that account. 

Because the term ‘‘debit card’’ applies to any 

card, or other payment code or device, that 

is issued or approved for use through a 

payment card network to debit an account, 

regardless of whether the issuer holds the 

account, decoupled debit cards are debit 

cards for purposes of this subpart. 

4. 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. 

5. 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 

by common corporate control. For purposes 

of the ‘‘debit card’’ definition, the Board 

would view franchisees 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. 

6. 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. 

7. 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 the 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 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 

automated teller machine network includes 

any network of automated teller machines 

identified by the issuer that provides 

reasonable and convenient access to the 

issuer’s cardholders. An issuer provides 

reasonable and convenient access, for 

example, if, for each person to whom a card 

is issued, the network provides access to an 

automated teller machine in the network 

within the metropolitan statistical area of the 

person’s last known address, or if the address 

is not known, where the card was first 

issued. 

2(h) Electronic Debit Transaction 

1. Subsequent transactions. The term 

‘‘electronic debit transaction’’ includes both 

the cardholder’s use of a debit card for the 

initial purchase of goods or services and any 

subsequent use by the cardholder of the debit 

card in connection with the initial purchase 

of goods or services. For example, the term 

‘‘electronic debit transaction’’ includes using 

the debit card to return merchandise or 

cancel a service that then results in a credit 

to the account initially debited to pay for the 

merchandise or service. 

2. 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 purchase goods 

or services and to withdraw cash (known as 

a ‘‘cashback transaction’’). 

3. 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 at a U.S. bank 

or a U.S. branch of a foreign bank, 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 card, or 

other payment code or other device, is 

redeemable upon presentation at multiple, 

unaffiliated merchants if such merchants 

agree to honor the card, or other payment 

code or device, if, for example, it bears the 

mark, logo, or brand of a payment card 

network, pursuant to the rules of the 

payment network. 

2. Mall cards. Mall cards that are generally 

intended to be used or redeemed for goods 

or services at participating retailers within a 

shopping mall are considered general-use 

prepaid cards if they carry the mark, logo, or 

brand of a payment card network and can be 

used at any retailer that accepts that card 

brand, including retailers located outside of 

the mall. 

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 

merchants or acquirers. The merchants or 

acquirers then pay to the issuers any 

interchange transaction fee established and 

charged by the network. Therefore, issuers 

are considered to receive interchange 

transaction fees from merchants or acquirers. 

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 

transaction. (See § 235.3(c) and commentary 

thereto for a description of an issuer’s role in 

the transaction). In contrast, a payment card 

network may charge issuers and acquirers 

fees for sending transaction information to 

the network for clearing and settlement. Such 

fees are not interchange transaction fees 

because the payment card network is 

charging and receiving the fee as 

compensation for its role in clearing and 

settling. 

2(k) Issuer 

1. In general. The term ‘‘issuer’’ means any 

person that issues a debit card. 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. Four-party systems. In a four-party 

system, the cardholder receives the card 

directly or indirectly (e.g., through the bank’s 

agent) from the account holding bank and has 

a direct contractual relationship with its bank 

with respect to the card. In this system, the 

cardholder’s bank is the issuer. 

3. Three-party systems. In a three-party 

system, the network typically provides the 

card, either directly or indirectly, to the 

cardholder and holds the cardholder’s 

account. Accordingly, the network is also the 

issuer with respect to the card. In most cases, 

the network also has a contractual 

relationship with the cardholder. 

4. BIN-sponsor arrangements. Payment 

card networks assign member-financial 


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institutions Bank Identification Numbers 

(BINs) 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 take 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 provide, directly or 

indirectly, debit cards to its account holders. 

The bank or credit union’s name typically 

will appear on the debit card. The bank or 

credit union also holds the underlying 

account that is debited and has the primary 

relationship with the cardholder. Under 

these circumstances, the bank or credit union 

is the issuer for purposes of this part. If that 

affiliate member, 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 issues 

cards through the BIN sponsors, the BIN 

sponsor does not have the direct relationship 

with the cardholder, and therefore 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, the BIN-sponsoring institution 

generally holds the funds for the prepaid 

card program in a pooled account, although 

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 cardholder’s 

relationship is generally with the bank 

holding the funds in the pooled account. 

This bank typically is also the BIN sponsor. 

Accordingly, under these circumstances, the 

BIN sponsor, or the bank holding the pooled 

account, is the issuer. 

5. Decoupled debit cards. In the case of 

decoupled debit cards, an entity other than 

the entity holding the cardholder’s account 

directly or indirectly provides the debit card 

to the cardholder and has a direct 

relationship with the cardholder. The 

account-holding institution does not have a 

relationship with the cardholder with respect 

to the decoupled debit card. Under these 

circumstances, the entity providing the debit 

card, and not the account-holding institution, 

is considered the issuer. If the issuer of a 

decoupled debit card, together with its 

affiliates, has assets of less than $10 billion, 

the issuer is not exempt under § 235.5(a) 

because it is not the entity holding the 

account to be debited. 

2(l) Merchant [Reserved] 

2(m) Payment Card Network 

1. Scope of definition. The term ‘‘payment 

card network’’ generally includes only those 

entities that establish guidelines, rules, or 

procedures that govern the rights and 

obligations of, at a minimum, issuers and 

acquirers involved in processing electronic 

debit transactions through the network. Such 

guidelines, rules, or procedures may also 

govern the rights and obligations of 

merchants, processors, or cardholders in 

addition to issuers and acquirers. The term 

‘‘payment card network’’ includes an entity 

that serves in the multiple roles of payment 

card network and issuer and/or acquirer, 

such as in the case of a three-party system, 

to the extent that the entity’s guidelines, 

rules, or procedures also cover its activities 

in its role(s) as issuer or acquirer. Acquirers, 

issuers, third-party processors, payment 

gateways, or other entities that may provide 

services, equipment, or software that may be 

used in authorizing, clearing, or settling 

electronic debit transactions are generally 

excluded from the term ‘‘payment card 

network,’’ unless such entities also establish 

guidelines, rules, or procedures that govern 

the rights and obligations of issuers and 

acquirers involved in processing an 

electronic debit transaction through the 

network. For example, an acquirer is not 

considered to be a payment card network 

solely due to the fact that it establishes 

particular transaction format standards, rules, 

or guidelines that apply to electronic debit 

transactions submitted by merchants using 

the acquirer’s services, because such 

standards, rules, or guidelines apply only to 

merchants that use its services, and not to 

other entities that are involved in processing 

those transactions, such as the card issuer. 

2(n) Person [Reserved] 

2(o) Processor 

1. Distinction from acquirers. Although a 

processor may perform all transactionprocessing functions for a merchant or 

acquirer, a processor is not the entity that 

acquires (that is, settles with the merchant 

for) the transactions. The entity that acquires 

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. An issuer may use a third party 

to perform services related to authorization, 

clearance, and settlement of transactions. The 

third party is the issuer’s processor. 

2(p) United States [Reserved] 

Sec. 235.3 Reasonable and Proportional 

Interchange Transaction Fees 

Alternative 1 (Issuer-Specific Standard 

With Safe Harbor and Cap): 

3(a) [Reserved] 

3(b) Determination of Reasonable and 

Proportional Fees 

1. Two options. An issuer may comply 

with § 235.3(a) in two ways: (1) an issuer may 

elect to receive or charge an interchange 

transaction fee that is no more than the 

amount in § 235.3(b)(1), known as the ‘‘safe 

harbor,’’ or (2) an issuer may determine the 

maximum interchange transaction fee it may 

receive or charge using the cost-based 

approach in § 235.3(b)(2) (See § 235.3(c) and 

related commentary). An issuer complies 

with § 235.3(a) if it receives an interchange 

transaction fee in an amount at or below the 

safe harbor even if the maximum interchange 

transaction fee that the issuer is able to 

receive or charge under § 235.3(b)(2) is less 

than the safe harbor. 

2. Safe harbor. An issuer that receives or 

charges interchange fees at or below the 

amount in § 235.3(b)(1) (known as the ‘‘safe 

harbor’’) is not required to compute an 

interchange fee transaction amount under 

§ 235.3(b)(2). An issuer that receives or 

charges an interchange transaction fee in an 

amount at or below the safe harbor, however, 

must comply the reporting requirements in 

§ 235.8. 

3. Cap. An issuer that determines the 

maximum interchange transaction fee that it 

may receive or charge under the cost-based 

approach in § 235.3(b)(2) may not receive or 

charge an interchange transaction fee above 

the maximum amount allowable under 

§ 235.3(b)(2), known as the ‘‘cap,’’ even if its 

costs are above the cap. In contrast, if an 

issuer calculates that it has allowable pertransaction costs that are lower than the cap, 

that issuer may not receive or charge an 

interchange transaction fee higher than the 

amount determined using the formula in 

§ 235.3(b)(2) or the safe harbor amount, 

whichever is greater. 

4. Variation among interchange fees. A 

network is permitted to set fees that vary 

with the value of the transaction (ad valorem 

fees), as long as the maximum amount of the 

interchange fee received by an issuer for any 

electronic debit transaction was not more 

than that issuer’s maximum permissible 

interchange fee. A network is permitted to 

establish different interchange fees for 

different types of transactions (e.g., cardpresent and card-not-present) or different 

types of merchants, as long as each of those 

fees satisfied the relevant limits of the 

standard. 

3(c) Issuer Costs 

1. In general. Section 235.3(c) sets forth the 

allowable costs that an issuer may include 

when calculating its interchange transaction 

fee under § 235.3(b)(2). These costs are those 

that are attributable to the authorization, 

clearance, and settlement of electronic debit 

transactions. Section 235.3(c)(1) further 

limits the costs in §§ 235.3(c)(1)(i) through 

(c)(1)(iv) to those that vary with the number 

of transactions sent to the issuer. 

2. Activities. Section 235.3(c)(1) limits the 

allowable costs that an issuer may include 

when calculating its interchange transaction 

fee to the variable costs associated with its 

role in authorization, clearance, and 

settlement of electronic debit transactions. 

i. Issuer’s role in authorization. Section 

235.3(c)(1)(i) describes an issuer’s role in the 

authorization process. The authorization 

process begins when the cardholder presents 

a debit card or otherwise provides the card 

information to the merchant to purchase 

goods or services and ends when the 

merchant receives notice that the issuer 

either has approved or denied the 

transaction. In both four-party and threeparty systems, the issuer receives the request 

for authorization of the electronic debit 

transaction. In a four-party system, the 

approval request is sent to the issuer via the 

acquirer and payment card network (and any 


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processors that the acquirer or issuer may 

use). In a three-party system, the payment 

card network is both the issuer and the 

acquirer and therefore the approval request 

travels through fewer parties. In both 

systems, the issuer decides whether to 

approve or deny the electronic debit 

transaction based on several factors, such as 

the availability of funds in the cardholder’s 

account. Once the issuer approves or denies 

the transaction, it sends the approval or 

denial back through the payment card 

network and acquirer (and any processors) to 

the merchant. Section 235.3(c)(1)(i)’s 

authorization activities include activities 

such as data processing, voice authorization 

inquiries, and referral inquiries. An issuer 

generally performs separate activities with 

the primary purpose of fraud-prevention in 

connection with authorization. Those 

separate activities are not considered to be 

part of an issuer’s role in authorization under 

§ 235.3(c)(1). 

ii. Issuer’s role in clearance. Section 

235.3(c)(1)(ii) describes the issuer’s role in 

the clearance process. Clearance is the 

process of submitting a record of an 

electronic debit transaction for payment. In 

PIN debit (or single-message) networks, the 

authorization message also generally serves 

as the clearance of the transaction. In 

signature debit (or dual-message) networks, 

the acquirer sends the clearance message 

through the network to the issuer following 

the completion of the purchase by the 

cardholder, as specified in payment card 

network rules. Section 235.3(c)(1)(ii)’s 

signature-debit clearance activities include 

activities such as data processing and 

reconciling clearing message information. 

iii. Non-routine transactions. In some 

instances, an issuer may decide to reverse 

settlement for an electronic debit transaction, 

pursuant to payment card network rules. 

This reversal is known as a ‘‘chargeback.’’ The 

issuer’s role in the clearance process includes 

the process of initiating the chargeback. After 

the acquirer receives a chargeback, the 

acquirer may decide to represent the 

transaction, pursuant to the network rules. 

The issuer’s role in the clearance process also 

includes receiving and processing 

representments. Finally, after the initial 

clearance process, an acquirer may determine 

that the transaction record contained an 

error. For example, the transaction record 

may reflect an incorrect transaction amount 

or may be a duplicate of a previous 

transaction. The issuer’s role in the clearance 

of a transaction also includes receiving and 

processing adjustments. Accordingly, 

§ 235.3(c)(1)(iii)’s non-routine clearance 

activities include activities such as data 

processing to prepare and send the 

chargeback message through the network, 

and reconciliation expenses specific to 

receiving representments and error 

adjustments, such as posting a credit to a 

cardholder’s account. An issuer’s clearance 

costs do not include the costs of receiving 

cardholder inquiries about particular 

transactions. 

iv. Issuer’s role in settlement. Issuers have 

two roles in settlement of electronic debit 

transactions: Interbank settlement and 

settlement with the cardholders. Interbank 

settlement is the process of transferring funds 

between issuers and acquirers. Typically, 

each day a payment card network will collect 

all transactions sent for clearing and will 

determine the net amount owed by each 

issuer and acquirer, after deducting 

interchange transaction fees and other fees. 

The issuer (unless it is also a large merchant 

acquirer) will generally be in a net debit 

position and will transmit funds for 

interbank settlement. Issuers settle the 

electronic debit transactions with their 

cardholders by posting the transactions to the 

cardholder accounts. Section 235.3(c)(1)(iv)’s 

settlement costs include the fees for 

settlement through a net settlement service, 

ACH, or Fedwire ®, and data processing costs 

for posting transactions to the cardholders’ 

accounts. 

3. Issuer’s costs. 

i. Variable costs vs. fixed costs. Variable 

costs that are attributable to authorizing, 

clearing, and settling electronic debit 

transactions can be considered in 

determining an issuer’s permissible 

interchange transaction fee. For example, the 

portion of an issuer’s data-processing costs 

that vary based on the number of 

authorization requests is a variable cost. If an 

issuer uses a third-party processor or other 

agent for all of its authorization, clearance, 

and settlement activities, then any pertransaction fee the third-party processor 

charges is a variable cost for the issuer. In 

contrast, fixed costs are those costs that do 

not vary with changes in output up to 

existing capacity limits within a calendar 

year. For example, an issuer may pay a fixed 

fee to connect to a network in order to 

process transactions. The connectivity fee is 

a fixed cost. 

ii. Network fees excluded. Per-transaction 

fees (e.g., switch fees) paid to the network in 

its role as network for purposes of 

authorization, clearance, and settlement are 

not an allowable cost. A payment card 

network may offer optional authorization, 

clearance, and settlement services to an 

issuer. In this case, although the network is 

charging fees to the issuer, the network is not 

doing so in its role as a network. Rather, 

these fees are considered fees an issuer pays 

to a processor. Therefore, fees charged by a 

network for its role as a third-party processor 

may be included in an issuer’s allowable 

costs, provided they otherwise are 

permissible to include under § 235.3(c)(1). 

iii. Common costs excluded. Common 

costs, which are not attributable to 

authorization, clearance, and settlement, are 

not allowable costs. For example, an issuer 

may not allocate a portion of its overhead 

costs (e.g., the costs of its facilities or its 

human resources and legal staff) for the 

purpose of calculating its permissible 

interchange transaction fee. Similarly, the 

costs of operating a branch office are 

common to all banking activities, including 

the debit card program, and therefore are not 

allowable costs. 

iv. Costs of other activities excluded. 

Section 235.3(c) sets forth an exclusive list of 

costs that an issuer may include when 

determining the amount of an interchange 

transaction fee it may receive or charge with 

respect to an electronic debit transaction. 

Therefore, an issuer may not include those 

costs that are not incurred for the activities 

listed in §§ 235.3(c)(1)(i) through (iv). In 

addition, as discussed earlier, fixed costs, 

even if incurred for activities related to 

authorization, clearance, or settlement of 

debit card transactions, may not be included. 

Fraud losses, the cost of fraud-prevention 

activities, and the cost of rewards programs 

are not includable as allowable costs. 

3(d) Disclosure to payment card network 

1. No differentiation. A payment card 

network may, but is not required to, 

differentiate among issuers subject to § 235.3 

when setting interchange transaction fees. If 

a payment card network chooses to set the 

interchange transaction fee for all issuers that 

are subject to the interchange fee standards 

at or below the safe harbor amount, it is not 

necessary for issuers to report to the payment 

card network through which it receives 

electronic debit transactions the maximum 

amount of any interchange transaction fee it 

may receive or charge. 

2. Differentiation. If a payment card 

network differentiates among issuers when 

setting interchange transaction fees, any 

issuer that is subject to the interchange fee 

standards receives or charges interchange 

transaction fees above the safe harbor must 

report the maximum amount of any 

interchange transaction fee it may receive or 

charge to the payment card network. An 

issuer must report such amount by March 31 

of each calendar year for which it will be 

receiving an interchange transaction fee 

above the safe harbor (effective October 1 of 

the calendar year). An issuer need not submit 

its detailed cost information to the payment 

card networks. 

Alternative 2 (Cap): 

3(a) [Reserved] 

3(b) Determining reasonable and proportional 

fees 

1. Variation among interchange fees. A 

network is permitted to set fees that vary 

with the value of the transaction (ad valorem 

fees), as long as the maximum amount of the 

interchange fee received by an issuer for any 

electronic debit transaction was not more 

than that issuer’s maximum permissible 

interchange fee. A network is permitted to 

establish different interchange fees for 

different types of transactions (e.g., cardpresent and card-not-present) or types of 

merchants, as long as each of those fees 

satisfied the relevant limits of the standard. 

Sec. 235.4 [Reserved] 

Sec. 235.5 Exemptions for certain electronic 

debit transactions. 

§ 235.5 In general 

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 previous calendar 

year. In this case, the electronic debit 

transaction made using that card may qualify 


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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. 

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, are less than $10 billion. 

5(b) Exemption for government-administered 

payment programs 

1. Government-administered payment 

program. Electronic debit transactions made 

using a debit card issued pursuant to a 

government-administered payment program 

generally are exempt from the interchange fee 

restrictions. 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. In 

addition, a program may be governmentadministered 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 governmentadministered programs even though a 

Federal, State, or local government agency is 

not the source of funds. 

5(c) Exemption for certain reloadable prepaid 

cards 

1. Reloadable. Electronic debit transactions 

made using certain reloadable general-use 

prepaid cards are exempt from the 

interchange fee restrictions. 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 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. 

2. Marketed or labeled as a gift card or gift 

certificate. 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 

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. 

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.) 

3. 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. 

4. 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 

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 same facts as in 

comment 5(c)–4.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 same facts as in 

comment 5(c)–4.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 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 


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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. 

iv. Same facts as in same facts as in 

comment 5(c)–4.i,, except that the retailer 

sells a variety of prepaid card products, 

including store gift cards and generalpurpose reloadable cards, arranged side-byside 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 general-purpose reloadable 

cards as gift cards or gift certificates are 

maintained. 

5. 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. 

6. Temporary non-reloadable cards issued 

in connection with a general-purpose 

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 nonreloadable card. After the card is purchased, 

the card holder 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 as long as the 

card is not marketed as a gift card or gift 

certificate. 

Sec. 235.6 Prohibition on Circumvention or 

Evasion 

1. Illustration of circumvention or evasion. 

A finding of evasion or circumvention will 

depend on all relevant facts and 

circumstances. 

i. Example. Circumvention or evasion of 

the interchange transaction fee restrictions is 

indicated in the following example: The total 

amount of payments or incentives received 

by an issuer from a payment card network 

during a calendar year in connection with 

electronic debit transactions, other than 

interchange transaction fees passed through 

to the issuer by the network, exceeds the total 

amount of all fees paid by the issuer to the 

network for electronic debit transactions 

during that year. 

ii. Incentives or fees considered. 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 fixed 

payments for debit card related activities. 

Incentives or payments made by a payment 

card network do not include interchange 

transaction fees that are passed through to 

the issuer by the network. In addition, funds 

received by an issuer from a payment card 

network as a result of chargebacks or 

violations of network rules or requirements 

by a third party do not constitute incentives 

or payments made by a payment card 

network. Fees paid by an issuer to a payment 

card network include, but are not limited to 

network processing, or switch fees, 

membership or licensing fees, network 

administration fees, and fees for optional 

services provided by the network. 

2. Examples of circumstances not involving 

circumvention or evasion. The following 

examples illustrate circumstances that would 

not indicate circumvention or evasion of the 

interchange transaction fee restrictions in 

§§ 235.3 and 235.4: 

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 year. Over the same period, 

however, the total network 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 payments or incentives paid by the 

network to the issuer. Under these 

circumstances, the issuer does not receive 

any net compensation from the network for 

electronic debit transactions, and thus, no 

circumvention or evasion of the interchange 

transaction fee restrictions has occurred. 

ii. Because of an increase in debit card 

transactions that are processed through a 

payment card network during a calendar 

year, an issuer receives a rate reduction for 

network processing fees that reduces the total 

amount of network processing fees paid by 

the issuer during the year. However, the total 

amount of all fees paid to the network by the 

issuer for debit card transactions continues to 

exceed the total amount of payments or 

incentives received by the issuer from the 

network for such transactions. Under these 

circumstances, the issuer does not receive 

any net compensation from the network for 

electronic debit transactions and thus, no 

circumvention or evasion of the interchange 

transaction fee restrictions has occurred. 

3. No applicability to exempt issuers or 

electronic debit transactions. The prohibition 

against circumventing or evading the 

interchange transaction fee restrictions does 

not apply to issuers or electronic debit 

transactions that qualify for an exemption 

under § 235.5 from the interchange 

transaction fee restrictions. 

Sec. 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, an issuer of debit cards for 

government-administered payment programs, 

while exempt from the restrictions on 

interchange transaction fees, is 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 

determine the routing for electronic debit 

transactions. 

7(a) Prohibition on Network Exclusivity 

1. Personal Identification Number (PIN) 

debit. The term ‘‘PIN debit’’ refers to a 

cardholder’s use of a personal identification 

number, or PIN, to authorize a debit card 

transaction. Payment card networks that 

process debit card transactions that are 

typically authorized by means of a 

cardholder’s entry of a PIN are referred to as 

‘‘PIN’’ or ‘‘PIN-based’’ (or single message) 

debit networks. 

2. Signature debit. The term ‘‘signature 

debit’’ generally refers to a cardholder’s use 

of a signature to authorize a debit card 

transaction. Payment card networks that 

process debit card transactions that are 

typically authorized by means of a 

cardholder’s signature are referred to as 

‘‘signature’’ or ‘‘signature-based’’ debit (or dual 

message) networks. 

Alternative A (Two unaffiliated networks) 

3. Scope of restriction. Section 235.7(a) 

does not require an issuer to have multiple, 

unaffiliated networks available for each 

method of cardholder authorization. For 

example, it is sufficient for an issuer to issue 

a debit card that operates on one signaturebased 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. 

Alternative B (Two unaffiliated networks for 

each authorization method) 

3. Scope of restriction. Section 235.7(a) 

provides that each electronic debit 

transaction, regardless of the method of 

authorization used by the cardholder, must 

be able to be processed on at least two 

unaffiliated payment card networks. For 

example, if a cardholder authorizes an 

electronic debit transaction using a signature, 

that transaction must be capable of being 

processed on at least two unaffiliated 

signature-based payment card networks. 

Similarly, if a consumer authorizes an 


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electronic debit transaction using a PIN, that 

transaction must be capable of being 

processed on at least two unaffiliated PINbased payment card networks. The use of 

alternative technologies, such as contactless 

or radio-frequency identification (RFID), to 

authorize a transaction does not constitute a 

separate method of authorization because 

such transactions are generally processed 

over either a signature debit network or a PIN 

debit network. 

4. Examples of limited geographic or 

merchant acceptance networks. Section 

235.7(a) requires that a payment card 

network (or combination of payment card 

networks) meet geographic and merchant 

acceptance requirements to satisfy the rule. 

The following are examples of payment card 

networks that would not meet the geographic 

or merchant acceptance tests: 

i. A payment card network that operates in 

only a limited region of the United States 

would not meet the geographic test, unless 

one or more other unaffiliated payment card 

network(s) are also enabled on the card, such 

that the combined geographic coverage of 

networks permits the card to be accepted on 

at least two unaffiliated payment card 

networks for any geographic area in the 

United States. For example, an issuer may 

not issue a debit card that is enabled solely 

on one payment card network that is 

accepted nationwide and another unaffiliated 

payment card network that operates only in 

the Midwest United States. In such case, the 

issuer would also be required to add one or 

more unaffiliated payment card networks 

that would generally enable transactions 

involving the card to be processed on at least 

two unaffiliated payment card networks in 

almost all of the rest of the country. A 

payment card network is considered to have 

sufficient geographic reach even though there 

may be limited areas in the United States that 

it does not serve. For example, a national 

network that has no merchant acceptance in 

Guam or American Samoa would nonetheless 

meet the geographic reach requirement. 

ii. A payment card network that is 

accepted only at a limited category of 

merchants (for example, at a particular 

grocery store chain or at merchants located 

in a particular shopping mall). 

5. Examples of prohibited 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. 

ii. Network rules or guidelines that allow 

only that network’s brand, mark, or logo to 

be displayed on a particular debit card or that 

otherwise limit the number, or location, of 

network brands, marks, or logos that may 

appear on the debit card. 

6. Network logos or symbols on card not 

required. Section 235.7(a) does not require 

that a debit card identify the brand, mark, or 

logo of each payment card network over 

which an electronic debit transaction may be 

processed. For example, a debit card that is 

enabled for two or more unaffiliated payment 

card networks need not bear the logos or 

symbols for each card network. 

7. 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 in all cases, even if the issuer is not 

subject to any 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. 

Alternative A Only (Two unaffiliated 

networks) 

8. 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 in 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. 

Alternative B Only (Two unaffiliated 

networks for each authorization method) 

8. 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 for a 

particular debit card, as long as, for each 

method of authorization, 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 network for PIN 

debit transactions as long as those debit cards 

may also be accepted on a second signature 

debit network and a second PIN debit 

network, both of which are unaffiliated with 

the first network. 

7(b) Prohibition on Routing Restrictions 

1. Relationship to the network exclusivity 

restrictions. The prohibition on routing 

restrictions applies solely to the payment 

card networks on which an electronic debit 

transaction may be processed for a particular 

debit card. Thus, an issuer or payment card 

network is prohibited from inhibiting a 

merchant’s ability to route or direct the 

transaction over any of the payment card 

networks that the issuer has enabled to 

process an electronic debit transaction for 

that particular 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, 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 method of debit 

card authorization based on the type of 

access device provided by to the cardholder 

by the issuer, such as requiring the use of 

signature debit if the consumer provides a 

contactless debit card. 

3. Real-time routing decision not required. 

Section 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. 

Instead, the merchant and its acquirer may 

agree to a pre-determined set of routing 

choices that apply to all electronic debit 

transactions that are processed by the 

acquirer on behalf of the merchant. 

By order of the Board of Governors of the 

Federal Reserve System, December 16, 2010. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 2010–32061 Filed 12–27–10; 8:45 am] 

BILLING CODE 6210–01–P 


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