78100 Federal Register / Vol. 88, No. 218 / Tuesday, November 14, 2023 / Proposed Rules 

1Public Law 110–203, section 1075, 124 Stat. 

1376, 2068 (codified at 15 U.S.C. 1693o–2). 2 12 CFR part 235. 

FEDERAL RESERVE SYSTEM 

12 CFR Part 235 

[Regulation II; Docket No. R–1818] 

RIN 7100–AG67 

Debit Card Interchange Fees and 

Routing 

AGENCY: Board of Governors of the 

Federal Reserve System (Board). 

ACTION: Notice of proposed rulemaking. 

SUMMARY: Regulation II implements a 

provision of the Dodd-Frank Act that 

requires the Board to establish standards 

for assessing whether the amount of any 

interchange fee received by a debit card 

issuer is reasonable and proportional to 

the cost incurred by the issuer with 

respect to the transaction. Under the 

current rule, for a debit card transaction 

that does not qualify for a statutory 

exemption, the interchange fee can be 

no more than the sum of a base 

component of 21 cents, an ad valorem 

component of 5 basis points multiplied 

by the value of the transaction, and a 

fraud-prevention adjustment of 1 cent if 

the issuer meets certain fraudprevention-standards. The Board 

developed the current interchange fee 

cap in 2011 using data voluntarily 

reported to the Board by large debit card 

issuers concerning transactions 

performed in 2009. Since that time, data 

collected by the Board every other year 

on a mandatory basis from large debit 

card issuers show that certain costs 

incurred by these issuers have declined 

significantly; however, the interchange 

fee cap has remained the same. For this 

reason, the Board proposes to update all 

three components of the interchange fee 

cap based on the latest data reported to 

the Board by large debit card issuers. 

Further, the Board proposes to update 

the interchange fee cap every other year 

going forward by directly linking the 

interchange fee cap to data from the 

Board’s biennial survey of large debit 

card issuers. Initially, under the 

proposal, the base component would be 

14.4 cents, the ad valorem component 

would be 4.0 basis points (multiplied by 

the value of the transaction), and the 

fraud-prevention adjustment would be 

1.3 cents for debit card transactions 

performed from the effective date of the 

final rule to June 30, 2025. The Board 

also proposes a set of technical revisions 

to Regulation II. 

DATES: Comments must be received on 

or before February 12, 2024. 

ADDRESSES: You may submit comments, 

identified by Docket No. R–1818, RIN 

7100–AG67, by any of the following 

methods: 

• Agency Website: https://

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

https://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: 

https://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Email: regs.comments@

federalreserve.gov. Include docket 

number in the subject line of the 

message. 

• Fax: (202) 452–3819 or (202) 452– 

3102. 

• Mail: Ann E. Misback, 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 website at https://

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

and will not be modified to remove 

confidential, contact or any identifiable 

information. Public comments may also 

be viewed electronically or in person in 

Room M–4365A, 2001 C St. NW, 

Washington, DC 20551, between 9 a.m. 

and 5 p.m. during Federal business 

weekdays. 

FOR FURTHER INFORMATION CONTACT: 

Benjamin Snodgrass, Senior Counsel 

(202–263–4877) or Cody Gaffney, Senior 

Attorney (202–452–2674), Legal 

Division; or Krzysztof Wozniak, Section 

Chief (202–452–3878) or Elena 

Falcettoni, Senior Economist (202–452– 

2528), Division of Reserve Bank 

Operations and Payment Systems. For 

users of TTY–TRS, please call 711 from 

any telephone, anywhere in the United 

States or (202) 263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Overview 

A. Summary of Proposal 

A section of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act known as the Durbin Amendment 

requires the Board to establish standards 

for assessing whether the amount of any 

interchange fee received by a debit card 

issuer is reasonable and proportional to 

the cost incurred by the issuer with 

respect to the debit card transaction.1

The Durbin Amendment also authorizes 

the Board to allow for an adjustment to 

such interchange fee in an amount that 

is reasonably necessary to make 

allowance for costs incurred by the 

debit card issuer in preventing fraud in 

relation to debit card transactions 

involving that issuer. 

The Board implemented these and 

other provisions of the Durbin 

Amendment in 2011 and 2012 when the 

Board adopted Regulation II (Debit Card 

Interchange Fees and Routing).2 Under 

the current rule, each interchange fee 

received by a debit card issuer for a 

debit card transaction that does not 

qualify for a statutory exemption can be 

no more than the sum of (i) 21 cents (the 

‘‘base component’’), (ii) 5 basis points 

multiplied by the value of the 

transaction (the ‘‘ad valorem 

component’’), and (iii) for a debit card 

issuer that meets certain fraudprevention standards, a ‘‘fraudprevention adjustment’’ of 1 cent per 

transaction. Together, the base 

component and ad valorem component 

comprise the ‘‘interchange fee 

standards’’; the base component, ad 

valorem component, and fraudprevention adjustment comprise the 

‘‘interchange fee cap.’’ 

The Board developed the current 

interchange fee cap using data reported 

to the Board by large debit card issuers 

on a voluntary survey that the Board 

conducted during the original 

Regulation II rulemaking. As such, the 

current base component, ad valorem 

component, and fraud-prevention 

adjustment are based on the costs 

incurred by large debit card issuers in 

connection with debit card transactions 

performed in 2009. Since that time, the 

Board has collected data from large 

debit card issuers on a mandatory basis 

every other year, as required by the 

Durbin Amendment. 

When the Board established the 

interchange fee standards in current 

Regulation II, the Board stated that it 

would, over time, adjust the interchange 

fee standards based on reported costs, if 

appropriate. Similarly, with respect to 

the fraud-prevention adjustment, the 

Board stated that it would take into 

account data reported by large debit 

card issuers in the future when 

considering any future revisions to the 

fraud-prevention adjustment. The Board 

also noted that lower costs should result 

in a lower interchange fee cap as issuers 

become more efficient. 

The data collected by the Board from 

large debit card issuers since the 

original Regulation II rulemaking show 

that the costs incurred by large debit 

card issuers in connection with debit 

card transactions have changed 

significantly over time. In particular, the 

costs on which the Board based the base 

component have nearly halved, the 

issuer fraud losses on which the Board 

based the ad valorem component have 

fallen, and the fraud-prevention costs on 


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3As described in section III.A, infra, the costs on 

which the Board based the base component include 

transaction-processing and transaction-monitoring 

costs. 

4As described in section III.A, infra, the costs on 

which the Board based the base component include 

transaction-processing and transaction-monitoring 

costs. These costs may also be referred to as 

‘‘allowable costs (excluding fraud losses)’’ or ‘‘base 

component costs.’’ 

5 In this preamble, the term ‘‘covered issuer 

transactions’’ refers to debit card transactions 

performed with debit cards issued by covered 

issuers. By targeting full cost recovery for 98.5 

percent of covered issuer transactions, the Board 

expects that, over time, the per-transaction 

allowable costs (excluding fraud losses) of around 

98.5 percent of covered issuer transactions will be 

less than or equal to the base component. As 

discussed in section III.B, infra, the proposed 

approach would not guarantee that covered issuers 

will fully recover their allowable costs for the target 

percentage of covered issuer transactions in any 

particular year. 

which the Board based the fraudprevention adjustment have risen, 

according to key metrics of those costs.3

As a result, the Board believes that the 

current interchange fee standards may 

no longer be effective for assessing 

whether, for a debit card transaction 

subject to the standards, the amount of 

any interchange fee received by a debit 

card issuer is reasonable and 

proportional to the cost incurred by the 

issuer with respect to the transaction. 

Further, the Board believes that the 

current fraud-prevention adjustment 

may not reflect an amount that is 

reasonably necessary to make allowance 

for costs incurred by the debit card 

issuer in preventing fraud in relation to 

debit card transactions involving that 

issuer. 

For these reasons, the Board proposes 

to update all three components of the 

interchange fee cap based on the latest 

data reported to the Board by large debit 

card issuers concerning transactions 

performed in 2021. Under the proposal, 

the base component would decrease 

from 21.0 cents to 14.4 cents, the ad 

valorem component would decrease 

from 5.0 basis points (multiplied by the 

value of the transaction) to 4.0 basis 

points (multiplied by the value of the 

transaction), and the fraud-prevention 

adjustment would increase from 1.0 

cents to 1.3 cents. The Board 

determined the proposed base 

component using a new methodology 

that is informed by the cumulative data 

reported to the Board every other year 

since the original Regulation II 

rulemaking. This methodology targets 

full cost recovery over time for a 

significant majority of transactions 

across large debit card issuers through a 

formula that relates the base component 

to a key metric of issuer costs. By 

contrast, the Board determined the 

proposed ad valorem component and 

proposed fraud-prevention adjustment 

using generally the same methodologies 

used in the original rulemaking. 

In addition to updating the 

interchange fee cap for the first time 

since the original rulemaking, the 

proposed revisions would codify in 

Regulation II an approach for updating 

the three components of the interchange 

fee cap every other year going forward 

based on the latest data reported to the 

Board by large debit card issuers. By 

directly linking the interchange fee cap 

to data collected by the Board from large 

debit card issuers every other year, the 

proposed approach should ensure that 

the interchange fee cap will reflect 

changes in the costs incurred by debit 

card issuers. As a result, the Board 

believes that the proposal would ensure 

that, to the extent practicable, (i) the 

interchange fee standards will be 

effective going forward for assessing 

whether, for a transaction subject to the 

interchange fee standards, the amount of 

any interchange fee received by a debit 

card issuer is reasonable and 

proportional to the cost incurred by the 

issuer with respect to the transaction, 

and (ii) the fraud-prevention adjustment 

will continue to reflect an amount that 

is reasonably necessary to make 

allowance for costs incurred by the 

debit card issuer in preventing fraud in 

relation to debit card transactions 

involving that issuer. These future 

updates to the interchange fee cap 

would be implemented in accordance 

with the proposed methodology and 

would be published without inviting 

public comment. 

The Board has reviewed its 

construction of the Durbin Amendment 

and original analysis regarding the costs 

incurred by debit card issuers that the 

Board may consider in establishing the 

interchange fee standards, and believes 

that this prior analysis remains sound. 

As such, the Board does not propose 

any changes to the costs considered for 

purposes of determining the base 

component or the issuer fraud losses 

considered for purposes of determining 

the ad valorem component. The Board 

also does not propose to modify the 

fraud-prevention costs considered for 

purposes of determining the fraudprevention adjustment, or the fraudprevention standards that large debit 

card issuers must meet to receive the 

fraud-prevention adjustment. 

B. Outline of This Preamble 

This preamble is divided into eight 

sections, including this overview 

section I. Section II provides additional 

legal background for the proposal, 

including a detailed description of the 

Durbin Amendment and current 

Regulation II. 

Section III discusses the proposed 

revisions to the interchange fee 

standards in § 235.3. The Board 

proposes to determine the base 

component and ad valorem component 

every other year based on the latest data 

reported to the Board by debit card 

issuers with consolidated assets of $10 

billion or more—referred to in this 

preamble as ‘‘covered issuers’’—on the 

Board’s biennial Debit Card Issuer 

Survey. The base component would be 

determined using a new methodology 

that is informed by the cumulative data 

reported to the Board every other year 

since the original Regulation II 

rulemaking. Specifically, the base 

component would be the product of (i) 

the transaction-weighted average of pertransaction allowable costs (excluding 

fraud losses) across covered issuers 

based on the latest data reported to the 

Board, and (ii) a fixed multiplier 

codified in Regulation II.4 The Board 

proposes a fixed multiplier of 3.7, 

which targets full cost recovery for 98.5 

percent of covered issuer transactions 

over time based on the cumulative data 

reported to the Board by covered issuers 

since the initial Debit Card Issuer 

Survey.5 The ad valorem component 

would be the median ratio of issuer 

fraud losses to transaction value among 

covered issuers (multiplied by the value 

of the debit card transaction), which is 

the same methodology the Board used to 

determine the ad valorem component 

during the original Regulation II 

rulemaking. 

Initially, under the proposal, the base 

component would be 14.4 cents and the 

ad valorem component would be 4.0 

basis points (multiplied by the value of 

the transaction) for debit card 

transactions performed from the 

effective date of the final rule to June 30, 

2025. Going forward, the Board would 

determine the base component and the 

ad valorem component for debit card 

transactions performed during the twoyear period beginning July 1, 2025, 

based on the data reported to the Board 

by covered issuers on the Board’s next 

Debit Card Issuer Survey, and would 

thereafter determine these amounts for 

each succeeding two-year period based 

on data reported to the Board on future 

Debit Card Issuer Surveys. 

Section IV discusses the proposed 

revisions to the fraud-prevention 

adjustment in § 235.4. As with the 

interchange fee standards, the Board 

proposes to determine the fraudprevention adjustment every other year 

based on the latest data reported to the 

Board by covered issuers on the biennial 


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6See Public Law 111–203, 124 Stat. 1376 (2010). 

7EFTA section 920 is codified at 15 U.S.C. 

1693o–2. EFTA section 920(c)(2) defines ‘‘debit 

card’’ to mean any card (including a general-use 

prepaid 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, and 

regardless of whether authorization is based on 

signature, PIN, or other means. Most of EFTA 

section 920’s requirements relate to debit card 

transactions—referred to in the statute and in 

Regulation II as ‘‘electronic debit transactions’’— 

which are defined in EFTA section 920(c)(5) as 

transactions in which a person uses a debit card. 

This preamble uses the term ‘‘debit card 

transaction’’ interchangeably with ‘‘electronic debit 

transaction.’’ Similarly, this preamble uses the term 

‘‘interchange fee’’ interchangeably with the 

statutory term ‘‘interchange transaction fee.’’ EFTA 

section 905(c)(8) defines ‘‘interchange transaction 

fee’’ as any fee established, charged, or received by 

a payment card network for the purpose of 

compensating an issuer for its involvement in an 

electronic debit transaction. For an overview of the 

debit card industry, see 76 FR 43393, 43395–96 

(July 20, 2011). 

8 ‘‘Issuer’’ is defined in EFTA section 920(c)(9) to 

mean any person who issues a debit card, or credit 

card, or the agent of such person with respect to 

such card. 

9For purposes of this exemption, EFTA section 

920(a)(6) provides that the term ‘‘issuer’’ shall be 

limited to the person holding the asset account that 

is debited through a debit card transaction. 

10Specifically, EFTA section 920(a)(7)(A)(ii) 

exempts an interchange fee charged or received 

with respect to a debit card transaction in which a 

person uses a plastic card, payment code, or device 

that is (i) linked to funds, monetary value, or assets 

purchased or loaded on a prepaid basis; (ii) not 

issued or approved for use to access or debit any 

account held by or for the benefit of the cardholder 

(other than a subaccount or other method of 

recording or tracking funds purchased or loaded on 

the card on a prepaid basis); (iii) redeemable at 

multiple, unaffiliated merchants or service 

providers, or automated teller machines; (iv) used 

to transfer or debit funds, monetary value, or other 

assets; and (v) reloadable and not marketed or 

labeled as a gift card or gift certificate. 

Debit Card Issuer Survey. The fraudprevention adjustment would be the 

median per-transaction fraudprevention costs among covered issuers, 

which is generally the same 

methodology the Board used to 

determine the fraud-prevention 

adjustment in 2012. 

Initially, under the proposal, the 

fraud-prevention adjustment would be 

1.3 cents for debit card transactions 

performed from the effective date of the 

final rule to June 30, 2025. Going 

forward, the Board would determine the 

fraud-prevention adjustment for debit 

card transactions performed during the 

two-year period beginning July 1, 2025, 

based on the data reported to the Board 

by covered issuers on the Board’s next 

Debit Card Issuer Survey, and would 

thereafter determine the fraudprevention adjustment for each 

succeeding two-year period based on 

data reported to the Board on future 

Debit Card Issuer Surveys. 

Section V discusses the proposed 

technical revisions to Regulation II, 

which are generally intended to make 

Regulation II clearer. For example, the 

Board proposes to add ‘‘covered issuer’’ 

as a defined term in Regulation II and 

use this term throughout the regulation 

and the Official Board Commentary on 

Regulation II to refer to debit card 

issuers with consolidated assets of $10 

billion or more. 

Section VI discusses the proposed 

effective date for the revisions. The 

Board proposes that the revisions 

would, if adopted, take effect on the first 

day of the next calendar quarter that 

begins at least 60 days after the final 

rule is published in the Federal 

Register. 

Section VII sets forth the Board’s 

general request for comment, as well as 

specific questions for feedback. 

Section VIII sets forth certain 

regulatory analyses that the Board is 

required to complete under the Durbin 

Amendment and certain other statutes, 

such as the Regulatory Flexibility Act 

and the Paperwork Reduction Act. 

II. Legal Background 

A. Statutory Authority 

The Dodd-Frank Wall Street Reform 

and Consumer Protection Act (the 

Dodd-Frank Act) was enacted on July 

21, 2010.6 Section 1075 of the DoddFrank Act amended the Electronic Fund 

Transfer Act (EFTA) (15 U.S.C. 1693 et 

seq.) to add a new section 920 regarding 

interchange fees for debit card 

transactions and rules for debit card and 

credit card transactions.7

EFTA section 920(a)(2) provides that 

the amount of any interchange fee that 

an issuer may receive or charge with 

respect to a debit card transaction shall 

be reasonable and proportional to the 

cost incurred by the issuer with respect 

to the transaction.8 EFTA section 

920(a)(3) requires the Board to establish 

standards for assessing whether the 

amount of any interchange fee is 

reasonable and proportional to the cost 

incurred by the issuer with respect to 

the transaction. EFTA section 920(a)(4) 

sets forth various considerations that the 

Board must take into account when 

establishing these interchange fee 

standards. Specifically, the Board must 

consider the functional similarity 

between debit card transactions and 

checking transactions that are required 

within the Federal Reserve bank system 

to clear at par. The Board must also 

distinguish between (i) the incremental 

cost incurred by an issuer for the role of 

the issuer in the authorization, 

clearance, or settlement of a particular 

debit card transaction, which cost shall 

be considered by the Board; and (ii) 

other costs incurred by an issuer which 

are not specific to a particular debit card 

transaction, which costs shall not be 

considered by the Board. 

Under EFTA section 920(a)(5)(A), the 

Board may allow for an adjustment to 

the interchange fee received or charged 

by an issuer under the interchange fee 

standards if such adjustment is 

reasonably necessary to make allowance 

for costs incurred by the issuer in 

preventing fraud in relation to debit 

card transactions involving the issuer, 

provided that the issuer complies with 

fraud-related standards established by 

the Board. The Board’s fraud-related 

standards must, among other things, 

require issuers to take effective steps to 

reduce the occurrence of, and costs 

from, fraud in relation to debit card 

transactions, including through the 

development and implementation of 

cost-effective fraud prevention 

technology. 

Certain issuers and debit card 

transactions are exempt from the 

interchange fee standards. EFTA section 

920(a)(6) exempts any issuer that, 

together with its affiliates, has assets of 

less than $10 billion.9 EFTA section 

920(a)(7)(A)(i) exempts an interchange 

fee charged or received with respect to 

a debit card transaction in which a 

person uses a debit card or general-use 

prepaid card that has been provided to 

a person pursuant to a Federal, State, or 

local government-administered payment 

program, in which the person may only 

use the debit card or general-use 

prepaid card to transfer or debit funds, 

monetary value, or other assets that 

have been provided pursuant to such 

program. EFTA section 920(a)(7)(A)(ii) 

exempts an interchange fee charged or 

received with respect to a debit card 

transaction in which a person uses 

certain general-use prepaid cards.10

EFTA section 920(a)(3)(B) authorizes 

the Board to require any issuer or 

payment card network to provide the 

Board with such information as may be 

necessary to carry out the provisions of 

EFTA section 920(a). This provision 

additionally requires the Board, in 

issuing rules under EFTA section 920(a) 

and on at least a biannual basis 

thereafter, to disclose such aggregate or 

summary information concerning the 

costs incurred, and interchange fees 

charged or received, by issuers or 

payment card networks in connection 

with the authorization, clearance, or 

settlement of debit card transactions as 


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11EFTA section 920 contains various other 

provisions, but the proposed revisions to Regulation 

II discussed in this preamble would not 

substantively amend the provisions of Regulation II 

that implement these other statutory provisions. 

Specifically, EFTA section 920(a)(1) authorizes the 

Board to prescribe regulations to prevent 

circumvention or evasion of EFTA section 920(a). 

EFTA section 920(a)(8) confers upon the Board 

additional authority to prescribe regulations 

concerning network fees. EFTA section 920(b) 

requires the Board to prescribe regulations related 

to the routing of debit card transactions. 

12Regulation II, Debit Card Interchange Fees and 

Routing, codified at 12 CFR part 235. See 76 FR 

43393 (July 20, 2011) (final rule); 76 FR 43477 (July 

20, 2011) (interim final rule). 

13See 77 FR 46258 (Aug. 3, 2012). 

14The Official Board Commentary on Regulation 

II, found in appendix A to part 235, refers to these 

amounts as the ‘‘base component’’ and the ‘‘ad 

valorem component,’’ respectively. 

15The appropriate agency for a particular entity 

is determined pursuant to § 235.9 and EFTA section 

918 (15 U.S.C. 1693o). For example, the Board is 

the appropriate agency with respect to 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. 

16The reference to ‘‘the requirements of this part’’ 

in § 235.8(a) is erroneous, as debit card issuers that 

qualify for the exemption in § 235.5(a) are not 

exempt from the requirements of § 235.7 (network 

exclusivity and debit card transaction routing) or 

§ 235.8(c) (record retention). As described in section 

V, infra, the Board proposes a technical correction 

to fix this error. 

17See FR 3064a. 

18See FR 3064b. 

19See Board of Governors of the Federal Reserve 

System, 2011 Interchange Fee Revenue, Covered 

Issuers Costs, and Covered Issuer and Merchant 

Fraud Losses Related to Debit Card Transactions 

(Mar. 5, 2013), https://www.federalreserve.gov/ 

paymentsystems/files/debitfees_costs_2011.pdf. 

20The Board’s reports may be found on the 

Board’s website. See Board of Governors of the 

Federal Reserve System, Regulation II (Debit Card 

Interchange Fees and Routing): Reports and Data 

Collections, https://www.federalreserve.gov/ 

paymentsystems/regii-data-collections.htm. 

Additionally, on an annual basis, the Board 

publishes average interchange fees by network. See 

Board of Governors of the Federal Reserve System, 

Regulation II (Debit Card Interchange Fees and 

Routing): Average Debit Card Interchange Fee by 

Payment Card Network, https://www.federal

reserve.gov/paymentsystems/regii-averageinterchange-fee.htm. 

21Other provisions of Regulation II implement 

provisions of EFTA section 920 that are not directly 

relevant to the proposed revisions discussed in this 

preamble. Specifically, § 235.6 prohibits 

circumvention or evasion of the interchange fee 

restrictions in Regulation II and prohibits an issuer 

from receiving net compensation from a payment 

card network within a calendar year. Section 235.7 

sets forth rules related to network exclusivity and 

the routing of debit card transactions. To address 

certain issues related to the routing of card-notpresent debit card transactions, the Board recently 

revised § 235.7 and the commentary thereto, with 

an effective date of July 1, 2023. See 87 FR 61217 

(Oct. 11, 2022). 

the Board considers appropriate and in 

the public interest.11

B. Regulation II 

The Board adopted a final rule 

implementing the interchange fee 

standards and an interim final rule 

implementing the fraud-prevention 

adjustment in July 2011.12 In August 

2012, the Board adopted a final rule 

amending its interim final rule 

regarding the fraud-prevention 

adjustment.13 These rules were codified 

as Regulation II. 

Section 235.3(a) of Regulation II 

implements EFTA section 920(a)(2) by 

providing that the amount of any 

interchange fee that an issuer may 

receive or charge with respect to a debit 

card transaction shall be reasonable and 

proportional to the cost incurred by the 

issuer with respect to the transaction. 

Section 235.3(b) implements EFTA 

section 920(a)(3) by providing that an 

issuer complies with the requirements 

of § 235.3(a) only if each interchange fee 

received or charged by the issuer for a 

debit card transaction is no more than 

the sum of (i) 21 cents and (ii) 5 basis 

points multiplied by the value of the 

transaction.14 These amounts, together 

with any fraud-prevention adjustment 

permitted under § 235.4, comprise the 

interchange fee cap. 

Section 235.4 implements the fraudprevention adjustment permitted by 

EFTA section 920(a)(5). Specifically, 

§ 235.4(a) allows an issuer that meets 

the fraud-prevention standards 

enumerated in § 235.4(b) to receive or 

charge an amount of no more than 1 

cent per transaction in addition to any 

interchange fee it receives or charges in 

accordance with § 235.3. Section 

235.4(b) provides that to be eligible to 

receive or charge the fraud-prevention 

adjustment, an issuer must develop, 

implement, and periodically review 

fraud-related policies and procedures 

meeting certain requirements. Section 

235.4(c) provides that to be eligible to 

receive or charge a fraud-prevention 

adjustment, an issuer must annually 

notify its payment card networks that it 

complies with the fraud-prevention 

standards in § 235.4(b). Section 235.4(d) 

sets forth rules for when an issuer, or 

the appropriate agency, determines that 

the issuer is not eligible to receive or 

charge a fraud-prevention adjustment.15

Section 235.5 implements the 

statutory exemptions from the 

interchange fee standards. Section 

235.5(a) generally provides that the 

interchange fee standards do not apply 

to an interchange fee received or 

charged by an issuer with respect to a 

debit card transaction if the issuer, 

together with its affiliates, has assets of 

less than $10 billion as of the end of the 

calendar year preceding the date of the 

transaction and holds the account that 

is debited. Section 235.5(b) implements 

the statutory exemption for governmentadministered payment programs. 

Section 235.5(c) implements the 

statutory exemption for certain 

reloadable prepaid cards. 

Section 235.8 implements the data 

collection provisions in EFTA section 

920(a)(3)(B). Specifically, § 235.8(a) 

provides that 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.16 Section 235.8(b) 

provides that each entity required to file 

a report with the Board shall submit 

data in a form prescribed by the Board 

for that entity. Pursuant to this 

authority, the Board collects 

information from debit card issuers with 

consolidated assets of $10 billion or 

more every other year through the Debit 

Card Issuer Survey.17 The Board also 

collects information from payment card 

networks every year through the 

Payment Card Network Survey.18 The 

Board has published a summary of 

findings from these two surveys on a 

biennial basis since 2013, consistent 

with EFTA section 920(a)(3)(B).19 The 

Board’s most recent biennial report was 

published concurrently with this 

proposal.20

Appendix A to part 235 is the Official 

Board Commentary on Regulation II. In 

general, the commentary provides 

background material to explain the 

Board’s intent in adopting a particular 

part of the regulation and examples to 

aid in understanding how a particular 

requirement is to work.21

III. Proposed Revisions to the 

Interchange Fee Standards (§ 235.3) 

A. Background 

As described above, EFTA section 

920(a)(3) directs the Board to establish 

standards for assessing whether the 

amount of any interchange fee is 

reasonable and proportional to the cost 

incurred by the issuer with respect to 

the transaction. To fulfill this statutory 

mandate, the Board (i) defined the costs 

incurred by debit card issuers that the 

Board considers, consistent with the 

statute (referred to herein as ‘‘allowable 

costs’’), and (ii) established standards 

for assessing interchange fees relative to 

allowable costs. A brief overview of how 

the Board developed the interchange fee 

standards in current § 235.3 follows. 

1. Allowable Costs 

EFTA section 920(a)(4)(B) requires the 

Board, in establishing interchange fee 

standards, to distinguish between (i) the 

incremental cost incurred by an issuer 


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22EFTA section 920(a)(4)(a) also requires the 

Board to consider the functional similarity between 

debit card transactions and checking transactions 

that are required within the Federal Reserve bank 

system to clear at par. For a discussion of this 

requirement, see section VIII.B, infra. 

23The Board observed in 2011 that EFTA does 

not define ‘‘other costs incurred by an issuer which 

are not specific to a particular electronic debit 

transaction,’’ which the Board is prohibited from 

considering. See 76 FR 43393, 43426 (July 20, 

2011). In 2010, the Board initially proposed to 

exclude costs that could not be attributed to any 

identified debit card transaction (referred to as 

‘‘fixed costs’’ in the proposal), even if those costs 

were specific to effecting debit card transactions as 

a whole. See 75 FR 81721, 81735–36 (Dec. 28, 

2010). After considering public comments, the 

Board at the final rule stage interpreted the category 

of prohibited costs to include only those costs that 

are not incurred in the course of effecting any debit 

card transaction. See 76 FR at 43426. Further, the 

Board noted that the statute is silent on those costs 

that are not incremental costs related to a debit card 

issuer’s role in authorization, clearance, and 

settlement, but that are specific to a particular debit 

card transaction. See id. The Board determined that 

EFTA section 920(a)(4)(B) did not specifically 

instruct the Board to consider this third category of 

costs but did not prohibit their consideration. See 

id. The Board’s interpretation of the statute was 

upheld by the U.S. Court of Appeals for the District 

of Columbia Circuit. See NACS v. Board of 

Governors of the Federal Reserve System, 746 F.3d 

474, 488–89 (D.C. Cir. 2014). See also 80 FR 48684 

(Aug. 14, 2015) (clarifying the treatment of 

transaction-monitoring costs, as required by the 

D.C. Circuit). 

24See 76 FR at 43429–31. 

25See 76 FR at 43427–29. 

26See 76 FR at 43431–35. 

27See Board of Governors of the Federal Reserve 

System, 2009 Debit Card Issuer Survey (Sep. 13, 

2010), https://www.federalreserve.gov/ 

paymentsystems/files/payment_card_network_

survey_20100920.pdf. The survey respondents 

included 66 covered issuers, representing about 57 

percent of total debit card transactions by volume 

and 60 percent of total debit card transactions by 

value in 2009. However, because some covered 

issuers did not respond to the voluntary survey, the 

proportion of total debit card transactions 

performed in 2009 that are attributable to covered 

issuers (including respondents and nonrespondents) was greater than 57 percent (by 

volume) and 60 percent (by value). The Board 

discussed preliminary summary findings from this 

survey in its 2010 proposal to establish interchange 

fee standards. See 75 FR at 81724–26. The Board 

subsequently published a report summarizing the 

data collected from the survey. See Board of 

Governors of the Federal Reserve System, 2009 

Interchange Fee Revenue, Covered Issuer Costs, and 

Covered Issuer and Merchant Fraud Losses Related 

to Debit Card Transactions (June 2011), https://

www.federalreserve.gov/paymentsystems/files/ 

debitfees_costs.pdf. 

28See 76 FR at 43433. 

29See id. 

30 In other words, for approximately 80 percent of 

covered issuers that responded to the Board’s 

voluntary survey, the covered issuer’s base 

component costs in 2009 were less than or equal to 

the product of 21 cents and the number of 

transactions involving that issuer’s debit cards in 

2009. However, the Board did not indicate that the 

Board was adopting any particular cost-recovery 

target across covered issuers (i.e., that 80 percent of 

covered issuers should fully recover their base 

component costs) or across covered issuer 

transactions. 

for the role of the issuer in the 

authorization, clearance, or settlement 

of a particular debit card transaction, 

which cost shall be considered by the 

Board; and (ii) other costs incurred by 

an issuer which are not specific to a 

particular debit card transaction, which 

costs shall not be considered by the 

Board.22 When the Board adopted 

current § 235.3 in 2011, the Board 

identified a third category of costs that 

the Board is permitted, but not required, 

to consider: costs incurred by an issuer 

that are specific to a particular debit 

card transaction but are not incremental 

costs related to a debit card issuer’s role 

in authorization, clearance, and 

settlement.23

Using this framework, the Board 

defined the allowable costs that the 

Board considered in establishing the 

interchange fee standards set forth in 

§ 235.3. For reasons explained in the 

preamble accompanying the 2011 final 

rule, allowable costs comprise (i) 

transaction-processing costs, including 

fixed and variable authorization, 

clearance, and settlement costs, network 

processing fees (e.g., switch fees), and 

the costs of processing chargebacks and 

other non-routine transactions; (ii) 

transaction-monitoring costs; and (iii) 

issuer fraud losses.24 Allowable costs do 

not include other costs incurred by 

debit card issuers in connection with 

their debit card programs, such as 

corporate overhead and accountrelationship costs, general debit card 

program costs (e.g., card production and 

delivery costs, marketing costs, and 

research and development costs), or 

costs of non-sufficient funds handling, 

cardholder rewards, and cardholder 

inquiries.25

The Board has reviewed its 

construction of the statute and prior 

analysis regarding the allowable costs 

that the Board considered in 

establishing the interchange fee 

standards, and believes that this prior 

analysis remains sound. As such, the 

Board does not propose any changes to 

the allowable costs considered for 

purposes of the interchange fee 

standards. 

As described below, the Board 

established the base component based 

on transaction-processing and 

transaction-monitoring costs, but 

separately assessed issuer fraud losses 

through the ad valorem component. 

Transaction-processing and transactionmonitoring costs are collectively 

referred to in this preamble as ‘‘base 

component costs.’’ 

2. Interchange Fee Standards 

For reasons explained in the preamble 

accompanying the 2011 final rule, the 

Board adopted a uniform, transactionlevel standard that, subject to any fraudprevention adjustment that a covered 

issuer may be permitted to receive or 

charge under § 235.4, establishes the 

maximum permissible interchange fee 

that a covered issuer may receive for a 

debit card transaction subject to the 

interchange fee standards.26 This 

maximum interchange fee is the sum of 

a base component and an ad valorem 

component. 

To determine the base component, the 

Board referred to the data that the Board 

had collected shortly after the DoddFrank Act was signed into law via a 

voluntary survey of covered issuers 

concerning debit card transactions 

performed in the 2009 calendar year.27

Based on these data, the Board 

computed the per-transaction base 

component costs of each covered issuer 

that reported such costs by summing the 

base component costs reported by the 

covered issuer and dividing this sum by 

the total number of debit card 

transactions reported by the covered 

issuer. The Board then arranged these 

per-transaction costs in ascending order 

from lowest- to highest-cost covered 

issuer.28

The Board observed that this 

distribution of per-transaction base 

component costs across covered issuers 

was quite skewed. These costs ranged 

from 3 cents to 66 cents per transaction, 

with a considerable majority of covered 

issuers concentrated in the range of 

costs below 21 cents, and a scattered set 

of covered issuers having significantly 

higher costs above 21 cents. Further, 

below 21 cents, the difference between 

the per-transaction base component 

costs of adjacently ranked covered 

issuers was small, but at around 21 

cents, the distribution showed a marked 

discontinuity, with base component 

costs varying more significantly across 

these higher-cost covered issuers. 

The Board concluded that 

establishing interchange fee standards to 

accommodate these higher-cost covered 

issuers would not be reasonable or 

proportional to the overall cost 

experience of the substantial majority of 

covered issuers.29 For that reason, the 

Board adopted a base component of 21 

cents per transaction. Had that base 

component been in effect in 2009, 

approximately 80 percent of covered 

issuers that responded to the Board’s 

voluntary survey would have fully 

recovered their base component costs.30

The Board recognized that issuer 

fraud losses are distinct from the other 

types of allowable costs in that the 

amount of a fraud loss varies with the 


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31See 76 FR at 43431. 

32 In the preamble accompanying the 2011 final 

rule, the Board used the term ‘‘per-transaction fraud 

losses’’ for this metric, but the Board now believes 

that ‘‘ratio of issuer fraud losses to transaction 

value’’ is a more accurate description. 

33See 76 FR at 43434. 

34See 76 FR at 43432. 

35 In December 2022, two trade associations 

representing merchants submitted a rulemaking 

petition to the Board regarding the interchange fee 

standards in Regulation II. Specifically, the 

petitioners requested that the Board initiate a 

rulemaking to lower the base component from 21 

cents to 9.7 cents, and eliminate or substantially 

reduce the ad valorem component and the fraudprevention adjustment. The Board views the 

rulemaking petition as an additional consideration 

related to the proposal; however, the Board’s 

rationale for the proposal is discussed in this 

section III.B. 

36The Board computes the transaction-weighted 

average of per-transaction base component costs 

across covered issuers by (i) summing base 

component costs across covered issuers that 

reported these costs; and (ii) dividing this sum by 

the sum of the total number of debit card 

transactions across covered issuers that reported 

base component costs. The transaction-weighted 

average of per-transaction base component costs 

across covered issuers can be viewed as a broad 

measure of whether covered issuers collectively are 

becoming more or less efficient at processing debit 

card transactions. Specifically, this metric 

corresponds to the average base component costs of 

a debit card transaction for covered issuers as a 

whole. The Board believes that, for skewed 

distributions like the distribution of per-transaction 

base component costs, the transaction-weighted 

average is preferable to alterative metrics, such as 

the unweighted average across covered issuers, or 

a given percentile across covered issuers. In 

particular, the transaction-weighted average is less 

affected than these alternative metrics by outliers, 

including covered issuers with low transaction 

volumes but per-transaction base component costs 

considerably greater than the vast majority of 

covered issuers. Further, for skewed distributions 

like the distribution of per-transaction base 

component costs, the transaction-weighted average 

is preferable to the median because, unlike that 

metric, its value depends on all covered issuers’ 

per-transaction base component costs, rather than 

only on whether such values fall above or below the 

median. For example, a reduction in the pertransaction base component costs of the less 

efficient 50 percent of covered issuers (e.g., due to 

the adoption of a new transaction-processing 

technology by these issuers) would cause a decline 

in the transaction-weighted average but may not 

affect the median. 

37A covered issuer is considered to have fully 

recovered its allowable costs if the covered issuer’s 

allowable costs in a particular year were less than 

or equal to the aggregate amount of interchange fees 

permitted under the interchange fee cap for 

transactions involving that issuer’s debit cards in 

the particular year. In contrast to the increase in the 

percentage of covered issuers that fully recovered 

their allowable costs from 2011 to 2021, the 

percentage of covered issuer transactions for which 

covered issuers fully recovered their allowable costs 

was the same in 2021 as it was in 2011 (99.5 

percent). 

amount of the transaction.31 For this 

reason, the Board determined that these 

fraud losses were best assessed through 

a separate ad valorem component. To 

determine the ad valorem component, 

the Board computed the ratio of issuer 

fraud losses to transaction value for 

each covered issuer that reported such 

costs in response to the voluntary 

survey.32 Specifically, for each such 

issuer, the Board divided (i) the issuer 

fraud losses by (ii) the total value of the 

issuer’s debit card transactions. The 

Board then sorted these ratios, 

expressed in basis points, in ascending 

order from lowest to highest. 

The resulting distribution showed 

that the ratio of issuer fraud losses to 

transaction value varied considerably 

among covered issuers, ranging from 0.9 

to 19.6 basis points, but the distribution 

was not skewed like that of pertransaction base component costs. For 

the reasons explained in the preamble 

accompanying the 2011 final rule, the 

Board adopted an ad valorem 

component of 5 basis points of the 

transaction value, which corresponded 

to the median ratio of issuer fraud losses 

to transaction value among covered 

issuers, rounded to the nearest basis 

point, based on the Board’s voluntary 

survey.33

The Board described the foregoing 

methodologies for determining the base 

component and ad valorem component 

in the preamble accompanying the 2011 

final rule. The Board did not, however, 

codify these methodologies in § 235.3. 

Rather, § 235.3(b) simply provides that 

each interchange fee received or charged 

by a debit card issuer for a debit card 

transaction shall be no more than the 

sum of 21 cents and 5 basis points 

multiplied by the value of the 

transaction. 

B. Rationale for Proposal 

When the Board established the 

interchange fee standards in current 

§ 235.3, the Board stated that it would 

regularly collect data on the costs 

incurred by covered issuers in 

connection with debit card transactions 

and, over time, would adjust the 

interchange fee standards based on 

reported costs, if appropriate. The Board 

also noted that lower costs should result 

in a lower interchange fee cap as issuers 

become more efficient.34 To date, the 

Board has not proposed or finalized any 

adjustments to the interchange fee 

standards in § 235.3.35

Consistent with EFTA section 

920(a)(3)(B), the Board has surveyed 

covered issuers on a mandatory basis 

every other year since the reporting 

requirements in § 235.8 of Regulation II 

were adopted. Through these biennial 

surveys, the Board has collected data 

from covered issuers concerning the 

costs incurred by those issuers in 

connection with debit card transactions 

performed in calendar years 2011, 2013, 

2015, 2017, 2019, and 2021. The Board 

has reviewed the interchange fee 

standards in § 235.3 in light of both the 

most recently collected data from 2021 

and the cumulative data collected from 

covered issuers since the original 

Regulation II rulemaking. As a result of 

this analysis, and as described below, 

the Board believes that revisions to the 

current interchange fee standards are 

appropriate at this time. 

While the interchange fee standards 

have remained the same since § 235.3 

was adopted, several data points show 

that the allowable costs incurred by 

covered issuers have fallen significantly 

since the original Regulation II 

rulemaking. In particular, the Board 

monitors one especially important 

metric that approximates the base 

component costs of the average covered 

issuer transaction: the transactionweighted average of per-transaction base 

component costs across covered 

issuers.36 That metric was 3.9 cents in 

2021, which represents a decline of 

nearly 50 percent since 2009 (7.7 cents) 

and over 23 percent since 2011 (5.1 

cents), the first year for which the Board 

collected data on a mandatory basis. 

The Board also monitors issuer fraud 

losses, on which the Board based the ad 

valorem component. The median ratio 

of issuer fraud losses to transaction 

value among covered issuers declined 

by around 15 percent from 2011 (4.7 

basis points, or 5.0 basis points if 

rounded to the nearest basis point) to 

2021 (4.0 basis points). 

Taken together, these declines in base 

component costs and issuer fraud losses 

have resulted in a substantial increase 

in the percentage of covered issuers that 

fully recovered their allowable costs 

from 2011 (61.1 percent) to 2021 (77.4 

percent).37

As a result of the significant decline 

in the allowable costs incurred by 

covered issuers since 2009, the Board 

believes that the current interchange fee 

standards in § 235.3 may no longer be 

effective for assessing whether, for a 

debit card transaction subject to the 

interchange fee standards, the amount of 

any interchange fee received or charged 

by a debit card issuer is reasonable and 

proportional to the cost incurred by the 

issuer with respect to the transaction, as 

required by EFTA section 920(a)(2). As 

such, the Board believes it is necessary 

to revise the interchange fee standards 

to reflect the decline since 2009 in base 

component costs and the decline over 

time in the ratio of issuer fraud losses 

to transaction value for covered issuers. 

Furthermore, the Board believes that, 

as much as practicable, the base 

component and ad valorem component 

should be updated regularly and 


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38 In lieu of directly linking the interchange fee 

standards to data from the Board’s biennial survey 

of covered issuers going forward, the Board could 

consider adopting a one-time update to the base 

component and ad valorem component in § 235.3. 

Following such an approach, the Board would 

continue to monitor changes in the allowable costs 

incurred by covered issuers and would propose 

further updates to the base component and ad 

valorem component in the future, if appropriate. 

However, such ad hoc updates to the base 

component and ad valorem component would not 

be predictable, and they could result in periods 

during which the interchange fee standards may not 

be effective for assessing whether, for a debit card 

transaction subject to the interchange fee standards, 

the amount of any interchange fee received or 

charged by a debit card issuer is reasonable and 

proportional to the cost incurred by the issuer with 

respect to the transaction. 

39As described above, the Board noted that, had 

the current base component been in effect in 2009, 

approximately 80 percent of covered issuers would 

have fully recovered their base component costs 

through the base component. However, the Board 

did not indicate that the Board was selecting a costrecovery target of 80 percent of covered issuers (or 

any other cost-recovery target across covered issuers 

or covered issuer transactions) and did not codify 

in Regulation II an approach for updating the base 

component to reflect any particular cost-recovery 

target. 

40 In 2011, the Board rejected a mathematical 

interpretation of the word ‘‘proportional’’ that 

would have required a constant proportion between 

allowable costs and interchange fees. See 76 FR 

43393, 43423 (July 20, 2011). The Board continues 

to believe that the statute requires only that the 

interchange fees must have a relationship to 

allowable costs, as the Board stated in 2011. See id. 

Determining the base component as a fixed multiple 

of the transaction-weighted average of pertransaction base component costs across covered 

issuers is thus consistent with the statute, and is 

desirable because it will enable the Board, going 

forward, to determine the base component based on 

the latest data reported to the Board by covered 

issuers. 

41The Board generates the distribution of pertransaction base component costs across covered 

issuer transactions as follows. For each covered 

issuer that reported base component costs, the 

Board first determines the per-transaction base 

component costs of the covered issuer by (i) 

summing the base component costs reported by the 

covered issuer and (ii) dividing this sum by the 

total number of debit card transactions reported by 

the covered issuer. The Board then assigns this 

result to each of the covered issuer’s transactions. 

Finally, the Board arranges the per-transaction base 

component costs of all covered issuer transactions 

in ascending order from lowest- to highest-cost 

covered issuer transaction. 

predictably to reflect changes in the 

allowable costs incurred by covered 

issuers as those changes occur. Such an 

approach would avoid long periods 

during which the interchange fee 

standards may not be effective for 

assessing whether, for a debit card 

transaction subject to the interchange 

fee standards, the amount of any 

interchange fee received or charged by 

a debit card issuer is reasonable and 

proportional to the cost incurred by the 

issuer with respect to the transaction. In 

addition, directly linking the 

interchange fee standards to the data 

reported to the Board by covered issuers 

on the Board’s biennial survey would 

capture changes in allowable costs as 

quickly as practicable. Further, the 

Board believes that the patterns 

observed in the cumulative data 

collected by the Board since the original 

rulemaking, described further below, are 

consistent over time and thus support 

the establishment at this time of a 

repeatable process that directly links the 

interchange fee standards to the data 

reported on the Debit Card Issuer 

Survey. Finally, this approach would 

create predictability for the debit card 

industry regarding how and when 

updates to the interchange fee cap 

would occur. 

For these reasons, and as described 

below, the Board proposes to determine 

the base component and ad valorem 

component in § 235.3 every other year 

based on the latest data reported to the 

Board by covered issuers. The Board 

believes that, under this approach, the 

interchange fee standards in § 235.3 will 

be effective going forward for assessing 

whether, for a debit card transaction 

subject to the interchange fee standards, 

the amount of any interchange fee 

received or charged by a debit card 

issuer is reasonable and proportional to 

the cost incurred by the issuer with 

respect to the transaction.38

The Board also proposes a new 

methodology for determining the base 

component. As described above, in 

2011, the Board adopted a base 

component of 21 cents per transaction. 

The Board selected 21 cents because 

that value was the site of a clear 

discontinuity in the distribution of pertransaction base component costs across 

covered issuers, arranged from lowestto highest-cost covered issuer, for debit 

card transactions performed in 2009.39

The Board has reviewed the distribution 

of per-transaction base component costs 

across covered issuers, arranged from 

lowest- to highest-cost covered issuer, 

from each biennial survey of covered 

issuers conducted since Regulation II 

was adopted. In some survey years, the 

distribution contained no clear 

discontinuity; in other survey years, 

there were multiple apparent 

discontinuities. In addition, in some 

cases, the amount corresponding to a 

particular discontinuity did not reflect 

the overall trend in the transactionweighted average of per-transaction base 

component costs across covered issuers. 

For these reasons, the Board believes 

that the original methodology that the 

Board used to determine the base 

component by reference to a clear 

discontinuity in the distribution of pertransaction base component costs across 

covered issuers, arranged from lowestto highest-cost covered issuer, is not 

appropriate for determining the base 

component at this time and, going 

forward, would not facilitate the regular 

and predictable updates to the 

interchange fee standards that the Board 

proposes. 

Instead, as described below, the Board 

proposes to determine the base 

component as a function of the 

transaction-weighted average of pertransaction base component costs across 

covered issuers. Under this 

methodology, any change in the base 

component costs of the average covered 

issuer transaction would result in a 

proportional change to the base 

component. As such, this methodology 

will ensure that the maximum 

interchange fee that a covered issuer 

may receive will be proportional to the 

base component costs incurred by 

covered issuers with respect to the 

average covered issuer transaction, 

consistent with the Durbin Amendment. 

Combined with the Board’s proposal to 

determine the base component every 

other year based on the latest data 

reported to the Board by covered 

issuers, this approach is designed to 

ensure that, to the extent practicable, 

any interchange fee that a covered issuer 

receives or charges will remain 

proportional to the costs incurred by 

covered issuers with respect to the 

average debit card transaction over 

time.40

More specifically, the Board proposes 

to determine the base component as the 

product of a fixed multiplier and the 

transaction-weighted average of pertransaction base component costs across 

covered issuers. Under this formula, the 

fixed multiplier would be codified in 

Regulation II and would remain 

constant. The fixed multiplier would 

correspond to a target selected by the 

Board for a reasonable percentage of 

covered issuer transactions for which 

covered issuers should fully recover 

their base component costs over time, 

consistent with the Durbin Amendment. 

Consistent patterns that the Board has 

observed in the data collected from 

covered issuers since 2009 related to 

per-transaction base component costs 

make it possible to derive such a 

formula. Specifically, while the 

transaction-weighted average of pertransaction base component costs across 

covered issuers has declined 

significantly since the original 

Regulation II rulemaking, the shape of 

the distribution of per-transaction costs 

across covered issuer transactions has 

not changed markedly between the data 

collections.41 Importantly, this 

particular shape can be wellcharacterized by a probability 


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42 In particular, the data on per-transaction base 

component costs across covered issuer transactions, 

arranged from lowest- to highest-cost covered issuer 

transaction, for each year closely approximates the 

Weibull distribution. The Weibull distribution, 

commonly used in social sciences and engineering, 

has the property that the value of the distribution 

at a particular percentile is a fixed multiple of the 

average value of the distribution. The Weibull 

distribution captures a number of key features of 

the data on covered issuer transactions, including 

the existence of a small number of high-cost 

transactions associated with relatively low-volume, 

high-cost covered issuers. 

43A particular Weibull distribution is described 

by two parameters: (i) its scale, which determines 

the magnitude of the values along the distribution; 

and (ii) its shape, which determines the degree to 

which the distribution is skewed to one side. The 

Board’s analysis determined that the consistent 

patterns in the distribution of per-transaction base 

component costs across covered issuer transactions 

for each set of survey data collected since 2009 can 

be best captured using the Weibull distribution 

with (i) a scale parameter that is proportional to the 

transaction-weighted average of per-transaction 

base component costs across covered issuers for 

each year, and (ii) a shape parameter that is stable 

over time. The Board’s analysis did not find a 

statistically significant improvement in the fit of the 

Weibull distribution to the data when the shape 

parameter is allowed to differ across years. 

44The Board assesses how close actual cost 

recovery is to the cost-recovery target for a 

particular fixed multiplier by evaluating, for each 

year, the extent to which actual cost recovery would 

have diverged from the target had the relevant base 

component been in effect, and then considering the 

average deviation over time resulting from these 

calculations. Specifically, the Board first calculates 

the difference between the cost-recovery target and 

the percentage of covered issuer transactions 

performed in 2009 for which covered issuers would 

have fully recovered their base component costs if, 

in 2009, the base component had been the product 

of (i) the transaction-weighted average of pertransaction base component costs across covered 

issuers in 2009, and (ii) the fixed multiplier. 

Second, the Board performs the same calculation 

for transactions performed in 2011. The Board then 

takes the simple average of the differences 

calculated for each year (i.e., for 2009 and 2011). 

Third, the Board repeats this process for 

transactions performed in 2013, 2015, 2017, 2019, 

and 2021, in each case taking the average of the 

differences calculated for each year so far. These 

averages represent the extent to which actual cost 

recovery would have diverged over time from the 

target had the relevant base components been in 

effect. 

For the fixed multiplier that the Board proposes 

(i.e., 3.7, as described below), using the measure of 

closeness described above, the Board found that the 

actual cost-recovery rate drew nearer to the target 

cost-recovery rate with each subsequent data 

collection that was incorporated into the Board’s 

analysis. In other words, the simple average of the 

differences for 2009–13 transactions improved on 

that for 2009–11 transactions, which improved on 

the difference for 2009, and so on. This result 

suggests that, while for a particular data collection 

the actual cost-recovery rate may diverge from the 

target cost-recovery rate, over time actual cost 

recovery is likely to be close to the cost-recovery 

target. 

45 In 2011, the Board stated that the term 

‘‘reasonable’’ implies that, above some amount, an 

interchange fee is not reasonable, and noted that 

common definitions of the term ‘‘reasonable’’ 

include ‘‘fair, proper, or moderate’’ and ‘‘not 

excessive.’’ See 76 FR at 43423. The Board also 

noted that the Board did not believe that it was 

consistent with the statutory purpose to permit 

networks to set interchange fees in order to 

accommodate 100 percent of the average pertransaction costs of the highest-cost issuers. See 76 

FR at 43433. 

46See section VII, infra, for the average value of 

this ratio across these data collections for a range 

of potential cost-recovery targets. 

distribution with a key property: the 

value of per-transaction base component 

costs at a target percentile across 

covered issuer transactions is a multiple 

of the transaction-weighted average of 

per-transaction base component costs 

across covered issuers.42 The stability of 

the shape of the distribution over time 

means that the Board can identify a 

fixed multiplier that, when multiplied 

by the transaction-weighted average of 

per-transaction base component costs in 

each year, should yield full cost 

recovery for the target percentage of 

covered issuer transactions over time.43

The stability of the shape of the 

distribution observed in data collected 

from covered issuers since 2009 

suggests that there are features inherent 

to the covered issuer segment of the 

debit card market that persist over time. 

For this reason, the Board believes that, 

in future data collections, the 

distribution of per-transaction base 

component costs across covered issuer 

transactions will continue to exhibit a 

similar shape. Thus, the fixed multiplier 

derived from the cumulative data 

collected by the Board since 2009 

should continue to yield full cost 

recovery over time for the target 

percentage of covered issuer 

transactions going forward. 

Although the proposed fixed 

multiplier would correspond to a target 

percentage of covered issuer 

transactions for which covered issuers 

should fully recover their base 

component costs over time, the 

proposed approach would not guarantee 

this precise level of cost recovery in any 

particular year. Rather, in some years, 

covered issuers may fully recover their 

base component costs for more than the 

target percentage of covered issuer 

transactions; in other years, covered 

issuers may fully recover their base 

component costs for less than the target 

percentage of covered issuer 

transactions. Over time, however, the 

Board expects the actual cost recovery 

of covered issuer transactions to be 

close to the Board’s cost-recovery 

target.44 The Board intends to monitor 

over time the actual cost recovery of 

covered issuer transactions relative to 

the Board’s cost-recovery target, and in 

the future may seek comment on 

potential adjustments to improve the 

proposed methodology for determining 

the base component, if appropriate. For 

example, adjustments to the proposed 

methodology may be appropriate in the 

event of fundamental changes to the 

debit card industry that significantly 

change the shape of the distribution of 

per-transaction base component costs 

across covered issuer transactions 

relative to the consistent patterns the 

Board has observed in the cumulative 

data collected from covered issuers 

since 2009. 

To ensure that, for a debit card 

transaction subject to the interchange 

fee standards, the amount of any 

interchange fee received or charged by 

a debit card issuer is reasonable, the 

Board proposes a cost-recovery target of 

98.5 percent of covered issuer 

transactions, which corresponds to a 

fixed multiplier of 3.7 based on the 

cumulative data collected from covered 

issuers since 2009. The Board believes 

that this cost-recovery target, and the 

base component that would result from 

multiplying this fixed multiplier and 

the transaction-weighted average of pertransaction base component costs, is 

reasonable because it would allow 

covered issuers to fully recover their 

base component costs over time for a 

significant majority of covered issuer 

transactions. At the same time, this 

target acknowledges that full cost 

recovery for the highest-cost covered 

issuer transactions would not be 

reasonable.45

A useful measure of the difference 

between covered issuer transactions 

above the target percentile (for which 

the Board believes full cost recovery 

would be unreasonable) and covered 

issuer transactions below the target 

percentile (for which the Board believes 

full cost recovery would be reasonable) 

is the efficiency gap with respect to 

transaction processing between covered 

issuers whose transactions are above 

and below the target percentile. This 

efficiency gap may be represented by 

the ratio of the transaction-weighted 

average of per-transaction base 

component costs for covered issuers 

whose transactions are above the target 

percentile to that for covered issuers 

whose transactions are below the target 

percentile. The Board computed this 

ratio for a range of potential costrecovery targets using each set of data 

collected from covered issuers since 

2009.46 For the proposed cost-recovery 

target of 98.5 percent of covered issuer 

transactions, the average value of this 

ratio across these data collections is 

approximately 5.2, meaning that 

covered issuers whose transactions are 

above the 98.5 percentile are, on 

average, more than five times less 

efficient than covered issuers whose 

transactions are below the 98.5 


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47Specifically, setting the base component equal 

to the transaction-weighted average of pertransaction base component costs across covered 

issuers would have resulted in only around 15 

percent of covered issuers, on average across the 

biennial data collections, fully recovering their base 

component costs. Such a methodology would, 

however, permit covered issuers as a whole to 

recover their aggregate base component costs. 

48For example, a tiered base component 

approach would require the Board to demarcate 

different tiers of issuers, and the Board’s 

demarcations would likely need to be adjusted over 

time. In addition, networks would need to track 

covered issuers by tier to ensure that the 

interchange fees received by each covered issuer do 

not exceed the interchange fee standards. 

49For additional information regarding fraud 

losses with respect to covered issuer transactions, 

see section VIII.C, infra. 

50See 76 FR at 43431 and 43434. The Board 

recognizes that some aspects of the fraud 

environment have changed with, for example, the 

introduction of increased security for in-person 

card payments through the issuance of chip-based 

EMV cards and the growth of ecommerce and 

remote fraud. As discussed in section VIII.C, infra, 

covered issuers now absorb a smaller percentage of 

fraud losses from covered issuer transactions than 

they did in 2009, with both cardholders and 

merchants absorbing larger proportions of such 

losses over time. Notwithstanding these changes, 

the Board believes that its conclusions with respect 

to the ad valorem component remain sound. 

Furthermore, because the methodology for 

determining the ad valorem component is based on 

actual fraud losses absorbed by covered issuers, any 

future decrease or increase in the median ratio of 

issuer fraud losses to transaction value among 

covered issuers would, pursuant to the Board’s 

proposed methodology, result in a corresponding 

future reduction or increase to the ad valorem 

component. 

51The Board proposes to round the ad valorem 

component to the nearest quarter of one basis point 

to achieve a similar degree of accuracy as for the 

base component, which the Board proposes to 

round to the nearest tenth of one cent. Specifically, 

for a $50 debit card transaction subject to the 

interchange fee standards, a change in the ad 

valorem component of one quarter of one basis 

point would result in a change of around one tenth 

of one cent to the maximum interchange fee 

permitted under the interchange fee standards. 

percentile. Accordingly, the Board 

believes that targeting full cost recovery 

over time for 98.5 percent of covered 

issuers transactions is reasonable. 

Although the proposed new 

methodology for determining the base 

component would ultimately rely on a 

simple formula (i.e., the transactionweighted average of per-transaction base 

component costs across covered issuers 

multiplied by 3.7), the Board 

appreciates that the underlying 

statistical analysis is complex. The 

Board considered other methodologies 

for determining the base component. 

For example, the Board considered 

setting the base component equal to the 

transaction-weighted average of pertransaction base component costs across 

covered issuers (i.e., effectively with a 

fixed multiplier of 1.0), but determined 

that this methodology would result in 

an unreasonably low percentage of 

covered issuers fully recovering their 

costs.47 The Board also considered 

determining the base component by 

reference to a target percentile in (i) the 

distribution of per-transaction base 

component costs, arranged from lowestto highest-cost covered issuer, or (ii) the 

distribution of per-transaction base 

component costs across covered issuer 

transactions. In both cases, however, the 

Board determined that these 

methodologies could result in a base 

component that does not reflect changes 

over time in the transaction-weighted 

average of per-transaction base 

component costs across covered issuers 

due to the sensitivity of these alternative 

methodologies to low-volume, high-cost 

covered issuers. Finally, the Board 

considered adopting a tiered approach 

that would establish different base 

components for high-volume, low-cost 

covered issuers and low-volume, highcost covered issuers. However, the 

Board determined that such an 

approach would create numerous 

practical challenges for both the Board 

and debit card industry participants and 

could disincentivize covered issuers in 

the tier with the higher base component 

from growing their debit card 

programs.48

Whereas the Board proposes a new 

methodology to determine the base 

component, the Board does not propose 

to revise the original methodology that 

the Board used to determine the ad 

valorem component (i.e., the median 

ratio of issuer fraud losses to transaction 

value among covered issuers, multiplied 

by the value of the transaction). Since 

the Board adopted the interchange fee 

standards in 2011, the Board has 

observed an overall increase in fraud 

losses to all parties related to covered 

issuer transactions, but the share of such 

fraud losses absorbed by covered issuers 

(i.e., issuer fraud losses) has declined 

during that time. Accordingly, as noted 

above, the median ratio of issuer fraud 

losses to transaction value among 

covered issuers has declined from 2011 

to 2021, despite the overall increase in 

fraud losses to all parties.49 The Board 

originally determined the ad valorem 

component using only those fraud 

losses absorbed by covered issuers, and 

analysis of the data collected by the 

Board since the original Regulation II 

rulemaking shows that, despite these 

changes in the fraud environment, the 

median ratio of issuer fraud losses to 

transaction value among covered issuers 

remains a representative metric of the 

cost of fraud incurred by covered 

issuers. Therefore, for the reasons 

explained in the preamble 

accompanying the 2011 final rule, the 

Board believes that the original 

methodology continues to be 

appropriate for determining the ad 

valorem component.50

C. Description of Proposal 

The Board proposes to determine, for 

every two-year period, the base 

component and the ad valorem 

component using the latest data 

reported to the Board by covered issuers 

on the Debit Card Issuer Survey. 

Further, the Board proposes a new 

methodology for determining the base 

component. Initially, under the 

proposed approach, the base component 

would be 14.4 cents and the ad valorem 

component would be 4.0 basis points 

(multiplied by the value of the 

transaction) for debit card transactions 

performed from the effective date of the 

final rule to June 30, 2025. The Board 

does not propose to modify the 

allowable costs considered for purposes 

of determining the base component and 

the ad valorem component, or the 

original methodology used to determine 

the ad valorem component. 

Proposed § 235.3(b)(1) would provide 

that the current base component of 21.0 

cents and the current ad valorem 

component of 5.0 basis points 

(multiplied by the value of the 

transaction) would continue to apply for 

debit card transactions performed from 

October 1, 2011 (the original effective 

date of § 235.3) until the calendar day 

prior to the effective date of the final 

rule. Proposed § 235.3(b)(2) would 

establish the base component and the ad 

valorem component that would apply 

for debit card transactions performed 

from the effective date of the final rule 

to June 30, 2025. Specifically, for these 

transactions, the base component would 

be 14.4 cents, and the ad valorem 

component would be 4.0 basis points 

(multiplied by the value of the 

transaction). As described in section 

III.B, supra, the proposed base 

component of 14.4 cents is the 

transaction-weighted average of pertransaction allowable costs (excluding 

fraud losses) across covered issuers 

based on the data reported on the 2021 

Debit Card Issuer Survey (3.9 cents) 

multiplied by the fixed multiplier of 3.7 

and rounded to the nearest tenth of one 

cent. The proposed ad valorem 

component of 4.0 basis points 

(multiplied by the value of the 

transaction) is the median ratio of issuer 

fraud losses to transaction value among 

covered issuers based on the data 

reported on the 2021 Debit Card Issuer 

Survey, rounded to the nearest quarter 

of one basis point.51


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52Section III.B, supra, describes the Board’s 

rationale for proposing 3.7 as the fixed multiplier 

for determining the base component. 

53These costs are reported on line 3a of section 

II of the Debit Card Issuer Survey as ‘‘costs of 

authorization, clearance, and settlement.’’ See FR 

3064a. 

54These costs are reported on line 5a.1 of section 

II of the Debit Card Issuer Survey as ‘‘transactions 

monitoring costs tied to authorization.’’ See id. 

55The total number of debit card transactions 

attributable to a covered issuer is reported on line 

1a of section II of the Debit Card Issuer Survey as 

the volume of ‘‘settled purchase transactions 

(excluding pre-authorizations, denials, adjustments, 

returns, and cash back amounts).’’ See id. 

56These costs are reported on line 8b of section 

II of the Debit Card Issuer Survey as ‘‘losses 

incurred by issuer’’ (i.e., gross value of fraudulent 

transactions, less fraud-related chargebacks to 

acquirers net of representments, and less losses 

absorbed by cardholders). See id. 

57The total value of debit card transactions 

attributable to a covered issuer is reported on line 

1a of section II of the Debit Card Issuer Survey as 

the value of ‘‘settled purchase transactions 

(excluding pre-authorizations, denials, adjustments, 

returns, and cash back amounts).’’ See id. 

58See, e.g., 5 U.S.C. 553(b)(3)(B) (exempting 

agencies from notice and comment rulemaking 

when the agency for good cause finds that such 

procedures are impracticable, unnecessary, or 

contrary to the public interest). The Board believes 

that future determinations of the base component 

and the ad valorem component should qualify for 

the good cause exemption from notice and 

comment rulemaking because such determinations 

would involve the ministerial application of the 

approach described in proposed appendix B, and 

the Board would not be exercising any discretion 

in connection with such determinations. The Board 

would seek public comment on any future 

substantive changes to the proposed approach. 

The Board proposes a set of 

conforming revisions to comments 

235.3(b)–2 and 235.3(b)–3 of the Official 

Commentary to make clear that the base 

component and the ad valorem 

component for a particular transaction 

depend on the date on which the 

transaction is performed. Proposed new 

comment 235.3(b)–4 would provide 

that, for this purpose, a debit card 

transaction is considered to be 

performed on the date on which the 

transaction is settled on an interbank 

basis. 

Proposed new paragraph (c) to § 235.3 

would set forth the basis for 

determining the amounts in proposed 

§ 235.3(b). Specifically, proposed 

§ 235.3(c) would provide that, for every 

two-year period, beginning with the 

period from July 1, 2025, to June 30, 

2027, the Board will determine the base 

component and the ad valorem 

component using the approach 

described in a new proposed appendix 

B to Regulation II. Paragraph (a) to 

proposed appendix B would similarly 

state that the Board will determine the 

base component and the ad valorem 

component for each ‘‘applicable period’’ 

(i.e., every two-year period beginning 

with the period from July 1, 2025, to 

June 30, 2027) using the approach 

described in proposed appendix B. 

Paragraph (b) of proposed appendix B 

would set forth the data that the Board 

would use to determine the base 

component and ad valorem component 

for each applicable period—namely, the 

latest data reported to the Board by 

covered issuers on the Debit Card Issuer 

Survey. Specifically, paragraph (b) 

would provide that the Board will 

determine the base component and the 

ad valorem component for each 

applicable period using the data 

reported to the Board by covered issuers 

pursuant to § 235.8 concerning 

transactions performed during the 

calendar year that is two years prior to 

the year in which that applicable period 

begins. For example, in the case of the 

applicable period beginning July 1, 

2025, the Board would use the data 

reported to the Board by covered issuers 

on the Debit Card Issuer Survey 

concerning debit card transactions 

performed in calendar year 2023, which 

the Board will collect in 2024. 

Paragraph (c)(1) of proposed appendix 

B would establish the formula that the 

Board would use to determine the base 

component for each applicable period. 

Specifically, for each applicable period, 

the base component would be the 

product of the transaction-weighted 

average of per-transaction allowable 

costs (excluding fraud losses) across 

covered issuers and 3.7, rounded to the 

nearest tenth of one cent.52 Paragraph 

(c)(2) would define ‘‘allowable costs 

(excluding fraud losses)’’—which is 

synonymous with the term ‘‘base 

component costs’’ used elsewhere in 

this preamble—as the sum of the costs 

of authorization, clearance, and 

settlement, as reported on the Debit 

Card Issuer Survey,53 and transactionmonitoring costs tied to authorization, 

as reported on the Debit Card Issuer 

Survey.54 Paragraph (c)(3) would set 

forth how the Board calculates the 

transaction-weighted average of pertransaction allowable costs (excluding 

fraud losses) across issuers. Specifically, 

using the latest data reported to the 

Board by covered issuers, the Board 

would (i) sum allowable costs 

(excluding fraud losses) across covered 

issuers that reported allowable costs 

(excluding fraud losses); (ii) divide this 

sum by the sum of the total number of 

debit card transactions across covered 

issuers that reported allowable costs 

(excluding fraud losses); and (iii) round 

this result to the nearest tenth of one 

cent.55

Paragraph (d)(1) of proposed 

appendix B would establish the metric 

that the Board would use to determine 

the ad valorem component for each 

applicable period. Specifically, for each 

applicable period, the ad valorem 

component for a particular debit card 

transaction would be the median ratio of 

issuer fraud losses to transaction value 

among covered issuers, rounded to the 

nearest quarter of one basis point, 

multiplied by the value of the debit card 

transaction. Paragraph (d)(2) would 

define ‘‘ratio of issuer fraud losses to 

transaction value’’ as the value of fraud 

losses incurred by the covered issuer, as 

reported on the Debit Card Issuer 

Survey,56 divided by the total value of 

debit card transactions, as reported on 

the Debit Card Issuer Survey.57

Paragraph (d)(3) would set forth how the 

Board calculates the median ratio of 

issuer fraud losses to transaction value 

among covered issuers. Specifically, 

using the latest data reported to the 

Board by covered issuers, the Board 

would (i) determine the ratio of issuer 

fraud losses to transaction value for 

each covered issuer that reported issuer 

fraud losses, (ii) sort these ratios in 

ascending order, and (iii) select the ratio 

in the middle (if the number of ratios is 

odd) or calculate the simple average of 

the two ratios in the middle (if the 

number of ratios is even). 

Paragraph (f) of proposed appendix B 

would establish the timing of the 

publication of the base component and 

ad valorem component for an applicable 

period. Specifically, the Board would 

publish these amounts in the Federal 

Register no later than March 31 of the 

calendar year in which the applicable 

period begins. Because the Board would 

determine these amounts by applying 

the approach described in proposed 

appendix B and using the latest data 

reported to the Board by covered 

issuers, the Board would not intend to 

seek public comment on future updates 

to these amounts.58

IV. Proposed Revisions to Fraud 

Prevention Adjustment (§ 235.4) 

A. Background 

As described above, under EFTA 

section 920(a)(5)(A), the Board may 

allow for an adjustment to the 

interchange fee received or charged by 

an issuer under the interchange fee 

standards if such adjustment is 

reasonably necessary to make allowance 

for costs incurred by the issuer in 

preventing fraud in relation to debit 

card transactions involving the issuer, 

provided that the issuer complies with 

fraud-related standards established by 

the Board. The Board’s fraud-related 

standards must (i) be designed to ensure 

that any fraud-prevention adjustment is 

limited to the amount that is reasonably 

necessary to make allowance for costs 


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59EFTA section 920(a)(5)(A)(ii). The Board does 

not propose revisions to the current fraudprevention standards in § 235.4(b). For the reasons 

explained in the preamble accompanying the 2012 

final rule, the Board adopted a non-prescriptive 

approach to these standards. See 77 FR 46258, 

46268–75 (Aug. 3, 2012). The fraud-prevention 

standards require issuers to develop and implement 

policies and procedures reasonably designed to take 

effective steps to reduce the occurrence of, and 

costs to all parties from, fraudulent debit card 

transactions, including through the development 

and implementation of cost-effective fraudprevention technology. See § 235.4(b)(1). 

Specifically, an issuer’s policies and procedures 

must address: (i) methods to identify and prevent 

fraudulent debit card transactions; (ii) monitoring of 

the volume and value of its fraudulent debit card 

transactions; (iii) appropriate responses to 

suspicious debit card transactions in a manner 

designed to limit the costs to all parties from and 

prevent the occurrence of future fraudulent debit 

card transactions; (iv) methods to secure debit card 

and cardholder data; and (v) such other factors as 

the issuer considers appropriate. See § 235.4(b)(2). 

An issuer must review, at least annually, its fraudprevention policies and procedures, and their 

implementation, and update them as necessary in 

light of: (i) their effectiveness in reducing the 

occurrence of, and costs to all parties from, 

fraudulent debit card transactions involving the 

issuer; (ii) their cost-effectiveness; and (iii) changes 

in the types of fraud, methods used to commit 

fraud, and available methods for detecting and 

preventing fraudulent debit card transactions that 

the issuer identifies from (A) its own experience or 

information, (B) information provided to the issuer 

by its payment card networks, law enforcement 

agencies, and fraud-monitoring groups in which the 

issuer participates, and (C) applicable supervisory 

guidance. See § 235.4(b)(3). In order to charge or 

receive the fraud-prevention adjustment, an issuer 

must annually notify its payment card networks 

that it complies with the Board’s fraud-prevention 

standards, and must notify its payment card 

networks if it is no longer eligible to receive or 

charge the fraud-prevention adjustment. See 

§ 235.4(c) and (d). 

60 In issuing regulations to implement any fraudprevention adjustment, the Board must consider 

certain factors set forth in EFTA section 

920(a)(5)(B)(ii), which are discussed in section 

VIII.C, infra. 

61Section 235.4 was initially adopted via an 

interim final rule in July 2011. See 76 FR 43477 

(July 20, 2011). The Board subsequently issued a 

final rule that made various amendments to the 

interim final rule. See 77 FR 46258 (Aug. 3, 2012). 

62 77 FR 46258, 46264 (Aug. 3, 2012). 

63See id.; see also 76 FR 43393, 43431 (July 20, 

2011) (noting that the types of fraud-prevention 

activities considered in connection with the fraudprevention adjustment are those activities that 

prevent fraud with respect to debit card 

transactions at times other than when the issuer is 

effecting the transaction); 80 FR 48684, 48685 (Aug. 

14, 2015) (same). 

64 77 FR at 46264. 

65 76 FR at 43482. The Board rejected an 

interpretation that would require a direct 

connection between the fraud-prevention 

adjustment and actual issuer costs. The Board also 

did not interpret the statute to require the fraudprevention adjustment to permit each (or any) 

issuer to fully recover its fraud-prevention costs. 

See id. 

66 77 FR at 46265–66. 

67 77 FR at 46263. 

68 77 FR at 46266. 

incurred by the issuer in preventing 

fraud in relation to debit card 

transactions involving the issuer and 

takes into account any fraud-related 

reimbursements (including amounts 

from chargebacks) received from 

consumers, merchants, or payment card 

networks in relation to debit card 

transactions involving the issuer; and 

(ii) require issuers to take effective steps 

to reduce the occurrence of, and costs 

from, fraud in relation to debit card 

transactions, including through the 

development and implementation of 

cost-effective fraud prevention 

technology.59 EFTA section 920(a)(5)(B) 

requires the Board to prescribe 

regulations to establish standards for 

making any such fraud-prevention 

adjustment.60

The Board adopted a fraud-prevention 

adjustment and fraud-prevention 

standards in § 235.4 of Regulation II.61

In adopting the fraud-prevention 

adjustment, the Board (i) defined the 

fraud-prevention costs that issuers incur 

and (ii) structured the fraud-prevention 

adjustment to allow issuers to recover a 

portion of these costs. A brief overview 

of how the Board developed the fraudprevention adjustment in current 

§ 235.4 follows. 

1. Fraud-Prevention Costs 

EFTA section 920 does not specify 

types of fraud-prevention costs incurred 

by issuers that the Board may or may 

not consider in determining the fraudprevention adjustment. When the Board 

adopted current § 235.4, the Board 

explained that fraud prevention 

involves a broad range of activities in 

which an issuer may engage before, 

during, or after a debit card 

transaction.62 Accordingly, and for 

reasons explained in the preamble 

accompanying the 2012 final rule, the 

Board considered costs incurred by 

debit card issuers associated with a 

variety of activities that contribute to 

preventing fraud, including research 

and development of new fraudprevention technologies, card 

reissuance due to fraudulent activity, 

data security, card activation, and 

merchant blocking. However, the Board 

did not consider transaction-monitoring 

costs to be a fraud-prevention cost for 

purposes of determining the fraudprevention adjustment because the 

Board included transaction-monitoring 

costs in allowable costs for purposes of 

the interchange fee standards.63 The 

Board also did not consider costs 

incurred to prevent fraud to a 

cardholder’s transaction account 

through means other than debit card 

transactions, or costs incurred to 

prevent fraud in connection with other 

payment methods such as credit cards. 

Additionally, fraud losses, lost revenue 

attributable to cardholders waiting for 

replacement cards, fraud-loss insurance, 

and recovering losses were not included 

in fraud-prevention costs.64

2. Fraud-Prevention Adjustment 

When the Board adopted the fraudprevention adjustment as an interim 

final rule in 2011, the Board noted that 

the statute does not specify what 

amount, or range of amounts, is 

reasonably necessary to make allowance 

for an issuer’s fraud-prevention costs. 

The Board concluded that an amount 

that makes allowance for an issuer’s 

fraud-prevention costs is one that gives 

consideration to those costs and allows 

a reasonable recovery of those costs 

based on the considerations set forth in 

EFTA section 920(a)(5)(B)(ii).65

For the reasons explained in the 

preamble accompanying the 2012 final 

rule, the Board adopted a fraudprevention adjustment of 1 cent per 

transaction.66 This amount 

corresponded to the difference, rounded 

to the nearest whole cent, between the 

median per-transaction fraudprevention costs aggregated with 

transaction-monitoring costs among 

covered issuers (1.8 cents) and the 

median per-transaction transactionmonitoring costs among covered issuers 

(0.7 cents), based on the data collected 

on the Board’s voluntary survey.67

The Board described the foregoing 

methodology for determining the fraudprevention adjustment in the preamble 

accompanying the 2012 final rule. The 

Board did not, however, codify this 

methodology in § 235.4. Rather, 

§ 235.4(a) simply provides that, subject 

to compliance with the Board’s fraudprevention standards, an issuer may 

receive or charge an amount of no more 

than 1.0 cent per transaction in addition 

to any interchange fee it receives or 

charges in accordance with § 235.3. 

B. Rationale for Proposal 

When the Board adopted the fraudprevention adjustment in current 

§ 235.4, the Board stated that it would 

take into account data from future Debit 

Card Issuer Surveys when considering 

any future revisions to the fraudprevention adjustment.68 Consistent 

with EFTA section 920(a)(3)(B), the 

Board has surveyed covered issuers on 

a mandatory basis every other year since 

the reporting requirements in § 235.8 of 

Regulation II were adopted. Through 

these biennial surveys, the Board has 

collected data from covered issuers 

concerning the costs incurred by 

covered issuers in connection with debit 

card transactions performed in calendar 

years 2011, 2013, 2015, 2017, 2019, and 


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69The Board computes the median pertransaction fraud-prevention among covered issuers 

by (i) for each covered issuer that reported fraudprevention costs, dividing the covered issuer’s 

fraud-prevention costs by the total number of debit 

card transactions reported by the covered issuer; (ii) 

sorting these values in ascending order; and (iii) 

selecting the value in the middle (if the number of 

values is odd) or calculating the simple average of 

the two values in the middle (if the number of 

values is even). 

70Specifically, the Board’s voluntary survey 

asked covered issuers to report (i) their fraudprevention costs aggregated with transactionmonitoring costs, and also to break out, if possible, 

(ii) their transaction-monitoring costs. Some 

covered issuers reported the first figure but not the 

second. Instead of directly calculating the median 

per-transaction fraud-prevention costs among 

covered issuers—which would have required the 

Board to rely on a smaller data set comprised only 

of those covered issuers that reported both figures— 

the Board approximated this metric by calculating 

the difference between (i) the median pertransaction fraud-prevention costs aggregated with 

transaction-monitoring costs among covered issuers 

that reported their fraud prevention costs 

aggregated with transaction-monitoring costs, and 

(ii) the median per-transaction transactionmonitoring costs among covered issuers that broke 

out their transaction-monitoring costs. 

71Specifically, beginning with the first 

mandatory Debit Card Issuer Survey, a more 

representative number of covered issuers have 

reported their fraud-prevention costs disaggregated 

from their transaction-monitoring costs. 

72Fraud-prevention costs are (i) ‘‘total fraudprevention and data-security costs,’’ as reported on 

line 5a of section II of the Debit Card Issuer Survey, 

minus (ii) ‘‘transactions monitoring costs tied to 

authorization,’’ as reported on line 5a.1 of section 

II of the Debit Card Issuer Survey. See FR 3064a. 

2021. These data show that fraudprevention costs have risen since 2009. 

Specifically, the median per-transaction 

fraud-prevention costs among covered 

issuers was 1.3 cents in 2021.69

Given this development, the Board 

believes it is necessary to revise the 

fraud-prevention adjustment to reflect 

the increase since 2009 in fraudprevention costs. In addition—and for 

the reasons explained in section III.B, 

supra, in connection with the 

interchange fee standards—the Board 

believes that, as much as practicable, 

the fraud-prevention adjustment should 

be updated regularly and predictably to 

reflect changes in the fraud-prevention 

costs incurred by covered issuers as 

those changes occur. Accordingly, the 

Board proposes to determine the fraudprevention adjustment in § 235.4 every 

other year based on the latest data 

reported to the Board by covered 

issuers. The Board believes that, under 

this approach, the fraud-prevention 

adjustment in § 235.4 will continue over 

time to reflect an amount that is 

reasonably necessary to make allowance 

for costs incurred by an issuer in 

preventing fraud in relation to debit 

card transactions involving that issuer. 

The Board also proposes to modify 

the original methodology used to 

determine the fraud-prevention 

adjustment. When the Board adopted 

current § 235.4, the Board’s objective 

was to determine the fraud-prevention 

adjustment as the median pertransaction fraud-prevention costs 

among covered issuers. However, due to 

limitations in the data reported to the 

Board by covered issuers on the Board’s 

voluntary survey, the Board did not 

directly calculate this metric, but rather 

approximated it by calculating the 

difference between (i) the median pertransaction fraud-prevention costs 

aggregated with transaction-monitoring 

costs among covered issuers, and (ii) the 

median per-transaction transactionmonitoring costs among covered issuers, 

rounded to the nearest cent.70 However, 

these limitations no longer persist in the 

data collected since the reporting 

requirements in § 235.8 of Regulation II 

were adopted.71 As a result, the Board 

is now able to directly calculate this 

metric. Therefore, as described below, 

the Board proposes to determine the 

fraud-prevention adjustment as the 

median per-transaction fraudprevention costs among covered issuers, 

rounded to the nearest tenth of one cent. 

The Board believes that the original 

methodology, with the proposed 

modification, continues to be an 

appropriate methodology for 

determining the fraud-prevention 

adjustment, both for the reasons 

explained in the preamble 

accompanying the 2012 final rule, and 

in light of the factors set forth in EFTA 

section 920(a)(5)(B)(ii), which are 

discussed in section VIII.C, infra. 

C. Description of Proposal 

The Board proposes to determine, for 

every two-year period, the fraudprevention adjustment based on the 

latest data reported to the Board by 

covered issuers on the Debit Card Issuer 

Survey. Further, the Board proposes to 

modify the original methodology used 

to determine the fraud-prevention 

adjustment. The Board does not propose 

to modify the fraud-prevention costs 

considered for purposes of determining 

the fraud-prevention adjustment, or the 

fraud-prevention standards that covered 

issuers must meet to receive the fraudprevention adjustment. 

Proposed § 235.4(a)(1) would provide 

that the fraud-prevention adjustment of 

1.0 cents would continue to apply for 

debit card transactions performed from 

October 1, 2011 (the original effective 

date of § 235.4) until the calendar day 

prior to the effective date of the final 

rule. Proposed § 235.4(a)(2) would 

establish the fraud-prevention 

adjustment (1.3 cents) that would apply 

for debit card transactions performed 

from the effective date of the final rule 

to June 30, 2025. Proposed new 

comment 235.4(a)-1 would provide that, 

for purposes of § 235.4(a), a debit card 

transaction is considered to be 

performed on the date on which the 

transaction is settled on an interbank 

basis. 

Proposed new paragraph (b) to § 235.4 

would set forth the basis for 

determining the fraud-prevention 

adjustment in proposed § 235.4(a). 

Specifically, proposed § 235.4(b) would 

provide that, for every two-year period, 

beginning with the period from July 1, 

2025, to June 30, 2027, the Board will 

determine the fraud-prevention 

adjustment using the approach 

described in proposed appendix B to 

Regulation II. Paragraph (a) to proposed 

appendix B similarly would state that 

the Board will determine the fraudprevention adjustment for each 

‘‘applicable period’’ (i.e., every two-year 

period beginning with the period from 

July 1, 2025, to June 30, 2027) using the 

approach described in proposed 

appendix B. 

Paragraph (b) of proposed appendix B 

would set forth the data that the Board 

would use to determine the fraudprevention adjustment for each 

applicable period—namely, the latest 

data reported to the Board by covered 

issuers on the Debit Card Issuer Survey. 

Specifically, paragraph (b) would 

provide that the Board will determine 

the fraud-prevention adjustment for 

each applicable period using the data 

reported to the Board by covered issuers 

pursuant to § 235.8 concerning 

transactions performed during the 

calendar year that is two years prior to 

the year in which that applicable period 

begins. For example, in the case of the 

applicable period beginning July 1, 

2025, the Board would use the data 

reported to the Board by covered issuers 

on the Debit Card Issuer Survey 

concerning debit card transactions 

performed in calendar year 2023, which 

the Board will collect in 2024. 

Paragraph (e)(1) of proposed appendix 

B would establish the metric that the 

Board would use to determine the fraudprevention adjustment for each 

applicable period. Specifically, for each 

applicable period, the fraud-prevention 

adjustment would be the median pertransaction fraud-prevention costs 

among covered issuers, rounded to the 

nearest tenth of one cent. Paragraph 

(e)(2) would define ‘‘per-transaction 

fraud-prevention costs’’ as fraudprevention costs, as reported on the 

Debit Card Issuer Survey,72 divided by 


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73The total number of debit card transactions 

attributable to a covered issuer is reported on line 

1a of section II of the Debit Card Issuer Survey as 

the volume of ‘‘settled purchase transactions 

(excluding pre-authorizations, denials, adjustments, 

returns, and cash back amounts).’’ See id. 

74As with future determinations of the base 

component and the ad valorem component, the 

Board believes that future determinations of the 

fraud-prevention adjustment should qualify for the 

good cause exemption from notice and comment 

rulemaking. See supra note 58. 

75The proposed definition is derived from 

current § 235.5(a)(1)(ii). 

76The General Instructions to the Debit Card 

Issuer Survey currently provide that ‘‘[i]f an issuer 

that is covered by the interchange fee standards in 

Regulation II at the time of this data collection was 

not also covered in [the previous calendar year], it 

does not need to file a report . . . .’’ See FR 3064a. 

77For the same reason, the Board proposes to 

remove § 235.5(a)(4), which temporarily modified 

the application of the small issuer exemption due 

the COVID–19 pandemic. See 85 FR 77345 (Dec. 2, 

2020). Because the last debit card transactions to 

which § 235.5(a)(4) applied were performed on 

December 31, 2021, the Board proposes to remove 

§ 235.5(a)(4) with an effective date of January 1, 

2027, which is after the five-year record retention 

requirement prescribed in § 235.8(c)(1) will have 

elapsed with respect to these transactions. The 

effective date of the other proposed revisions 

described in this preamble is discussed in section 

VI, infra. 

78The Board does not anticipate any future 

revisions to § 235.7(a) at this time. However, 

questions regarding the effective date arose in 

connection with the Board’s recent revisions to 

§ 235.7(a) and the commentary thereto. See 87 FR 

61217 (Oct. 11, 2022). 

the total number of debit card 

transactions, as reported on the Debit 

Card Issuer Survey.73 Paragraph (e)(3) 

would set forth how the Board 

calculates the median per-transaction 

fraud-prevention costs among covered 

issuers. Specifically, using the latest 

data reported to the Board by covered 

issuers, the Board would (i) determine 

the per-transaction fraud-prevention 

costs for each covered issuer that 

reported fraud-prevention costs, (ii) sort 

these values in ascending order, and (iii) 

select the value in the middle (if the 

number of values is odd) or calculate 

the simple average of the two values in 

the middle (if the number of values is 

even). 

Paragraph (f) of proposed appendix B 

would set forth the timing of the 

publication of the fraud-prevention 

adjustment for an applicable period. 

Specifically, the Board would publish 

the fraud-prevention adjustment in the 

Federal Register no later than March 31 

of the calendar year in which the 

applicable period begins. Because the 

Board would determine the fraudprevention adjustment by applying the 

methodology described in proposed 

appendix B and using the latest data 

reported to the Board by covered 

issuers, the Board would not intend to 

seek public comment on future updates 

to the fraud-prevention adjustment.74

V. Other Proposed Revisions 

In addition to the proposed revisions 

to the interchange fee standards in 

§ 235.3 and the fraud-prevention 

adjustment in § 235.4, the Board 

proposes a set of technical revisions to 

Regulation II. In general, these proposed 

revisions are intended to make 

Regulation II clearer. Additionally, some 

of the proposed revisions are intended 

to ensure the text of the regulation 

directly incorporates the Board’s current 

construction of the rule. 

First, to improve the readability of 

Regulation II, the Board proposes to add 

‘‘covered issuer’’ as a defined term in 

§ 235.2. Under the proposal, ‘‘covered 

issuer’’ would mean, for a particular 

calendar year, an issuer that, together 

with its affiliates, has assets of $10 

billion or more as of the end of the 

preceding calendar year.75 Further, the 

Board proposes certain conforming 

revisions to the regulation to reflect the 

addition of ‘‘covered issuer’’ as a 

defined term. For example, the Board 

proposes to move current comment 

235.5(a)–1, which describes which 

assets do and do not count toward the 

$10 billion threshold, to the 

commentary under § 235.2. In addition, 

the Board proposes to incorporate the 

defined term ‘‘covered issuer’’ where 

relevant in other sections of Regulation 

II, particularly in § 235.5(a) (the small 

issuer exemption) and § 235.8(a) 

(reporting requirements) and the 

commentary thereto. The Board does 

not intend the addition and 

incorporation of the defined term 

‘‘covered issuer’’ to be a substantive 

change. 

Second, the Board identified three 

sentences in the commentary to current 

§ 235.2(k) (definition of ‘‘issuer’’) that 

relate to an issuer’s eligibility for the 

small issuer exemption in § 235.5(a). 

The Board proposes to move the 

substance of these sentences into the 

commentary to § 235.5(a). The Board 

does not intend this proposed revision 

to modify the definition of ‘‘issuer’’ or 

alter any issuer’s eligibility for the small 

issuer exemption. 

Third, the Board proposes minor 

revisions to add specificity to § 235.8 

(reporting requirements and record 

retention) and the commentary thereto. 

Specifically, the Board proposes to 

specify in § 235.8(a) that each covered 

issuer must file a report with the Board 

on a biennial basis, and that each 

payment card network must file a report 

with the Board on an annual basis, 

consistent with the Board’s survey 

practices since 2011. Further, the Board 

proposes to add new comment 235.8(a)- 

1 to specify that the reports referred to 

in proposed § 235.8(a) are the Board’s 

biennial Debit Card Issuer Survey and 

annual Payment Card Network Survey, 

and that each survey collects 

information concerning debit card 

transactions performed during the 

previous calendar year. In addition, the 

Board proposes to add new comment 

235.8(a)–2 to specify that newly covered 

issuers are exempt from the Debit Card 

Issuer Survey, consistent with the 

current instructions to that survey.76

The Board believes that these proposed 

revisions are helpful in light of the 

significance of the data collected on the 

Debit Card Issuer Survey to the 

proposed approach for determining the 

base component, the ad valorem 

component, and the fraud-prevention 

adjustment. 

Fourth, the Board proposes to remove 

§ 235.7(c), the commentary to § 235.7(c), 

and § 235.10 of Regulation II. These 

sections of the regulation specify the 

original effective date of Regulation II 

(October 1, 2011) and give debit card 

issuers and networks additional time to 

comply with the requirements in 

§ 235.7(a) for certain types of debit 

cards, such as general-use prepaid cards 

and debit cards that use point-of-sale 

transaction qualification or 

substantiation systems for verifying the 

eligibility of purchased goods or 

services. Both the original effective date 

of Regulation II and these extended 

compliance dates have long since 

passed. As such, the Board believes that 

these provisions of Regulation II are no 

longer necessary.77 In addition, deleting 

these provisions would avoid the 

potential for confusion regarding the 

effective date of any future revisions to 

the requirements in § 235.7(a).78

Fifth, the Board proposes minor 

revisions to § 235.4 (in addition to those 

described in section IV.C, supra) and 

the commentary to § 235.3(b) (in 

addition to those described in section 

III.C, supra) to clarify the relationship 

between the interchange fee standards 

in § 235.3 and the fraud-prevention 

adjustment in § 235.4. Specifically, the 

Board proposes to modify the first 

sentence of § 235.4(a) to clarify that the 

fraud-prevention adjustment is in 

addition to any interchange fee an issuer 

receives or charges in accordance with 

§ 235.3. Further, the Board proposes to 

add a sentence in both comments 

235.3(b)–1 and 235.3(b)–3 stating that, 

in addition to the base component and 

ad valorem component, an issuer may 

be permitted to receive a fraudprevention adjustment under § 235.4. 


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79Unlike the other proposed revisions described 

in this preamble, the proposed deletion of 

§ 235.5(a)(4) would, if adopted, take effect on 

January 1, 2027. See supra note 77. 

80Section 302 of the Riegle Community 

Development and Regulatory Improvement Act, 

Public Law 103–325, requires that amendments to 

regulations prescribed by a Federal banking agency 

that impose additional requirements on insured 

depository institutions must take effect on the first 

day of a calendar quarter that begins on or after the 

date of publication in the Federal Register. See 12 

U.S.C. 4802. 

81The Board notes that, compared with the 

original rulemaking in which the Board adopted 

current § 235.3, the proposed revisions would 

represent a significantly smaller reduction in the 

amount of interchange fees that covered issuers may 

receive for transactions subject to the interchange 

fee standards. In addition, at the time of the original 

rulemaking, there was significant uncertainty as to 

whether payment card networks would implement 

different interchange fee schedules for transactions 

subject to and exempt from the interchange fee cap. 

Since that time, all networks have established 

different interchange fee schedules for transactions 

subject to and exempt from the interchange fee cap. 

82As noted in section III.A, supra, the Board has 

reviewed its construction of the statute and prior 

analysis regarding the allowable costs that the 

Board considered in establishing the interchange 

fee standards, and believes that this prior analysis 

remains sound. As such, the Board is not inviting 

comments on the allowable costs considered for 

purposes of the interchange fee standards. 

83The transaction-weighted average of pertransaction base component costs across covered 

issuers, rounded to the nearest tenth of one cent, 

for transactions performed in 2021 was 3.9 cents. 

For purposes of comparison, the same average for 

transactions performed in 2009 and 2011 was 7.7 

cents and 5.1 cents, respectively. The base 

component values listed are the product of 3.9 cents 

and the relevant fixed multiplier. 

84As described in section III.B, supra, this 

efficiency gap is represented by the ratio of the 

transaction-weighted average of per-transaction 

base component costs for covered issuers whose 

transactions are above the target percentile to that 

for covered issuers whose transactions are below 

the target percentile. 

Although the Board does not believe 

that debit card industry participants 

currently misunderstand the 

relationship between the interchange fee 

standards in § 235.3 and the fraudprevention adjustment in § 235.4, the 

proposed revisions would eliminate any 

doubt that the maximum permissible 

interchange fee amount that a covered 

issuer may receive for a transaction 

subject to the interchange fee standards 

is the sum of the base component, the 

ad valorem component, and, if the 

covered issuer is eligible, the fraudprevention adjustment. 

Finally, the Board proposes to remove 

the first clause of § 235.5(a)(1), which 

cross-references § 235.5(a)(3) (transition 

period for newly covered issuers) and 

characterizes the latter paragraph as an 

exception to the small issuer exemption 

in § 235.5(a)(1). The Board believes that 

characterizing § 235.5(a)(3) as an 

exception to § 235.5(a)(1) is potentially 

confusing, as § 235.5(a)(3) adds to, 

rather than subtracts from, the relief 

provided in § 235.5(a)(1) by providing 

additional, temporary relief to newly 

covered issuers that would not 

otherwise qualify for the relief provided 

in § 235.5(a)(1). The proposed revision 

would clarify the relationship between 

these two paragraphs in § 235.5(a) but is 

not intended to alter any issuer’s 

eligibility for the small issuer 

exemption. 

VI. Effective Date of Proposed Revisions 

With one exception,79 the Board 

proposes that the revisions would, if 

adopted, take effect on the first day of 

the next calendar quarter that begins at 

least 60 days after the final rule is 

published in the Federal Register.80

Such an implementation period would 

be similar to the implementation period 

of the current interchange fee standards, 

which the Board published on July 20, 

2011, and became effective on October 

1, 2011.81

Once the proposed revisions are 

effective, and as described in sections 

III.C and IV.C, supra, the proposed base 

component (14.4 cents), ad valorem 

component (4.0 basis points multiplied 

by the value of the transaction), and 

fraud-prevention adjustment (1.3 cents) 

would be in effect through June 30, 

2025. On July 1, 2025, a new base 

component, ad valorem component, and 

fraud-prevention adjustment would take 

effect. The Board would determine these 

amounts using the approach described 

in proposed appendix B based on the 

data reported to the Board by covered 

issuers on the Debit Card Issuer Survey 

in 2024 (concerning debit card 

transactions performed in calendar year 

2023), and would publish these values 

in the Federal Register no later than 

March 31, 2025. 

VII. Request for Comment 

The Board invites comment on all 

aspects of the proposed revisions.82 In 

addition, the Board invites feedback on 

the following specific questions related 

to the proposal: 

1. As stated in paragraph (a) of 

proposed appendix B to Regulation II, 

the Board would determine the base 

component, ad valorem component, and 

fraud-prevention adjustment for every 

two-year period, beginning with the 

period from July 1, 2025, to June 30, 

2027. Is the proposed two-year cadence 

appropriate, or should the Board 

determine these amounts more or less 

frequently? 

2. As described in paragraph (c)(1) of 

proposed appendix B to Regulation II, 

the Board would determine the base 

component as a fixed multiple of the 

transaction-weighted average of pertransaction base component costs (i.e., 

allowable costs (excluding fraud losses)) 

across covered issuers. As described in 

section III.B, supra, the fixed multiplier 

corresponds to the percentage of 

covered issuer transactions for which 

the Board believes covered issuers 

should fully recover their base 

component costs over time. Should the 

Board select an alternative cost-recovery 

target from among the possibilities 

below, or another cost-recovery target 

not included below? If so, why? 

3. 

Cost-recovery 

target 

(percentage of 

covered issuer 

transactions) 

(%) 

Fixed multiplier 

Base component 

(based on 2021 

data) 83

(cents) 

Decline in base 

component 

relative to current 

(based on 2021 

data) 

(%) 

Efficiency gap with respect to 

transaction processing 

between covered issuers 

whose transactions are above 

and below the 

cost-recovery target 

(based on 2021 data) 84

Percentage of covered issuers 

that would have fully 

recovered their base 

component costs in 2021 had 

the relevant base component 

been in effect in 2021 

(based on 2021 data) 

(%) 

Current ............................. 21.0 ............................. ................................................. 77 

99.5 4.5 17.6 16 7.7 76 

99.0 4.0 15.6 26 5.8 71 

* 98.5 3.7 14.4 31 5.2 66 

98.0 3.5 13.7 35 4.7 63 

95.0 2.7 10.5 50 3.8 52 

* Proposal. 


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85The Board interprets ‘‘other users of electronic 

fund transfer services’’ in EFTA section 904(a)(2) to 

refer primarily to merchants. 

86 Data collected by the Board show that, since 

adoption of the current interchange fee cap, actual 

per-transaction interchange fees for transactions 

subject to the interchange fee standards have been 

close in value to the amount permitted under the 

interchange fee cap. Thus, the Board expects that 

the proposed revisions to the interchange fee cap 

will directly lower per-transaction interchange fees 

for most transactions subject to the interchange fee 

standards. 

4. As described in paragraph (d)(1) of 

proposed appendix B to Regulation II, 

the Board would determine the ad 

valorem component, for a particular 

debit card transaction, as the median 

ratio of issuer fraud losses to transaction 

value among covered issuers, multiplied 

by the value of the transaction. Should 

the Board adopt an alternative 

methodology for determining the ad 

valorem component? If so, why? 

5. As described in paragraph (e)(1) of 

proposed appendix B to Regulation II, 

the Board would determine the fraudprevention adjustment as the median 

per-transaction fraud-prevention costs 

among covered issuers. Should the 

Board adopt an alternative methodology 

for determining the fraud-prevention 

adjustment? If so, why? 

6. As described in paragraphs (c)(1), 

(d)(1), and (e)(1) of proposed appendix 

B to Regulation II, respectively, the 

Board proposes to round the base 

component to the nearest tenth of one 

cent, the ad valorem component to the 

nearest quarter of one basis point, and 

the fraud-prevention adjustment to the 

nearest tenth of one cent. Further, as 

described in paragraph (c)(3) of 

proposed appendix B to Regulation II, in 

determining the base component, the 

Board proposes to round the 

transaction-weighted average of pertransaction allowable costs (excluding 

fraud losses) across covered issuers to 

the nearest tenth of one cent. Do these 

rounding conventions provide an 

appropriate degree of precision? If not, 

what alternative rounding conventions 

should the Board adopt? 

7. As described in paragraphs (c) 

through (e) of proposed appendix B to 

Regulation II, the Board would 

determine the base component, ad 

valorem component, and fraudprevention adjustment for an applicable 

period using data reported on lines 1a, 

3a, 5a, 5a.1, and 8b of the Debit Card 

Issuer Survey (FR 3064a). 

a. Are there any reporting challenges 

or data quality issues associated with 

these line items of which the Board 

should be aware? If so, how could the 

Board address these challenges or 

issues? 

b. Should the Board amend § 235.8 of 

Regulation II to specify that a covered 

issuer is required to retain records 

supporting the data that the covered 

issuer reports on the Debit Card Issuer 

Survey? Would this record retention 

requirement be duplicative of any 

existing recordkeeping requirements for 

covered issuers? If not, what would be 

the estimated additional annual burden 

of this requirement, in terms of hours 

and cost, for covered issuers? 

8. As described in section VI, with 

one exception, the Board proposes that 

the revisions would take effect on the 

first day of the next calendar quarter 

that begins at least 60 days after the 

final rule is published in the Federal 

Register. Would this proposed effective 

date provide sufficient notice to covered 

issuers, payment card networks, and 

other industry stakeholders to prepare 

for the initial changes to the base 

component, ad valorem component, and 

fraud-prevention adjustment? 

9. As stated in paragraph (f) of 

proposed appendix B to Regulation II, 

going forward, the Board would publish 

the base component, ad valorem 

component, and fraud-prevention 

adjustment in the Federal Register no 

later than March 31 for an applicable 

period beginning July 1. Would this 

timeline provide sufficient notice to 

covered issuers, payment card networks, 

and other industry stakeholders to 

prepare for changes to these amounts? 

Should the Board increase or decrease 

the period between publication of these 

values and the beginning of the next 

applicable period? 

10. Proposed comments 235.3(b)–4 

and 235.4(b)–1 would provide that, for 

purposes of determining in which twoyear period a debit card transaction is 

considered to be performed, a debit card 

transaction is considered to be 

performed on the date on which it is 

settled on an interbank basis. Is this 

proposed convention sufficiently clear? 

For example, should the Board specify 

which time zone is controlling for 

purposes of determining the date on 

which a transaction is settled on an 

interbank basis? Should the Board adopt 

an alternative standard, such as 

considering a transaction to be 

performed on the date on which the 

cardholder presents the debit card to the 

merchant for payment? 

11. Would any of the proposed 

technical revisions described in section 

V, which are generally intended to make 

Regulation II clearer, create unintended 

consequences? 

12. Does the Board’s economic 

analysis of the proposal, set forth in 

section VIII.A, appropriately describe 

the likely impact of the proposal on 

various participants in the debit card 

market? Are there additional impacts of 

the proposal that the Board has not 

considered? 

VIII. Regulatory Analyses 

A. EFTA Section 904(a) Analysis 

1. Statutory Requirement 

Section 904(a)(2) of the EFTA requires 

the Board, in prescribing regulations to 

carry out the purposes of EFTA section 

920, to prepare an economic analysis 

that considers the costs and benefits to 

financial institutions, consumers, and 

other users of electronic fund transfers. 

The analysis must address the extent to 

which additional paperwork will be 

required, the effect upon competition in 

the provision of electronic fund transfer 

services among large and small financial 

institutions, and the availability of such 

services to different classes of 

consumers, particularly low-income 

consumers. EFTA section 904(a)(2) also 

requires, to the extent practicable, the 

Board to demonstrate that the consumer 

protections of the proposed regulations 

outweigh the compliance costs imposed 

upon consumers and financial 

institutions. The Board interprets these 

requirements as applying with respect 

to both proposed and final rules 

implementing EFTA section 920. 

In analyzing the potential effects of 

the proposal, the Board considered 

predictions of economic theory, 

information regarding debit card 

industry structure and practices, and 

issues raised during the original 

Regulation II rulemaking. The analysis 

also incorporates the experience of debit 

card industry participants since the 

current interchange fee cap was adopted 

in 2011. 

2. Cost/Benefit Analysis 

(a) Effects on Merchants 85

The Board believes that the primary 

way in which the proposal would 

impact merchants is by lowering their 

costs of accepting debit card 

transactions. The proposal would 

generally decrease the interchange fee 

paid by an acquirer (i.e., a merchant’s 

depository institution) on an average 

transaction performed using a debit card 

issued by a covered issuer, which would 

in turn decrease a merchant’s costs by 

decreasing the merchant discount that 

the merchant pays to its acquirer for a 

debit card transaction.86 Although the 

precise extent to which acquirers would 

pass on savings from lower debit card 

interchange fees to merchants may vary, 

competition between acquirers in the 

industry should generally result in 

acquirers passing on savings from lower 


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87The extent to which an acquirer passes on 

savings from lower interchange fees to a merchant 

may depend on many factors, including the 

merchant’s type and size. 

88 In addition, merchants may use savings from 

lower costs of accepting debit card transactions to 

enhance their operations, for example, by adding 

staff, improving their facilities, or implementing 

new technology. 

89Potential challenges include (i) a lack of 

detailed price and cost data at the merchant level, 

(ii) contemporaneous changes in other costs for 

merchants, (iii) the small magnitude of cost 

variation due to changes in interchange fees relative 

to total price, and (iv) asymmetric price stickiness 

in the short term, meaning that merchants are more 

likely to increase prices in response to cost 

increases than to lower prices in response to cost 

decreases. For an overview of research looking to 

measure merchant cost pass-through, see Howard 

Chang, David S. Evans & Daniel D. Garcia Swartz, 

The Effect of Regulatory Intervention in Two-Sided 

Markets: An Assessment of Interchange-Fee 

Capping in Australia, 4 Review of Network 

Economics 328 (2005), https://doi.org/10.2202/ 

1446-9022.1080. 

90See Wang, Zhu, Scarlett Schwartz, & Neil 

Mitchell, The Impact of the Durbin Amendment on 

Merchants: A Survey Study, 100 Federal Reserve 

Bank of Richmond Economic Quarterly 183 (2014), 

https://www.richmondfed.org/-/media/ 

RichmondFedOrg/publications/research/economic_

quarterly/2014/q3/pdf/wang.pdf. 

91See, e.g., Vladmir Mukharlyamov & Natasha 

Sarin, Price Regulation in Two-Sided Markets: 

Empirical Evidence from Debit Cards (last rev. Nov. 

28, 2022) (unpublished manuscript), https://

papers.ssrn.com/sol3/papers.cfm?abstract_

id=3328579; Efraim Berkovich & Zheli He, 

Rewarding the Rich: Cross Subsidies from 

Interchange Fees (Hispanic Leadership Fund, May 

3, 2022), https://hispanicleadershipfund.org/wpcontent/uploads/2022/05/HLF_Report_

RewardingTheRich-InterchangeFees_03May22.pdf. 

92The Board interprets ‘‘financial institutions’’ in 

EFTA section 904(a)(2) to refer primarily to issuers 

of debit cards. 

93Board of Governors of the Federal Reserve 

System, The Federal Reserve Payments Study: 2022 

Triennial Initial Data Release, https://www.federal

reserve.gov/paymentsystems/fr-paymentsstudy.htm. 94An issuer seeking to reduce costs may reduce 

transaction-processing costs and/or other types of 

costs. Under the proposed approach, the former 

could result in a reduction to the interchange fee 

cap once data collected by the Board show a 

reduction in the transaction-weighted average of 

per-transaction transaction-processing costs across 

covered issuers. Although another way in which 

covered issuers could offset a loss in interchange 

fee revenue could be through reductions in debit 

card reward programs, data collected by the Board 

show that following the adoption of the current 

interchange fee cap, covered issuers significantly 

limited or eliminated such programs, suggesting 

that issuers may not be able to reduce such 

programs much further. See generally Board of 

Governors of the Federal Reserve System, 

Regulation II (Debit Card Interchange Fees and 

Routing): Reports and Data Collections, https://

www.federalreserve.gov/paymentsystems/regii-datacollections.htm. 

95 In addition, the reduction in covered issuers’ 

interchange fee revenue could theoretically lead 

some covered issuers, particularly those serving 

niche market segments, such as high net-worth 

individuals, to downsize or potentially discontinue 

their debit card programs. 96Benjamin S. Kay, Mark D. Manuszak & Cindy 

M. Vojtech, Competition and Complementarities in 

Continued 

interchange fees to their merchant 

customers.87

Merchants that experience a decrease 

in the costs of accepting debit card 

transactions may pass on some or all 

these savings to consumers in the form 

of lower prices, foregone future price 

increases, or improved products or 

services.88 The extent to which 

merchants would pass on such savings 

to consumers may depend on many 

factors. For example, merchants in more 

competitive markets would be likely to 

pass on more of their cost savings to 

consumers compared with merchants 

facing less competition. 

Measuring the extent to which 

merchants pass on cost savings to 

consumers, including any decrease in 

the costs of accepting certain forms of 

payment, is generally difficult.89 Efforts 

to measure the extent to which 

merchants passed on to consumers any 

savings associated with the decrease in 

the costs of accepting debit card 

transactions in the period following the 

adoption of the current interchange fee 

cap in 2011 have yielded a wide range 

of results. For example, in response to 

a survey conducted soon after the 

introduction of the interchange fee cap, 

merchants did not consistently report 

making adjustments to their prices in 

response to the interchange fee cap.90

By contrast, later research efforts 

analyzing data from longer time periods 

found evidence that merchants passed 

on to consumers a portion of their debit 

card acceptance costs (e.g., by adjusting 

their prices) and that the degree of passthrough depended on merchant size.91

Finally, the decrease in costs of 

accepting debit card transactions may 

incentivize some merchants that until 

now have not accepted debit cards as a 

form of payment to begin doing so. In 

particular, while debit card acceptance 

is already high for most in-person 

transactions, the proposal may 

encourage greater adoption of debit 

cards in market segments where 

acceptance may be lower, such as cardnot-present (e.g., ecommerce) 

transactions. Another market segment 

for which merchants may increase debit 

card acceptance are small-dollar 

purchases because, for this market 

segment, the proposed decrease in the 

base component would substantially 

reduce debit card acceptance costs as a 

proportion of the transaction value. 

Faced with lower debit card acceptance 

costs, some merchants may also look to 

provide incentives to their customers, or 

otherwise steer them, to pay with debit 

cards over alternative payment methods. 

(b) Effects on Debit Card Issuers 92

The Board believes that the proposal 

would have a direct effect on covered 

issuers but would not directly affect 

debit card issuers exempt from the 

interchange fee cap (exempt issuers). 

The primary way in which the 

proposal would affect covered issuers 

would be by lowering their revenue 

from debit card transactions. In 

particular, covered issuers’ interchange 

fee revenue would decline as the 

proposal would decrease the average 

interchange fee they collect on debit 

card transactions subject to the 

interchange fee standards. This 

reduction in covered issuers’ total debit 

card interchange fee revenue could be 

offset to some extent by the likely 

continued growth in total debit card 

volume, with the offset potentially 

varying between different issuers. Debit 

card popularity has grown substantially 

since the current interchange fee cap 

was adopted; over this period, debit 

cards have become the most commonly 

used noncash payment method in the 

United States.93 As noted above, further 

reduction in interchange fee levels may 

support continued growth in debit card 

volumes to the extent that more 

merchants accept debit cards as a form 

of payment or encourage their 

customers to use debit cards. 

Faced with lower interchange revenue 

from debit card transactions, covered 

issuers may offset some or all lost 

interchange fee revenue through a 

combination of customer fee increases 

and issuer cost reductions (e.g., 

improvements to transaction-processing 

efficiency).94 Depending on a variety of 

factors, such adjustments may make 

covered issuers’ checking account and 

debit card programs less attractive to 

consumers. In response to these 

adjustments, consumers may switch to 

checking account or debit card programs 

offered by exempt issuers, or to 

alternative payment methods such as 

credit cards and digital payment 

methods, potentially leading to a further 

reduction in covered issuers’ revenues 

from debit cards.95

The experience following the 

introduction of the current interchange 

fee cap in 2011 provides information 

about how covered issuers may adjust 

their debit card programs in response to 

the proposal. Research shows that the 

adoption of the current interchange fee 

cap resulted in covered issuers 

increasing customer fees on checking 

accounts more than they otherwise 

would have, although these increases 

offset the reduction in interchange fee 

revenue only partially.96 Furthermore, 


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Retail Banking: Evidence from Debit Card 

Interchange Regulation, 34 Journal of Financial 

Intermediation 91 (2018); Mark D. Manuszak & 

Krzysztof Wozniak, The Impact of Price Controls in 

Two-Sided Markets: Evidence from US Debit Card 

Interchange Fee Regulation, Finance and 

Economics Discussion Series 2017–074, https://

www.federal6reserve.gov/econres/feds/files/ 

2017074pap.pdf; Vladmir Mukharlyamov & Natasha 

Sarin, Price Regulation in Two-Sided Markets: 

Empirical Evidence from Debit Cards (last rev. Nov. 

28, 2022) (unpublished manuscript), https://

papers.ssrn.com/sol3/papers.cfm?abstract_

id=3328579. 

97See generally Board of Governors of the Federal 

Reserve System, Regulation II (Debit Card 

Interchange Fees and Routing): Reports and Data 

Collections, https://www.federalreserve.gov/ 

paymentsystems/regii-data-collections.htm. 

98The Board collects and reports annual 

information from payment card networks about 

their interchange fees for transactions subject to and 

exempt from the interchange fee cap. See Board of 

Governors of the Federal Reserve System, 

Regulation II (Debit Card Interchange Fees and 

Routing): Average Debit Card Interchange Fee by 

Payment Card Network, https://www.federal

reserve.gov/paymentsystems/regii-averageinterchange-fee.htm. The Board also annually 

publishes lists of covered and exempt institutions 

that issuers, payment card networks, and other 

market participants can use to determine which 

issuers qualify for the small issuer exemption. See 

Board of Governors of the Federal Reserve System, 

Interchange Fee Standards: Small Issuer 

Exemption, https://www.federalreserve.gov/ 

paymentsystems/regii-interchange-feestandards.htm. 

99See Board of Governors of the Federal Reserve 

System, Regulation II (Debit Card Interchange Fees 

and Routing): Average Debit Card Interchange Fee 

by Payment Card Network, https://www.federal

reserve.gov/paymentsystems/regii-averageinterchange-fee.htm. 

100See id. 

101However, the Board notes that the unbanked 

rate in the United States has been steadily declining 

over time, including after the introduction of the 

current interchange fee cap in 2011. According to 

the data collected by the Federal Deposit Insurance 

Corporation, the rate of unbanked in the population 

fell from 8.2 percent in 2011 to an all-time low of 

4.5 percent in 2021. See Federal Deposit Insurance 

Corporation, 2021 FDIC National Survey of 

Unbanked and Underbanked Households, https://

www.fdic.gov/analysis/household-survey/ 

2021report.pdf. 

102However, the Board requests comment on 

whether § 235.8 of Regulation II should be amended 

to specify that a covered issuer is required to retain 

records supporting the data that the covered issuer 

reports on the Debit Card Issuer Survey. See section 

VII, supra (Question 6(b)). 

103Although EFTA section 904(a)(2) requires the 

Board to consider the effects upon competition in 

the provision of electronic banking services among 

large and small financial institutions, the Board is 

considering the impact of the final rule on 

competition generally, including competition 

between large and small financial institutions. 

104See, e.g., Robert M. Adams, Kenneth P. 

Brevoort & Elizabeth K. Kiser, Who Competes with 

Whom? The Case of Depository Institutions, 55 

Journal of Industrial Economics 141 (2007); Andrew 

M. Cohen & Michael J. Mazzeo, Market Structure 

and Competition Among Retail Depository 

Institutions, 89 Review of Economics and Statistics 

60 (2007); Timothy H. Hannan & Robin A. Prager, 

The Profitability of Small Single-Market Banks in 

an Era of Multi-Market Banking, 33 Journal of 

Banking and Finance 263 (2009). 

the continued growth in debit card 

popularity since the adoption of 

Regulation II, and the lack of a 

pronounced shift by consumers from 

covered issuers’ to exempt issuers’ debit 

card programs, suggest that such fee 

increases and other adjustments to 

checking accounts and debit card 

programs offered by covered issuers did 

not make them substantially less 

attractive to consumers.97 Finally, the 

Board is not aware of any evidence that 

the adoption of the current interchange 

fee cap led any covered issuers to 

discontinue their debit card programs. 

By contrast, the proposal would not 

directly or, the Board believes, 

indirectly affect exempt issuers (i.e., 

those with consolidated assets under 

$10 billion).98 The experience following 

the introduction of the current 

interchange fee cap in 2011 provides 

information about whether exempt 

issuers are likely to be affected by the 

proposal. First, the adoption of the 

current interchange fee cap and the 

statutory exemptions for certain issuers 

and debit card transactions led all debit 

card networks to adopt pricing 

structures with different interchange 

fees for covered and exempt issuers. 

Second, data collected by the Board 

demonstrate that average per-transaction 

interchange fees for exempt issuers 

across all payment card networks did 

not decline after the current interchange 

fee cap was introduced in 2011 and 

have not declined since then.99 Average 

per-transaction interchange fees for 

exempt issuers have remained at a level 

substantially higher than average pertransaction interchange fees for covered 

issuers, with the latest data collected by 

the Board documenting that average pertransaction interchange fees for exempt 

issuers increased in 2020 and 2021.100

(c) Effects on Consumers and 

Availability of Services to Different 

Classes of Consumers 

As discussed above in the context of 

effects on merchants and debit card 

issuers, the proposal could affect 

consumers in two main ways. On the 

one hand, consumers could benefit if 

merchants pass on savings associated 

with the decrease in costs of accepting 

debit card transactions in the form of 

lower prices, forgone future price 

increases, or improvements in product 

or service quality. On the other hand, 

consumers could be negatively affected 

if covered issuers increase fees on debit 

cards or checking accounts, or make 

other adjustments that make these 

products less attractive to consumers. 

The net effect on consumers, both 

individually and in the aggregate, will 

depend on which of these two effects 

predominates, which would in turn 

depend on many factors and is thus 

difficult to predict. As noted above, 

merchants in more competitive markets 

would likely pass on a larger portion of 

their cost savings to consumers. In a 

similar way, in response to declines in 

interchange fee revenue, covered issuers 

in more competitive markets would be 

less likely to increase fees or make other 

changes that negatively affect 

consumers. Covered issuers that face 

strong competition from exempt issuers 

may be less likely to raise fees, as doing 

so could increase the probability that 

customers switch to these competing 

institutions. 

In addition, the effect of the proposal 

could differ between particular classes 

of consumers in several ways. First, if 

the proposal results in merchants 

further increasing debit card acceptance 

(e.g., for card-not-present transactions), 

consumers’ ability to make such 

payments could increase, generating 

benefits to consumers without access to 

alternative non-cash payment methods, 

such as credit cards. Second, if the 

proposal results in covered issuers 

increasing fees, banking services could 

become less accessible to lower-income 

consumers who may be more sensitive 

to such fees.101

(d) Additional Paperwork 

The proposal would not substantively 

alter the reporting and recordkeeping 

requirements that § 235.8 of Regulation 

II imposes on covered issuers and 

networks, and would not alter the 

recordkeeping requirement for exempt 

issuers.102 Regulation II does not impose 

any reporting or recordkeeping 

requirements on consumers or 

merchants. 

(e) Effects Upon Competition in the 

Provision of Electronic Banking 

Services 103

The proposal could affect competition 

between covered and exempt issuers by 

reducing the average per-transaction 

debit card interchange fee received by 

covered issuers without affecting the 

amount received by exempt issuers. As 

noted above, the competitive effect of 

any adjustments made by covered 

issuers to their fee structures in 

response to the reduction in interchange 

fee revenue would depend on the degree 

of substitution between exempt and 

covered issuers. Research suggests that 

competition between smaller and larger 

depository institutions is weaker than 

competition between large depository 

institutions or competition between 

small depository institutions, likely 

because these institutions serve 

different customer bases.104 In addition, 


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105See generally Board of Governors of the 

Federal Reserve System, Regulation II (Debit Card 

Interchange Fees and Routing): Reports and Data 

Collections, https://www.federalreserve.gov/ 

paymentsystems/regii-data-collections.htm. 

106To the extent that the interchange fee 

standards and fraud-prevention adjustment 

constitute consumer protections, the Board believes 

that the aim of those protections is broadly to 

benefit consumers, rather than to address specific 

consumer rights. As such, the Board has, to the 

extent practicable, considered broadly whether the 

overall benefits of the proposed revisions to 

consumers outweigh other costs imposed on 

consumers or financial institutions. 

107The same provision of the statute additionally 

requires the Board to (i) distinguish between certain 

types of costs incurred by debit card issuers and (ii) 

consult with certain other agencies. The allowable 

costs that the Board considered in establishing the 

interchange fee standards are discussed in section 

III.A, supra. The interagency consultation 

requirement is discussed in section VIII.D, infra. 108See 76 FR 43393, 43399 (July 20, 2011). For 

example, similarities and differences between debit 

card transactions and check transactions were 

factors in the Board’s decision to include or exclude 

from allowable costs a number of types of costs 

incurred by debit card issuers. See 76 FR at 43428 

(July 20, 2011). 109All data used in this section have been 

sourced from the Board’s Debit Card Issuer Surveys 

and Payment Card Network Surveys. Reports and 

data tables published by the Board, as well as notes 

regarding the figures cited in this section, may be 

found on the Board’s website. See Board of 

Governors of the Federal Reserve System, 

Regulation II (Debit Card Interchange Fees and 

Routing): Reports and Data Collections, https://

www.federalreserve.gov/paymentsystems/regii-datacollections.htm. 

110EFTA section 920(a)(5)(B)(ii) does not specify 

precisely how the Board should evaluate each of 

these factors. 

111See 77 FR 46258, 46265 (Aug. 3, 2012). The 

Board also considered the costs of losses absorbed 

by different parties to fraudulent transactions when 

it developed the fraud-prevention standards, which 

the Board does not propose to revise. See 77 FR at 

46270. The Board additionally considered certain 

other factors in connection with the overall 

structure of the fraud-prevention adjustment, such 

as the incentives created by the adjustment. See 76 

FR 43477, 43483 (July 20, 2011). 

data collected by the Board indicates 

that the proportion of debit card 

transactions attributable to covered and 

exempt issuers did not significantly 

change before and after the adoption of 

the current interchange fee cap.105 In 

light of this evidence, the Board does 

not expect the proposal to have a 

significant impact on competitive 

dynamics between the two groups of 

issuers. The Board further does not 

believe that the proposal would affect 

competition between debit card 

networks. 

(f) Consumer Protection and 

Compliance Costs 106

Based on the analysis above, the 

Board cannot, at this time, determine 

whether the potential benefits of the 

proposal to consumers exceed the 

possible costs imposed on consumers 

and financial institutions. As described 

above, the proposal may yield benefits 

for consumers, but the magnitude of 

these benefits will depend on the 

behavior of various participants in the 

debit card industry. The proposal may 

also impose costs on consumers and 

financial institutions, but the net effect 

on any individual or entity will depend 

on its particular circumstances. Because 

the overall effects of the proposal on 

consumers and on financial institutions 

are dependent on a variety of factors, 

the Board cannot determine at this time 

whether the potential benefits of the 

proposal to consumers exceed the 

possible costs imposed on consumers 

and financial institution. 

B. Statutory Considerations for 

Proposed Revisions to the Interchange 

Fee Standards 

In prescribing regulations to establish 

interchange fee standards, EFTA section 

920(a)(4) requires the Board to consider 

the functional similarity between debit 

card transactions and checking 

transactions that are required within the 

Federal Reserve bank system to clear at 

par.107

The Board considered the functional 

similarity between debit card 

transactions and checking transactions 

when the Board adopted Regulation II, 

and this analysis informed certain 

decisions the Board made when the 

Board established the interchange fee 

standards.108 The similarities noted by 

the Board included the fact that both 

types of transactions result in a debit to 

an asset account; both involve electronic 

processing and deposit; both involve 

processing fees paid by merchants to 

banks and other intermediaries; and 

both have similar settlement 

timeframes. The differences noted by 

the Board included the closed nature of 

debit card systems compared to the 

open check clearing and collection 

system (and limitations on routing a 

debit card transaction based on the set 

of networks the issuer has enabled or 

that the merchant accepts); the payment 

authorization that is an integral part of 

debit card transactions (but not check 

transactions), which generally 

guarantees that the transaction will not 

be returned for insufficient funds or 

certain other reasons (e.g., a closed 

account); processing and collection 

costs incurred by the issuer (analogous 

to the payor’s bank) for debit card 

transactions but not for check 

transactions; par clearance in the check 

system; payee deposit and availability; 

the amount of time in which a payor 

may reverse a transaction (which is 

much longer in the case of a debit card 

transaction compared to a check); and 

the increasing popularity of debit card 

payments (and declining use of check). 

The Board has reviewed its analysis 

from 2011 regarding the functional 

similarity between debit card 

transactions and checking transactions 

and believes that the factual predicates 

underlying that analysis remain 

unchanged. For that reason, the Board 

continues to believe that its prior 

analysis remains sound. 

C. Statutory Considerations for 

Proposed Revisions to the Fraud 

Prevention Adjustment 109

1. Statutory Requirement 

EFTA section 920(a)(5)(B)(ii) requires 

the Board, in prescribing regulations for 

any fraud-prevention adjustment, to 

consider (i) the nature, type, and 

occurrence of fraud in debit card 

transactions; (ii) the extent to which the 

occurrence of fraud depends on whether 

authorization in a debit card transaction 

is based on signature, personal 

identification number (PIN), or other 

means; (iii) the available and 

economical means by which fraud on 

debit card transactions may be reduced; 

(iv) the fraud-prevention and datasecurity costs expended by each party 

involved in debit card transactions 

(including consumers, persons who 

accept debit cards as a form of payment, 

financial institutions, retailers, and 

payment card networks); (v) 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); (vi) the extent 

to which interchange fees have in the 

past reduced or increased incentives for 

parties involved in debit card 

transactions to reduce fraud on such 

transactions; and (vii) such other factors 

as the Board considers appropriate.110

The Board has considered the factors set 

forth in EFTA section 920(a)(5)(B)(ii) in 

light of the latest data from covered 

issuers from 2021 and the cumulative 

data collected from covered issuers 

since the original Regulation II 

rulemaking. 

When the Board adopted the current 

fraud-prevention adjustment of 1.0 cent, 

the Board focused on one factor in 

particular: the fraud-prevention costs 

expended by various parties involved in 

debit card transactions.111 As discussed 

below, the Board believes that all parties 

continue to incur fraud-prevention costs 

and that the Board’s proposed 

methodology for determining the fraudprevention adjustment appropriately 

considers those costs. 


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112See 77 FR 46258, 46261 (Aug. 3, 2012). 

113See 84 FR 65815 (Nov. 29, 2019). 114See 77 FR at 46261–62. 

Notably, as described below, data 

reported by covered issuers since the 

adoption of Regulation II show that the 

incidence, types, and relative rates of 

absorption of fraud losses have changed. 

As noted in section III.B, supra, in 

connection with the Board’s proposed 

revisions to the ad valorem component, 

the Board has observed an overall 

increase in fraud losses to all parties 

related to covered issuer transactions, 

but the share of such fraud losses 

absorbed by covered issuers has 

declined. Changes in the median ratio of 

issuer fraud losses to transaction value 

among covered issuers would be 

reflected in the Board’s proposed 

revisions to the ad valorem component. 

2. Factors 

(a) Nature, Type, and Occurrence of 

Fraud 

With respect to covered issuer 

transactions, fraud losses to all parties 

as a share of transaction value increased 

from 9.0 basis points in 2009 to 17.5 

basis points in 2021, and have displayed 

an upward trend since 2011 (the first 

year for which the Debit Card Issuer 

Survey was mandatory). In 2021, the 

most commonly reported and highestvalue fraud types for covered issuer 

transactions were card-not-present 

fraud, lost and stolen card fraud, and 

counterfeit fraud. Card-not-present 

fraud, at 8.6 basis points of transaction 

value, accounted for almost half of 

overall fraud in 2021. Lost and stolen 

card fraud accounted for 4.6 basis points 

of transaction value, and counterfeit 

card fraud accounted for 3.4 basis points 

of transaction value. In 2009, counterfeit 

card fraud, card-not-present fraud, and 

lost and stolen card fraud accounted for 

4.3 basis points, 1.8 basis points, and 

1.5 basis points, respectively, as a share 

of transaction value. 

(b) Extent to Which the Occurrence of 

Fraud Depends on Authentication 

Mechanism 

Overall fraud incidence for covered 

issuer transactions approximately 

doubled from 2009 to 2021, and dualmessage (traditionally mainly signatureauthenticated) debit card transactions 

exhibited a considerably higher fraud 

incidence than single-message 

(traditionally mainly PIN-authenticated) 

debit card transactions, as has been the 

case since 2009. In 2021, 0.11 percent of 

covered issuer transactions were 

reported as fraudulent. Covered issuers 

reported as fraudulent 0.13 percent of 

dual-message transactions and 0.02 

percent of single-message transactions. 

Across all covered issuer transactions, 

the average loss for dual-message 

transactions was 8.6 cents per 

transaction and represented 17.5 basis 

points of transaction value. For singlemessage transactions, the average loss 

was 1.9 cents per transaction and 

represented 4.2 basis points of 

transaction value. In 2009, 0.04 percent 

of covered issuer transactions were 

reported as fraudulent. The average loss 

for dual-message transactions was 4.7 

cents per transaction and represented 

12.7 basis points of transaction value. 

The average loss for single-message 

transactions was 1.3 cent per transaction 

and represented approximately 3.2 basis 

points of transaction value. 

The differential in fraud losses 

between single- and dual-message 

transactions can be explained in part by 

differences in the use of single- and 

dual-message networks for card-notpresent transactions. As noted above, 

card-not-present fraud accounted for 

almost half of overall fraud on covered 

issuer transactions in 2021, and single 

message networks continue to be used 

relatively rarely for card-not-present 

transactions. In 2021, the percentage of 

card-not-present transactions out of the 

total number and value of all debit card 

transactions processed over singlemessage networks, at 6.1 and 6.7 

percent, respectively, continued to be 

significantly lower than the analogous 

percentages for dual-message networks, 

at 44.2 and 60.7 percent, respectively. 

(c) Available and Economical Means by 

Which Fraud May Be Reduced 

In response to the Board’s voluntary 

survey of covered issuers concerning 

transactions performed in 2009, covered 

issuers identified several categories of 

activities used to detect, prevent, and 

mitigate fraudulent debit card 

transactions, including transaction 

monitoring; merchant blocking; card 

activation and authentication systems; 

PIN customization; system and 

application security measures, such as 

firewalls and virus protection software; 

and ongoing research and development 

focused on making fraud-prevention 

activities more effective.112 Since that 

time, the Board identified tokenization 

as an important emerging fraudprevention technique, and added it to 

the list of fraud-prevention activities 

starting from the 2019 Debit Card Issuer 

Survey.113

(d) Fraud-Prevention Costs Expended by 

Parties Involved in Debit Card 

Transactions 

When the Board adopted current 

§ 235.4 in 2012, the Board reviewed 

fraud-prevention costs expended by 

parties involved in debit card 

transactions.114 The Board continues to 

believe that all parties involved in debit 

card transactions incur fraud-prevention 

costs. For example, some consumers 

routinely monitor their accounts for 

unauthorized debit card purchases, but 

the opportunity cost of consumers’ time 

to monitor their account is difficult to 

put into monetary terms. Merchants and 

acquirers incur costs for fraudprevention tools, such as terminals that 

enable merchants to use various cardand cardholder-authentication 

mechanisms, address verification, 

geolocation services, and dataencryption technologies. Merchants may 

purchase services from third parties and 

may also develop their own fraudprevention tools. In addition, merchants 

may also take steps and incur costs to 

secure data and comply with Payment 

Card Industry Data Security Standards 

(PCI–DSS) and other fraud-prevention 

standards. 

As discussed in section IV of this 

preamble, supra, the Board has 

collected data from covered issuers 

concerning the costs incurred by 

covered issuers in connection with debit 

card transactions performed in calendar 

years 2011, 2013, 2015, 2017, 2019, and 

2021. These data show that fraudprevention costs incurred by covered 

issuers have risen since 2009, such that 

the median per-transaction fraudprevention costs among covered issuers 

was 1.3 cents in 2021. 

(e) Costs of Fraudulent Transactions 

Absorbed by Different Parties Involved 

in Fraudulent Transactions 

Most fraud losses associated with 

covered issuer transactions in 2021 were 

borne by covered issuers and merchants. 

In 2009, covered issuers, merchants, and 

cardholders bore 61.2 percent, 38.3 

percent, and 0.5 percent of these fraud 

losses, respectively. In 2021, covered 

issuers, merchants, and cardholders 

bore 33.5 percent, 47.0 percent, and 19.5 

percent of fraud losses, respectively. 

This shift reflects a number of factors. 

First, card-not-present transactions grew 

from 9.8 percent of covered issuer 

transactions in 2009 to 32.1 percent of 

covered issuer transactions in 2021. 

Second, card-not-present fraud 

accounted for almost half of overall 

fraud in 2021, and merchants bear a 

greater share of fraud losses for this type 

of transactions (almost two-thirds of 

card-not-present fraud in 2021). Third, 

merchants absorbed an increasing share 

of fraud losses across almost all 

transaction categories and fraud types in 


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115 77 FR at 46262. 

116These agencies include the Office of the 

Comptroller of the Currency (OCC), the Federal 

Deposit Insurance Corporation (FDIC), the National 

Credit Union Administration (NCUA), the 

Department of Transportation, the Securities and 

Exchange Commission, the Consumer Financial 

Protection Bureau (CFPB), and the Federal Trade 

Commission. See EFTA section 918. 

117These agencies include the OCC, FDIC, Office 

of Thrift Supervision, NCUA, Small Business 

Administration (SBA), and CFPB. 

118As described in section V, supra, the Board 

additionally proposes a set of technical revisions to 

Regulation II. Because these proposed revisions are 

not intended to be substantive changes, the Board’s 

IRFA does not address these aspects of the 

proposal. 

2021, relative to 2009. For example, 

merchants’ share of fraud losses has also 

increased over time for single-message 

transactions, from around 4 percent in 

2009 to 31.9 percent in 2021. 

(f) Extent to Which Interchange 

Transaction Fees Have in the Past 

Affected Fraud-Prevention Incentives 

In 2012, the Board noted that issuers 

have a strong incentive to protect 

cardholders and reduce fraud 

independently of interchange fees, and 

that competition among issuers for 

cardholders suggested that protecting 

cardholders from fraud is good business 

practice for issuers. At the time, 

merchants commented that, historically, 

higher interchange fee revenue for 

signature debit relative to PIN debit may 

have encouraged issuers to promote the 

use of signature debit over PIN debit, 

even though signature debit had 

substantially higher rates of fraud.115

The Board continues to believe that 

covered issuers have an incentive to 

protect cardholders and reduce fraud, 

despite a reduction in the proportion of 

fraud losses borne by covered issuers 

and an increase in the proportion born 

by cardholders. Covered issuers 

continue to bear more than a quarter of 

all fraud losses, which means that their 

efforts to reduce fraud rates translate 

directly into lower fraud losses. 

Moreover, competition with other debit 

card issuers continues to provide 

downward pressure on the proportion of 

fraud losses that an issuer passes on to 

its cardholders, as passing on more 

fraud losses to cardholders increases the 

likelihood that they switch to competing 

issuers. Notwithstanding the adoption 

of the interchange fee standards and the 

fraud-prevention adjustment, the 

median per-transaction fraudprevention costs among covered issuers 

has risen since 2009, to 1.3 cents per 

transaction in 2021. 

Furthermore, data collected by the 

Board show that interchange fees on 

most transactions subject to the 

interchange fee cap are at or close to the 

cap, including for different 

authentication methods, which suggests 

that covered issuers have no incentives 

to promote the use of networks or 

authentication mechanisms that have 

higher rates of fraud. 

D. Interagency Consultation 

In addition to the economic analysis 

provided above, EFTA section 904(a)(2) 

requires the Board to consult with the 

other agencies that have enforcement 

authority under the EFTA on any 

rulemakings related to EFTA section 

920.116 Separately, EFTA section 

920(a)(4)(C) requires the Board to 

consult with certain other agencies in 

prescribing regulations under EFTA 

section 920(a)(3)(A).117 The Board 

consulted with each of the relevant 

agencies prior to issuing this proposal. 

E. Regulatory Flexibility Act 

The Regulatory Flexibility Act, 5 

U.S.C. 601 et seq. (RFA), requires an 

agency to consider the impact of its 

rules on small entities. In connection 

with a proposed rule, the RFA generally 

requires an agency to prepare an Initial 

Regulatory Flexibility Analysis (IRFA) 

describing the impact of the rule on 

small entities, unless the head of the 

agency certifies that the proposal will 

not have a significant economic impact 

on a substantial number of small entities 

and publishes such certification along 

with a statement providing the factual 

basis for such certification in the 

Federal Register. An IRFA must contain 

(i) a description of the reasons why 

action by the agency is being 

considered; (ii) a succinct statement of 

the objectives of, and legal basis for, the 

proposal; (iii) a description of, and, 

where feasible, an estimate of the 

number of small entities to which the 

proposal will apply; (iv) a description of 

the projected reporting, recordkeeping, 

and other compliance requirements of 

the proposal, including an estimate of 

the classes of small entities that will be 

subject to the requirement and the type 

of professional skills necessary for 

preparation of the report or record; (v) 

an identification, to the extent 

practicable, of all relevant Federal rules 

that may duplicate, overlap with, or 

conflict with the proposal; and (vi) a 

description of any significant 

alternatives to the proposal that 

accomplish its stated objectives. 

The Board is providing an IRFA with 

respect to the proposal. The Board 

invites comment on all aspects of this 

IRFA. 

1. Reasons Action Is Being Considered 

The Board proposes revisions to the 

interchange fee standards in § 235.3 and 

the fraud-prevention adjustment in 

§ 235.4 of Regulation II.118 Under the 

proposal, the Board would determine, 

for every two-year period, the base 

component, ad valorem component, and 

fraud-prevention adjustment based on 

the latest data reported to the Board by 

covered issuers on the Debit Card 

Survey using the methodology 

described in proposed appendix B. 

Initially, the base component and the ad 

valorem component would decrease to 

14.4 cents and 4.0 basis points 

(multiplied by the value of the 

transaction), respectively, while the 

fraud-prevention adjustment would 

increase to 1.3 cents, for debit card 

transactions performed from the 

effective date of the final rule to June 30, 

2025. 

As described in section III.B, supra, 

one key rationale for the proposal is the 

significant decline in the average cost of 

a debit card transaction, as measured by 

the transaction-weighted average of pertransaction base component costs across 

covered issuers, since the Board first 

adopted § 235.3. In addition, in lieu of 

an ad hoc approach to updating the 

interchange fee cap components, the 

Board believes that, as much as 

practicable, these components should be 

updated regularly and predictably to 

reflect changes in the allowable costs 

and fraud-prevention costs incurred by 

covered issuers as those changes occur. 

2. Objectives of and Legal Basis for the 

Proposal 

Consistent with EFTA section 

920(a)(3), the proposed revisions to 

§ 235.3 are intended to ensure that the 

interchange fee standards will be 

effective going forward for assessing 

whether, for a debit card transaction 

subject to the interchange fee standards, 

the amount of any interchange fee 

received or charged by a debit card 

issuer is reasonable and proportional to 

the cost incurred by the issuer with 

respect to the transaction. Consistent 

with EFTA section 920(a)(5), the 

proposed revisions to § 235.4 are 

intended to ensure that eligible covered 

issuers receive an adjustment to any 

interchange fee permitted under § 235.3 

in an amount that is reasonably 

necessary to make allowance for the 

costs incurred by the covered issuer in 

preventing fraud in relation to debit 

card transactions involving that issuer. 

3. Description and Estimate of the 

Number of Small Entities 

The proposed revisions to § 235.3 and 

§ 235.4 apply to debit card issuers 

subject to the interchange fee standards 


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119See 13 CFR 121.210. Consistent with the 

SBA’s General Principles of Affiliation, the Board 

generally includes the assets of all domestic and 

foreign affiliates toward the applicable size 

threshold when determining whether to classify a 

particular entity as a small entity. See 13 CFR 

121.103. 

120See 13 CFR 121.201 (sector 522210). Although 

this size standard applies to credit card-issuing 

institutions, the Board believes that the same size 

standard should apply to debit card-issuing 

institutions. 

121However, the Board requests comment on 

whether § 235.8 of Regulation II should be amended 

to specify that a covered issuer is required to retain 

records supporting the data that the covered issuer 

reports on the Debit Card Issuer Survey. See section 

VII, supra (Question 6(b)). 

(i.e., covered issuers). Pursuant to EFTA 

section 920(a)(6) and § 235.5(a), a debit 

card issuer that, together with its 

affiliates, has assets of less than $10 

billion as of the end of the calendar year 

preceding the date of the debit card 

transaction is exempt from the 

interchange fee standards, provided that 

such issuer holds the account that is 

debited. 

The Board generally uses the 

industry-specific size standards adopted 

by the SBA for purposes of estimating 

the number of small entities to which a 

proposal would apply.119 The SBA has 

adopted size standards that provide that 

card-issuing institutions with average 

assets of less than $850 million over the 

preceding year (based on the 

institution’s four quarterly financial 

statements) are considered small 

entities.120 Because all such issuers 

would qualify for the exemption from 

the interchange fee standards in 

§ 235.5(a) provided that they hold the 

account that is debited, the proposed 

revisions would not apply to any small 

entities. 

4. Description of Compliance 

Requirements 

The proposal would not substantively 

alter the reporting or recordkeeping 

requirements that apply to debit card 

issuers and payment card networks in 

§ 235.8 of Regulation II.121 Rather, the 

proposed revisions would adjust the 

amount of any interchange fee that a 

covered issuer may receive or charge 

with respect to a debit card transaction 

subject to the interchange fee standards. 

Because interchange fees are collected 

by networks from acquirers and paid to 

issuers, a covered issuer should not 

need to make any changes to its systems 

to ensure that the amount of any 

interchange fee does not exceed the 

amount permitted under Regulation II. 

5. Duplicative, Overlapping, and 

Conflicting Rules 

The Board is not aware of any federal 

rules that may duplicate, overlap with, 

or conflict with the proposal. 

6. Significant Alternatives Considered 

As described in section III.B, supra, 

the Board considered several alternative 

methodologies for determining the base 

component. In addition, the Board 

considered a variety of different costrecovery targets from which the fixed 

multiplier for determining the base 

component under the proposed formula 

is derived. However, due to the 

statutory exemption from the 

interchange fee standards for debit card 

issuers with consolidated assets under 

$10 billion that hold the account that is 

debited, the Board does not believe that 

any of the alternatives considered by the 

Board would have affected the 

economic impact of the proposal on 

small entities. 

F. Paperwork Reduction Act 

Regulation II contains ‘‘collections of 

information’’ within the meaning of the 

Paperwork Reduction Act of 1995 (PRA) 

(44 U.S.C. 3501–3521). In accordance 

with the requirements of the PRA, the 

Board may not conduct or sponsor, and 

a respondent is not required to respond 

to, an information collection unless it 

displays a currently valid Office of 

Management and Budget (OMB) control 

number. The Board reviewed the 

proposal under the authority delegated 

to the Board by OMB. 

Sections 235.8(a) and (b) of 

Regulation II (12 CFR 235.8(a) and (b)) 

currently require the reporting of 

information to the Board, and this 

reporting requirement is conducted in 

the form of two surveys collected by the 

Board: the Debit Card Issuer Survey (FR 

3064a; OMB No. 7100–0344) and 

Payment Card Network Survey (FR 

3064b; OMB No. 7100–0344). The 

proposal would amend section 235.8(a) 

of Regulation II to reflect the reporting 

frequency of the FR 3064a and FR 3064b 

surveys. No revisions to these surveys 

are being proposed at this time, but the 

Board is proposing to extend the FR 

3064a and FR 3064b for three years. 

However, the Board requests 

comment on whether § 235.8 of 

Regulation II should be amended to 

specify that a covered issuer is required 

to retain records supporting the data 

that the covered issuer reports on the 

Debit Card Issuer Survey. See section 

VII.6, supra (Question 6(b)). The Board 

may revise § 235.8 of Regulation II based 

on comments received in response to 

this question. 

Comments are invited on the 

following: 

(a) Whether the collections of 

information are necessary for the proper 

performance of the Board’s functions, 

including whether the information has 

practical utility; 

(b) The accuracy of the Board’s 

estimates of the burden of the 

information collections, including the 

validity of the methodology and 

assumptions used; 

(c) Ways to enhance the quality, 

utility, and clarity of the information to 

be collected; 

(d) Ways to minimize the burden of 

the information collections on 

respondents, including through the use 

of automated collection techniques or 

other forms of information technology; 

and 

(e) Estimates of capital or start-up 

costs and costs of operation, 

maintenance, and purchase of services 

to provide information. 

Comments on aspects of this 

document that may affect reporting, 

recordkeeping, or disclosure 

requirements and burden estimates 

should be sent to the addresses listed in 

the ADDRESSES section. A copy of the 

comments may also be submitted to the 

OMB desk officer for the Agencies: By 

mail to U.S. Office of Management and 

Budget, 725 17th Street NW, #10235, 

Washington, DC 20503 or by facsimile 

to (202) 395–5806, Attention, Federal 

Banking Agency Desk Officer. 

Proposed Extension, Without Revision, 

of the Following Information Collection 

(1) Collection title: Interchange 

Transaction Fees Survey. 

Collection identifier: FR 3064. 

OMB control number: 7100–0344. 

General description of report: This 

information collection comprises the 

following reports: 

Debit Card Issuer Survey (FR 3064a) 

collects data from issuers of debit cards 

(including general-use prepaid cards) 

that, together with their affiliates, have 

assets of $10 billion or more, including 

information regarding the volume and 

value of debit card transactions; 

chargebacks and returns; costs of 

authorization, clearance, and settlement 

of debit card transactions; other costs 

incurred in connection with particular 

debit card transactions; fraud 

prevention costs and fraud losses; and 

interchange fee revenue. 

Payment Card Network Survey (FR 

3064b) collects data from payment card 

networks, including the volume and 

value of debit card transactions; 

interchange fees; network fees; and 

payments and incentives paid by 


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networks to acquirers, merchants, and 

issuers. 

The data from the FR 3064a and FR 

3064b are used to fulfill a statutory 

requirement that the Board disclose 

certain information regarding debit card 

transactions on a biennial basis. In 

addition, the Board uses data from the 

Payment Card Network Survey (FR 

3064b) to publicly report on an annual 

basis the extent to which networks have 

established separate interchange fees for 

exempt and covered issuers. 

Frequency: Annual and biennial. 

Affected public: Businesses or other 

for-profit. 

Respondents: Debit card issuers and 

payment card networks. 

Estimated number of respondents: 

FR 3064a—534. 

FR 3064b—15. 

Estimated average hours per response: 

FR 3064a—160. 

FR 3064b—75. 

Estimated annual burden hours: 

FR 3064a—85,440. 

FR 3064b—1,125. 

G. Solicitation of Comments on the Use 

of Plain Language 

Section 722 of the Gramm-LeachBliley Act (Pub. L. 106–102, 113 Stat. 

1338, 1471, 12 U.S.C. 4809) requires the 

federal banking agencies to use plain 

language in all proposed and final rules 

published after January 1, 2000. The 

Board has sought to present the 

proposal in a simple and 

straightforward manner and invites 

comment on the use of plain language 

and whether any part of the proposal 

could be more clearly stated. 

H. Providing Accountability Through 

Transparency Act of 2023 

The Providing Accountability 

Through Transparency Act of 2023 (5 

U.S.C. 553(b)(4)) requires that a notice 

of proposed rulemaking include the 

internet address of a summary of not 

more than 100 words in length of the 

proposed rule, in plain language, that 

shall be posted on the internet website 

under section 206(d) of the EGovernment Act of 2002 (44 U.S.C. 3501 

note). 

In summary, the Board requests 

comment on a proposal to update the 

debit card interchange fee cap, which 

the Board established in 2011, based on 

the latest data reported to the Board 

concerning the costs incurred by large 

debit card issuers. The Board also 

requests comment on a proposal to 

establish an approach for updating the 

interchange fee cap every other year 

going forward. 

The proposal and such a summary 

can be found at https://

www.regulations.gov and https://

www.federalreserve.gov/supervisionreg/ 

reglisting.htm. 

List of Subjects in 12 CFR Part 235 

Banks, banking, Debit card routing, 

Electronic debit transactions, 

Interchange transaction fees. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Board is proposing to 

revise Regulation II, 12 CFR part 235, as 

follows: 

PART 235—DEBIT CARD 

INTERCHANGE FEES AND ROUTING 

(REGULATION II) 

Sec. 

235.1 Authority and purpose. 

235.2 Definitions. 

235.3 Reasonable and proportional 

interchange transaction fees. 

235.4 Fraud-prevention adjustment. 

235.5 Exemptions. 

235.6 Prohibition on circumvention, 

evasion, and net compensation. 

235.7 Limitations on payment card 

restrictions. 

235.8 Reporting requirements and record 

retention. 

235.9 Administrative enforcement. 

Appendix A to Part 235—Official Board 

Commentary on Regulation II 

Appendix B to Part 235—Determination of 

Base Component, Ad Valorem 

Component, and Fraud-Prevention 

Adjustment 

Authority: 15 U.S.C. 1693o–2. 

§ 235.1 Authority and purpose. 

(a) Authority. This part is issued by 

the Board of Governors of the Federal 

Reserve System (Board) under section 

920 of the Electronic Fund Transfer Act 

(EFTA) (15 U.S.C. 1693o–2, as added by 

section 1075 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act, Public Law 111–203, 124 Stat. 1376 

(2010)). 

(b) Purpose. This part implements the 

provisions of section 920 of the EFTA, 

including standards for reasonable and 

proportional interchange transaction 

fees for electronic debit transactions, 

standards for receiving a fraudprevention adjustment to interchange 

transaction fees, exemptions from the 

interchange transaction fee limitations, 

prohibitions on evasion and 

circumvention, prohibitions on payment 

card network exclusivity arrangements 

and routing restrictions for debit card 

transactions, and reporting requirements 

for debit card issuers and payment card 

networks. 

§ 235.2 Definitions. 

For purposes of this part: 

(a) Account: 

(1) Means transaction, savings, or 

other asset account (other than an 

occasional or incidental credit balance 

in a credit plan) established for any 

purpose and that is located in the 

United States; and 

(2) Does not include an account held 

under a bona fide trust agreement that 

is excluded by section 903(2) of the 

Electronic Fund Transfer Act and rules 

prescribed thereunder. 

(b) Acquirer means a person that 

contracts directly or indirectly with a 

merchant to provide settlement for the 

merchant’s electronic debit transactions 

over a payment card network. An 

acquirer does not include a person that 

acts only as a processor for the services 

it provides to the merchant. 

(c) Affiliate means any company that 

controls, is controlled by, or is under 

common control with another company. 

(d) Cardholder means the person to 

whom a debit card is issued. 

(e) Control of a company means: 

(1) Ownership, control, or power to 

vote 25 percent or more of the 

outstanding shares of any class of voting 

security of the company, directly or 

indirectly, or acting through one or 

more other persons; 

(2) Control in any manner over the 

election of a majority of the directors, 

trustees, or general partners (or 

individuals exercising similar functions) 

of the company; or 

(3) The power to exercise, directly or 

indirectly, a controlling influence over 

the management or policies of the 

company, as the Board determines. 

(f) Covered issuer means, for a 

particular calendar year, an issuer that, 

together with its affiliates, has assets of 

$10 billion or more as of the end of the 

preceding calendar year. 

(g) Debit card: 

(1) Means any card, or other payment 

code or device, issued or approved for 

use through a payment card network to 

debit an account, regardless of whether 

authorization is based on signature, 

personal identification number (PIN), or 

other means, and regardless of whether 

the issuer holds the account, and 

(2) Includes any general-use prepaid 

card; and 

(3) Does not include: 

(i) Any card, or other payment code 

or device, that is redeemable upon 

presentation at only a single merchant 

or an affiliated group of merchants for 

goods or services; or 

(ii) A check, draft, or similar paper 

instrument, or an electronic 

representation thereof. 

(h) Designated automated teller 

machine (ATM) network means either: 

(1) All ATMs identified in the name 

of the issuer; or 


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(2) Any network of ATMs identified 

by the issuer that provides reasonable 

and convenient access to the issuer’s 

customers. 

(i) Electronic debit transaction: 

(1) Means the use of a debit card by 

a person as a form of payment in the 

United States to initiate a debit to an 

account, and 

(2) Does not include transactions 

initiated at an ATM, including cash 

withdrawals and balance transfers 

initiated at an ATM. 

(j) General-use prepaid card means a 

card, or other payment code or device, 

that is— 

(1) Issued on a prepaid basis in a 

specified amount, whether or not that 

amount may be increased or reloaded, 

in exchange for payment; and 

(2) Redeemable upon presentation at 

multiple, unaffiliated merchants for 

goods or services. 

(k) Interchange transaction fee means 

any fee established, charged, or received 

by a payment card network and paid by 

a merchant or an acquirer for the 

purpose of compensating an issuer for 

its involvement in an electronic debit 

transaction. 

(l) Issuer means any person that 

authorizes the use of a debit card to 

perform an electronic debit transaction. 

(m) Merchant means any person that 

accepts debit cards as payment. 

(n) Payment card network means an 

entity that: 

(1) Directly or indirectly provides the 

proprietary services, infrastructure, and 

software that route information and data 

to an issuer from an acquirer to conduct 

the authorization, clearance, and 

settlement of electronic debit 

transactions; and 

(2) A merchant uses in order to accept 

as a form of payment a brand of debit 

card or other device that may be used 

to carry out electronic debit 

transactions. 

(o) Person means a natural person or 

an organization, including a 

corporation, government agency, estate, 

trust, partnership, proprietorship, 

cooperative, or association. 

(p) Processor means a person that 

processes or routes electronic debit 

transactions for issuers, acquirers, or 

merchants. 

(q) Route means to direct and send 

information and data to an unaffiliated 

entity or to an affiliated entity acting on 

behalf of an unaffiliated entity. 

(r) 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. 

(b) Reasonable and proportional fees. 

An issuer complies with the 

requirements of paragraph (a) of this 

section only if each interchange 

transaction fee received or charged by 

the issuer for an electronic debit 

transaction is no more than the sum of— 

(1) For an electronic debit transaction 

performed from October 1, 2011, to [one 

calendar day prior to effective date of 

final rule], a base component of 21.0 

cents, and an ad valorem component of 

5.0 basis points multiplied by the value 

of the transaction; and 

(2) For an electronic debit transaction 

performed from [effective date of final 

rule], to June 30, 2025, a base 

component of 14.4 cents, and an ad 

valorem component of 4.0 basis points 

multiplied by the value of the 

transaction. 

(c) Determination of base component 

and ad valorem component. For every 

two-year period, beginning with the 

period from July 1, 2025, to June 30, 

2027, the Board will determine the base 

component and the ad valorem 

component using the approach 

described in appendix B to this part. 

§ 235.4 Fraud-prevention adjustment. 

(a) In general. In addition to any 

interchange transaction fee an issuer 

receives or charges in accordance with 

§ 235.3, and subject to paragraph (c) of 

this section, an issuer may receive or 

charge an amount of no more than— 

(1) For an electronic debit transaction 

performed from October 1, 2011, to [one 

calendar day prior to effective date of 

final rule], a fraud-prevention 

adjustment of 1.0 cent; and 

(2) For an electronic debit transaction 

performed from [effective date of final 

rule], to June 30, 2025, a fraudprevention adjustment of 1.3 cents. 

(b) Determination of fraud-prevention 

adjustment. For every two-year period, 

beginning with the period from July 1, 

2025, to June 30, 2027, the Board will 

determine the fraud-prevention 

adjustment using the approach 

described in appendix B to this part. 

(c) Issuer standards. (1) To be eligible 

to receive or charge the fraudprevention adjustment in paragraph (a) 

of this section, an issuer must develop 

and implement policies and procedures 

reasonably designed to take effective 

steps to reduce the occurrence of, and 

costs to all parties from, fraudulent 

electronic debit transactions, including 

through the development and 

implementation of cost-effective fraudprevention technology. 

(2) An issuer’s policies and 

procedures must address— 

(i) Methods to identify and prevent 

fraudulent electronic debit transactions; 

(ii) Monitoring of the volume and 

value of its fraudulent electronic debit 

transactions; 

(iii) Appropriate responses to 

suspicious electronic debit transactions 

in a manner designed to limit the costs 

to all parties from and prevent the 

occurrence of future fraudulent 

electronic debit transactions; 

(iv) Methods to secure debit card and 

cardholder data; and 

(v) Such other factors as the issuer 

considers appropriate. 

(3) An issuer must review, at least 

annually, its fraud-prevention policies 

and procedures, and their 

implementation and update them as 

necessary in light of— 

(i) Their effectiveness in reducing the 

occurrence of, and cost to all parties 

from, fraudulent electronic debit 

transactions involving the issuer; 

(ii) Their cost-effectiveness; and 

(iii) Changes in the types of fraud, 

methods used to commit fraud, and 

available methods for detecting and 

preventing fraudulent electronic debit 

transactions that the issuer identifies 

from— 

(A) Its own experience or information; 

(B) Information provided to the issuer 

by its payment card networks, law 

enforcement agencies, and fraudmonitoring groups in which the issuer 

participates; and 

(C) Applicable supervisory guidance. 

(d) Notification. To be eligible to 

receive or charge a fraud-prevention 

adjustment, an issuer must annually 

notify its payment card networks that it 

complies with the standards in 

paragraph (c) of this section. 

(e) Change in status. An issuer is not 

eligible to receive or charge a fraudprevention adjustment if the issuer is 

substantially non-compliant with the 

standards set forth in paragraph (c) of 

this section, as determined by the issuer 

or the appropriate agency under § 235.9. 

Such an issuer must notify its payment 

card networks that it is no longer 

eligible to receive or charge a fraudprevention adjustment no later than 10 

days after determining or receiving 

notification from the appropriate agency 

under § 235.9 that the issuer is 

substantially non-compliant with the 

standards set forth in paragraph (c) of 

this section. The issuer must stop 


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receiving and charging the fraudprevention adjustment no later than 30 

days after notifying its payment card 

networks. 

§ 235.5 Exemptions. 

(a) Exemption for small issuers—(1) In 

general. Sections 235.3, 235.4, and 

235.6 do not apply to an interchange 

transaction fee received or charged by 

an issuer that— 

(i) Holds the account that is debited; 

and 

(ii) Is not a covered issuer when the 

electronic debit transaction is 

performed. 

(2) Determination of issuer asset size. 

A person may rely on lists published by 

the Board to determine whether an 

issuer is a covered issuer for a particular 

calendar year. 

(3) Change in status. If an issuer 

qualifies for the exemption in paragraph 

(a)(1) of this section in a particular 

calendar year, but, as of the end of that 

calendar year the issuer, together with 

its affiliates, has assets of $10 billion or 

more, the issuer must begin complying 

with §§ 235.3, 235.4, and 235.6 no later 

than July 1 of the succeeding calendar 

year. 

(b) Exemption for governmentadministered programs. Except as 

provided in paragraph (d) of this 

section, §§ 235.3, 235.4, and 235.6 do 

not apply to an interchange transaction 

fee received or charged by an issuer 

with respect to an electronic debit 

transaction if— 

(1) The electronic debit transaction is 

made using a debit card that has been 

provided to a person pursuant to a 

Federal, State, or local governmentadministered payment program; and 

(2) The cardholder may use the debit 

card only to transfer or debit funds, 

monetary value, or other assets that 

have been provided pursuant to such 

program. 

(c) Exemption for certain reloadable 

prepaid cards—(1) In general. Except as 

provided in paragraph (d) of this 

section, §§ 235.3, 235.4, and 235.6 do 

not apply to an interchange transaction 

fee received or charged by an issuer 

with respect to an electronic debit 

transaction using a general-use prepaid 

card that is— 

(i) Not issued or approved for use to 

access or debit any account held by or 

for the benefit of the cardholder (other 

than a subaccount or other method of 

recording or tracking funds purchased 

or loaded on the card on a prepaid 

basis); 

(ii) Reloadable and not marketed or 

labeled as a gift card or gift certificate; 

and 

(iii) The only means of access to the 

underlying funds, except when all 

remaining funds are provided to the 

cardholder in a single transaction. 

(2) Temporary cards. For purposes of 

this paragraph (c), the term ‘‘reloadable’’ 

includes a temporary non-reloadable 

card issued solely in connection with a 

reloadable general-use prepaid card. 

(d) Exception. The exemptions in 

paragraphs (b) and (c) of this section do 

not apply to any interchange transaction 

fee received or charged by an issuer on 

or after July 21, 2012, with respect to an 

electronic debit transaction if any of the 

following fees may be charged to a 

cardholder with respect to the card: 

(1) A fee or charge for an overdraft, 

including a shortage of funds or a 

transaction processed for an amount 

exceeding the account balance, unless 

the fee or charge is imposed for 

transferring funds from another asset 

account to cover a shortfall in the 

account accessed by the card; or 

(2) A fee imposed by the issuer for the 

first withdrawal per calendar month 

from an ATM that is part of the issuer’s 

designated ATM network. 

§ 235.6 Prohibition on circumvention, 

evasion, and net compensation. 

(a) Prohibition of circumvention or 

evasion. No person shall circumvent or 

evade the interchange transaction fee 

restrictions in §§ 235.3 and 235.4. 

(b) Prohibition of net compensation. 

An issuer may not receive net 

compensation from a payment card 

network with respect to electronic debit 

transactions or debit card-related 

activities within a calendar year. Net 

compensation occurs when the total 

amount of payments or incentives 

received by an issuer from a payment 

card network with respect to electronic 

debit transactions or debit card-related 

activities, other than interchange 

transaction fees passed through to the 

issuer by the network, during a calendar 

year exceeds the total amount of all fees 

paid by the issuer to the network with 

respect to electronic debit transactions 

or debit card-related activities during 

that calendar year. Payments and 

incentives paid by a network to an 

issuer, and fees paid by an issuer to a 

network, with respect to electronic debit 

transactions or debit card related 

activities are not limited to volumebased or transaction-specific payments, 

incentives, or fees, but also include 

other payments, incentives or fees 

related to an issuer’s provision of debit 

card services. 

§ 235.7 Limitations on payment card 

restrictions. 

(a) Prohibition on network 

exclusivity—(1) In general. An issuer or 

payment card network shall not directly 

or through any agent, processor, or 

licensed member of a payment card 

network, by contract, requirement, 

condition, penalty, or otherwise, restrict 

the number of payment card networks 

on which an electronic debit transaction 

may be processed to less than two 

unaffiliated networks. 

(2) Permitted arrangements. An issuer 

satisfies the requirements of paragraph 

(a)(1) of this section only if the issuer 

enables at least two unaffiliated 

payment card networks to process an 

electronic debit transaction— 

(i) Where such networks in 

combination do not, by their respective 

rules or policies or by contract with or 

other restriction imposed by the issuer, 

result in the operation of only one 

network or only multiple affiliated 

networks for a geographic area, specific 

merchant, particular type of merchant, 

or particular type of transaction, and 

(ii) Where each of these networks has 

taken steps reasonably designed to be 

able to process the electronic debit 

transactions that it would reasonably 

expect will be routed to it, based on 

expected transaction volume. 

(3) Prohibited exclusivity 

arrangements by networks. For purposes 

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

payment card network may not restrict 

or otherwise limit an issuer’s ability to 

contract with any other payment card 

network that may process an electronic 

debit transaction involving the issuer’s 

debit cards. 

(4) Subsequent affiliation. If 

unaffiliated payment card networks 

become affiliated as a result of a merger 

or acquisition such that an issuer is no 

longer in compliance with paragraph (a) 

of this section, the issuer must add an 

unaffiliated payment card network 

through which electronic debit 

transactions on the relevant debit card 

may be processed no later than six 

months after the date on which the 

previously unaffiliated payment card 

networks consummate the affiliation. 

(b) Prohibition on routing restrictions. 

An issuer or payment card network 

shall not, directly or through any agent, 

processor, or licensed member of the 

network, by contract, requirement, 

condition, penalty, or otherwise, inhibit 

the ability of any person that accepts or 

honors debit cards for payments to 

direct the routing of electronic debit 

transactions for processing over any 

payment card network that may process 

such transactions. 


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§ 235.8 Reporting requirements and record 

retention. 

(a) Entities required to report. Each 

covered issuer shall file a report with 

the Board on a biennial basis in 

accordance with this section. Each 

payment card network shall file a report 

with the Board on an annual basis in 

accordance with this section. 

(b) Report. Each entity required to file 

a report with the Board shall submit 

data in a form prescribed by the Board 

for that entity. Data required to be 

reported may include, but may not be 

limited to, data regarding costs incurred 

with respect to an electronic debit 

transaction, interchange transaction 

fees, network fees, fraud-prevention 

costs, fraud losses, and transaction 

value, volume, and type. 

(c) Record retention. (1) An issuer 

subject to this part shall retain evidence 

of compliance with the requirements 

imposed by this part for a period of not 

less than five years after the end of the 

calendar year in which the electronic 

debit transaction occurred. 

(2) Any person subject to this part 

having actual notice that it is the subject 

of an investigation or an enforcement 

proceeding by its enforcement agency 

shall retain the records that pertain to 

the investigation, action, or proceeding 

until final disposition of the matter 

unless an earlier time is allowed by 

court or agency order. 

§ 235.9 Administrative enforcement. 

(a) Appropriate agency. (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 to Part 235—Official Board 

Commentary on Regulation II 

Introduction 

The following commentary to Regulation II 

(12 CFR part 235) provides background 

material to explain the Board’s intent in 

adopting a particular part of the regulation. 

The commentary also provides examples to 

aid in understanding how a particular 

requirement is to work. 

Section 235.2—Definitions 

2(a)—Account 

1. Types of accounts. The term ‘‘account’’ 

includes accounts held by any person, 

including consumer accounts (i.e., those 

established primarily for personal, family or 

household purposes) and business accounts. 

Therefore, the limitations on interchange 

transaction fees and the prohibitions on 

network exclusivity arrangements and 

routing restrictions apply to all electronic 

debit transactions, regardless of whether the 

transaction involves a debit card issued 

primarily for personal, family, or household 

purposes or for business purposes. For 

example, an issuer of a business-purpose 

debit card is subject to the restrictions on 

interchange transaction fees and is also 

prohibited from restricting the number of 

payment card networks on which an 

electronic debit transaction may be processed 

under § 235.7. 

2. Bona fide trusts. This part does not 

define the term bona fide trust agreement; 

therefore, institutions must look to state or 

other applicable law for interpretation. An 

account held under a custodial agreement 

that qualifies as a trust under the Internal 

Revenue Code, such as an individual 

retirement account, is considered to be held 

under a trust agreement for purposes of this 

part. 

3. Account located in the United States. 

This part applies only to electronic debit 

transactions that are initiated to debit (or 

credit, for example, in the case of returned 

goods or cancelled services) an account 

located in the United States. If a cardholder 

uses a debit card to debit an account held 

outside the United States, then the electronic 

debit transaction is not subject to this part. 

2(b)—Acquirer 

1. In general. The term ‘‘acquirer’’ includes 

only the institution that contracts, directly or 

indirectly, with a merchant to provide 

settlement for the merchant’s electronic debit 

transactions over a payment card network 

(referred to as acquiring the merchant’s 

electronic debit transactions). In some 

acquiring relationships, an institution 

provides processing services to the merchant 

and is a licensed member of the payment 

card network, but does not settle the 

transactions with the merchant (by crediting 

the merchant’s account) or with the issuer. 

These institutions are not ‘‘acquirers’’ 

because they do not provide credit to the 

merchant for the transactions or settle the 

merchant’s transactions with the issuer. 

These institutions are considered processors 

and in some circumstances may be 

considered payment card networks for 

purposes of this part (See §§ 235.2(n), 

235.2(p), and commentary thereto). 


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2(c)—Affiliate 

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

includes any bank and nonbank affiliates 

located in the United States or a foreign 

country. 

2. Other affiliates. For commentary on 

whether merchants are affiliated, see 

comment 2(g)–7. 

2(d)—Cardholder 

1. Scope. In the case of debit cards that 

access funds in transaction, savings, or other 

similar asset accounts, ‘‘the person to whom 

a card is issued’’ generally will be the named 

person or persons holding the account. If the 

account is a business account, multiple 

employees (or other persons associated with 

the business) may have debit cards that can 

access the account. Each employee that has 

a debit card that can access the account is a 

cardholder. In the case of a prepaid card, the 

cardholder generally is either the purchaser 

of the card or a person to whom the 

purchaser gave the card, such as a gift 

recipient. 

2(e)—Control [Reserved] 

2(f)—Covered Issuer 

1. Asset size determination. An issuer 

would qualify as a covered issuer in a 

particular calendar year if its total worldwide 

banking and nonbanking assets, including 

assets of affiliates, other than trust assets 

under management, are at least $10 billion, 

as of December 31 of the preceding calendar 

year. 

2(g)—Debit Card 

1. Card, or other payment code or device. 

The term ‘‘debit card’’ as defined in 

§ 235.2(g) applies to any card, or other 

payment code or device, even if it is not 

issued in a physical form. Debit cards 

include, for example, an account number or 

code that can be used to access funds in an 

account to make internet purchases. 

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

device with a chip or other embedded 

mechanism, such as a mobile phone or 

sticker containing a contactless chip that 

links the device to funds stored in an 

account, and enables an account to be 

debited. The term ‘‘debit card,’’ however, 

does not include a one-time password or 

other code if such password or code is used 

for the purposes of authenticating the 

cardholder and is used in addition to another 

card, or other payment code or device, rather 

than as the payment code or device. 

2. Deferred debit cards. The term ‘‘debit 

card’’ includes a card, or other payment code 

or device, that is used in connection with 

deferred debit card arrangements in which 

transactions are not immediately posted to 

and funds are not debited from the 

underlying transaction, savings, or other 

asset account upon settlement of the 

transaction. Instead, the funds in the account 

typically are held and made unavailable for 

other transactions for a period of time 

specified in the issuer-cardholder agreement. 

After the expiration of the time period, the 

cardholder’s account is debited for the value 

of all transactions made using the card that 

have been submitted to the issuer for 

settlement during that time period. For 

example, under some deferred debit card 

arrangements, the issuer may debit the 

consumer’s account for all debit card 

transactions that occurred during a particular 

month at the end of the month. Regardless of 

the time period between the transaction and 

account posting, a card, or other payment 

code or device, that is used in connection 

with a deferred debit arrangement is 

considered a debit card for purposes of the 

requirements of this part. 

3. Decoupled debit cards. Decoupled debit 

cards are issued by an entity other than the 

financial institution holding the cardholder’s 

account. In a decoupled debit arrangement, 

transactions that are authorized by the card 

issuer settle against the cardholder’s account 

held by an entity other than the issuer, 

generally via a subsequent ACH debit to that 

account. The term ‘‘debit card’’ includes any 

card, or other payment code or device, issued 

or approved for use through a payment card 

network to debit an account, regardless of 

whether the issuer holds the account. 

Therefore, decoupled debit cards are debit 

cards for purposes of this part. 

4. Hybrid cards. 

i. Some cards, or other payment codes or 

devices, may have both credit- and debit-like 

features (‘‘hybrid cards’’). For example, these 

cards may enable a cardholder to access a 

line of credit, but select certain transactions 

for immediate repayment (i.e., prior to the 

end of a billing cycle) via a debit to the 

cardholder’s account, as the term is defined 

in § 235.2(a), held either with the issuer or 

at another institution. If a card permits a 

cardholder to initiate transactions that debit 

an account or funds underlying a prepaid 

card, the card is considered a debit card for 

purposes of this part. Not all transactions 

initiated by such a hybrid card, however, are 

electronic debit transactions. Rather, only 

those transactions that debit an account as 

defined in this part or funds underlying a 

prepaid card are electronic debit 

transactions. If the transaction posts to a line 

of credit, then the transaction is a credit 

transaction. 

ii. If an issuer conditions the availability of 

a credit or charge card that permits preauthorized repayment of some or all 

transactions on the cardholder maintaining 

an account at the issuer, such a card is 

considered a debit card for purposes of this 

part. 

5. Virtual wallets. A virtual wallet is a 

device (e.g., a mobile phone) that stores 

several different payment codes or devices 

(‘‘virtual cards’’) that access different 

accounts, funds underlying the card, or lines 

of credit. At the point of sale, the cardholder 

may select from the virtual wallet the virtual 

card he or she wishes to use for payment. 

The virtual card that the cardholder uses for 

payment is considered a debit card under 

this part if the virtual card that initiates a 

transaction meets the definition of debit card, 

notwithstanding the fact that other cards in 

the wallet may not be debit cards. 

6. General-use prepaid card. The term 

‘‘debit card’’ includes general-use prepaid 

cards. See § 235.2(j) and related commentary 

for information on general-use prepaid cards. 

7. Store cards. The term ‘‘debit card’’ does 

not include prepaid cards that may be used 

at a single merchant or affiliated merchants. 

Two or more merchants are affiliated if they 

are related by either common ownership or 

by common corporate control. For purposes 

of the ‘‘debit card’’ definition, franchisees are 

considered to be under common corporate 

control if they are subject to a common set 

of corporate policies or practices under the 

terms of their franchise licenses. 

8. Checks, drafts, and similar instruments. 

The term ‘‘debit card’’ does not include a 

check, draft, or similar paper instrument or 

a transaction in which the check is used as 

a source of information to initiate an 

electronic payment. For example, if an 

account holder provides a check to buy goods 

or services and the merchant takes the 

account number and routing number 

information from the MICR line at the bottom 

of a check to initiate an ACH debit transfer 

from the cardholder’s account, the check is 

not a debit card, and such a transaction is not 

considered an electronic debit transaction. 

Likewise, the term ‘‘debit card’’ does not 

include an electronic representation of a 

check, draft, or similar paper instrument. 

9. ACH transactions. The term ‘‘debit card’’ 

does not include an account number when it 

is used by a person to initiate an ACH 

transaction that debits that person’s account. 

For example, if an account holder buys goods 

or services over the internet using an account 

number and routing number to initiate an 

ACH debit, the account number is not a debit 

card, and such a transaction is not 

considered an electronic debit transaction. 

However, the use of a card to purchase goods 

or services that debits the cardholder’s 

account that is settled by means of a 

subsequent ACH debit initiated by the card 

issuer to the cardholder’s account, as in the 

case of a decoupled debit card arrangement, 

involves the use of a debit card for purposes 

of this part. 

2(h)—Designated Automated Teller Machine 

(ATM) Network 

1. Reasonable and convenient access 

clarified. Under § 235.2(h)(2), a designated 

ATM network includes any network of ATMs 

identified by the issuer that provides 

reasonable and convenient access to the 

issuer’s cardholders. Whether a network 

provides reasonable and convenient access 

depends on the facts and circumstances, 

including the distance between ATMs in the 

designated network and each cardholder’s 

last known home or work address, or if a 

home or work address is not known, where 

the card was first issued. 

2(i)—Electronic Debit Transaction 

1. Debit an account. The term ‘‘electronic 

debit transaction’’ includes the use of a card 

to debit an account. The account debited 

could be, for example, the cardholder’s asset 

account or the account that holds the funds 

used to settle prepaid card transactions. 

2. Form of payment. The term ‘‘electronic 

debit transaction’’ includes the use of a card 

as a form of payment that may be made in 

exchange for goods or services, as a 

charitable contribution, to satisfy an 

obligation (e.g., tax liability), or for other 

purposes. 

3. Subsequent transactions. The term 

‘‘electronic debit transaction’’ includes both 


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the cardholder’s use of a debit card for the 

initial payment and any subsequent use by 

the cardholder of the debit card in 

connection with the initial payment. For 

example, the term ‘‘electronic debit 

transaction’’ includes using the debit card to 

return merchandise or cancel a service that 

then results in a debit to the merchant’s 

account and a credit to the cardholder’s 

account. 

4. Cash withdrawal at the point of sale. 

The term ‘‘electronic debit transaction’’ 

includes a transaction in which a cardholder 

uses the debit card both to make a purchase 

and to withdraw cash (known as a ‘‘cashback transaction’’). 

5. Geographic limitation. This regulation 

applies only to electronic debit transactions 

that are initiated at a merchant located in the 

United States. If a cardholder uses a debit 

card at a merchant located outside the United 

States to debit an account held in the United 

States, the electronic debit transaction is not 

subject to this part. 

2(j)—General-Use Prepaid Card 

1. Redeemable upon presentation at 

multiple, unaffiliated merchants. A prepaid 

card is redeemable upon presentation at 

multiple, unaffiliated merchants if such 

merchants agree to honor the card. 

2. Selective authorization cards. Selective 

authorization cards, (e.g., mall cards) are 

generally intended to be used or redeemed 

for goods or services at participating retailers 

within a shopping mall or other limited 

geographic area. Selective authorization 

cards are considered general-use prepaid 

cards, regardless of whether they carry the 

mark, logo, or brand of a payment card 

network, if they are redeemable at multiple, 

unaffiliated merchants. 

2(k)—Interchange Transaction Fee 

1. In general. Generally, the payment card 

network is the entity that establishes and 

charges the interchange transaction fee to the 

acquirers or merchants. The acquirers then 

pay to the issuers any interchange transaction 

fee established and charged by the network. 

Acquirers typically pass the interchange 

transaction fee through to merchantcustomers. 

2. Compensating an issuer. The term 

‘‘interchange transaction fee’’ is limited to 

those fees that a payment card network 

establishes, charges, or receives to 

compensate the issuer for its role in the 

electronic debit transaction. By contrast, 

payment card networks generally charge 

issuers and acquirers fees for services the 

network performs. Such fees are not 

interchange transaction fees because the 

payment card network is charging and 

receiving the fee as compensation for services 

it provides. 

3. Established, charged, or received. 

Interchange transaction fees are not limited 

to those fees for which a payment card 

network sets the value. A fee that 

compensates an issuer is an interchange 

transaction fee if the fee is set by the issuer 

but charged to acquirers by virtue of the 

network determining each participant’s net 

settlement position. 

2(l)—Issuer 

1. In general. A person issues a debit card 

by authorizing the use of debit card by a 

cardholder to perform electronic debit 

transactions. That person may provide the 

card directly to the cardholder or indirectly 

by using a third party (such as a processor, 

or a telephone network or manufacturer) to 

provide the card, or other payment code or 

device, to the cardholder. The following 

examples illustrate the entity that is the 

issuer under various card program 

arrangements. 

2. Traditional debit card arrangements. In 

a traditional debit card arrangement, the bank 

or other entity holds the cardholder’s funds 

and authorizes the cardholder to use the 

debit card to access those funds through 

electronic debit transactions, and the 

cardholder receives the card directly or 

indirectly (e.g., through an agent) from the 

bank or other entity that holds the funds 

(except for decoupled debit cards, discussed 

below). In this system, the bank or entity 

holding the cardholder’s funds is the issuer. 

3. BIN-sponsor arrangements. Payment 

card networks assign Bank Identification 

Numbers (BINs) to member-institutions for 

purposes of issuing cards, authorizing, 

clearing, settling, and other processes. In 

exchange for a fee or other financial 

consideration, some members of payment 

card networks permit other entities to issue 

debit cards using the member’s BIN. The 

entity permitting the use of its BIN is referred 

to as the ‘‘BIN sponsor’’ and the entity that 

uses the BIN to issue cards is often referred 

to as the ‘‘affiliate member.’’ BIN sponsor 

arrangements can follow at least two different 

models: 

i. Sponsored debit card model. In some 

cases, a community bank or credit union may 

provide debit cards to its account holders 

through a BIN sponsor arrangement with a 

member institution. In general, the bank or 

credit union will authorize its account 

holders to use debit cards to perform 

electronic debit transactions that access 

funds in accounts at the bank or credit union. 

The bank or credit union’s name typically 

will appear on the debit card. The bank or 

credit union may directly or indirectly 

provide the cards to cardholders. Under these 

circumstances, the bank or credit union is the 

issuer for purposes of this part. Although the 

bank or credit union may distribute cards 

through the BIN sponsors, the BIN sponsor 

does not enter into the agreement with the 

cardholder that authorizes the cardholder to 

use the card to perform electronic debit 

transactions that access funds in the account 

at the bank or credit union, and therefore the 

BIN sponsor is not the issuer. 

ii. Prepaid card model. A member 

institution may also serve as the BIN sponsor 

for a prepaid card program. Under these 

arrangements, a program manager distributes 

prepaid cards to the cardholders and the BINsponsoring institution generally holds the 

funds for the prepaid card program in an 

omnibus or pooled account. Either the BIN 

sponsor or the prepaid card program manager 

may keep track of the underlying funds for 

each individual prepaid card through 

subaccounts. While the cardholder may 

receive the card directly from the program 

manager or at a retailer, the BIN sponsor 

authorizes the cardholder to use the card to 

perform electronic debit transactions that 

access the funds in the pooled account and 

the cardholder’s relationship generally is 

with the BIN sponsor. Accordingly, under 

these circumstances, the BIN sponsor, or the 

bank holding the pooled account, is the 

issuer. 

4. Decoupled debit cards. In the case of 

decoupled debit cards, an entity other than 

the bank holding the cardholder’s account 

enters into a relationship with the cardholder 

authorizing the use of the card to perform 

electronic debit transactions. The entity 

authorizing the use of the card to perform 

electronic debit transaction typically arranges 

for the card to be provided directly or 

indirectly to the cardholder and has a direct 

relationship with the cardholder with respect 

to the card. The bank holding the 

cardholder’s account has agreed generally to 

permit ACH debits to the account, but has 

not authorized the use of the debit card to 

access the funds through electronic debit 

transactions. Under these circumstances, the 

entity authorizing the use of the debit card, 

and not the account-holding institution, is 

considered the issuer. 

2(m)—Merchant [Reserved] 

2(n)—Payment Card Network 

1. In general. An entity is a considered a 

payment card network with respect to an 

electronic debit transaction for purposes of 

this rule if it routes information and data to 

the issuer from the acquirer to conduct 

authorization, clearance, and settlement of 

the electronic debit transaction. By contrast, 

if an entity receives transaction information 

and data from a merchant and authorizes and 

settles the transaction without routing the 

information and data to another entity (i.e., 

the issuer or the issuer’s processor) for 

authorization, clearance, or settlement, that 

entity is not considered a payment card 

network with respect to the electronic debit 

transaction. 

2. Three-party systems. In the case of a 

three-party system, electronic debit 

transactions are processed by an entity that 

acts as system operator and issuer, and may 

also act as the acquirer. The entity acting as 

system operator and issuer that receives the 

transaction information from the merchant or 

acquirer also holds the cardholder’s funds. 

Therefore, rather than directing the 

transaction information to a separate issuer, 

the entity authorizes and settles the 

transaction based on the information 

received from the merchant. As these entities 

do not connect (or ‘‘network’’) multiple 

issuers and do not route information to 

conduct the transaction, they are not 

‘‘payment card networks’’ with respect to 

these transactions. 3. Processors as payment 

card networks. A processor is considered a 

payment card network if, in addition to 

acting as processor for an acquirer and issuer, 

the processor routes transaction information 

and data received from a merchant or the 

merchant’s acquirer to an issuer. For 

example, if a merchant uses a processor in 

order to accept any, some, or all brands of 

debit cards and the processor routes 

transaction information and data to the issuer 


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or issuer’s processor, the merchant’s 

processor is considered a payment card 

network with respect to the electronic debit 

transaction. If the processor establishes, 

charges, or receives a fee for the purpose of 

compensating an issuer, that fee is 

considered an interchange transaction fee for 

purposes of this part. 

4. Automated clearing house (ACH) 

operators. An ACH operator is not 

considered a payment card network for 

purposes of this part. While an ACH operator 

processes transactions that debit an account 

and provides for interbank clearing and 

settlement of such transactions, a person 

does not use the ACH system to accept as a 

form of payment a brand of debit card. 

5. ATM networks. An ATM network is not 

considered a payment card network for 

purposes of this part. While ATM networks 

process transactions that debit an account 

and provide for interbank clearing and 

settlement of such transactions, a cash 

withdrawal from an ATM is not a payment 

because there is no exchange of money for 

goods or services, or payment made as a 

charitable contribution, to satisfy an 

obligation (e.g., tax liability), or for other 

purposes. 

2(o)—Person [Reserved] 

2(p)—Processor 

1. Distinction from acquirers. A processor 

may perform all transaction-processing 

functions for a merchant or acquirer, but if 

it does not acquire (that is, settle with the 

merchant for the transactions), it is not an 

acquirer. The entity that 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. A processor may perform 

services related to authorization, clearance, 

and settlement of transactions for an issuer 

without being considered to be an issuer for 

purposes of this part. 

2(q)—Route 

1. An entity routes information if it both 

directs and sends the information to an 

unaffiliated entity (or affiliated entity acting 

on behalf of the unaffiliated entity). This 

other entity may be a payment card network 

or processor (if the entity directing and 

sending the information is a merchant or an 

acquirer) or an issuer or processor (if the 

entity directing and sending the information 

is a payment card network). 

2(r)—United States [Reserved] 

Section 235.3—Reasonable and Proportional 

Interchange Transaction Fees 

3(a)—[Reserved] 

3(b)—Reasonable and Proportional Fees 

1. Two components. The standard for the 

maximum permissible interchange 

transaction fee that an issuer may receive 

consists of two components: a base 

component that does not vary with a 

transaction’s value and an ad valorem 

component. The amount of any interchange 

transaction fee received or charged by an 

issuer may not exceed the sum of these 

components. In addition, an issuer may be 

permitted to receive or charge a fraudprevention adjustment under § 235.4 of this 

part. 2. Variation in interchange fees. An 

issuer is permitted to charge or receive, and 

a network is permitted to establish, 

interchange transaction fees that vary based 

on, for example, the transaction value or the 

type of transaction or merchant, provided the 

amount of any interchange transaction fee for 

any transaction does not exceed the sum of 

the base component and the ad valorem 

component. 

3. Examples. For a $50 electronic debit 

transaction performed on June 30, 2023, the 

maximum permissible interchange 

transaction fee is 23.5 cents (21.0 cents plus 

5.0 basis points multiplied by $50). For a $50 

electronic debit transaction performed on 

July 1, 2023, the maximum permissible 

interchange transaction fee is 16.4 cents (14.4 

cents plus 4.0 basis points multiplied by 

$50). In addition, an issuer may be permitted 

to receive a fraud-prevention adjustment 

under § 235.4 of this part. 

4. Performance of an electronic debit 

transaction. For purposes of § 235.3(b), an 

electronic debit transaction is considered to 

be performed on the date on which such 

transaction is settled on an interbank basis. 

For example, an electronic debit transaction 

that is authorized and cleared on June 30, 

2023, but is settled on an interbank basis on 

July 1, 2023, is considered to be performed 

on July 1, 2023. 

3(c)—[Reserved] 

Section 235.4—Fraud-Prevention 

Adjustment 

4(a)—Fraud-Prevention Adjustment Amount 

1. Performance of an electronic debit 

transaction. For purposes of § 235.4(a), an 

electronic debit transaction is considered to 

be performed on the date on which such 

transaction is settled on an interbank basis. 

For example, an electronic debit transaction 

that is authorized and cleared on June 30, 

2023, but is settled on an interbank basis on 

July 1, 2023, is considered to be performed 

on July 1, 2023. 

4(b)—[Reserved] 

4(c)(1)—Issuer Standards 

1. An issuer’s policies and procedures 

should address fraud related to debit card use 

by unauthorized persons. Examples of use by 

unauthorized persons include, but are not 

limited to, the following: 

i. A thief steals a cardholder’s wallet and 

uses the debit card to purchase goods, 

without the authority of the cardholder. 

ii. A cardholder makes a purchase at a 

merchant. Subsequently, the merchant’s 

employee uses information from the debit 

card to initiate a subsequent transaction, 

without the authority of the cardholder. 

iii. A hacker steals cardholder account 

information from the issuer or a merchant 

processor and uses the stolen information to 

make unauthorized card-not-present 

purchases or to create a counterfeit card to 

make unauthorized card-present purchases. 

2. An issuer’s policies and procedures 

must be designed to reduce fraud, where cost 

effective, across all types of electronic debit 

transactions in which its cardholders engage. 

Therefore, an issuer should consider whether 

its policies and procedures are effective for 

each method used to authenticate the card 

(e.g., a chip or a code embedded in the 

magnetic stripe) and the cardholder (e.g., a 

signature or a PIN), and for different sales 

channels (e.g., card-present and card-notpresent). 

3. An issuer’s policies and procedures 

must be designed to take effective steps to 

reduce both the occurrence of and costs to all 

parties from fraudulent electronic debit 

transactions. An issuer should take steps 

reasonably designed to reduce the number 

and value of its fraudulent electronic debit 

transactions relative to its non-fraudulent 

electronic debit transactions. These steps 

should reduce the costs from fraudulent 

transactions to all parties, not merely the 

issuer. For example, an issuer should take 

steps to reduce the number and value of its 

fraudulent electronic debit transactions 

relative to its non-fraudulent transactions 

whether or not it bears the fraud losses as a 

result of regulations or network rules. 

4. For any given issuer, the number and 

value of fraudulent electronic debit 

transactions relative to non-fraudulent 

transactions may vary materially from year to 

year. Therefore, in certain circumstances, an 

issuer’s policies and procedures may be 

effective notwithstanding a relative increase 

in the transactions that are fraudulent in a 

particular year. However, continuing 

increases in the share of fraudulent 

transactions would warrant further scrutiny. 

5. In determining which fraud-prevention 

technologies to implement or retain, an 

issuer must consider the cost-effectiveness of 

the technology, that is, the expected cost of 

the technology relative to its expected 

effectiveness in controlling fraud. In 

evaluating the cost of a particular technology, 

an issuer should consider whether and to 

what extent other parties will incur costs to 

implement the technology, even though an 

issuer may not have complete information 

about the costs that may be incurred by other 

parties, such as the cost of new merchant 

terminals. In evaluating the costs, an issuer 

should consider both initial implementation 

costs and ongoing costs of using the fraudprevention method. 

6. An issuer need not develop fraudprevention technologies itself to satisfy the 

standards in § 235.4(c). An issuer may 

implement fraud-prevention technologies 

that have been developed by a third party 

that the issuer has determined are 

appropriate under its own policies and 

procedures. 

4(c)(2)—Elements of Fraud-Prevention 

Policies and Procedures 

1. In general. An issuer may tailor its 

policies and procedures to address its 

particular debit card program, including the 

size of the program, the types of transactions 

in which its cardholders commonly engage, 

fraud types and methods experienced by the 

issuer, and the cost of implementing new 

fraud-prevention methods in light of the 

expected fraud reduction. 


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4(c)(2)(i)—Methods To Identify and Prevent 

Fraudulent Debit Card Transactions 

1. In general. Examples of policies and 

procedures reasonably designed to identify 

and prevent fraudulent electronic debit 

transactions include the following: 

i. Practices to help determine whether a 

card is authentic and whether the user is 

authorized to use the card at the time of a 

transaction. For example, an issuer may 

specify the use of particular authentication 

technologies or methods, such as dynamic 

data, to better authenticate a card and 

cardholder at the time of the transaction, to 

the extent doing so does not inhibit the 

ability of a merchant to direct the routing of 

electronic debit transactions for processing 

over any payment card network that may 

process such transactions. (See § 235.7 and 

commentary thereto.) 

ii. An automated mechanism to assess the 

risk that a particular electronic debit 

transaction is fraudulent during the 

authorization process (i.e., before the issuer 

approves or declines an authorization 

request). For example, an issuer may use 

neural networks to identify transactions that 

present increased risk of fraud. As a result of 

this analysis, the issuer may decide to 

decline to authorize these transactions. An 

issuer may not be able to determine whether 

a given transaction in isolation is fraudulent 

at the time of authorization, and therefore 

may have implemented policies and 

procedures that monitor sets of transactions 

initiated with a cardholder’s debit card. For 

example, an issuer could compare a set of 

transactions initiated with the card to a 

customer’s typical transactions in order to 

determine whether a transaction is likely to 

be fraudulent. Similarly, an issuer could 

compare a set of transactions initiated with 

a debit card and common fraud patterns in 

order to determine whether a transaction or 

future transaction is likely to be fraudulent. 

iii. Practices to support reporting of lost 

and stolen cards or suspected incidences of 

fraud by cardholders or other parties to a 

transaction. As an example, an issuer may 

promote customer awareness by providing 

text alerts of transactions in order to detect 

fraudulent transactions in a timely manner. 

An issuer may also report debit cards 

suspected of being fraudulent to their 

networks for inclusion in a database of 

potentially compromised cards. 

4(c)(2)(ii)—Monitoring of the Issuer’s Volume 

and Value of Fraudulent Electronic Debit 

Transactions 

1. Tracking its fraudulent electronic debit 

transactions over time enables an issuer to 

assess whether its policies and procedures 

are effective. Accordingly, an issuer must 

include policies and procedures designed to 

monitor trends in the number and value of 

its fraudulent electronic debit transactions. 

An effective monitoring program would 

include tracking issuer losses from 

fraudulent electronic debit transactions, 

fraud-related chargebacks to acquirers, losses 

passed on to cardholders, and any other 

reimbursements from other parties. Other 

reimbursements could include payments 

made to issuers as a result of fines assessed 

to merchants for noncompliance with 

Payment Card Industry (PCI) Data Security 

Standards or other industry standards. An 

issuer should also establish procedures to 

track fraud-related information necessary to 

perform its reviews under § 235.4(c)(3) and to 

retain and report information as required 

under § 235.8. 

4(c)(2)(iii)—Appropriate Responses to 

Suspicious Electronic Debit Transactions 

1. An issuer may identify transactions that 

it suspects to be fraudulent after it has 

authorized or settled the transaction. For 

example, a cardholder may inform the issuer 

that the cardholder did not initiate a 

transaction or transactions, or the issuer may 

learn of a fraudulent transaction or possibly 

compromised debit cards from the network, 

the acquirer, or other parties. An issuer must 

implement policies and procedures designed 

to provide an appropriate response once an 

issuer has identified suspicious transactions 

to reduce the occurrence of future fraudulent 

electronic debit transactions and the costs 

associated with such transactions. The 

appropriate response may differ depending 

on the facts and circumstances, including the 

issuer’s assessment of the risk of future 

fraudulent electronic debit transactions. For 

example, in some circumstances, it may be 

sufficient for an issuer to monitor more 

closely the account with the suspicious 

transactions. In other circumstances, it may 

be necessary to contact the cardholder to 

verify a transaction, reissue a card, or close 

an account. An appropriate response may 

also require coordination with industry 

organizations, law enforcement agencies, and 

other parties, such as payment card 

networks, merchants, and issuer or merchant 

processors. 

4(c)(2)(iv)—Methods To Secure Debit Card 

and Cardholder Data 

1. An issuer must implement policies and 

procedures designed to secure debit card and 

cardholder data. These policies and 

procedures should apply to data that are 

transmitted by the issuer (or its service 

provider) during transaction processing, that 

are stored by the issuer (or its service 

provider), and that are carried on media (e.g., 

laptops, transportable data storage devices) 

by employees or agents of the issuer. This 

standard may be incorporated into an issuer’s 

information security program, as required by 

Section 501(b) of the Gramm-Leach-Bliley 

Act. 

4(c)(3)—Review of and Updates to Policies 

and Procedures 

1. i. An issuer’s assessment of the 

effectiveness of its policies and procedures 

should consider whether they are reasonably 

designed to reduce the number and value of 

fraudulent electronic debit transactions 

relative to non-fraudulent electronic debit 

transactions and are cost effective. (See 

comment 4(c)(1)–3 and comment 4(c)(1)–5). 

ii. An issuer must also assess its policies 

and procedures in light of changes in fraud 

types (e.g., the use of counterfeit cards, lost 

or stolen cards) and methods (e.g., common 

purchase patterns indicating possible 

fraudulent behavior), as well as changes in 

the available methods of detecting and 

preventing fraudulent electronic debit 

transactions (e.g., transaction monitoring, 

authentication methods) as part of its 

periodic review of its policies and 

procedures. An issuer’s review of its policies 

and procedures must consider information 

from the issuer’s own experience and that the 

issuer otherwise identified itself; information 

from payment card networks, law 

enforcement agencies, and fraud-monitoring 

groups in which the issuer participates; and 

supervisory guidance. For example, an issuer 

should consider warnings and alerts it 

receives from payment card networks 

regarding compromised cards and data 

breaches. 

2. An issuer should review its policies and 

procedures and their implementation more 

frequently than annually if the issuer 

determines that more frequent review is 

appropriate based on information obtained 

from monitoring its fraudulent electronic 

debit transactions, changes in the types or 

methods of fraud, or available methods of 

detecting and preventing fraudulent 

electronic debit transactions. (See 

§ 235.4(c)(1)(ii) and commentary thereto.) 

3. In light of an issuer’s review of its 

policies and procedures, and their 

implementation, the issuer may determine 

that updates to its policies and procedures, 

and their implementation, are necessary. 

Merely determining that updates are 

necessary does not render an issuer ineligible 

to receive or charge the fraud-prevention 

adjustment. To remain eligible to receive or 

charge a fraud-prevention adjustment, 

however, an issuer should develop and 

implement such updates as soon as 

reasonably practicable, in light of the facts 

and circumstances. 

4(d)—Notification 

1. Payment card networks that plan to 

allow issuers to receive or charge a fraudprevention adjustment can develop processes 

for identifying issuers eligible for this 

adjustment. Each issuer that wants to be 

eligible to receive or charge a fraudprevention adjustment must notify annually 

the payment card networks in which it 

participates of its compliance through the 

networks’ processes. 

Section 235.5—Exemptions for Certain 

Electronic Debit Transactions 

1. Eligibility for multiple exemptions. An 

electronic debit transaction may qualify for 

one or more exemptions. For example, a 

debit card that has been provided to a person 

pursuant to a Federal, State, or local 

government-administered payment program 

may be issued by an issuer that is not a 

covered issuer. In this case, an electronic 

debit transaction made using that card may 

qualify for the exemption under § 235.5(a) for 

small issuers or for the exemption under 

§ 235.5(b) for government-administered 

payment programs. A payment card network 

establishing interchange fees for transactions 

that qualify for more than one exemption 

need only satisfy itself that the issuer’s 

transactions qualify for at least one of the 

exemptions in order to exempt the electronic 

debit transaction from the interchange fee 

restrictions. 

2. Certification process. Payment card 

networks that plan to allow issuers to receive 


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higher interchange fees than permitted under 

§§ 235.3 and 235.4 pursuant to one of the 

exemptions in § 235.5 could develop their 

own processes for identifying issuers and 

products eligible for such exemptions. 

Section 235.5(a)(2) permits payment card 

networks to rely on lists published by the 

Board to help determine eligibility for the 

small issuer exemption set forth in 

§ 235.5(a)(1). 

5(a)—Exemption for Small Issuers 

1. Account that is debited. An issuer that 

is not a covered issuer is exempt under 

§ 235.5(a) only if the issuer holds the account 

that is debited. For example, in the case of 

the sponsored debit card model described in 

comment 235.2(l)–3(i), if the bank or credit 

union is not a covered issuer, then that bank 

or credit union is exempt from the 

interchange fee restrictions because the 

issuer holds the account that is debited. 

However, in the case of the decoupled debit 

card described in comment 235.2(l)–4, the 

issuer of a decoupled debit card is not 

exempt under § 235.5(a), regardless of asset 

size, because it does not hold the account 

that is debited. 

2. Change in status. If an exempt issuer 

becomes a covered issuer based on its and its 

affiliates assets at the end of a calendar year, 

that issuer must begin complying with the 

interchange fee standards (§ 235.3), the fraudprevention adjustment standards (to the 

extent the issuer wishes to receive a fraudprevention adjustment) (§ 235.4), and the 

provisions prohibiting circumvention, 

evasion, and net compensation (§ 235.6) no 

later than July 1. 

5(b)—Exemption for GovernmentAdministered Payment Programs 

1. Government-administered payment 

program. A program is considered 

government-administered regardless of 

whether a Federal, State, or local government 

agency operates the program or outsources 

some or all functions to third parties so long 

as the program is operated on behalf of the 

government agency. In addition, a program 

may be government-administered even if a 

Federal, State, or local government agency is 

not the source of funds for the program it 

administers. For example, child support 

programs are government-administered 

programs even though a Federal, State, or 

local government agency is not the source of 

funds. A tribal government is considered a 

local government for purposes of this 

exemption. 

5(c)—Exemption for Certain Reloadable 

Prepaid Cards 

1. Subaccount clarified. A subaccount is an 

account within an account, opened in the 

name of an agent, nominee, or custodian for 

the benefit of two or more cardholders, where 

the transactions and balances of individual 

cardholders are tracked in such subaccounts. 

An account that is opened solely in the name 

of a single cardholder is not a subaccount. 

2. Reloadable. A general-use prepaid card 

is ‘‘reloadable’’ if the terms and conditions of 

the agreement permit funds to be added to 

the general-use prepaid card at any time after 

the initial purchase or issuance. A generaluse prepaid card is not ‘‘reloadable’’ merely 

because the issuer or processor is technically 

able to add functionality that would 

otherwise enable the general-use prepaid 

card to be reloaded. 

3. Marketed or labeled as a gift card or gift 

certificate. 

i. Electronic debit transactions made using 

a reloadable general-use prepaid card are not 

exempt from the interchange fee restrictions 

if the card is marketed or labeled as a gift 

card or gift certificate. The term ‘‘marketed or 

labeled as a gift card or gift certificate’’ means 

directly or indirectly offering, advertising or 

otherwise suggesting the potential use of a 

general-use prepaid card as a gift for another 

person. Whether the exclusion applies 

generally does not depend on the type of 

entity that makes the promotional message. 

For example, a card may be marketed or 

labeled as a gift card or gift certificate if 

anyone (other than the purchaser of the card), 

including the issuer, the retailer, the program 

manager that may distribute the card, or the 

payment network on which a card is used, 

promotes the use of the card as a gift card 

or gift certificate. A general-use prepaid card 

is marketed or labeled as a gift card or gift 

certificate even if it is only occasionally 

marketed as a gift card or gift certificate. For 

example, a network-branded general purpose 

reloadable card would be marketed or labeled 

as a gift card or gift certificate if the issuer 

principally advertises the card as a less costly 

alternative to a bank account but promotes 

the card in a television, radio, newspaper, or 

internet advertisement, or on signage as ‘‘the 

perfect gift’’ during the holiday season. 

ii. The mere mention of the availability of 

gift cards or gift certificates in an 

advertisement or on a sign that also indicates 

the availability of exempted general-use 

prepaid cards does not by itself cause the 

general-use prepaid card to be marketed as a 

gift card or a gift certificate. For example, the 

posting of a sign in a store that refers to the 

availability of gift cards does not by itself 

constitute the marketing of otherwise 

exempted general-use prepaid cards that may 

also be sold in the store along with gift cards 

or gift certificates, provided that a person 

acting reasonably under the circumstances 

would not be led to believe that the sign 

applies to all cards sold in the store. (See, 

however, comment 5(c)–4.ii.) 

4. Examples of marketed or labeled as a 

gift card or gift certificate. 

i. The following are examples of marketed 

or labeled as a gift card or gift certificate: 

A. Using the word ‘‘gift’’ or ‘‘present’’ on 

a card or accompanying material, including 

documentation, packaging and promotional 

displays; 

B. Representing or suggesting that a card 

can be given to another person, for example, 

as a ‘‘token of appreciation’’ or a ‘‘stocking 

stuffer,’’ or displaying a congratulatory 

message on the card or accompanying 

material; 

C. Incorporating gift-giving or celebratory 

imagery or motifs, such as a bow, ribbon, 

wrapped present, candle, or a holiday or 

congratulatory message, on a card, 

accompanying documentation, or 

promotional material; 

ii. The term does not include the following: 

A. Representing that a card can be used as 

a substitute for a checking, savings, or 

deposit account; 

B. Representing that a card can be used to 

pay for a consumer’s health-related 

expenses—for example, a card tied to a 

health savings account; 

C. Representing that a card can be used as 

a substitute for travelers checks or cash; 

D. Representing that a card can be used as 

a budgetary tool, for example, by teenagers, 

or to cover emergency expenses. 

5. Reasonable policies and procedures to 

avoid marketing as a gift card. The 

exemption for a general-use prepaid card that 

is reloadable and not marketed or labeled as 

a gift card or gift certificate in § 235.5(c) 

applies if a reloadable general-use prepaid 

card is not marketed or labeled as a gift card 

or gift certificate and if persons involved in 

the distribution or sale of the card, including 

issuers, program managers, and retailers, 

maintain policies and procedures reasonably 

designed to avoid such marketing. Such 

policies and procedures may include 

contractual provisions prohibiting a 

reloadable general-use prepaid card from 

being marketed or labeled as a gift card or gift 

certificate, merchandising guidelines or plans 

regarding how the product must be displayed 

in a retail outlet, and controls to regularly 

monitor or otherwise verify that the generaluse prepaid card is not being marketed as a 

gift card. Whether a general-use prepaid card 

has been marketed as a gift card or gift 

certificate will depend on the facts and 

circumstances, including whether a 

reasonable person would be led to believe 

that the general-use prepaid card is a gift card 

or gift certificate. The following examples 

illustrate the application of § 235.5(c): 

i. An issuer or program manager of prepaid 

cards agrees to sell general-purpose 

reloadable cards through a retailer. The 

contract between the issuer or program 

manager and the retailer establishes the terms 

and conditions under which the cards may 

be sold and marketed at the retailer. The 

terms and conditions prohibit the generalpurpose reloadable cards from being 

marketed as a gift card or gift certificate, and 

require policies and procedures to regularly 

monitor or otherwise verify that the cards are 

not being marketed as such. The issuer or 

program manager sets up one promotional 

display at the retailer for gift cards and 

another physically separated display for 

exempted products under § 235.5(c), 

including general-purpose reloadable cards, 

such that a reasonable person would not 

believe that the exempted cards are gift cards. 

The exemption in § 235.5(c) applies because 

policies and procedures reasonably designed 

to avoid the marketing of the general-purpose 

reloadable cards as gift cards or gift 

certificates are maintained, even if a retail 

clerk inadvertently stocks or a consumer 

inadvertently places a general-purpose 

reloadable card on the gift card display. 

ii. Same facts as in comment 5(c)–5.i, 

except that the issuer or program manager 

sets up a single promotional display at the 

retailer on which a variety of prepaid cards 

are sold, including store gift cards and 

general-purpose reloadable cards. A sign 

stating ‘‘Gift Cards’’ appears prominently at 


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the top of the display. The exemption in 

§ 235.5(c) does not apply with respect to the 

general-purpose reloadable cards because 

policies and procedures reasonably designed 

to avoid the marketing of exempted cards as 

gift cards or gift certificates are not 

maintained. 

iii. Same facts as in comment 5(c)–5.i, 

except that the issuer or program manager 

sets up a single promotional multi-sided 

display at the retailer on which a variety of 

prepaid card products, including store gift 

cards and general-purpose reloadable cards 

are sold. Gift cards are segregated from 

exempted cards, with gift cards on one side 

of the display and exempted cards on a 

different side of a display. Signs of equal 

prominence at the top of each side of the 

display clearly differentiate between gift 

cards and the other types of prepaid cards 

that are available for sale. The retailer does 

not use any more conspicuous signage 

suggesting the general availability of gift 

cards, such as a large sign stating ‘‘Gift 

Cards’’ at the top of the display or located 

near the display. The exemption in § 235.5(c) 

applies because policies and procedures 

reasonably designed to avoid the marketing 

of the general-purpose reloadable cards as 

gift cards or gift certificates are maintained, 

even if a retail clerk inadvertently stocks or 

a consumer inadvertently places a generalpurpose reloadable card on the gift card 

display. 

iv. Same facts as in comment 5(c)–5.i, 

except that the retailer sells a variety of 

prepaid card products, including store gift 

cards and general-purpose reloadable cards, 

arranged side-by-side in the same checkout 

lane. The retailer does not affirmatively 

indicate or represent that gift cards are 

available, such as by displaying any signage 

or other indicia at the checkout lane 

suggesting the general availability of gift 

cards. The exemption in § 235.5(c) applies 

because policies and procedures reasonably 

designed to avoid marketing the generalpurpose reloadable cards as gift cards or gift 

certificates are maintained. 

6. On-line sales of prepaid cards. Some 

websites may prominently advertise or 

promote the availability of gift cards or gift 

certificates in a manner that suggests to a 

consumer that the website exclusively sells 

gift cards or gift certificates. For example, a 

website 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 

website are gift cards or gift certificates. 

Under these facts, the website 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 

website. 

7. Temporary non-reloadable cards issued 

in connection with a general-use reloadable 

card. Certain general-purpose prepaid cards 

that are typically marketed as an account 

substitute initially may be sold or issued in 

the form of a temporary non-reloadable card. 

After the card is purchased, the cardholder 

is typically required to call the issuer to 

register the card and to provide identifying 

information in order to obtain a reloadable 

replacement card. In most cases, the 

temporary non-reloadable card can be used 

for purchases until the replacement 

reloadable card arrives and is activated by 

the cardholder. Because the temporary nonreloadable card may only be obtained in 

connection with the reloadable card, the 

exemption in § 235.5(c) applies so long as the 

card is not marketed as a gift card or gift 

certificate. 

5(d)—Exception 

1. Additional ATM access. Some debit 

cards may be used to withdraw cash from 

ATMs that are not part of the issuer’s 

designated ATM network. An electronic 

debit card transaction may still qualify for 

the exemption under §§ 235.5(b) or (c) with 

a respect to a card for which a fee may be 

imposed for a withdrawal from an ATM that 

is outside of the issuer’s designated ATM 

network as long as the card complies with 

the condition set forth in § 235.5(d)(2) for 

withdrawals within the issuer’s designated 

ATM network. The condition with respect to 

ATM fees does not apply to cards that do not 

provide ATM access. 

Section 235.6—Prohibition on 

Circumvention, Evasion, and Net 

Compensation 

6(a)—Prohibition of Circumvention or 

Evasion 

1. Finding of circumvention or evasion. A 

finding of evasion or circumvention will 

depend on all relevant facts and 

circumstances. Although net compensation 

may be one form of circumvention or evasion 

prohibited under § 235.6(a), it is not the only 

form. 

2. Examples of circumstances that may 

constitute circumvention or evasion. The 

following examples do not constitute per se 

circumvention or evasion, but may warrant 

additional supervisory scrutiny to determine 

whether the totality of the facts and 

circumstances constitute circumvention or 

evasion: 

i. A payment card network decreases 

network processing fees paid by issuers for 

electronic debit transactions by 50 percent 

and increases the network processing fees 

charged to merchants or acquirers with 

respect to electronic debit transactions by a 

similar amount. Because the requirements of 

this subpart do not restrict or otherwise 

establish the amount of fees that a network 

may charge for its services, the increase in 

network fees charged to merchants or 

acquirers and decrease in fees charged to 

issuers is not a per se circumvention or 

evasion of the interchange transaction fee 

standards, but may warrant additional 

supervisory scrutiny to determine whether 

the facts and circumstances constitute 

circumvention or evasion. 

ii. An issuer replaces its debit cards with 

prepaid cards that are exempt from the 

interchange limits of §§ 235.3 and 235.4. The 

exempt prepaid cards are linked to its 

customers’ transaction accounts and funds 

are swept from the transaction accounts to 

the prepaid accounts as needed to cover 

transactions made. Again, this arrangement is 

not per se circumvention or evasion, but may 

warrant additional supervisory scrutiny to 

determine whether the facts and 

circumstances constitute circumvention or 

evasion. 

6(b)—Prohibition of Net Compensation 

1. Net compensation. Net compensation to 

an issuer through the use of network fees is 

prohibited. 

2. Consideration of payments or incentives 

provided by the network in net compensation 

determination. 

i. For purposes of the net compensation 

determination, payments or incentives paid 

by a payment card network to an issuer with 

respect to electronic debit transactions or 

debit card related activities could include, 

but are not limited to, marketing incentives; 

payments or rebates for meeting or exceeding 

a specific transaction volume, percentage 

share, or dollar amount of transactions 

processed; or other payments for debit card 

related activities. For example, signing 

bonuses paid by a network to an issuer for 

the issuer’s debit card portfolio would also be 

included in the total amount of payments or 

incentives received by an issuer from a 

payment card network with respect to 

electronic debit transactions. A signing bonus 

for an entire card portfolio, including credit 

cards, may be allocated to the issuer’s debit 

card business based on the proportion of the 

cards or transactions that are debit cards or 

electronic debit transactions, as appropriate 

to the situation, for purposes of the net 

compensation determination. 

ii. Incentives paid by the network with 

respect to multiple-year contracts may be 

allocated over the life of the contract. 

iii. For purposes of the net compensation 

determination, payments or incentives paid 

by a payment card network with respect to 

electronic debit transactions or debit cardrelated activities do not include interchange 

transaction fees that are passed through to 

the issuer by the network, or discounts or 

rebates provided by the network or an 

affiliate of the network for issuer-processor 

services. In addition, funds received by an 

issuer from a payment card network as a 

result of chargebacks, fines paid by 

merchants or acquirers for violations of 

network rules, or settlements or recoveries 

from merchants or acquirers to offset the 

costs of fraudulent transactions or a data 

security breach do not constitute incentives 

or payments made by a payment card 

network. 

3. Consideration of fees paid by an issuer 

in net compensation determination. 

i. For purposes of the net compensation 

determination, fees paid by an issuer to a 

payment card network with respect to 

electronic debit transactions or debit card 

related activities include, but are not limited 

to, membership or licensing fees, network 

administration fees, and fees for optional 

network services, such as risk management 

services. 

ii. For purposes of the net compensation 

determination, fees paid by an issuer to a 

payment card network with respect to 


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electronic debit transactions or debit cardrelated activities do not include network 

processing fees (such as switch fees and 

network connectivity fees) or fees paid to an 

issuer processor affiliated with the network 

for authorizing, clearing, or settling an 

electronic debit transaction. 

4. Example of circumstances not involving 

net compensation to the issuer. The 

following example illustrates circumstances 

that would not indicate net compensation by 

the payment card network to the issuer: 

i. Because of an increase in debit card 

transactions that are processed through a 

payment card network during a calendar 

year, an issuer receives an additional 

volume-based incentive payment from the 

network for that period. Over the same 

period, however, the total network fees (other 

than processing fees) the issuer pays the 

payment card network with respect to debit 

card transactions also increase so that the 

total amount of fees paid by the issuer to the 

network continue to exceed incentive 

payments by the network to the issuer. Under 

these circumstances, the issuer does not 

receive net compensation from the network 

for electronic debit transactions or debit card 

related activities. 

Section 235.7—Limitations on Payment Card 

Restrictions 

7(a)—Prohibition on Network Exclusivity 

1. Scope of restriction. Section 235.7(a) 

requires an issuer to configure each of its 

debit cards so that each electronic debit 

transaction performed with such card can be 

processed on at least two unaffiliated 

payment card networks. In particular, section 

§ 235.7(a) requires this condition to be 

satisfied for each geographic area, specific 

merchant, particular type of merchant, and 

particular type of transaction for which the 

issuer’s debit card can be used to perform an 

electronic debit transaction. As long as the 

condition is satisfied for each such case, 

section § 235.7(a) does not require the 

condition to be satisfied for each method of 

cardholder authentication (e.g., signature, 

PIN, biometrics, any other method of 

cardholder authentication that may be 

developed in the future, or the lack of a 

method of cardholder authentication). For 

example, it is sufficient for an issuer to issue 

a debit card that can perform signatureauthenticated transactions only over one 

payment card network and PIN-authenticated 

transactions only over another payment card 

network, as long as the two payment card 

networks are not affiliated and each network 

can be used to process electronic debit 

transactions for every geographic area, 

specific merchant, particular type of 

merchant, and particular type of transaction 

for which the issuer’s debit card can be used 

to perform an electronic debit transaction. 

2. Issuer’s role. Section 235.7(a) does not 

require an issuer to ensure that two or more 

unaffiliated payment card networks will 

actually be available to the merchant to 

process every electronic debit transaction. To 

comply with the requirement in § 235.7(a), it 

is sufficient for an issuer to configure each 

of its debit cards so that each electronic debit 

transaction performed with such card can be 

processed on at least two unaffiliated 

payment card networks, even if the networks 

that are actually available to the merchant for 

a particular transaction are limited by, for 

example, the card acceptance technologies 

that a merchant adopts, or the networks that 

the merchant accepts. 

3. Permitted networks. 

i. Network volume capabilities. A payment 

card network could be used to satisfy the 

requirement that an issuer enable two 

unaffiliated payment card networks for each 

electronic debit transaction if the network 

was either (a) capable of processing the 

volume of electronic debit transactions that 

it would reasonably expect to be routed to it 

or (b) willing to expand its capabilities to 

meet such expected transaction volume. If, 

however, the network’s policy or practice is 

to limit such expansion, it would not qualify 

as one of the two unaffiliated payment card 

networks. 

ii. Reasonable volume expectations. One of 

the steps a payment card network can take 

to form a reasonable expectation of its 

transaction volume is to consider factors 

such as the number of cards expected to be 

issued that are enabled by an issuer on the 

network and expected card usage patterns. 

iii. Examples of permitted arrangements. 

For each geographic area (e.g., New York 

State), specific merchant (e.g., a specific fast 

food restaurant chain), particular type of 

merchant (e.g., fast food restaurants), and 

particular type of transaction (e.g., card-notpresent transaction) for which the issuer’s 

debit card can be used to perform an 

electronic debit transaction, an issuer must 

enable at least two unaffiliated payment card 

networks, but those payment card networks 

do not necessarily have to be the same two 

payment card networks for every transaction. 

A. Geographic area: An issuer complies 

with the rule only if, for each geographic area 

in which the issuer’s debit card can be used 

to perform an electronic debit transaction, 

the issuer enables at least two unaffiliated 

payment card networks. For example, an 

issuer could comply with the rule by 

enabling two unaffiliated payment card 

networks that can each process transactions 

in all 50 U.S. states. Alternatively, the issuer 

could comply with the rule by enabling three 

unaffiliated payment card networks, A, B, 

and C, where network A can process 

transactions in all 50 U.S. states, network B 

can process transactions in the 48 contiguous 

United States, and network C can process 

transactions in Alaska and Hawaii. 

B. Particular type of transaction: An issuer 

complies with the rule only if, for each 

particular type of transaction for which the 

issuer’s debit card can be used to perform an 

electronic debit transaction, the issuer 

enables at least two unaffiliated payment 

card networks. For example, an issuer could 

comply with the rule by enabling two 

unaffiliated payment card networks that can 

each process both card-present and card-notpresent transactions. Alternatively, the issuer 

could comply with the rule by enabling three 

unaffiliated payment card networks, A, B, 

and C, where network A can process both 

card-present and card-not-present 

transactions, network B can process cardpresent transactions, and network C can 

process card-not-present transactions. 

4. Examples of prohibited network 

restrictions on an issuer’s ability to contract 

with other payment card networks. 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 an issuer may 

enable on a particular debit card, or network 

rules or contract provisions that specify the 

other networks that an issuer may enable on 

a particular debit card. 

ii. Network rules or guidelines that allow 

only that payment card network’s (or its 

affiliated networks’) brand, mark, or logo to 

be displayed on a particular debit card, or 

that otherwise limit the ability of brands, 

marks, or logos of other payment card 

networks to appear on the debit card. 

5. Network logos or symbols on card not 

required. Section 235.7(a) does not require 

that a debit card display the brand, mark, or 

logo of each payment card network over 

which an electronic debit transaction may be 

processed. For example, the rule does not 

require a debit card that an issuer enables on 

two or more unaffiliated payment card 

networks to bear the brand, mark, or logo of 

each such payment card network. 

6. Voluntary exclusivity arrangements 

prohibited. Section 235.7(a) requires that an 

issuer enable at least two unaffiliated 

payment card networks to process an 

electronic debit transaction, even if the issuer 

is not subject to any rule of, or contract or 

other agreement with, a payment card 

network requiring that all or a specified 

minimum percentage of electronic debit 

transactions be processed on the network or 

its affiliated networks. 

7. Affiliated payment card networks. 

Section 235.7(a) does not prohibit an issuer 

from enabling two affiliated payment card 

networks among the networks on a particular 

debit card, as long as at least two of the 

networks that can be used to process each 

electronic debit transaction are unaffiliated. 

8. Application of rule regardless of form. 

The network exclusivity provisions in 

§ 235.7(a) apply to electronic debit 

transactions performed with any debit card 

as defined in § 235.2, regardless of the form 

of such debit card. For example, the 

requirement applies to electronic debit 

transactions performed using a plastic card, 

a supplemental device such as a fob, 

information stored inside an e-wallet on a 

mobile phone or other device, or any other 

form of debit card, as defined in § 235.2, that 

may be developed in the future. 

7(b)—Prohibition on Routing Restrictions 

1. Relationship to the network exclusivity 

restrictions. An issuer or payment card 

network is prohibited from inhibiting a 

merchant’s ability to direct the routing of an 

electronic debit transaction over any of the 

payment card networks that the issuer has 

enabled to process electronic debit 

transactions performed with a particular 

debit card. The rule does not require that an 

issuer allow a merchant to route a transaction 

over a payment card network that the issuer 

did not enable to process transactions 

performed with that debit card. 


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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 and 

that are therefore prohibited under § 235.7(b): 

i. Prohibiting a merchant from encouraging 

or discouraging a cardholder’s use of a 

particular method of cardholder 

authentication, for example prohibiting 

merchants from favoring a cardholder’s use 

of one cardholder authentication method 

over another, or from discouraging the 

cardholder’s use of any given cardholder 

authentication method, as further described 

in comment 7(a)–1. 

ii. Establishing network rules or 

designating issuer priorities directing the 

processing of an electronic debit transaction 

on a specified payment card network or its 

affiliated networks, or directing the 

processing of the transaction away from a 

specified payment card network or its 

affiliates, except as (A) a default rule in the 

event the merchant, or its acquirer or 

processor, does not designate a routing 

preference, or (B) if required by state law. 

iii. Requiring a specific payment card 

network to be used based on the form of debit 

card presented by the cardholder to the 

merchant (e.g., plastic card, payment code, or 

any other form of debit card as defined in 

§ 235.2). 

3. Merchant payments not prohibited. A 

payment card network does not restrict a 

merchant’s ability to route transactions over 

available payment card networks in violation 

of § 235.7(b) by offering payments or other 

incentives to encourage the merchant to route 

electronic debit card transactions to the 

network for processing. 

4. Real-time routing decision not required. 

A merchant need not make network routing 

decisions on a transaction-by-transaction 

basis. A merchant and its acquirer or 

processor may agree to a pre-determined set 

of routing choices that apply to all electronic 

debit transactions that are processed by the 

acquirer or processor on behalf of the 

merchant. 

5. No effect on network rules governing the 

routing of subsequent transactions. Section 

235.7 does not supersede a payment card 

network rule that requires a chargeback or 

return of an electronic debit transaction to be 

processed on the same network that 

processed the original transaction. 

Section 235.8—Reporting Requirements and 

Record Retention 

8(a)—Entities Required To Report 

1. Two surveys. The Board conducts a 

survey of covered issuers on a biennial basis 

using FR 3064a (OMB No. 7100–0344) and a 

survey of payment card networks on an 

annual basis using FR 3064b (OMB No. 

7100–0344). Each survey collects information 

concerning electronic debit transactions 

performed during the previous calendar year. 

2. Change in status. An issuer that is a 

covered issuer during the year in which the 

Board conducts a survey of covered issuers 

but was not a covered issuer during the 

previous calendar year is exempt from the 

reporting requirement in § 235.8. 

8(b)—[Reserved] 

8(c)—[Reserved] 

Section 235.9—Administrative Enforcement 

[Reserved] 

Appendix B to Part 235—Determination 

of Base Component, Ad Valorem 

Component, and Fraud-Prevention 

Adjustment 

(a) In general. For every two-year period 

beginning with the period from July 1, 2025, 

to June 30, 2027 (each an ‘‘applicable 

period’’), the Board will determine the base 

component and the ad valorem component as 

set forth in § 235.3 and the fraud-prevention 

adjustment as set forth in § 235.4 using the 

approach described in this appendix B. 

(b) Basis for determination. The Board will 

determine the amounts described in 

paragraph (a) of this appendix for an 

applicable period using the data reported to 

the Board by covered issuers pursuant to 

§ 235.8 concerning transactions performed 

during the calendar year that is two years 

prior to the year in which the applicable 

period begins. 

(c) Base component—(1) Formula. The 

base component for an applicable period is 

the product of the transaction-weighted 

average of per-transaction allowable costs 

(excluding fraud losses) across covered 

issuers, based on the data described in 

paragraph (b) of this appendix, and 3.7, 

rounded to the nearest tenth of one cent. 

(2) Allowable costs (excluding fraud 

losses). For purposes of paragraph (c)(1) of 

this appendix, allowable costs (excluding 

fraud losses) are the sum of costs of 

authorization, clearance, and settlement, as 

reported on line 3a of section II of FR 3064a 

(OMB No. 7100–0344), and transactions 

monitoring costs tied to authorization, as 

reported on line 5a.1 of section II of FR 3064a 

(OMB No. 7100–0344). 

(3) Transaction-weighted average of pertransaction allowable costs (excluding fraud 

losses) across covered issuers. For purposes 

of paragraph (c)(1) of this appendix, the 

Board determines the transaction-weighted 

average of per-transaction allowable costs 

(excluding fraud losses) across covered 

issuers by: 

(i) Summing allowable costs (excluding 

fraud losses) across covered issuers that 

reported allowable costs (excluding fraud 

losses); 

(ii) Dividing this sum by the sum of the 

total number of electronic debit transactions, 

as reported on line 1a of section II of FR 

3064a (OMB No. 7100–0344), across covered 

issuers that reported allowable costs 

(excluding fraud losses); and 

(iii) Rounding this result to the nearest 

tenth of one cent. 

(d) Ad valorem component—(1) Metric. 

The ad valorem component for an applicable 

period is, for a particular electronic debit 

transaction, the median ratio of issuer fraud 

losses to transaction value among covered 

issuers, based on the data described in 

paragraph (b) of this appendix, rounded to 

the nearest quarter of one basis point, 

multiplied by the value of the electronic 

debit transaction. 

(2) Ratio of issuer fraud losses to 

transaction value. For purposes of paragraph 

(d)(1) of this appendix, issuer fraud losses are 

the value of fraud losses incurred by the 

covered issuer, as reported on line 8b of 

section II of FR 3064a (OMB No. 7100–0344). 

The ratio of issuer fraud losses to transaction 

value is issuer fraud losses divided by the 

total value of electronic debit transactions 

reported on line 1a of section II of FR 3064a 

(OMB No. 7100–0344). 

(3) Median ratio of issuer fraud losses to 

transaction value among covered issuers. For 

purposes of paragraph (d)(1) of this 

appendix, the Board determines the median 

ratio of issuer fraud losses to transaction 

value among covered issuers by: 

(i) For each covered issuer that reported 

issuer fraud losses, determining the ratio of 

issuer fraud losses to transaction value; 

(ii) Sorting these ratios in ascending order; 

and 

(iii) Selecting the ratio in the middle (if the 

number of ratios is odd) or calculating the 

simple average of the two ratios in the 

middle (if the number of ratios is even). 

(e) Fraud-prevention adjustment—(1) 

Metric. The fraud-prevention adjustment for 

an applicable period is the median pertransaction fraud-prevention costs among 

covered issuers, based on the data described 

in paragraph (b) of this appendix, rounded to 

the nearest tenth of one cent. 

(2) Per-transaction fraud-prevention costs. 

For purposes of paragraph (e)(1) of this 

appendix, fraud-prevention costs are total 

fraud-prevention and data-security costs, as 

reported on line 5a of section II of FR 3064a 

(OMB No. 7100–0344), minus transactions 

monitoring costs tied to authorization, as 

reported on line 5a.1 of section II of FR 3064a 

(OMB No. 7100–0344). Per-transaction fraudprevention costs are fraud-prevention costs 

divided by the total number of electronic 

debit transactions reported on line 1a of 

section II of FR 3064a (OMB No. 7100–0344). 

(3) Median per-transaction fraudprevention costs among covered issuers. For 

purposes of paragraph (e)(1) of this appendix, 

the Board determines the median pertransaction fraud-prevention costs among 

covered issuers by: 

(i) For each covered issuer that reported 

fraud-prevention costs, determining pertransaction fraud-prevention costs; 

(ii) Sorting these values in ascending order; 

and 

(iii) Selecting the value in the middle (if 

the number of values is odd) or calculating 

the simple average of the two values in the 

middle (if the number of values is even). 

(f) Publication of applicable amounts. The 

Board will publish in the Federal Register 

the amounts described in paragraph (a) of 

this appendix for an applicable period no 

later than March 31 of the calendar year in 

which the applicable period begins. 

By order of the Board of Governors of the 

Federal Reserve System. 

Ann E. Misback, 

Secretary of the Board. 

[FR Doc. 2023–24034 Filed 11–13–23; 8:45 am] 

BILLING CODE 6210–01–P 


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