110
111
CMSPI – IAC State of the Industry Report
CMSPI – IAC State of the Industry Report
party model, where the network sets the interchange, not the bank. The NNE clause applies to all U.S. debit card issuers regardless of size. The Federal Reserve Board of Governors, or Fed, was tasked with implementing and enforcing Reg II. Additionally, while the Fed regulates the issuing banks, the Federal Trade Commission has oversight and enforcement power over the global networks. 241 Implemented in October 2011, the Fed’s cap was initially set at $0.21 per transaction, plus 0.05% of the transaction value, plus $0.01 as an adjustment if the card issuer meets fraud prevention standards. 242 This cap was based on the 80th percentile covered issuer’s authorization, clearing, and settlement (ACS) costs (see Glossary), and has not changed since its implementation despite the Fed’s own bi-annual survey data showing the average covered issuer ACS costs have nearly halved since that time, falling from $0.077 in 2009 to $0.039 in 2021. There is nothing in the Federal Reserve’s final rules nor in the Congressional statute that prohibits regulated debit networks from pricing transactions below the maximum allowable level. THE FED MOVES TO LOWER THE CAP In conjunction with the release of the 2021 bi-annual issuer survey 243 , in October 2023, the Federal Reserve Board of Governors voted to publish a proposed rule that would adjust all three portions of the U.S. debit card interchange cap.
TYPES OF CARD FEE INTERVENTI0ON: IMPACT ANALYSIS
United States
European Union
Country
Australia
Japan
Interchange Caps
Network Routing Requirements
Partial Partial
Surcharging Allowed
Partial
Type of Intervention
Government Grants for Payments-Related Costs Requirements to Publish Fee Schedules Decreases to Some Merchant Fees Evidence of Increased Market Share of Domestic Payment Networks Increases to Non-Regulated Fees (e.g. Network Fees, Commercial Card Interchange, Credit Interchange) Routing Limitations by Entry Method Limited Availability of Network Routing for Certain Channels Where the Domestic Network Could Support the Channel
Impact
Benefit Erosion Factors Observed Since Regulation
Issuance of Single-Network Cards
Partial
Partial, depending on country
Introduction of Consumer Routing Choice
Limitations to Routing When Network Tokens Are Used Limited Processor Routing Capabilities Loss of a Domestic Network (Including Consolidation)
Partial
Table 5.5 – Current and Proposed Interchange Fee Caps for Transactions on Cards Issued by Regulated U.S. Banks
Table 5.4 – Summary of Card Fee Intervention for a Sample of Markets Note: Japan imposed interchange caps in 2019 but they expired after nine months Section 5.2 – Payments Industry Regulation in the US Section 5.2.1 – Interchange Caps
Table 5.5 provides a breakdown of the proposed new cap values. CMSPI estimates that these proposed rates would save merchants $3 billion annually based on 2021 volumes. The proposed rule’s public comments period closed on May 12, 2024. The Federal Reserve had not yet released the final rule at the time of publication of this report.
The Durbin Amendment to the Dodd-Frank Wall Street Reform Act was signed into U.S. federal law in July 2010. This Durbin Amendment, also called Reg II, contained two main components: a “reasonable and proportional” debit card interchange fee standard and a No Network Exclusivity (NNE) clause mandating debit card co-badging and merchant-choice routing (see Section 5.2.2 for more information about co-badging in the U.S.). The debit rate cap applies to all banks with over $10 billion in assets that issue card products using the four-
241 Visa Responds to FTC Investigation With Rule Change - C-store Decisions; FTC Orders an End to Illegal Mastercard Business Tactics and Requires it to Stop Blocking Competing Debit Card Payment Networks | Federal Trade Commission 242 The Fed’s original suggested caps were 7 cents or 12 cents per transaction: Federal Reserve Board - Federal Reserve requests comment on a proposed rule to establish debit card interchange fee standards and prohibit network exclusivity
arrangements and routing restrictions 243 Federal Reserve Board Publication
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