ETA Summary on Durbin Amendment as contained in the Dodd-Frank Act

Last week, a congressional conference committee completed work on the Dodd-Frank Act for financial regulatory reform. It is important to note that the Dodd-Frank Act, while passed by the House, has not yet been passed by the Senate. Although it is not quite possible to say what will be in the final legislation, the summary below examines the Durbin amendment as it was reported out of the conference committee.

1. The Federal Reserve (Fed) is given authority to regulate “interchange transaction fees,” which are defined 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.” An electronic debit transaction means a transaction in which a person uses a debit or prepaid card.

2. Debit and prepaid reloadable interchange transaction fees must be “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” The Fed is required to set standards for determining if the amount of any interchange transaction fee is “reasonable and proportional” to the incremental cost incurred by an issuer in connection with a particular electronic debit transaction. The Fed may not consider other costs. The Fed may adjust the rates to consider fraud and costs dependent on fraud compliance, but only if the issuer has taken steps approved by the Fed on fraud protection. This also gives the Fed new rulemaking authority in regard to fraud.

3. The Fed is directed to issue the “reasonable and proportional” standards within nine months of the date of enactment; however, the requirement that debit and prepaid interchange transaction fees be “reasonable and proportional” is effective 12 months after the date of enactment even if the Fed does not issue any such standards.

4. The Fed is given authority to request information from issuers and networks on interchange pricing and make that information public in the aggregate at their discretion.

5. Exempted from interchange regulation are: 1) issuers with less than $10 billion in assets; and (2) general-use prepaid and debit cards (including those not marketed or labeled as gift cards) provided that after a two-year grace period the prepaid cardholding beneficiaries are not charged any overdraft fees or fees for the first monthly in-network ATM withdrawal. The exemption includes prepaid and debit cards for government-administered benefits.

6. Identifies and defines a category of fees called ‘network fees’. The Fed may not regulate network fees except to ensure that a network fee is not used to directly or indirectly compensate an issuer with respect to an electronic debit transaction fee, and that a network fee is not used to circumvent the Fed’s regulations.

The amendment also directs the Fed to issue regulations regarding:

• Neither an issuer nor a payment card network may restrict the number of networks on which an electronic debit transaction may be processed.
• Neither an issuer nor a payment card network may restrict the ability of a merchant to route debit transactions over any "network that may process such transactions."
• A network cannot restrict a merchant’s ability to provide a discount or in-kind incentive for payment by cash, checks, debit cards, prepaid cards, or credit cards as long as the discount or in-kind incentive does not discriminate between issuers or networks.
• The merchant discount must be offered to all prospective buyers and be disclosed 'clearly and conspicuously.'
• Merchants can set a minimum for payment by credit card not to exceed $10, and the minimum must be the same for all issuers and networks.
• Merchants cannot set a maximum for payment by credit card; payment maximums can only be set by Fed or institution of higher learning and must be the same for every issuer and network.