Fed Finalizes “Swipe Fee” Limit Rule

By Richard Roth, J.D., and Serena Lynn, Editors, the CCH Federal Banking Law Reporter and Bank Digest, June 30, 2011.

The Federal Reserve has finalized a rule implementing a provision of the Dodd-Frank Act calling for limits on “swipe fees,” the fees that debit card networks can charge for processing transactions. The rule also sets limits on network exclusivity arrangements and routing restrictions. The limit will apply only to issuers that have assets of $10 billion or more, when combined with all of their affiliates.

According to the Fed's initial proposal, the average swipe fee currently is 44 cents per transaction; however, based on the Dodd-Frank Act requirement that the fee be “reasonable and proportional to the cost insured by the issuer with respect to the transaction,” the Fed proposed a limit of only 12 cents. Under the final rule, the maximum fee will be 21 cents per transaction plus the product of multiplying the value of the transaction by 5 basis points. According to the Fed, this would result in a swipe fee of about 23 cents on a $39 transaction, which was said to be the average amount of a debit card transaction. The rule does not specify a maximum fee that can be generated by this calculation.

In order to facilitate ongoing compliance with the Dodd-Frank Act requirement, the Fed said that it will annually publish two lists:

1. a list of all issuers that are exempt from the standards because they do not meet the $10 billion threshold; and
2. a list of the average interchange transaction fees each network provides to its covered and exempt issuers.

The agency also issued an interim final rule under which card issuers that implement qualifying fraud-prevention standards will be able to seek permission to charge an extra 1 cent per transaction. If an issuer meets these standards and wishes to receive the adjustment, it must certify its eligibility to receive the adjustment to the payment card networks in which it participates. Comments on the interim final rule are due by Sept. 30, 2011. The fraud-prevention adjustment is effective Oct. 1, 2011, concurrent with the debit card interchange fee limits.

Fed Chairman Ben S. Bernanke called the interchange rulemaking one of the “most challenging” under Dodd-Frank. He said the Fed received input from more than 11,000 commenters on the proposed rule, which the agency reviewed carefully. According the chairman, “Congress has directed the Board to accomplish a very difficult task. I believe the final rule gives careful consideration to the statutory language, the cost data available to us, and the complexities of the debit interchange payment system.”

Vice Chair Janet Yellen added her hope that “the banking industry, the retail industry, and the card networks will work together in a collaborative manner to ensure that the debit card system, and card systems more broadly, are designed in a manner that best balances the needs of all parties.”

Assistant Senate Majority Leader Dick Durbin, D-Ill., expressed support, saying the rules “will finally make swipe fee reform a reality and help bring fairness, transparency and competition to a debit card system that for years has operated without them.” He added, however, that he is disappointed that the Fed “has yielded to the big banks in certain parts of its final rulemaking. The inflated cap and extended delay...will unnecessarily take money out of the pockets of consumers and small businesses and give it to big banks that neither need nor deserve it.”

While asserting his fundamental disagreement with “price fixing by the Fed,” Sen. Bob Corker, R-Tenn., commended the agency, stating “I know the Fed was listening when a majority of the Senate voted to delay and modify the interchange rule and require the Fed to consider the true costs of transactions when crafting their final rule.” He asserted his hope that the “final regulation will allow community banks to continue offering debit card services without unfairly penalizing consumers or hurting their ability to compete for business.”