On July 21, 2010 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law (P.L.111-203), ushering in sweeping reforms of the banking industry including reforms of interchange fees. The law directs the Federal Reserve to write regulations no later than nine months from enactment to establish standards for a number of provisions. Also networks and issuers will be defining this in far more detailed fashion via their contracts. For now, however, this is an overview of how we are interpreting the changes. This document is not meant to substitute for legal advice.
Effective Immediately
Transaction Minimums for Credit Card Transactions
- Merchants are now permitted to set a minimum transaction amount up to $10.00 BUT NOT MORE THAN $10.00 for credit card transactions. However, transaction minimums are not permitted on debit or on SNAP or other government benefit cards.
- Signage should indicate that the minimum purchase amount is only on credit card purchases and does not include debit card purchases. Signage may be placed throughout the store to help make customers aware of the credit card minimum purchase amount.
- The minimum purchase amount must be the same for all credit cards. You may not set a minimum purchase of five dollars for a Citibank Visa credit card and then set a minimum purchase amount of ten dollars for a Bank of America Visa credit card.
- Federal agencies and higher education institutions are permitted to set transaction maximums as well.
- The Federal Reserve Board may issue regulations to increase the minimum dollar amount.
Discounting for Use of Different Forms of Payment
- Merchants may provide a discount to consumers for use of a different form of payment such as cash, check, debit or credit (i.e. cash v credit card, etc.). The incentive may not differentiate on the basis of the issuing bank or payment card network. For example, you may not offer a one percent discount for a Citibank debit purchase and then a two percent discount for a Bank of America debit purchase.
- Discounts must be offered to all prospective buyers and must be clearly disclosed at the point of sale. A sign could state, for example, “one percent off for use of a debit card.” Discount signage may be posted at other locations throughout the store to help make customers aware of the discount.
Discounting Between Networks or Between Issuers
- Merchants are not permitted to offer discounts to consumers for using one card network over another or between issuing banks. The “Honor All Cards” rule remains in effect.
- The network rules for co-branded card programs were not changed by the new law. Typically, those rules require that any such discount be applied after the transaction (such as a discount/credit that comes when the customer receives a card statement).
- The new law does not change the rules set by Visa and MasterCard which do not permit discounting between cards within the same brand (i.e. a Citibank Visa versus a Chase Visa).
Effective No Later Than April 22, 2011
Debit Interchange Fees must be “Reasonable and Proportional”
- Financial institutions with assets under $10 billion are exempt from the Fed Rules.
- The definition of a “debit card” in the statute includes “any card, or other payment code or device, issued or approved for use through a payment card network to debit an asset account (regardless of the purpose for which the account is established), whether authorization is based on signature, PIN, or other means.” It does not include paper checks.
- The Federal Reserve Board must issue regulations no later than nine (9) months from July 22, 2010 (i.e. by April 22, 2011) that set standards to ensure debit interchange fees are reasonable and proportional to the cost incurred by the issuer with respect to the transaction.
- The Federal Reserve must prescribe standards for assessing whether debit interchange fees are “reasonable and proportional”. The Board is required to consider a number of factors including the functional similarities between debit and checking and distinguish between incremental costs incurred by the issuer, such as the cost of authorization, settlement and clearance.
- Federal, State, or local government administered payment program cards are EXEMPT from the “reasonable and proportional” regulations. In addition, pre-paid cards are exempt from this provision. Issuing banks lose this exemption for government issued cards if consumers using the cards are charged overdraft fees or fees for their first monthly ATM withdrawal by the card issuing banks.
- The new standards are likely to result in lower debit interchange fees.
Fraud Standards
- An individual issuer may petition the Federal Reserve Board for an adjustment to interchange fee amounts if the adjustment is “reasonably necessary” to account for fraud prevention and if the issuer complies with Board established fraud related standards.
- The Federal Reserve Board is required to establish fraud standards for making issuer requested adjustments to debit interchange fee amounts. In issuing standards and prescribing regulations, the Board SHALL consider:
o nature/type/occurrence of fraud, extent that fraud depends on authorization of debit transaction;
o available means to reduce fraud;
o fraud and data security costs of all parties;
o costs of fraud absorbed by each party;
o and the extent interchange fees have reduced or increased incentives for parties to reduce fraud and other factors the Board considers appropriate.
Effective No Later Than July 22, 2011 Debit Network Restrictions
- The Federal Reserve Board will issue regulations within twelve months (July 22, 2011) to prohibit card networks from requiring issuing banks to restrict debit cards to a single debit network.
- This provision enhances competition by permitting merchants to route debit transactions over any network that they choose.
