U.S. Financial Reform: Consumer Financial Protection Act of 2010 Institutes First Federal Regulation of Debit Card Interchange Fees

Author:Mr A. Bruce Bowden and Katherine Nichols
Profession:Duane Morris LLP

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("the Act") begins sweeping reform for the U.S. financial system. It requires new and existing regulatory agencies to undertake more than 50 studies of the financial system and more than 250 instances of rulemaking. Duane Morris has issued further Alerts on many of the broad topics addressed by the Act, accessible at www.duanemorris.com/FinancialReform.

Section 1075 of Title X of the Act, is also known as the "Durbin amendment." With the Durbin amendment, Congress has instituted the first federal regulation of interchange fees (i.e., fees charged by a cardholder's, or "issuing," bank to a merchant's, or "acquiring," bank) on debit card purchases. This part of the Act, which will become part of the existing Electronic Fund Transfer Act (EFTA), also represents the first direct federal regulation of agreements between merchants and payment card networks.

While the fee limits of the Durbin amendment apply only to debit cards, and not to credit cards, the new law is also aimed at indirectly regulating credit card interchange fees. By limiting interchange fees on debit card purchases (and, in turn, the amount of the merchant discount retained by banks) to rates that are "reasonable and proportional" to the actual costs incurred by issuing banks as well as restricting limits on merchants from providing discounts for cash, check or debit payments or imposing minimum amounts for purchase by credit card, the law is likely to encourage merchants to provide incentives to customers to use lower-cost payment methods. The full impact of the Durbin amendment is unlikely to be observed until the Board of Governors of the Federal Reserve System ("Board") promulgates regulations detailing the loosely outlined "reasonable and proportional" standard and other contemplated rules in the Act.

Limitations on Interchange Fees for Debit Card Issuers

Under the new law, interchange fees for purchases made by debit cards ("electronic debit transactions") are required to be "reasonable and proportional to the cost incurred by the issuer with respect to the transaction." The Board – the federal agency with jurisdiction under EFTA – is directed, within nine months of the enactment of the Act, to establish regulations setting forth the "reasonable and proportional" standard. In developing such standard, the law directs the Board to: (1) consider the extent to which electronic debit transactions are comparable with checking transactions that are required to clear without fees; (2) distinguish between actual costs incurred by a debit card issuer for a particular transaction and other costs incurred by the issuer not specific to a transaction; and (3) consult with other regulatory agencies.

Currently, many interchange fee...

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