Debit Card Interchange Fees and Routing
| Published date | 13 May 2021 |
| Citation | 86 FR 26189 |
| Record Number | 2021-10013 |
| Section | Proposed rules |
| Court | Federal Reserve System |
Federal Register, Volume 86 Issue 91 (Thursday, May 13, 2021)
[Federal Register Volume 86, Number 91 (Thursday, May 13, 2021)]
[Proposed Rules]
[Pages 26189-26195]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10013]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 86, No. 91 / Thursday, May 13, 2021 /
Proposed Rules
[[Page 26189]]
FEDERAL RESERVE SYSTEM
12 CFR Part 235
[Regulation II; Docket No. R-1748]
RIN 7100-AG15
Debit Card Interchange Fees and Routing
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Board of Governors (Board) is seeking comment on a
proposal to amend Regulation II to clarify that the requirement that
each debit card transaction must be able to be processed on at least
two unaffiliated payment card networks applies to card-not-present
transactions, clarify the requirements that Regulation II imposes on
debit card issuers to ensure that at least two unaffiliated payment
card networks have been enabled for debit card transactions, and
standardize and clarify the use of certain terminology.
DATES: Comments must be received on or before July 12, 2021.
ADDRESSES: You may submit comments, identified by Docket No. R-1748,
RIN 7100-AG15, by any of the following methods:
Agency Website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Email: [email protected]. Include docket
number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
All public comments are available from the Board's website at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons or to remove
personally identifiable information at the commenter's request.
Accordingly, comments will not be edited to remove any identifying or
contact information. Public comments may also be viewed electronically
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006,
between 9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Jess Cheng, Senior Counsel (202-452-
2309), Legal Division; or Krzysztof Wozniak, Manager (202-452-3878),
Elena Falcettoni, Economist (202-452-2528), or Larkin Turman, Financial
Institution and Policy Analyst (202-452-2388), Division of Reserve Bank
Operations and Payment Systems. Users of Telecommunication Device for
Deaf (TDD) only, call (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Statutory Authority
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act) was enacted on July 21, 2010.\1\ Section 1075 of the
Dodd-Frank Act amends the Electronic Fund Transfer Act (EFTA) (15
U.S.C. 1693 et seq.) to add a new section 920 regarding interchange
transaction fees for electronic debit transactions and rules for
payment card transactions.\2\
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ EFTA section 920 is codified as 15 U.S.C. 1693o-2.
Electronic debit transaction (or ``debit card transaction'') is
defined in EFTA section 920(c)(5) as a transaction in which a person
uses a debit card.
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EFTA section 920(b)(1) directs the Board to prescribe regulations
that limit restrictions that issuers and payment card networks may
place on the processing of an electronic debit transaction.\3\ An
electronic debit transaction typically involves at least five parties:
(i) A cardholder, (ii) the entity that issued the debit card to the
cardholder (the issuer), (iii) a merchant, (iv) the merchant's
depository institution (the acquirer), and (v) a payment card
network.\4\ EFTA section 920(b)(1) contains two provisions with respect
to issuers and payment card networks.
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\3\ EFTA section 920(c)(9) defines ``issuer'' as ``any person
who issues a debit card, or credit card, or the agent of such person
with respect to such card.'' EFTA section 920(c)(11) defines
``payment card network'' as ``an entity that directly, or through
licensed members, processors, or agents, provides the proprietary
services, infrastructure, and software that route information and
data to conduct debit card or credit card transaction authorization,
clearance, and settlement, and that a person uses in order to accept
as a form of payment a brand of debit card, credit card or other
device that may be used to carry out debit or credit transactions.''
15 U.S.C. 1693o-2.
\4\ The issuer provides the cardholder with a debit card that is
enabled to process transactions over various payment card networks.
The cardholder can initiate a debit card transaction at a merchant
that accepts the networks enabled on the cardholder's card. To
process the transaction, the acquirer routes the transaction over
one of the payment card networks available on the card.
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First, EFTA section 920(b)(1)(A) directs the Board to prescribe
regulations to prohibit an issuer or payment card network from imposing
exclusivity arrangements with respect to the payment card networks over
which an electronic debit transaction may be processed. In particular,
the statute directs the Board to prescribe regulations that forbid
issuers and payment card networks from restricting the number of such
networks to fewer than two unaffiliated networks (``prohibition on
network exclusivity''). Absent this prohibition on network exclusivity,
an issuer could enable only a single payment card network, or only two
affiliated networks, to process a debit card transaction, thereby
foreclosing the ability of the merchant or its acquirer to choose among
multiple competing networks to process the transaction.
Second, EFTA section 920(b)(1)(B) directs the Board to prescribe
regulations to prohibit an issuer or payment card network from
restricting the ability of a merchant or its acquirer to choose among
the networks enabled on a card when deciding how to route a debit card
transaction.\5\ Specifically, the statute directs the Board to
prescribe regulations that forbid issuers and payment card networks
from directly or indirectly inhibiting any person that accepts debit
cards for payment from directing the routing of an electronic debit
transaction over any network that may process that transaction
(``prohibition on routing restrictions''). Absent this prohibition on
routing
[[Page 26190]]
restrictions, an issuer or payment card network could establish rules
or other restrictions that override a merchant's routing preferences,
thereby preventing the merchant or its acquirer from routing a
transaction over a network with, for example, lower fees for merchants.
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\5\ The merchant's choice of network is typically implemented by
its acquirer or processor. A merchant may have preferences over the
payment card networks that are available to process a debit card
transaction, based on, for example, networks' interchange fees or
other network fees. The acquirer can incorporate a merchant's
preferences when determining how to route a transaction, given the
available networks.
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B. Regulation II Requirements
The Board promulgated its final rule implementing the prohibitions
on network exclusivity and routing restrictions in July 2011.\6\ These
prohibitions under Regulation II aim to ensure that merchants or their
acquirers can choose from at least two unaffiliated networks when
routing debit card transactions.
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\6\ Regulation II, Debit Card Interchange Fees and Routing,
codified at 12 CFR part 235. Regulation II also implements a
separate provision of EFTA section 920 regarding debit card
interchange fees. The proposed revisions in this notice do not
concern that provision.
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Section 235.7(a) implements the prohibition on network exclusivity
set out in EFTA section 920(b)(1)(A). Specifically, the provision
prohibits an issuer or payment card network from directly or indirectly
restricting the number of payment card networks on which an electronic
debit transaction may be processed to fewer than two unaffiliated
networks. To comply with the network exclusivity provisions, among
other things, an issuer must allow an electronic debit transaction to
be processed on at least two unaffiliated payment card networks, each
of which (i) must not, by rule or policy, restrict the network's
operation to a limited geographic area, specific merchant, or
particular type of merchant or transaction and (ii) must have taken
steps reasonably designed to enable the network to process the
electronic debit transactions that the network would reasonably expect
will be routed to it.
Section 235.7(b) implements the prohibition on routing restrictions
set out in EFTA section 920(b)(1)(B). Specifically, the provision
prohibits any issuer or payment card network from directly or
indirectly inhibiting the ability of any person that accepts or honors
debit cards for payments (such as a merchant) to direct the routing of
electronic debit transactions for processing over any payment card
network that may process such transactions. Therefore, if an issuer has
enabled a payment card network to process transactions for a particular
debit card, then the issuer or payment card network may not inhibit a
merchant's ability to route an electronic debit transaction over that
network.
C. Overview of Issue and Proposed Changes
At the time the Board promulgated Regulation II, for card-not-
present transactions, such as online purchases, the market had not
developed solutions to broadly support multiple networks over which
merchants could choose to route those transactions.\7\ In the decade
since the adoption of Regulation II, technology has evolved to address
these barriers, and more networks have introduced capabilities to
process card-not-present transactions. At the same time, card-not-
present transactions have become an increasingly significant portion of
all debit card transactions. Despite these developments, and in
contrast to the routing choice that currently exists for card-present
transactions, merchants are often not able to choose from at least two
unaffiliated networks when routing card-not-present transactions,
according to data collected by the Board and information from industry
participants.
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\7\ Card-not-present transactions are those in which a
cardholder initiates a card payment without physically presenting
the card to a merchant. Card-not-present transactions typically
involve remote commerce, such as internet, telephone, or mail-order
purchases.
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In light of this issue, the Board is proposing changes to
Regulation II to clarify that debit card issuers should enable, and
merchants should be able to choose from, at least two unaffiliated
networks for card-not-present transactions. Specifically, the Board is
proposing revisions to the commentary to Regulation II that clarify the
applicability of the prohibition on network exclusivity to card-not-
present transactions. These proposed revisions to the commentary
clarify that card-not-present transactions are a particular type of
transaction for which two unaffiliated payment card networks must be
available. The Board is further proposing revisions to the rule and the
commentary that clarify the responsibility of the debit card issuer in
ensuring that at least two unaffiliated networks have been enabled to
comply with the regulation's prohibition on network exclusivity. In
addition to these changes, the Board is proposing revisions to
standardize and clarify certain terms and phrases in the commentary.
The Board requests comment on all proposed changes to the rule and
commentary.
The proposed changes do not affect other parts of Regulation II
that directly address interchange fees for certain electronic debit
transactions. The Board will continue to review the regulation in light
of the most recent data collected by the Board pursuant to EFTA section
920 and may propose additional revisions in the future.
II. Background on Network Exclusivity Issues for Card-Not-Present Debit
Card Transactions
Debit cards are used for a wide variety of payments in the United
States today, involving both card-present and card-not-present
transactions.\8\ Over the last decade, card-not-present transactions
have become an increasingly significant type of debit card transaction.
Spurred by the growth of online commerce, the number of card-not-
present debit card transactions has increased rapidly in recent years,
growing approximately 17 percent per year, on average, from 2009 to
2019, in contrast to the 6 percent average annual growth in card-
present transactions over the same period.\9\ As a result of this
differential growth, card-not-present transactions comprised almost 23
percent of all debit card transactions in 2019, up from slightly less
than 10 percent in 2009. Recent evidence indicates that growth in card-
not-present transactions has accelerated further in the Coronavirus-19
(COVID-19) environment, as consumers have shifted from in-person to
remote purchases.\10\
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\8\ According to the Federal Reserve Payments Study, the number
of debit card payments in 2018 nearly equaled the combined number of
credit card, check, and automated clearinghouse payments. See
https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm.
\9\ See ``2019 Interchange Fee Revenue, Covered Issuer Costs,
and Covered Issuer and Merchant Fraud Losses Related to Debit Card
Transactions,'' (2019 Data Report) available at https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm.
The data summarized in the report are collected through mandatory
surveys of debit card issuers subject to the interchange fee
standard in Regulation II (covered issuers) and payment card
networks. Covered issuers are those with worldwide assets, including
affiliates, of $10 billion or more. The Board administers these
surveys and releases biennial reports pursuant to data collection
requirements in EFTA section 920.
\10\ For information about aggregate patterns in e-commerce, see
``Latest Quarterly E-Commerce Report,'' available at https://www.census.gov/retail/index.html#ecommerce.
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Like any debit card transaction, card-not-present transactions rely
on payment card networks to conduct payments. The network used to
process a transaction depends primarily on the set of networks that the
issuer has enabled for the transaction and the specific network that
the merchant or its acquirer chooses to route the transaction out of
those available.\11\
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\11\ The network used to process a transaction may also depend
on other factors, such as whether the merchant can support the
authentication methods used by the available networks. It may also
depend on the cardholder's choice of authentication method in
situations where the merchant has configured its card terminal to
enable cardholder choice.
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[[Page 26191]]
Two types of payment card networks currently exist to process debit
card transactions: Single-message networks and dual-message
networks.\12\ Single-message networks, which developed from automated
teller machine (ATM) networks, typically authorize and clear a
transaction through a single message and have traditionally processed
transactions authenticated using a cardholder's personal identification
number (PIN).\13\ Dual-message networks, which developed from credit
card systems, typically authorize and clear a transaction through two
separate messages and have traditionally processed signature-
authenticated transactions.\14\
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\12\ Examples of dual-message and single-message networks can be
found at https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm. The ``message'' in a card payment
involves various information related to the payment, such as the
amount, the account information of the consumer and the merchant,
the identities of their respective depository institutions, and the
transaction environment (that is, card-present or card-not-present).
\13\ Because of their historical reliance on PIN authentication,
single-message debit card networks were traditionally known as ``PIN
debit networks.''
\14\ Because of their historical reliance on signature
authentication, dual-message debit card networks were traditionally
known as ``signature debit networks.''
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Over time, technological developments, spurred by competition among
networks to improve their capabilities and increase their transaction
volumes, have allowed both single-message and dual-message networks to
evolve beyond their traditional methods of authentication. Today,
transactions over dual-message networks may no longer require signature
authentication or may use PIN authentication. Similarly, transactions
over single-message networks may no longer require PIN authentication.
In addition, some networks have developed capabilities that depart from
their primary messaging approach.\15\
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\15\ For example, some traditionally dual-message networks can
now process certain payments using a single message. Similarly, some
traditionally single-message networks can use two messages to
authorize and clear some transactions.
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There are various combinations of dual-message and single-message
networks that a debit card issuer could choose to enable on its debit
cards. However, the market has evolved such that, for card-present
transactions, the vast majority of issuers choose to enable one dual-
message network and one or more single-message networks on their cards.
As a result, when a consumer and merchant interact in person, the
typical debit card arrangement provides the merchant with multiple
network options to route a transaction. For example, when a consumer
performs an in-person debit card transaction at a grocery store, the
grocer has a dual-message network and at least one single-message
network as options to process the transaction. Such arrangements
generally comply with Regulation II's prohibition on network
exclusivity as long as at least two of those networks are unaffiliated.
In that case, the grocer has at least two unaffiliated networks
competing to attract its debit card transactions. Regulation II's
prohibition on routing restrictions further ensures that the grocer (or
its acquirer) is able to choose among the available networks.
At the time Regulation II was adopted, for card-not-present
transactions, the market had not developed solutions to broadly support
multiple networks for each transaction. While dual-message networks had
long been able to conduct card-not-present transactions, single-message
networks had limited ability to process such transactions at that time.
In particular, as discussed previously, single-message networks
primarily processed PIN-authenticated transactions, but methods of PIN
authentication for card-not-present transactions, such as PIN entry in
an online setting, were not well-established. Because of this
difficulty, along with the industry practice of enabling only one dual-
message network on each debit card, card-not-present transactions could
often only be processed on that one dual-message network at the time
Regulation II was promulgated. The Board explained, however, that it
expected the market to develop solutions to facilitate the use of
single-message networks for card-not-present transactions in the years
following the adoption of Regulation II.\16\
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\16\ ``Debit Card Interchange Fees and Routing; Final Rule,'' 76
FR 43393, 43448 (Jul. 20, 2011). Specifically, the Board expressed
the view that, by requiring two unaffiliated payment card networks
for each debit card transaction and removing limitations on merchant
routing choice, Regulation II would promote innovation to facilitate
the use of single-message networks in additional retail
environments, including for online purchases.
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As the Board anticipated, in the decade since Regulation II was
adopted, various innovations have emerged, and most single-message
networks are now capable of processing card-not-present
transactions.\17\ Data on network activity collected by the Board
confirm that nearly all single-message debit card networks conducted
card-not-present transactions in 2019. In contrast, fewer than half of
single-message networks reported such activity when Regulation II was
adopted in 2011.
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\17\ For example, as noted previously, many single-message
networks no longer require PIN entry for some transactions,
including card-not-present transactions and low-value card-present
transactions. Industry participants sometimes refer to such
transactions as ``PINless PIN'' transactions. Technologies have also
been developed to support PIN entry in different transaction
environments, such as online purchases. However, the industry has
not widely adopted those technologies for PIN entry.
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Despite the widespread adoption of these innovations, the volume of
card-not-present transactions processed over single-message networks
remains low. In particular, data collected by the Board indicate that
single-message networks processed only 6 percent of all card-not-
present debit card transactions in 2019. The single-message networks'
low aggregate share of card-not-present transactions contrasts sharply
with their share of card-present transactions, which exceeded 40
percent in 2019.\18\
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\18\ See 2019 Data Report.
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Additional data collected by the Board and information from
industry participants indicate that the low prevalence of card-not-
present transactions over single-message networks may have occurred
because issuers have not consistently enabled single-message networks
for card-not-present transactions. According to responses to the
Board's survey of covered debit card issuers, issuers that accounted
for approximately 50 percent of all debit card transactions and
approximately 50 percent of all card-not-present debit card
transactions did not conduct any card-not-present transactions over
single-message networks in 2019.\19\ Information from industry
participants, including individual merchants, merchant trade
associations, and representatives of single-message networks,
corroborates that some issuers do not make single-message networks
available to process card-not-present transactions on any of their
cards, while some other issuers make single-message networks available
to process card-not-present transactions only on a subset of their
cards.
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\19\ See 2019 Data Report.
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A failure by an issuer to enable at least one single-message
network for card-not-present transactions, combined with the common
industry approach of only enabling one dual-message network on each
card, results in only one network--the dual-message network--being
available to process card-not-present transactions. In this situation,
merchants do not have routing choice for such transactions. The Board
views these practices by issuers with respect to card-not-present
transactions as inconsistent with Regulation II because they restrict
the number of
[[Page 26192]]
payment card networks on which card-not-present transactions can be
processed to fewer than two unaffiliated networks.
III. Section-by-Section Analysis
In light of the issues described in the previous section, the Board
is proposing revisions to the commentary to Regulation II to clarify
the applicability of the regulation's prohibition on network
exclusivity to card-not-present transactions. The Board is specifically
proposing to clarify that card-not-present transactions are a
particular type of transaction for which issuers must ensure at least
two unaffiliated payment card networks have been enabled. The Board is
further proposing revisions to the rule and commentary to emphasize the
important role of the issuer in ensuring that at least two unaffiliated
payment card networks have been enabled for each debit card
transaction. The Board is also proposing revisions to the commentary to
standardize and clarify the use of certain terminology and clarify the
requirements that Regulation II imposes on debit card issuers.
A. Section 235.7 Limitations on Payment Card Restrictions
The Board is proposing to amend Sec. 235.7 of the regulation to
emphasize the issuer's role in configuring its debit cards to ensure
that at least two unaffiliated networks have been enabled to comply
with the regulation's prohibition on network exclusivity. Section
235.7(a)(2) currently states that an issuer satisfies the prohibition
on network exclusivity under Sec. 235.7(a)(1) ``only if the issuer
allows an electronic debit transaction to be processed on at least two
unaffiliated networks, each of which does not, by rule or policy,
restrict the operation of the network to a limited geographic area,
specific merchant, or particular type of merchant or transaction, and
each of which has taken steps reasonably designed to enable the network
to process the electronic debit transactions that the network would
reasonably expect will be routed to it, based on expected transaction
volume.'' The Board is proposing amendments to this section to reflect
the role of the issuer in ensuring that the enumerated capabilities of
networks are, in fact, enabled.
Specifically, Sec. 235.7(a)(2), with the proposed amendments,
would provide that an issuer satisfies the requirements of Sec.
235.7(a)(1) only if, for every particular type of transaction (as well
as every geographic area, specific merchant, and particular type of
merchant) for which the issuer's debit card can be used to process an
electronic debit transaction, the issuer has enabled at least two
unaffiliated payment card networks to process the transaction. The
Board does not intend these amendments as a substantive change to the
section but rather as a clarification of the existing language.
B. Appendix A to Part 235--Official Board Commentary on Regulation II
The Board is proposing several clarifying revisions to the
commentary on Sec. 235.7. The proposed changes throughout this
commentary include revisions to standardize and clarify the use of
certain terminology. For example, the term ``enabled'' would be revised
to ``enabled by the issuer,'' to explicitly recognize the role an
issuer plays in configuring its debit cards and enabling a payment card
network on a debit card, as described above. The revised terminology
reflects the fact that the issuer is the entity that configures a debit
card such that electronic debit transactions initiated with that card
can be processed over a particular payment card network. New
standardized terms would include ``payment card network'' (which would
replace the shorthand ``network'' or ``card network'') and ``method of
cardholder authentication'' (which would replace variations of
``authentication'' or ``authorization'').
Comment 235.7(a)-1 Scope of Restriction
The Board proposes additional revisions to comment 235.7(a)-1. This
comment currently clarifies the scope of the prohibition of network
exclusivity under Sec. 235.7(a), including a clarification that Sec.
235.7(a) does not require an issuer to have two or more unaffiliated
networks available for each method of cardholder authentication. The
Board proposes to update the examples of cardholder authentication
methods listed in the commentary to better align with current industry
practices. The proposed revisions add biometrics to the list of
cardholder authentication methods in the commentary, which currently
only includes signature and PIN authentication. The Board further
proposes adding ``or any other method of cardholder authentication that
may be developed in the future'' to capture cardholder authentication
methods that do not yet exist and that would still be captured by
Regulation II if they were to be developed. The proposed revisions also
recognize instances where no method of cardholder authentication is
used.
Comment 235.7(a)-2 Permitted Networks
The Board also proposes revising comment 235.7(a)-2. Comment
235.7(a)-2 currently clarifies the types of network arrangements that
may be used to help satisfy the requirement in Sec. 235.7(a) that an
issuer enable two unaffiliated networks. The proposed revisions add
titles to each sub-paragraph and make streamlining edits for ease of
reference.
The proposed revisions also clarify that, for purposes of Sec.
235.7, card-not-present debit card transactions are a ``particular type
of transaction'' for which at least two unaffiliated payment card
networks must be available. The Board believes this clarification is
necessary in light of developments in recent years among single-message
networks that have introduced capabilities to allow them to process
card-not-present transactions; yet, as noted previously, information
gathered by the Board suggests that certain issuers continue to enable
only one dual-message payment card network for such transactions.
Finally, the Board is proposing to add a new comment 235.7(a)-
2(iii) to provide clear examples of how an issuer could comply with the
rule by enabling various combinations of networks so that two
unaffiliated payment card networks that can each process both card-
present and card-not-present transactions are available. The Board is
proposing additional revisions to comment 235.7(a)-2 to further clarify
the variety of scenarios in which an issuer could enable two
unaffiliated payment card networks as examples of permitted
arrangements under Sec. 235.7.
Comment 235.7(a)-7 Application of Rule Regardless of Form Factor
The Board proposes revising comment 235.7(a)-7. Comment 235.7(a)-7
currently clarifies that the network exclusivity provisions in Sec.
235.7 apply regardless of ``form factor.'' Specifically, the commentary
currently provides that the prohibition on network exclusivity applies
regardless of whether the debit card is issued in plastic card form and
also applies to any supplemental device that is issued in connection
with a plastic card, even if that plastic card fully complies with the
rule. The proposed revisions replace the term ``form factor'' with
``means of access'' to better align with current industry terminology.
The revisions would also add, as an example of means of access,
``information stored inside an e-wallet on a mobile phone or other
device,'' to capture recent technological developments. The Board
further proposes adding ``or another means of access that may be
developed in the
[[Page 26193]]
future'' to capture means of access that do not yet exist and that
would still be captured by Regulation II if they were to be developed.
The proposed revisions further clarify that, for any means of access
that carries the debit card information, there must be at least two
unaffiliated payment card networks enabled by the issuer, as required
by the network exclusivity provisions in Sec. 235.7(a). For example,
if the issuer provides the cardholder with a fob in addition to a
plastic card, the fob must allow transactions to be processed over at
least two unaffiliated payment card networks.
IV. Regulatory Analysis
A. EFTA 904(a)
Section 904(a)(2) of the EFTA requires the Board, in prescribing
regulations to carry out the purposes of EFTA section 920, to prepare
an analysis of economic impact which considers the costs and benefits
to financial institutions, consumers, and other users of electronic
fund transfers. The analysis must address the extent to which
additional paperwork would be required, the effect upon competition in
the provision of electronic fund transfer services among large and
small financial institutions, and the availability of such services to
different classes of consumers, particularly low income consumers.
The proposed amendments clarify Regulation II's existing
requirements by emphasizing the role of the issuer in ensuring that at
least two unaffiliated networks have been enabled in compliance with
the regulation's network exclusivity provisions, and by clarifying that
those provisions apply to card-not-present transactions. Therefore, the
proposed amendments do not impose additional paperwork requirements
related to reporting to the Board. With respect to the competitive
effects of the proposed amendments, the proposed amendments clarify
that at least two networks must be enabled for card-not-present
transactions, allowing merchants or their acquirer to choose among
multiple competing networks to process the transaction. Because the
proposed amendments apply to all issuers regardless of their size, they
are unlikely to have an effect upon competition among large and small
financial institutions in the provision of electronic fund transfer
services. With respect to the availability of services to different
classes of consumers, particularly low-income consumers, consumers are
typically unaware of the networks used to process many debit card
transactions today, including card-not-present transactions where at
least two unaffiliated networks are already available. Nevertheless,
the effect of the proposed rule on the availability of services to
consumers will likely depend on various factors, including each
consumer's payment and purchase behavior, as well as market responses
to the increased availability of multiple networks for card-not-present
transactions. Ultimately, the costs and benefits of the proposed
revisions are uncertain and will depend on the adjustments that
different parties may make and the market response to the proposed
rule.
In addition, EFTA section 904(a)(3) provides that in prescribing
regulations to carry out the purposes of EFTA section 920, to the
extent practicable, the Board shall demonstrate that the consumer
protections of the proposed regulations outweigh the compliance costs
imposed upon consumers and financial institutions. The proposed rule
does not relate to consumer protections, and therefore the Board
cannot, at this time, determine whether the benefits to consumers
exceed the possible costs to financial institutions. Additionally, the
overall effects of the proposed rule on financial institutions and on
consumers are dependent on a variety of factors, and the Board cannot
predict the market response to the proposed rule.
The Board welcomes comment on the impact of the proposed amendments
on the various participants in the debit card market and on consumers,
as well as on all aspects of the analysis under EFTA section 904(a).
B. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320, Appendix A.1), the Board may not conduct
or sponsor, and a respondent is not required to respond to, an
information collection unless it displays a valid Office of Management
and Budget (OMB) control number. The Board reviewed the proposed rule
under the authority delegated to the Board by the OMB and determined
that it contains no collections of information under the PRA.\20\
Accordingly, there is no paperwork burden associated with the proposed
rule.
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\20\ See 44 U.S.C. 3502(3).
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C. Regulatory Flexibility Act
In accordance with section 4 of the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601 et seq., the Board is publishing an initial
regulatory flexibility analysis for the proposed rule. The RFA
generally requires an agency to assess the impact a rule is expected to
have on small entities. The RFA requires an agency either to provide a
regulatory flexibility analysis or to certify that the proposed rule
will not have a significant economic impact on a substantial number of
small entities.
Two of the requirements of an initial regulatory flexibility
analysis \21\--a description of the reasons the action is being
considered and a statement of the objectives of, and legal basis for,
the proposed rule--are contained in the information above. Although
EFTA section 920 exempts all issuers that, together with affiliates,
have assets of less than $10 billion from the limitations on
interchange transaction fees, the prohibition on network exclusivity
and the prohibition on routing restrictions apply to all issuers,
including small issuers. There are no reporting provisions or relevant
federal rules that duplicate, overlap, or conflict with the proposed
rule, and the Board is not aware of any significant alternatives to the
final rule that would reduce the economic impact on Board-regulated
small entities.
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\21\ 5 U.S.C. 603(b).
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As discussed above in this Supplementary Information section, the
Board is proposing to amend a particular section of the Regulation II,
as well as revise portions of the commentary to the regulation, to
emphasize the role of the issuer in ensuring that at least two
unaffiliated networks have been enabled in compliance with the
regulation's network exclusivity provisions and to clarify that the
requirement that each debit card transaction must be able to be
processed on at least two unaffiliated payment card networks applies to
card-not-present transactions. The proposed amendments would clarify
existing requirements that already apply to any person that chooses to
authorize the use of a debit card to perform an electronic debit
transaction, regardless of that issuer's size. The Board does not
intend these amendments to be an expansion of coverage to any
additional small entities that were not already subject to the rule.
Another requirement for the initial regulatory flexibility analysis
is a description of, and where feasible, an estimate of, the number of
small entities to which the proposed rule will apply. Under regulations
issued by the Small Business Administration, a small entity includes a
depository institution, bank holding company, savings and loan holding
company, and credit card issuer with total assets of $600 million or
less and trust companies with total annual
[[Page 26194]]
receipts of $41.5 million or less.\22\ According to Call Reports and
other Board reports, there were approximately 472 state member banks,
2,925 bank holding companies, 132 savings and loan holding companies,
and 16 Edge and agreement corporations that are small entities.\23\
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\22\ See 13 CFR 121.201; 84 FR 34261 (July 18, 2019).
\23\ State member bank data are derived from March 31, 2020 Call
Reports. Data for bank holding companies and savings and loan
holding companies are derived from the June 30, 2020, FR Y-9C and FR
Y-9SP. Data for Edge and agreement corporations are derived from the
December 31, 2019 and March 31, 2020, FR-2086b.
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As discussed in preceding sections, the proposed amendments are
intended to clarify the regulation's existing prohibition on network
exclusivity, and the Board does not intend these proposed amendments to
be an expansion of coverage to any additional small entities that were
not already subject to the rule. For these reasons, the Board believes
that this proposed rule will not have a significant economic impact on
a substantial number of small entities. The Board welcomes comment on
all aspects of its analysis. In particular, the Board requests that
commenters describe the nature of any impact on small entities and
provide empirical data to illustrate and support the extent of the
impact.
D. Solicitation of Comments of Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board has sought to present the proposed rule in a
simple and straightforward manner and invites comment on the use of
plain language and whether any part of the proposed rule could be more
clearly stated.
List of Subjects in 12 CFR Part 235
Banks, banking, Debit card routing, Electronic debit transactions,
Interchange transaction fees.
Authority and Issuance
For the reasons set forth in the preamble, the Board is proposing
to amend Regulation II, 12 CFR part 235, as follows:
PART 235--DEBIT CARD INTERCHANGE FEES AND ROUTING (REGULATION II)
0
1. The authority citation for part 235 continues to read as follows:
Authority: 15 U.S.C. 1693o-2.
0
2. Section 235.7 is amended by revising paragraph (a)(2) to read as
follows:
Sec. 235.7 Limitations on payment card restrictions.
(a) * * *
(2) Permitted arrangements. An issuer satisfies the requirements of
paragraph (a)(1) of this section only if, for every geographic area,
specific merchant, particular type of merchant, and particular type of
transaction for which the issuer's debit card can be used to process an
electronic debit transaction, such issuer enables at least two
unaffiliated payment card networks to process an electronic debit
transaction, and where each of these networks has taken steps
reasonably designed to be able to process the electronic debit
transactions that it would reasonably expect will be routed to it,
based on expected transaction volume.
* * * * *
0
3. Amend Appendix A to Part 235--Official Board Commentary on
Regulation II by:
0
a. Revising paragraph 7(a);
0
b. Revising paragraphs 7(b)1., (b)(2), and (b)(5).
The revisions read as follows:
Appendix A to Part 235--Official Board Commentary on Regulation II
* * * * *
Section 235.7 Limitations on Payment Card Restrictions
* * * * *
7(a) Prohibition on Network Exclusivity
1. Scope of restriction. Section 235.7(a) requires an issuer to
configure each of its debit cards so that each electronic debit
transaction initiated with such card can be processed on at least
two unaffiliated payment card networks. In particular, section
235.7(a) requires this condition to be satisfied for every
geographic area, specific merchant, particular type of merchant, and
particular type of transaction for which the issuer's debit card can
be used to process an electronic debit transaction. As long as the
condition is satisfied for each such case, Sec. 235.7(a) does not
require the condition to be satisfied for each method of cardholder
authentication (e.g., signature, PIN, biometrics, any other method
of cardholder authentication that may be developed in the future, or
the lack of a method of cardholder authentication). For example, it
is sufficient for an issuer to issue a debit card that can process
signature-authenticated transactions only over one payment card
network and PIN-authenticated transactions only over another payment
card network, as long as the two payment card networks are not
affiliated and each network can be used to process electronic debit
transactions for every geographic area, specific merchant,
particular type of merchant, and particular type of transaction for
which the issuer's debit card can be used to process an electronic
debit transaction.
2. Permitted networks.
i. Network volume capabilities. A payment card network could be
used to satisfy the requirement that an issuer enable two
unaffiliated payment card networks for each electronic debit
transaction if the network was either (a) capable of processing the
volume of electronic debit transactions that it would reasonably
expect to be routed to it or (b) willing to expand its capabilities
to meet such expected transaction volume. If, however, the network's
policy or practice is to limit such expansion, it would not qualify
as one of the two unaffiliated payment card networks.
ii. Reasonable volume expectations. One of the steps a payment
card network can take to form a reasonable expectation of its
transaction volume is to consider factors such as the number of
cards expected to be issued that are enabled by an issuer on the
network and expected card usage patterns.
iii. Examples of permitted arrangements. For every geographic
area (e.g., New York State), specific merchant (e.g., a specific
fast food restaurant chain), particular type of merchant (e.g., fast
food restaurants), and particular type of transaction (e.g., card-
not-present transaction) for which the issuer's debit card can be
used to process an electronic debit transaction, an issuer must
enable at least two unaffiliated payment card networks, but those
payment card networks do not necessarily have to be the same two
payment card networks for every transaction.
A. Geographic area: An issuer complies with the rule only if,
for every geographic area in which the issuer's debit card can be
used to process an electronic debit transaction, the issuer enables
at least two unaffiliated payment card networks. For example, an
issuer could comply with the rule by enabling two unaffiliated
payment card networks that can each process transactions in all 50
U.S. states. Alternatively, the issuer could comply with the rule by
enabling three unaffiliated payment card networks, A, B, and C,
where network A can process transactions in all 50 U.S. states,
network B can process transactions in the 48 contiguous United
States, and network C can process transactions in Alaska and Hawaii.
B. Particular type of transaction: An issuer complies with the
rule only if, for every particular type of transaction for which the
issuer's debit card can be used to process an electronic debit
transaction, the issuer enables at least two unaffiliated payment
card networks. For example, an issuer could comply with the rule by
enabling two unaffiliated payment card networks that can each
process both card-present and card-not-present transactions.
Alternatively, the issuer could comply with the rule by enabling
three unaffiliated payment card networks, A, B, and C, where network
A can process both card-present and card-not-present transactions,
network B can process card-present transactions, and network C can
process card-not-present transactions.
3. Examples of prohibited network restrictions on an issuer's
ability to contract with other payment card networks. The
[[Page 26195]]
following are examples of prohibited network restrictions on an
issuer's ability to contract with other payment card networks:
i. Network rules or contract provisions limiting or otherwise
restricting the other payment card networks that an issuer may
enable on a particular debit card, or network rules or contract
provisions that specify the other networks that an issuer may enable
on a particular debit card.
ii. Network rules or guidelines that allow only that payment
card network's (or its affiliated networks') brand, mark, or logo to
be displayed on a particular debit card, or that otherwise limit the
ability of brands, marks, or logos of other payment card networks to
appear on the debit card.
4. Network logos or symbols on card not required. Section
235.7(a) does not require that a debit card display the brand, mark,
or logo of each payment card network over which an electronic debit
transaction may be processed. For example, the rule does not require
a debit card that an issuer enables on two or more unaffiliated
payment card networks to bear the brand, mark, or logo of each such
payment card network.
5. Voluntary exclusivity arrangements prohibited. Section
235.7(a) requires that an issuer enable at least two unaffiliated
payment card networks to process an electronic debit transaction,
even if the issuer is not subject to any rule of, or contract or
other agreement with, a payment card network requiring that all or a
specified minimum percentage of electronic debit transactions be
processed on the network or its affiliated networks.
6. Affiliated payment card networks. Section 235.7(a) does not
prohibit an issuer from enabling two affiliated payment card
networks among the networks on a particular debit card, as long as
at least two of the networks that can be used to process each
electronic debit transaction are unaffiliated.
7. Application of rule regardless of means of access. The
network exclusivity provisions in Sec. 235.7(a) require that a
debit card be enabled by the issuer on at least two unaffiliated
payment card networks for each means of access. The means of access
that carries the debit card information could be a plastic card, a
supplemental device such as a fob, information stored inside an e-
wallet on a mobile phone or other device, or another means of access
that may be developed in the future.
7(b) Prohibition on Routing Restrictions
1. Relationship to the network exclusivity restrictions. An
issuer or payment card network is prohibited from inhibiting a
merchant's ability to direct the routing of an electronic debit
transaction over any of the payment card networks that the issuer
has enabled on that particular debit card. The rule does not permit
a merchant to route the transaction over a payment card network that
the issuer did not enable to process transactions using that debit
card.
2. Examples of prohibited merchant restrictions. The following
are examples of issuer or network practices that would inhibit a
merchant's ability to direct the routing of an electronic debit
transaction and that are therefore prohibited under Sec. 235.7(b):
i. Prohibiting a merchant from encouraging or discouraging a
cardholder's use of a particular method of cardholder
authentication, for example prohibiting merchants from favoring a
cardholder's use of one cardholder authentication method over
another, or from discouraging the cardholder's use of any given
cardholder authentication method, as further described in comment
7(a)-1.
ii. Establishing network rules or designating issuer priorities
directing the processing of an electronic debit transaction on a
specified payment card network or its affiliated networks, or
directing the processing of the transaction away from a specified
payment card network or its affiliates, except as (i) a default rule
in the event the merchant, or its acquirer or processor, does not
designate a routing preference, or (ii) if required by state law.
iii. Requiring a specific payment card network to be used based
on the means of access presented by the cardholder to the merchant.
* * * * *
5. No effect on network rules governing the routing of
subsequent transactions. Section 235.7 does not supersede a payment
card network rule that requires a chargeback or return of an
electronic debit transaction to be processed on the same network
that processed the original transaction.
* * * * *
By order of the Board of Governors of the Federal Reserve
System.
Ann Misback,
Secretary of the Board.
[FR Doc. 2021-10013 Filed 5-12-21; 8:45 am]
BILLING CODE 6210-01-P
