June 30, 2010
Authored by: Bryan Cave
The House and Senate conferees approved the financial regulatory reform conference report (otherwise known as the Dodd-Frank Wall Street Reform and Consumer Protection Act) late last week, and the House and Senate are now poised to vote on the legislation. As expected, the final version of the bill incorporates a provision requiring the Federal Reserve Board to write restrictions on the ability of card issuers to set interchange fees (see Section 1075 et seq.).
However, the interchange provision was substantially modified from its original form. Thanks to the successful lobbying efforts on the part of state governments, the prepaid industry and advocates for the unbanked community, prepaid cards used to disburse government benefits as well as reloadable prepaid cards are exempt from the interchange limits. It should be noted that such cards are exempt provided that they do not charge any overdraft fees and provide one fee-free withdrawal from the issuer’s ATM network per month.
The various lobbying efforts in support of striking the entire interchange provision from the bill proved less successful and ultimately failed. And while small issuers (i.e., issuers, together with it affiliates, having assets of less than $10 billion) are exempt from the interchange provisions, many have argued that the exemption is meaningless since small institutions will be forced to cut their interchange fees to compete with large banks.
Nonetheless, some small improvements were achieved. The modified interchange amendment allows the Federal Reserve to consider the issuer’s cost of protecting against fraud in its determination as to whether interchange rates are “reasonable and proportional.” Originally, the language only permitted the Fed to consider “incremental” transactional costs. Furthermore, the modified interchange amendment clarifies that merchants may offer discounts based upon a certain payment type (such as a credit card, debit card, check or cash) but not based on the card’s issuer or network. Finally, the ability to establish a card usage minimum dollar value (not to be less than $10) applies to the acceptance of credit cards alone, and not prepaid cards.
It is unclear exactly how the Fed will end up adjusting interchange fees so that they are “reasonable and proportional” to the issuer’s cost of processing the transactions (taking fraud and other incremental costs into consideration as well). Pursuant to the bill, the Fed will be required to draft regulations within nine months after the legislation’s passage, with the new rates to become effective 12 months after the bill is signed.