After reviewing more than 11,500 comments, the Federal Reserve Board (Fed) issued final rules on July 20 that will significantly change the fee structure for purchases made with debit cards beginning October 1. Senator Richard Durbin proposed this change as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The legislation requires that the amount of any interchange fee that a card issuer charges with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. Interchange fees are set by payment card networks and are paid by the merchant's bank (the acquirer) to the entity that issued the card to the cardholder. The acquirer then charges the merchant a merchant discount, which is the difference between the face value of the transaction and the amount the acquirer transfers to the merchant. That merchant discount includes the interchange fee and other fees charged to the acquirer.
Previously, the interchange fee for debit cards was 1.2 percent of the transaction amount. Effective October 1, a card issuer may not charge an interchange fee in excess of the sum of a 21 cent base component and 0.05 percent of the transaction's value. The Fed also adopted an interim final rule that would allow card issuers to "receive an adjustment of 1 cent to its interchange transaction fee if the issuer develops, implements, and updates policies and procedures" to prevent fraud.
Institutions which accept debit cards for tuition payments are likely to see a reduction in their merchant discount, as they usually process transactions with a high face value. For example, currently if a student pays an institution $2,500 using a debit card, the interchange fee, which would eventually be passed on to the institution, is $30 ($2,500 x 1.2 percent). Under the new rules, the interchange fee could be no more than $1.47 ($0.21 base + $0.01 fraud prevention + [$2,500 x .05 percent]). These savings should be passed along to the institution in the form of a lower merchant discount but renegotiation may be required. NACUBO encourages institutions to review their merchant agreements with their banks.
A card issuer is exempt from the new interchange fee rules if it, together with its affiliates, has assets of less than $10 billion. The Fed will publish annual lists of issuers above and below this small issuer threshold. The restrictions also do not apply to electronic debit transactions made using debit cards provided pursuant to certain government-administered payment programs and certain reloadable, general-use prepaid cards not marketed or labeled as a gift card or certificate. Beginning July 21, 2012, however, those two types of cards will not be exempt if the holder may be charged an overdraft fee or a fee imposed on the first withdrawal per month from ATMs in the issuer's ATM network.
In order to encourage competition, the new rules also prohibit card issuers and networks from restricting the number of networks on which a debit transaction may be processed to one network, or two or more affiliated networks. Additionally, the rules prohibit card issuers and networks from "inhibiting the ability of any person that accepts debit cards from directing the routing of electronic debit transactions over any network that may process such transactions."