Pub. 5 2010-2011

September/October 2010 19 Extraordinary Service for Extraordinary Members. interchange transaction fees so that they are “reasonable and proportionate” to the costs incurred by an issuer, subject to an adjustment for costs associated with fraud prevention and subject to a broad limitation on regulation of “network fees.” The interchange fee provisions become effective on July 21, 2011. Final regulations to implement the debit interchange restrictions are supposed to be pro- mulgated by April 21, 2011, leaving just three months for banks to comply. For purposes of crafting these rules, the Federal Reserve is required to consider that debit cards and traditional checks have a “functional similarity,” and that in promulgat- ing the regulations to implement the interchange fee regula- tion, the Federal Reserve should consider that checks clear “at par,” with zero interchange. In addition, the Federal Reserve is required to consider only “the actual incremental cost incurred by an issuer or payment card network . . . in the authorization, clearance, or settlement of a particular electronic debit transaction” and to ignore “other costs incurred by an issuer or payment card network which are not specific to a particular electronic debit transaction.” These “other costs” arguably would include administra- tive overhead costs, research and development costs, and system maintenance costs, as well as the costs associated with credit policies and mandatory compliance programs (e.g., for compliance with the Unlawful Internet Gambling Act). Non-transaction specific costs also may include ad- vertising expenses, rewards programs, and card issuance costs. The text of the legislation suggests that the Federal Reserve is required to wear blinders in crafting regulations that ignore these non-transaction specific costs associated with maintaining a debit card program. However, banks and card networks won two carve-outs in the final legislation that will limit in part the impact of the interchange fee provisions. First, the legislation per- mits the Federal Reserve to establish an interchange fee “adjustment” to take into account costs associated with fraud prevention. This provision permits interchange fee adjustments that are “reasonably necessary” for issuers to comply with mandatory new “fraud-related standards” and to account for other costs associated with fraud prevention. The adjustments are required to take into account fraud- related reimbursements, like charge-backs, and will man- date that issuers develop and implement cost-effective fraud prevention technology. Second, the legislation generally prohibits regulation of “network fees.” A “network fee” is defined as any fee that is not an interchange transaction fee. The Federal Reserve cannot regulate network fees except to prevent use of network fees to circumvent the interchange fee regulations or otherwise indirectly compensate issuers for debit transactions. Q Financial Reform — continued on page 20