Pub. 5 2010-2011 Issue 6

www.nebankers.org 14 Extraordinary Service for Extraordinary Members. article, the Durbin Amendment is subject to congressional hearings and a lawsuit challenging its validity. Although the possibility exists that the Durbin Amendment may undergo significant change, this article discusses the Durbin Amend- ment (and the proposed regulation) in its current form. For each of the two primary provisions covered by the proposed regulation—debit interchange fee limits and net- work exclusivity/routing—the Federal Reserve proposed two alternative regulatory regimes. This article addresses the debit interchange fee provision of the proposed regulation. The Federal Reserve is required to issue the final rule on interchange fees by April 21, 2011, and the rule will become effective on July 21, 2011. Q Debit Interchange Coverage The Durbin Amendment covers transactions made using “debit cards.” A “debit card” is “any card, or other payment code or device, issued or approved for use through a payment card network to debit an account. . . ” An “account” is any “transaction, savings, or other asset account. . . established for any purpose and that is located in the United States.” Both consumer-purpose and business-purpose debit cards are covered. There are exceptions, however, for (a) closed- loop prepaid cards that cannot be redeemed for cash; (b) cards issued by small issuers (issuers that, together with their affiliates, have combined assets of less than $10 billion as of the end of the previous calendar year) who hold the account that is debited; (c) cards issued in connection with certain government-administered programs; and (d) general purpose reloadable cards that do not access accounts held in the name of or for the benefit of the cardholder and that are not marketed as gift cards. Debit Interchange Fee Regulation The Durbin Amendment requires that any debit inter- change fee received or charged by an issuer of a debit card must be “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” In addition, the Federal Reserve is directed to issue standards for determin- ing whether the amount of a debit interchange transaction fee satisfies this “reasonable and proportional” condition. Proposed Debit Interchange Fee Regulation Alternatives The proposed regulation suggests two alternatives that the Federal Reserve is considering for determining whether an interchange fee complies with the “reasonable and pro- portional” standard: • Alternative I (issuer-specific standards with cap and safe harbor). Under Alternative I, all issuers may either collect (a) a per- transaction interchange fee up to 7 cents per transaction (the safe harbor) or (b) a per transaction interchange fee not to exceed 12 cents, based on certain allowable items of issuer costs whichmust be calculated annually and substan- tiated by each issuer desiring to receive more than 7 cents per transaction (the cap). The Federal Reserve narrowly defines the allowable costs that issuers may recover if they set a debit interchange rate above 7 cents. Specifically, such An Independent Licensee of the Blue Cross and Blue ShieldAssociation. bcbsne.com Nebraskans serving Nebraskans The financial implications of the Durbin Amendment will likely cause all banks to reexamine their deposit account product packaging. Banks will undoubtedly proceed with caution in testing such new business models to avoid risking existing customer relationships.