Pub. 5 2010-2011 Issue 6

March/April 2011 15 Extraordinary Service for Extraordinary Members. allowable costs include only certain costs for authorization, clearing, and settlement services. Moreover, even in those categories, only the per transaction value of costs (and not fixed or overhead costs) that varywith the number of transactions (average variable costs) could be considered in measuring the interchange fee. Only a specific portion of an issuer’s total costs of providing debit card services to customers would be included in the analysis. Accordingly, Alternative I would require customized inter- change analysis for issuers seeking more than 7 cents per transaction and potentially substantial administrative cost to justify such higher fees. • Alternative II (straight cap). Under Alternative II, issuers would comply with the “reasonable and proportional” standard if they charge a debit interchange fee of 12 cents or less per transaction. Issuers would not be required to separately calcu- late the amount of their allowable cost under this alternative. Fraud Prevention Costs The Durbin Amendment provides that the Federal Reserve may al- low adjustment of debit interchange transaction fees if necessary to cover fraud prevention costs incurred by the issuer. The Federal Reserve has not yet issued specific regulatory propos- als regarding this issue, but, under the proposed regulation, sought comment on two possible approaches. The first approach allows issuers to recover costs for implementing specific technological innovations designed to reduce fraud losses significantly. The second ap- proach allows an issuer to become eli- gible for an adjustment by establishing andmaintaining an effective fraud pre- vention program, but does not require the adoption of specific technologies. Implications for Banks Although the Durbin Amendment and the proposed regulation expressly exempt certain issuers by virtue of their size (issuers with assets of less than For more information, contact Dale Dixon at Husch Blackwell LLP at (402) 964-5028 or dale.dixon@huschblackwell.com. Dixon concentrates in the areas of structured finance and finance transactions. A significant portion of his practice also includes representation of banks and other financial institutions in regulatory matters. $10 billion), many believe that it will be difficult for networks to implement the technology necessary for a two-tier pricing system. Merchants, therefore, may push transactions to the less costly large bank systems, forcing smaller banks to lower their interchange fees to compete, effectively removing any ben- efit of a small bank exemption. If this occurs, all issuers will suffer a material reduction in debit card interchange in- come. Unless merchants pass savings from interchange fee markdowns to their customers, the primary benefi- ciaries of the Durbin Amendment and the proposed regulation appear to be merchants—not consumers. What This Means to You A core component of most banks’ consumer financial services business model is the deposit account. The stan- dard depository relationship involves providing the consumer with a package of products: transaction and savings ac- counts, transaction instruments, rewards points, and lines of credit. This model benefits banks by providing low-cost funding via deposits and customers by providing convenient low-cost access to their funds. Currently, banks use the revenue-generating parts of the package (e.g., interchange) to subsidize the costs of maintaining free checking accounts. The financial implications of the Durbin Amendment will likely cause all banks to reexamine their deposit account product packaging. Un- bundling the package and charging separately for services might be one solution (e.g., the basic savings ac- count being free but charging for other services). Banks will undoubtedly proceedwith caution in testing suchnew business models to avoid risking exist- ing customer relationships. Z