Rule2022-21838
Debit Card Interchange Fees and Routing
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 11, 2022
Effective
July 1, 2023
Issuing agencies
Federal Reserve System
Abstract
The Board of Governors is adopting a final rule that amends Regulation II to specify that the requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to card-not-present transactions, clarify the requirement that debit card issuers ensure that at least two unaffiliated networks have been enabled to process a debit card transaction, and standardize and clarify the use of certain terminology.
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<title>Federal Register, Volume 87 Issue 195 (Tuesday, October 11, 2022)</title>
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[Federal Register Volume 87, Number 195 (Tuesday, October 11, 2022)]
[Rules and Regulations]
[Pages 61217-61232]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-21838]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 87, No. 195 / Tuesday, October 11, 2022 /
Rules and Regulations
[[Page 61217]]
FEDERAL RESERVE SYSTEM
12 CFR Part 235
[Regulation II; Docket No. R-1748]
RIN 7100-AG15
Debit Card Interchange Fees and Routing
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board of Governors is adopting a final rule that amends
Regulation II to specify that the requirement that each debit card
transaction must be able to be processed on at least two unaffiliated
payment card networks applies to card-not-present transactions, clarify
the requirement that debit card issuers ensure that at least two
unaffiliated networks have been enabled to process a debit card
transaction, and standardize and clarify the use of certain
terminology.
DATES: Effective July 1, 2023
FOR FURTHER INFORMATION CONTACT: Jess Cheng, Senior Counsel (202-452-
2309), or Cody Gaffney, Senior Attorney (202-452-2674), Legal Division;
or Krzysztof Wozniak, Manager (202-452-3878), Elena Falcettoni,
Economist (202-452-2528), or Larkin Turman, Financial Institution and
Policy Analyst (202-452-2388), Division of Reserve Bank Operations and
Payment Systems. For users of TTY-TRS, please call 711 from any
telephone, anywhere in the United States.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Authority
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act) was enacted on July 21, 2010.\1\ Section 1075 of the
Dodd-Frank Act amended the Electronic Fund Transfer Act (EFTA) (15
U.S.C. 1693 et seq.) to add a new section 920 regarding interchange
transaction fees for debit card transactions and rules for debit card
and credit card transactions.\2\
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ EFTA section 920 is codified at 15 U.S.C. 1693o-2. Most of
EFTA section 920's requirements relate to debit card transactions--
referred to in the statute and in Regulation II as ``electronic
debit transactions''--which are defined in EFTA section 920(c)(5) as
``transaction[s] in which a person uses a debit card.'' This notice
uses the term ``debit card transaction'' interchangeably with
``electronic debit transaction.''
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EFTA section 920(b)(1) directs the Board to prescribe regulations
that limit the restrictions issuers and payment card networks
(networks) may place on the processing of debit card transactions.\3\ A
debit card transaction typically involves at least five parties: (i) a
cardholder, (ii) the entity that issued the debit card to the
cardholder (the issuer), (iii) a merchant, (iv) the merchant's
depository institution (the acquirer), and (v) a network.\4\ EFTA
section 920(b)(1) contains two provisions that apply to issuers and
networks.
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\3\ EFTA section 920(c)(9) defines ``issuer'' as ``any person
who issues a debit card, or credit card, or the agent of such person
with respect to such card.'' EFTA section 920(c)(11) defines
``payment card network'' as ``an entity that directly, or through
licensed members, processors, or agents, provides the proprietary
services, infrastructure, and software that route information and
data to conduct debit card or credit card transaction authorization,
clearance, and settlement, and that a person uses in order to accept
as a form of payment a brand of debit card, credit card or other
device that may be used to carry out debit or credit transactions.''
\4\ The issuer provides the cardholder with a debit card. The
issuer enables various networks to process debit card transactions
performed with such card. The cardholder can perform a debit card
transaction at a merchant that accepts at least one of the enabled
networks. If the merchant accepts more than one of the enabled
networks, the merchant can choose to route the transaction over its
preferred network. One or more of these parties may act through
third-party vendors, such as payment processors.
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First, EFTA section 920(b)(1)(A) directs the Board to prescribe
regulations to prohibit an issuer or network from imposing exclusivity
arrangements with respect to the networks over which a debit card
transaction may be processed. Specifically, the statute directs the
Board to prescribe regulations that prohibit issuers and networks from
restricting the number of such networks to fewer than two unaffiliated
networks.\5\ Absent this prohibition, an issuer could enable only a
single network, or only affiliated networks, to process a debit card
transaction, thereby foreclosing the ability of the merchant or its
acquirer to choose among competing networks to process the transaction.
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\5\ For this purpose, two networks are considered to be
affiliated if they are owned, controlled, or otherwise operated by
affiliated persons. EFTA section 920(c)(1) defines the term
``affiliate'' to mean any company that controls, is controlled by,
or is under common control with another company.
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Second, EFTA section 920(b)(1)(B) directs the Board to prescribe
regulations to prohibit issuers or networks from restricting the
ability of a merchant or its acquirer to choose among the networks
enabled to process a debit card transaction when deciding how to route
such transaction.\6\ Specifically, the statute requires the Board to
prescribe regulations that prohibit issuers and networks from directly
or indirectly inhibiting any person that accepts debit cards for
payment from directing the routing of a debit card transaction over any
network that may process that transaction. Absent this prohibition,
issuers or networks could establish rules or other restrictions that
override a merchant's routing preferences, thereby preventing the
merchant or its acquirer from routing a debit card transaction over a
network with lower merchant fees, better fraud-prevention capabilities,
or otherwise more favorable terms from the merchant's perspective.
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\6\ The merchant's choice of network is typically implemented by
its acquirer or processor. The acquirer can incorporate a merchant's
preferences when determining how to route a transaction, given the
available networks.
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B. Regulation II
The Board promulgated a final rule implementing these provisions of
the EFTA in July 2011.\7\ The routing provisions of Regulation II aim
to ensure that merchants or their acquirers have the opportunity to
choose from at least two unaffiliated networks when routing debit card
transactions.
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\7\ Regulation II, Debit Card Interchange Fees and Routing,
codified at 12 CFR part 235. Regulation II also implements a
separate provision of EFTA section 920 regarding debit card
interchange fees.
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Section 235.7(a) of Regulation II implements the prohibition set
out in EFTA section 920(b)(1)(A). Specifically, the provision prohibits
an issuer or network from directly or indirectly
[[Page 61218]]
restricting the number of networks on which a debit card transaction
may be processed to fewer than two unaffiliated networks (the
``prohibition on network exclusivity''). Current Sec. 235.7(a)
provides that to comply with the prohibition on network exclusivity, an
issuer must allow a debit card transaction to be processed on at least
two unaffiliated networks, (i) each of which does not, by rule or
policy, restrict the operation of the network to a limited geographic
area, specific merchant, or particular type of merchant or transaction,
and (ii) each of which has taken steps reasonably designed to enable
the network to process the debit card transactions that the network
would reasonably expect will be routed to it, based on expected
transaction volume. Therefore, when configuring its debit cards, an
issuer must enable at least two unaffiliated networks, neither of which
has rules or policies that restrict it from processing transactions in,
for example, a particular geographic area.
Section 235.7(b) implements the prohibition set out in EFTA section
920(b)(1)(B). Specifically, current Sec. 235.7(b) prohibits any issuer
or network from directly or indirectly inhibiting the ability of any
person that accepts or honors debit cards for payments (such as a
merchant) to direct the routing of debit card transactions for
processing over any network that may process such transactions. Taken
together, Sec. 235.7(a) and Sec. 235.7(b) of Regulation II require an
issuer to enable two unaffiliated networks to process a transaction
performed with the issuer's debit card and prohibit the issuer from
inhibiting the merchant's ability to route the debit card transaction
over the merchant's preferred network among those enabled by the
issuer.
C. Overview of Proposed Rule
On May 13, 2021, the Board published in the Federal Register a
proposal to amend Regulation II's prohibition on network exclusivity to
clarify that debit card issuers should enable at least two unaffiliated
networks for card-not-present debit card transactions.\8\ Specifically,
the Board proposed revisions to the Official Board Commentary on
Regulation II to specify that the prohibition on network exclusivity
applies to card-not-present debit card transactions by clarifying that
card-not-present transactions are a particular type of debit card
transaction for which two unaffiliated networks must be available.\9\
The Board proposed further revisions to the rule and commentary to
clarify the issuer's responsibility to enable at least two unaffiliated
networks to comply with the prohibition on network exclusivity. In
addition to these changes, the Board proposed revisions to the
commentary to Sec. 235.7 to standardize and clarify the use of certain
terminology.\10\
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\8\ 86 FR 26189 (May 13, 2021). The original proposal requested
public comment by July 12, 2021, but the Board later extended the
comment period an additional 30 days to August 11, 2021. 86 FR 34644
(June 30, 2021).
\9\ Card-not-present transactions are those in which a
cardholder performs payment without physically presenting a debit
card to a merchant. Card-not-present transactions typically involve
remote commerce, such as internet, telephone, or mail-order
purchases. According to the Board's most recent biennial data
collection (required under EFTA section 920(a)(3)(B)), card-not-
present transactions have become an increasingly significant type of
debit card transaction, comprising almost 23 percent of all debit
card transactions in 2019 (up from slightly less than 10 percent in
2009). See Federal Reserve Board, 2019 Interchange Fee Revenue,
Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses
Related to Debit Card Transactions (May 2021) at p. 3, available at
<a href="https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm">https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm</a> [hereinafter 2019 Data Report]. In addition, data
from the Federal Reserve Payments Study document that, in response
to the COVID-19 pandemic, growth in card-not-present transactions
accelerated in 2020. See Federal Reserve Board, Developments in
Noncash Payments for 2019 and 2020: Findings from the Federal
Reserve Payments Study, available at <a href="https://www.federalreserve.gov/paymentsystems/december-2021-findings-from-the-federal-reserve-payments-study.htm">https://www.federalreserve.gov/paymentsystems/december-2021-findings-from-the-federal-reserve-payments-study.htm</a>.
\10\ The proposal did not concern other parts of Regulation II
that directly address interchange fees for certain debit card
transactions. As stated in the proposal, the Board will continue to
review the regulation in light of the most recent data collected by
the Board and may propose additional revisions in the future.
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As explained in the proposal, the Board proposed these revisions in
light of data collected by the Board and information from debit card
industry participants indicating that some issuers are not enabling two
unaffiliated networks to process card-not-present transactions, and as
a result, merchants often can route card-not-present debit card
transactions only over a single network. When the Board promulgated
Regulation II, the market had not yet developed solutions to broadly
support multiple networks over which merchants could route card-not-
present debit card transactions.\11\ At the time, many networks could
not process such transactions at all, while others could do so only
with technology that was not widely deployed in the marketplace. In
particular, the lack of widely-deployed methods for online entry of
PINs was an impediment for single-message networks that traditionally
required PIN entry during transaction authorization. In the decade
since the adoption of Regulation II, however, technology has evolved to
address these barriers, and most networks have introduced capabilities
to process card-not-present transactions. Recent data collected by the
Board confirm that most single-message networks are now capable of
processing card-not-present transactions.
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\11\ Issuers typically enable one or more single-message
networks and one dual-message network to process debit card
transactions performed with the issuer's debit card. Single-message
networks, which developed from automated teller machine networks,
typically authorize and clear a transaction through a single message
and have traditionally processed transactions that are authenticated
using a cardholder's personal identification number (PIN). In
contrast, dual-message networks, which developed from credit card
systems, typically authorize and clear a transaction through two
separate messages and have traditionally processed signature-
authenticated transactions. Today, transactions over dual-message
networks may no longer require signature authentication or may use
PIN authentication. Similarly, transactions over single-message
networks may no longer require PIN authentication. In addition, some
networks have developed capabilities that depart from their primary
messaging approach. In general, the interchange fees that issuers
receive in connection with transactions routed over single-message
networks are lower than for transactions routed over dual-message
networks. See Average Debit Card Interchange Fee by Payment Card
Network, available at <a href="https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm">https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm</a>.
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Despite these developments, some issuers are not enabling two
unaffiliated networks to process card-not-present transactions, like
they currently do for card-present debit card transactions.\12\ As a
consequence, merchants often do not have the opportunity to choose from
at least two unaffiliated networks when routing card-not-present
transactions. Instead, merchants often have no alternative but to route
card-not-present transactions over the dual-message network that an
issuer has enabled as the only network available to process card-not-
present transactions performed with its debit cards.\13\
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\12\ According to the Board's most recent biennial data
collection, almost a quarter of issuers with consolidated assets
over $10 billion, representing slightly more than 50 percent of the
total number and value of all debit card transactions subject to
Regulation II's interchange fee standards in 2019, did not process
any card-not-present debit card transactions over single-message
networks.
\13\ Data collected by the Board indicate that single-message
networks processed only 6 percent of all card-not-present debit card
transactions in 2019. The single-message networks' low aggregate
share of card-not-present debit card transactions contrasts sharply
with their share of card-present debit card transactions, which
exceeded 40 percent in 2019. See 2019 Data Report at p. 25.
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II. Summary of Public Comments
The Board received slightly more than 2,750 comment letters in
response to the proposal.\14\ Of these comment letters,
[[Page 61219]]
approximately 1,700 were from debit card issuers (all of whom were
depository institutions) and related trade associations, approximately
1,000 were from merchants and related trade associations, 5 were from
networks, 3 were from federal agencies, 3 were from government
officials, and around 40 were from other interested parties (including
some consumers and consumer groups).\15\ Approximately 2,600 of the
comment letters were one of 11 form letters.
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\14\ These figures include a number of comment letters received
after the close of the comment period. The Board also accepted and
considered these late-filed comment letters. In general, these late-
filed comment letters addressed the extent to which issuers are
already compliant with the requirements of the proposal.
\15\ Although the Board received numerous comment letters from
individuals, most of these comment letters clearly represented the
interests of either issuers or merchants (rather than, for example,
the interests of the individual as a consumer). The Board has
classified such comment letters from individuals as comment letters
from either issuers or merchants, as appropriate, even where the
individual did not specifically identify a particular issuer or
merchant in the comment letter.
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Merchants and related trade associations, single-message networks,
and federal agencies uniformly supported the proposal. These commenters
generally expressed the view that the proposal is consistent with the
intent of the statute and would appropriately clarify requirements that
already apply to issuers. Some of these commenters suggested that the
statute and current text of Regulation II are sufficiently clear that
the Board should not have needed to propose revisions to address
routing issues for card-not-present debit card transactions. Commenters
that supported the proposal further argued that it would increase
routing choice for debit card transactions and promote competition
between networks, thereby reducing costs for merchants and ultimately
prices for consumers.
By contrast, most issuers, related trade associations, and dual-
message networks opposed the proposal, with several commenters urging
the Board to withdraw the proposal. These commenters generally, but not
unanimously, expressed the view that the proposal goes beyond mere
clarification of existing requirements and instead represents a
fundamental change to the regulation that would impose new obligations
on issuers. Commenters that opposed the proposal further argued that it
would impose significant compliance costs on issuers and result in
increased debit card fraud, and that these consequences would
ultimately harm consumers. At the same time, a small number of issuer
commenters and one related trade association expressed the view that
the proposed amendments were consistent with the intent of the statute
and represent clarifications to existing obligations that already apply
to issuers and with which many issuers already comply.
The remainder of this section provides a general overview of some
of the major themes raised by commenters. Issues raised by commenters
are additionally discussed in the Final Rule and Section-by-Section
Analysis, infra section III, and the Regulatory Analyses, infra section
IV, as appropriate.
A. Extent of Issuer's Obligation
The Board received numerous comment letters, primarily from
merchants and related trade associations, but also from federal
agencies and some community bank issuers, stating that the proposal
would merely clarify requirements that already apply to issuers and
with which issuers should already comply. In particular, these
commenters argued that the prohibition on network exclusivity already
requires issuers to enable two unaffiliated networks to process a debit
card transaction, and there is no exemption from this requirement in
either the statute or Regulation II for card-not-present transactions.
However, numerous other comment letters, primarily from issuers,
related trade associations, and dual-message networks, characterized
the proposal as an expansion of both the coverage and substantive
requirements of the prohibition on network exclusivity. Some of these
commenters stated that the proposal would expand the prohibition on
network exclusivity to include card-not-present transactions, which the
commenters believed had not previously been subject to that
prohibition. Commenters also raised concerns that the proposal would
transform the existing requirement that an issuer allow a debit card
transaction to be processed on at least two unaffiliated networks into
a broad new mandate requiring issuers to affirmatively guarantee that
two unaffiliated networks would always be available to all merchants in
every conceivable transaction context. Commenters raised a variety of
concerns with this broad reading of the proposal, including that it is
impractical, contrary to the statute, and overly burdensome, and would
deter innovation in the debit card industry. Commenters' concerns,
including the Board's analysis of these concerns and corresponding
adjustments to the final rule, are discussed further in the Final Rule
and Section-by-Section Analysis, infra section III.
B. Impact on Fraud
Various commenters, especially issuers, related trade associations,
and dual-message networks, expressed the view that the proposal would,
in practice, require most issuers to enable single-message networks to
process card-not-present debit card transactions, which in turn may
result in an increased level of fraud for card-not-present
transactions. In particular, such commenters suggested that single-
message networks would be likely to have higher levels of card-not-
present fraud than dual-message networks because of single-message
networks' limited experience in processing card-not-present
transactions. These commenters further argued that the proposal casts
doubt on whether an issuer could decline specific transactions for
good-faith fraud concerns.
Other commenters, including commenters representing merchants and
single-message networks, argued that the proposal would not increase
card-not-present fraud and that single-message networks are as
effective at mitigating fraud as dual-message networks. A few
commenters suggested that sending all information relevant to the
transaction in a single message gives single-message networks an
inherent advantage over dual-message networks in preventing card-not-
present fraud. Commenters' concerns related to fraud are discussed
further in the EFTA Section 904(a) Analysis, infra section IV.A.
C. Other Comments
The Board received numerous comment letters that raised issues not
specifically related to the proposed changes.\16\ Because these
comments are not directly related to the proposal, the Board is not
addressing them in this notice. The Board will continue to monitor
developments in the debit card industry, including how these
developments relate to the requirements of Regulation II.
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\16\ These comment letters generally raised issues related to
other provisions in Regulation II. For example, numerous comment
letters, primarily from merchants and related trade associations,
requested that the Board address various practices that these
commenters believe issuers and payment card networks could use, or
are allegedly already using, to restrict merchant routing choice,
even where the issuer has complied with the prohibition on network
exclusivity. In addition, numerous commenters, mostly merchants and
related trade associations, urged the Board to act quickly to lower
the interchange fee cap in section 235.3 of Regulation II.
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[[Page 61220]]
III. Final Rule and Section-by-Section Analysis
The Board has considered all comments received and is adopting a
final rule that is substantively consistent with the proposal, but with
certain changes, as described below, to address issues raised by
commenters, including changes clarifying that an issuer is not required
to ensure that two or more unaffiliated networks will actually be
available to the merchant to process every electronic debit
transaction. The final rule underscores that issuers should provide
routing choice for card-not-present debit card transactions. Under the
final rule, a debit card issuer must configure each of its debit cards
so that card-not-present transactions performed with such cards can be
processed on at least two unaffiliated networks. As a practical matter,
an issuer will first need to determine whether card-not-present
transactions performed with its debit cards can already be processed on
at least two unaffiliated networks; if the issuer is not already
compliant with the final rule, the issuer will need to adjust its debit
card processing arrangements to meet the final rule's requirements.
A. Section 235.7 (Limitations on Payment Card Restrictions), Comment
235.7(a)-2 (Issuer's Role), and Comment 235.7(a)-3 (Permitted Networks)
<SUP>17</SUP>
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\17\ The Board is combining its discussion of section
235.7(a)(2) and comments 235.7(a)-2 and -3 of the final rule in this
notice for ease of reference and due to the substantial overlap in
the issues presented with respect to each of these portions of the
final rule.
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1. Proposal
The Board proposed to amend Sec. 235.7 of Regulation II to
emphasize the issuer's role in configuring its debit cards to ensure
that at least two unaffiliated networks have been enabled to comply
with the prohibition on network exclusivity. Specifically, with the
proposed amendments, Sec. 235.7(a)(2) would provide that an issuer
satisfies the requirements of Sec. 235.7(a)(1) only if, for every
geographic area, specific merchant, particular type of merchant, and
particular type of transaction for which the issuer's debit card can be
used to process an electronic debit transaction, the issuer has enabled
at least two unaffiliated networks to process the transaction. Under
the proposal, an issuer would not be able to restrict the capability of
one or more enabled networks to process debit card transactions for a
geographic area, specific merchant, particular type of merchant, or
particular type of transaction if doing so would result in fewer than
two unaffiliated networks being available for a particular geographic
area, specific merchant, particular type of merchant, or particular
type of transaction.
The Board also proposed revising current comment 235.7(a)-2, which
clarifies the types of network arrangements that may be used to satisfy
the prohibition on network exclusivity. Specifically, the Board
proposed revisions to specify that, for purposes of the prohibition on
network exclusivity, card-not-present transactions are a ``particular
type of transaction'' for which an issuer must enable at least two
unaffiliated networks. The Board stated in the proposal that it
believes this amendment is necessary in light of information gathered
by the Board suggesting that some issuers are enabling only one dual-
message network to process card-not-present transactions, even though
most single-message networks have introduced capabilities in recent
years that allow them to process card-not-present transactions.
Finally, the Board proposed changes to the commentary to emphasize
the choices available to issuers in complying with the prohibition on
network exclusivity. In particular, the Board proposed to add a new
comment 235.7(a)-2(iii) to clarify that an issuer need not enable the
same two unaffiliated networks to process a debit card transaction for
every geographic area, specific merchant, particular type of merchant,
and particular type of transaction for which the issuer's debit card
can be used. Rather, as long as the issuer has enabled at least two
unaffiliated networks to process a debit card transaction for every
geographic area, specific merchant, particular type of merchant, and
particular type of transaction for which the issuer's debit card can be
used, the issuer has satisfied the prohibition on network exclusivity.
The proposed comment would provide clear examples of how an issuer
could comply with the rule by enabling various combinations of networks
so that two unaffiliated networks are available to process debit card
transactions for every geographic area, specific merchant, particular
type of merchant, and particular type of transaction. These examples
would demonstrate that, under the proposal (and unlike under current
Sec. 235.7), an issuer could comply with the prohibition on network
exclusivity by enabling a network that, for example, operates in a
limited geographic area, as long as there are at least two unaffiliated
networks to process debit card transactions for every geographic area
for which the issuer's debit card can be used.
2. Summary of Public Comments
As described in the Summary of Public Comments, section II supra,
the Board received numerous comments that supported proposed Sec.
235.7(a)(2) as a clarification of requirements that already apply to
issuers and with which issuers should already comply. The Board also
received numerous comment letters, primarily from issuers, related
trade associations, and dual-message networks, stating that the
proposal would expand the prohibition on network exclusivity to include
card-not-present transactions, which commenters believed were
previously not subject to that prohibition. In addition, commenters
argued that the proposal would transform the existing requirement that
an issuer allow a debit card transaction to be processed on at least
two unaffiliated networks into a broad new mandate requiring issuers to
affirmatively guarantee that two unaffiliated networks would always be
available to all merchants in every conceivable transaction
context.\18\ These commenters raised a variety of concerns with this
broad reading of the proposal.
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\18\ Moreover, a few commenters stated that the proposal could
be interpreted even more broadly to require issuers to enable
networks at the merchant's demand.
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First, commenters suggested that it would be impossible for issuers
to affirmatively guarantee the availability of two unaffiliated
networks to all merchants in all cases. Commenters raised a number of
examples in which, for reasons outside an issuer's control, a merchant
may not be able to choose between two unaffiliated networks when
routing debit card transactions, even if the issuer had enabled two or
more networks to process debit card transactions performed with the
issuer's debit cards. In particular, a merchant may choose to contract
with an acquirer or payment processor that does not support one of the
networks that the issuer has enabled to process debit card
transactions, with the result that the merchant can only route its
transactions over the other enabled network(s). Similarly, a merchant's
choice of card acceptance technologies could restrict the merchant's
routing choice if these technologies are not compatible with some
networks. Finally, a merchant may choose to enter into a commercial
agreement (for example, with a franchisor or corporate parent) that
restricts the networks over which the merchant may route transactions,
resulting in a lack of routing choice
[[Page 61221]]
even if the issuer has enabled two or more networks. Under some
commenters' broad reading of the proposal, an issuer could be deemed
non-compliant if a merchant could not choose between unaffiliated
networks in these or similar scenarios, even though the merchant's lack
of routing choice is the result of actions outside the issuer's
control.
Second, several commenters argued that issuers cannot control, and
may not even know, networks' coverage across all transactions, such as
whether a network operates in a particular geographic area. As a
result, these commenters argued that it may not be possible for an
issuer to know whether the networks that the issuer has enabled are
sufficient for the issuer to comply with the proposal's requirements.
To address this concern, one commenter suggested that the Board publish
lists of networks that can be used to satisfy the prohibition on
network exclusivity for a geographic area or particular type of
transaction. Other commenters argued that the Board should establish a
presumption that a network operates, for example, for a geographic area
(or is willing to expand its capabilities to operate for a geographic
area) if the network does not by rule or policy limit its operation or
expansion to such geographic area.
A third concern raised by commenters was the application of the
proposal to innovative technologies and transactions. Specifically,
commenters stated that, under the proposal, an issuer would not be
permitted to configure its debit cards to support new technologies,
such as technologies used to initiate or authenticate transactions, or
to perform new types of transactions until at least two unaffiliated
networks develop the capability to support the new technology. As a
result, these commenters argued that the proposal would deter
innovation, and potentially even require parties in the debit card
industry to share proprietary technology with their competitors.
Relatedly, some commenters identified examples of certain highly
specific transaction contexts where commenters believe that only one
network is desirable (for example, rapid throughput transactions, such
as in public transit contexts) or even technically capable of
processing debit card transactions (for example, airline cabin sales
and other ``offline'' environments). These commenters suggested that,
under the proposal, an issuer whose debit cards can be used to perform
transactions that only one network is technically capable of processing
would be in violation of the prohibition on network exclusivity. Other
commenters, however, disputed the suggestion that only one network is
capable of processing these specialized transactions.
Fourth, several issuer commenters criticized the proposal's use of
the word ``enable.'' These commenters viewed this term as an expansion
of the substantive requirements that issuers must meet to comply with
the prohibition on network exclusivity.\19\ These commenters
additionally argued that because the proposal does not define the term
``enable,'' it is not clear what steps issuers must take to comply with
the proposal. Other commenters, in turn, argued that the term
``enable'' accurately reflects the role of the issuer in configuring
its debit cards to comply with the prohibition on network exclusivity.
In addition, merchant commenters argued that issuers should not be
permitted to disable capabilities of the enabled networks if doing so
would result in fewer than two unaffiliated networks that can process
card-not-present debit card transactions.
---------------------------------------------------------------------------
\19\ By comparison, EFTA section 920(b)(1)(A) prohibits an
issuer from directly or indirectly restricting the number of
networks on which a debit card transaction may be processed to fewer
than two unaffiliated networks. Current section 235.7(a)(2) of
Regulation II, which implements this statutory provision, states
than issuer must allow an electronic debit transaction to be
processed on at least two unaffiliated networks.
---------------------------------------------------------------------------
Finally, the Board received several comment letters from issuers,
merchants, and trade associations concerning the proposal's requirement
that an issuer must enable at least two unaffiliated networks for every
particular type of transaction for which the issuer's debit card can be
used. In general, these comments argued that the meaning of
``particular type of transaction'' is not clear in the proposal. Many
of these commenters recommended that the Board clarify what constitutes
a ``particular type of transaction'' in the final rule. For example,
one commenter representing merchants argued that ``particular type of
transaction'' should refer to any substantial set of transactions. Some
of these commenters stated that the Board should go further by
enumerating additional examples of particular types of transactions
beyond card-present and card-not-present transactions, potentially
including automated fuel dispenser and low-value transactions. Other
commenters, in turn, opposed enumerating additional types of
transactions beyond card-present and card-not-present transactions.
The Board intended the proposal to clarify, but not expand, both
the coverage and substantive requirements of the prohibition on network
exclusivity.\20\ Current Sec. 235.7(a)(2) generally provides that an
issuer satisfies the prohibition on network exclusivity only if the
issuer allows a debit card transaction to be processed on at least two
unaffiliated networks, each of which does not, by rule or policy,
restrict the operation of the network to a particular type of
transaction (among other dimensions, such as type of merchant). The
proposal emphasizes the role of the issuer in ensuring that at least
two unaffiliated networks have been enabled for each type of
transaction (among other dimensions) and specifies that card-not-
present transactions are a particular type of transaction to which the
prohibition on network exclusivity applies. The Board notes that
numerous commenters, particularly issuers and dual-message network
commenters, viewed the Board's proposal as an expansion of coverage of
the prohibition of network exclusivity to include card-not-present
transactions, and an expansion of the substantive requirements that
apply to issuers. However, the Board did not intend to expand the
regulation's substantive requirements, but rather intended to specify
that existing requirements also apply to card-not-present transactions
and emphasize that issuers have an active role to play in order to
comply with the prohibition on network exclusivity.
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\20\ See 86 FR 26189, 26192 (May 13, 2021).
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3. Final Rule
The Board is adopting amendments to Sec. 235.7(a)(2) and the
commentary to Sec. 235.7(a) that are substantively consistent with the
proposal, but with certain changes to address issues raised by
commenters. Specifically, Sec. 235.7(a)(2) of the final rule provides
that an issuer satisfies the prohibition on network exclusivity only if
the issuer enables at least two unaffiliated networks to process an
electronic debit transaction, where such networks satisfy two
requirements. First, the enabled networks in combination must not, by
their respective rules or policies, or by contract with or other
restriction imposed by the issuer, result in the operation of only one
network or only multiple affiliated networks for a geographic area,
specific merchant, particular type of merchant, or particular type of
transaction. Second, the enabled networks must have each taken steps
reasonably designed to be able to process the electronic debit
transactions that they would reasonably
[[Page 61222]]
expect will be routed to them, based on expected transaction volume.
The Board believes that Sec. 235.7(a)(2) of the final rule
appropriately states that the obligation of the issuer is to ``enable''
at least two unaffiliated networks to process a debit card transaction,
where such networks satisfy the rule's two requirements.\21\ Compared
with the language in current Sec. 235.7(a)(2)--which provides that an
issuer must ``allow'' a debit card transaction to be processed on at
least two unaffiliated networks--the Board believes that term
``enable'' more accurately describes the role of the issuer in
configuring its debit cards so that the issuer complies with the
prohibition on network exclusivity.
---------------------------------------------------------------------------
\21\ The Board notes that the term ``enable'' is already used in
the current commentary to section 235.7(a) to describe the
obligation of the issuer.
---------------------------------------------------------------------------
As described above, numerous commenters interpreted the proposal to
require an issuer to affirmatively guarantee that all merchants will be
able to route a transaction over two unaffiliated networks in every
conceivable transaction context. To better reflect the Board's intent
behind the proposal, and to foreclose the overly broad reading of the
proposal put forward by many commenters, Sec. 235.7(a)(2) of the final
rule establishes discrete, objective requirements with which issuers
must comply; these requirements do not require an issuer to ensure that
two unaffiliated networks will actually be available to the merchant
for every transaction. Specifically, under the final rule, to comply
with the prohibition on network exclusivity, an issuer must enable at
least two unaffiliated networks to process an electronic debit
transaction, where such networks satisfy two requirements.
The first requirement provides, in part, that an issuer must enable
a combination of networks that does not result in certain impermissible
outcomes, namely only one network or only multiple affiliated networks
for a geographic area, specific merchant, particular type of merchant,
or particular type of transaction. The Board believes this
reformulation of the proposed requirement in the final rule should
address much of the confusion reflected in the comment letters, and
alleviate the concerns of numerous issuer commenters in particular.
In determining whether an issuer has enabled a combination of
networks that avoids the impermissible outcomes, the final rule allows
issuers to rely on network rules or policies, consistent with the
recommendations of some commenters. Specifically, the final rule
provides that the combination of networks that an issuer enables to
process a debit card transaction may not, by their respective rules or
policies, result in the operation of only one network or only multiple
affiliated networks for a geographic area, specific merchant,
particular type of merchant, or particular type of transaction. Current
Sec. 235.7(a)(2) already permits issuers to rely on network rules or
policies in determining whether a network may be used to satisfy the
prohibition on network exclusivity.\22\ The final rule preserves the
structure and wording of current Sec. 235.7(a)(2) in this respect,
thereby allowing issuers to rely on the same information sources that
they currently use to determine whether they comply with the
prohibition on network exclusivity.
---------------------------------------------------------------------------
\22\ The proposal would have eliminated the relevant language in
current section 235.7(a)(2). The Board believes that the omission of
this language in the proposal, which is retained in the final rule,
contributed significantly to the broad reading of the proposal put
forward by many issuer and dual-message network commenters, who
interpreted the proposal as requiring an issuer to ensure that two
unaffiliated networks will actually be available to the merchant for
every debit card transaction.
---------------------------------------------------------------------------
In addition to permitting issuers to rely on network rules or
policies in determining whether the networks enabled by an issuer may
be used to satisfy the prohibition on network exclusivity, the final
rule clarifies that issuers may not disable capabilities of the enabled
networks if doing so would result in fewer than two unaffiliated
networks to process a debit card transaction. Specifically, the final
rule provides that the combination of networks that an issuer enables
to process a debit card transaction may not, by contract with or other
restriction imposed by the issuer, result in the operation of only one
network or only multiple affiliated networks for a geographic area,
specific merchant, particular type of merchant, or particular type of
transaction. This addition--which makes more prominent a key aspect of
the proposal's requirement that an issuer enable at least two
unaffiliated networks to process a debit card transaction--is intended
to directly address the cases that the Board described in connection
with the proposal, and that were highlighted by many commenters, in
which certain issuers are actively disabling, or failing to enable, the
card-not-present capabilities of one or more enabled networks,
resulting in fewer than two unaffiliated networks to process such
transactions.\23\
---------------------------------------------------------------------------
\23\ 86 FR 26189, 26191-92.
---------------------------------------------------------------------------
With respect to the second requirement related to expected
transaction volume, the Board notes that this requirement is
substantively unchanged from both current Sec. 235.7(a)(2) and from
the proposed rule.
To further clarify the scope of Sec. 235.7(a) and address the
confusion reflected in the views of numerous issuer and some dual-
message network commenters, the Board is adopting new comment 235.7(a)-
2, which was not included in the proposal. Comment 235.7(a)-2 of the
final rule clarifies that Sec. 235.7(a) does not require an issuer to
ensure that two or more unaffiliated networks will actually be
available to the merchant to process every electronic debit
transaction. Rather, comment 235.7(a)-2 clarifies that, to comply with
the requirement in Sec. 235.7(a), it is sufficient for an issuer to
configure each of its debit cards so that each electronic debit
transaction performed with such card can be processed on at least two
unaffiliated networks, even if the networks that are actually available
to the merchant for a particular transaction are limited by, for
example, the card acceptance technologies that a merchant adopts or the
networks that the merchant accepts.
The Board is adopting proposed comment 235.7(a)-2 (now renumbered
as comment 235.7(a)-3) substantially as proposed.\24\ The Board does
not believe it is necessary to further define what constitutes a
``particular type of transaction'' because the prohibition on network
exclusivity applies to each debit card transaction performed with a
debit card. As stated clearly in comment 235.7(a)-1 of the final rule,
Sec. 235.7(a) requires an issuer to configure its debit cards so that
each electronic debit transaction performed with such cards can be
processed on at least two unaffiliated networks. In addition, because
the Board issued the proposal to address the observed lack of routing
choice for card-not-present transactions, the Board does not believe it
is necessary at this time to provide additional examples of particular
types of transactions beyond card-present and card-not-present
transactions. Moreover, the Board is concerned that providing
additional examples of particular types
[[Page 61223]]
of transactions could create the misimpression that types of
transactions not enumerated in the final rule are not subject to the
prohibition on network exclusivity.
---------------------------------------------------------------------------
\24\ The final rule specifies that card-not-present debit card
transactions are a ``particular type of transaction'' for purposes
of Regulation II's prohibition on network exclusivity as applied to
debit card issuers in section 235.7(a)(2). The Board emphasizes that
card-not-present debit card transactions are ``electronic debit
transactions'' for other Regulation II purposes, including
Regulation II's prohibition on network exclusivity as applied to
networks in section 235.7(a)(3), and prohibition on routing
restrictions in section 235.7(b).
---------------------------------------------------------------------------
The Board notes that comment 235.7(a)-3 of the final rule makes
clear that Sec. 235.7(a)(2) of the final rule permits issuers to use
more combinations of networks to satisfy the prohibition on network
exclusivity than are permitted under current Sec. 235.7(a)(2).
Specifically, current Sec. 235.7(a)(2) provides that an issuer
satisfies the prohibition on network exclusivity only if the issuer
allows an electronic debit transaction to be processed on at least two
unaffiliated networks, each of which does not, by rule or policy,
restrict the operation of the network to a limited geographic area,
specific merchant, or particular type of merchant or transaction, among
other requirements. Under the final rule, however, issuers may satisfy
the prohibition on network exclusivity by enabling networks whose
operations are limited to, for example, a limited geographic area, as
long as the final rule's two requirements are met. Comment 235.7(a)-3
of the final rule provides examples of issuers satisfying the
prohibition on network exclusivity by enabling networks whose
operations are restricted to a limited geographic area and particular
type of transaction. The combinations of networks in these examples are
not permitted under current Sec. 235.7(a)(2) but are permitted under
the final rule, and thus, the final rule provides issuers greater
flexibility in complying with the prohibition on network exclusivity.
Finally, the Board believes that it is unlikely that the final rule
will deter innovation, as some commenters suggested. Current Sec.
235.7(a)(2) generally provides that an issuer satisfies the prohibition
on network exclusivity only if the issuer allows a debit card
transaction to be processed on at least two unaffiliated networks, each
of which does not, by rule or policy, restrict the operation of the
network to a particular type of transaction (among other dimensions,
such as type of merchant). Like the proposal, the final rule specifies
that card-not-present debit card transactions are a particular type of
transaction to which the prohibition on network exclusivity applies. In
this respect, the final rule represents a modest clarification of
existing requirements, and thus, the Board does not believe that the
final rule will have a significant impact on innovation.
B. Comment 235.7(a)-1 (Scope of Restriction)
1. Proposal
The Board proposed additional revisions to comment 235.7(a)-1,
which clarifies that Sec. 235.7(a) does not require an issuer to have
two or more unaffiliated networks available for each method of
cardholder authentication. The Board proposed to update the examples of
cardholder authentication methods listed in the comment to better align
with current industry practices. Specifically, the Board proposed to
add biometrics to the list of cardholder authentication methods in the
commentary, which currently only includes signature and PIN
authentication. The Board further proposed adding ``or any other method
of cardholder authentication that may be developed in the future'' to
capture cardholder authentication methods that do not yet exist. The
Board also proposed revisions to recognize instances where no method of
cardholder authentication is used.
2. Summary of Public Comments
The Board received few comments that specifically addressed
proposed comment 235.7(a)-1. The comments that specifically addressed
proposed comment 235.7(a)-1 generally supported the proposed
amendments.
3. Final Rule
The Board is adopting amendments to comment 235.7(a)-1
substantially as proposed. Relative to the proposal, the final rule
makes minor changes to comment 235.7(a)-1 to bring the comment in line
with terminology used elsewhere in Regulation II. In particular, the
final rule uses the term ``perform,'' rather than the terms ``process''
or ``initiate'' as proposed, to refer to the use of a debit card to
perform a debit card transaction, consistent with the terminology used
in other parts of Regulation II.\25\
---------------------------------------------------------------------------
\25\ Relative to the proposal, the final rule makes other non-
substantive changes to terminology outside of comment 235.7(a)-1,
including in the commentary to 235.7(b).
---------------------------------------------------------------------------
B. Comment 235.7(a)-8 (Application of Rule Regardless of Form)
1. Proposal
The Board proposed revising current comment 235.7(a)-7, which
clarifies that the prohibition on network exclusivity applies
regardless of ``form factor.'' The Board proposed to replace the term
``form factor'' with ``means of access'' to better align with current
industry terminology. The revisions would also add, as an example of
means of access, ``information stored inside an e-wallet on a mobile
phone or other device,'' to capture recent technological developments.
The Board further proposed adding ``or another means of access that may
be developed in the future'' to capture means of access that do not yet
exist but that would be captured by Regulation II if they were to be
developed. The proposed revisions would further clarify that an issuer
must enable at least two unaffiliated networks for each means of access
that carries the debit card information, as required by the prohibition
on network exclusivity. For example, if the issuer provides the
cardholder with a fob in addition to a plastic card, the fob must allow
transactions to be processed over at least two unaffiliated networks.
2. Summary of Public Comments
The Board received several comments from issuers, related trade
associations, and a dual-message network expressing the view that
because the term ``means of access'' is not defined in the proposal,
the proposal would create ambiguity as to whether a particular
technology is a means of access (for which the issuer must enable at
least two unaffiliated networks) or, for example, a technology
supporting a method of authentication (for which the issuer need not
enable at least two unaffiliated networks). These commenters generally
argued that the term ``means of access'' should be limited only to the
hardware and software necessary to process the transaction, and thus,
the term should exclude technologies supporting ancillary features
related to authentication or security. Some of these commenters
additionally stated that it was not necessary for the proposal to
capture any means of access that may be developed in the future.
At least one merchant commenter also commented on the lack of
definition of ``means of access,'' but instead argued for a definition
that would capture any technology used to send the cardholder's debit
card credentials through the merchant to the issuer. Other comment
letters from merchants and related trade associations generally
supported the proposal's clarification that the prohibition on network
exclusivity applies to any means of access, including any means of
access that may be developed in the future.
3. Final Rule
Current comment 235.7(a)-7 clarifies that the prohibition on
network exclusivity applies to all types of debit cards. In proposing
revisions to current
[[Page 61224]]
comment 235.7(a)-7, the Board intended only to update the term ``form
factor'' to align with current industry terminology. In light of the
comments received, the Board has determined that adopting the undefined
term ``means of access'' is unnecessary, would create confusion, and
would undermine clarity. Instead, the Board is adopting a modified
version of proposed comment 235.7(a)-7 (now renumbered as comment
235.7(a)-8) that states that the prohibition on network exclusivity
applies to electronic debit transactions performed with any debit card
as defined in Sec. 235.2 of Regulation II, regardless of the form of
such debit card. The final rule further states that the requirement
applies to electronic debit transactions performed using, for example,
a plastic card, a supplemental device such as a fob, information stored
inside an e-wallet on a mobile phone or other device, or any other form
of debit card, as defined in Sec. 235.2, that may be developed in the
future. The Board is also adopting conforming changes to current
comment 235.7(b)-2(iii).
Importantly, while current comment 235.7(a)-7 refers to a token as
an example of a form factor to which the prohibition on network
exclusivity applies, the final rule (like the proposal) removes the
term ``token.'' The Board believes that the use of the term ``token''
in the context of current comment 235.7(a)-7 is outdated. In
particular, the term ``token'' was intended to be synonymous with
``fob,'' rather than refer to tokenized debit card numbers.\26\ Thus,
as in the proposal, the final rule removes an outdated use of the term
``token.''
---------------------------------------------------------------------------
\26\ Tokenization is a process whereby the primary account
number associated with a debit card is converted into substitute
credentials (a ``tokenized debit card number'' or ``token''),
usually to improve security and decrease fraud associated with debit
card transactions.
---------------------------------------------------------------------------
Removal of the word ``token'' in the final rule is not intended to
suggest that tokenized debit card numbers are not subject to the
prohibition on network exclusivity. To the contrary, the Board is aware
of a variety of different types of tokenization arrangements in the
marketplace (many of which were described in comment letters) and
believes that some tokenized debit card numbers qualify as debit cards
as defined in Sec. 235.2. Under the final rule, where a tokenized
debit card number qualifies as a debit card, the prohibition on network
exclusivity would apply, and the issuer would be required to enable two
unaffiliated networks to process transactions performed with the
tokenized debit card number.
D. Effective Date of Final Rule
For the reasons described below, the Board is adopting the final
rule with an effective date of July 1, 2023.\27\
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\27\ Section 302 of the Riegle Community Development and
Regulatory Improvement Act, Pub. L. 103-325, requires that
amendments to regulations prescribed by a federal banking agency
that impose additional requirements on insured depository
institutions must take effect on the first day of a calendar quarter
that begins on or after the date of publication in the Federal
Register. 12 U.S.C. 4802. Consistent with this requirement, the
effective date of the final rule is July 1, 2023.
---------------------------------------------------------------------------
The Board received numerous comments related to the timeline for
implementing the proposal. In general, merchants argued that issuers
should already be complying with the proposal's requirements with
respect to card-not-present debit card transactions and, therefore,
urged the Board to finalize the proposal as quickly as possible, with
some merchants suggesting that the proposal should be effective before
the 2021 holiday shopping season. In contrast, issuers argued for a
much longer implementation time frame (for example, four or more
years), stating that compliance with the proposal would require
significant time and resources, which they would need to divert from
other priorities.
The Board does not believe that the final rule requires either a
very short or very long implementation timeline, as commenters
variously argued.\28\ When Sec. 235.7(a) was originally adopted in
2011, the Board gave issuers nine months to comply with the prohibition
on network exclusivity, with limited exceptions.\29\ The final rule
specifies that card-not-present debit card transactions are a
particular type of transaction to which the prohibition on network
exclusivity applies. The Board believes that, as when Sec. 235.7(a)
was originally adopted, approximately nine months is a sufficient
amount of time for issuers to comply with the final rule. In addition,
and as described in the Regulatory Analyses, infra section IV, the
Board understands that many issuers, and especially most community bank
issuers, are already compliant with the final rule because they have
already enabled two unaffiliated networks to process card-not-present
transactions performed with their debit cards.\30\
---------------------------------------------------------------------------
\28\ The Board believes that some commenters' requests for a
very long implementation timeline largely stemmed from their broad
reading of the proposal. As described above, the final rule includes
changes (relative to the proposal) to foreclose the overly broad
reading of the proposal put forward by many commenters.
\29\ Specifically, section 235.7 was promulgated on July 20,
2011. The general compliance date for issuers for section 235.7(a)
was April 1, 2012, but the compliance date was extended for certain
types of debit cards. 76 FR 43393 (July 20, 2011).
\30\ As a practical matter, an issuer will first need to
determine (potentially by consulting its payment processor) whether
card-not-present transactions performed with its debit cards can
already be processed on at least two unaffiliated networks. If the
issuer confirms that is the case, no further action is required for
the issuer to comply with the final rule.
---------------------------------------------------------------------------
IV. Regulatory Analyses
A. EFTA Section 904(a) Analysis
1. Statutory Requirement
Section 904(a)(2) of the EFTA requires the Board to prepare an
economic analysis of the impact of the final rule that considers the
costs and benefits to financial institutions, consumers, and other
users of electronic fund transfers. The analysis must address the
extent to which additional paperwork will be required, the effect upon
competition in the provision of electronic fund transfer services among
large and small financial institutions, and the availability of such
services to different classes of consumers, particularly low-income
consumers. The section also requires, to the extent practicable, the
Board to demonstrate that the consumer protections of the proposed
regulations outweigh the compliance costs imposed upon consumers and
financial institutions.
EFTA section 904(a)(2) requires the Board to perform this economic
analysis with respect to both proposed and final rules implementing
EFTA section 920. The Board published a preliminary economic analysis
in connection with the proposal. The Board received six comment letters
from issuers and related trade associations and one additional comment
letter that explicitly referenced the EFTA section 904(a)(2) economic
analysis that was published with the proposal. In general, these
commenters stated that the Board's economic analysis was insufficiently
detailed and did not fully account for the economic impact of the
proposal. In addition to these comments that directly referenced the
EFTA section 904(a)(2) economic analysis, the Board received numerous
comments discussing the proposed rule's impact on various debit card
industry participants. Further discussion of these comments is provided
in this section and in the Summary of Public Comments, supra section
II, Final Rule and Section-by-Section Analysis, supra section III, and
the Regulatory Flexibility Act Analysis, infra section IV.C.
[[Page 61225]]
2. Cost/Benefit Analysis
(a.) Effects on Merchants \31\
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\31\ The Board interprets ``other users of electronic fund
transfer services'' in EFTA section 904(a)(2) to refer primarily to
merchants.
---------------------------------------------------------------------------
i. Comments Received
Many commenters, primarily merchants, but also some issuers,
networks, federal agencies, and consumers, expressed the view that the
proposal would result in merchants being able to choose from at least
two unaffiliated networks for card-not-present debit card transactions.
Many of these commenters suggested that such choice between multiple
networks would benefit merchants through increased competition between
networks for card-not-present transactions. Commenters suggested that
merchants may benefit from being able to route debit card transactions
over networks with lower interchange or network fees, better fraud-
prevention capabilities, or otherwise better service. These commenters
also widely expressed the view that merchants operating in competitive
conditions would ultimately pass through such benefits to consumers in
the form of lower prices and improved service.
Some commenters, mainly issuers, expressed the view that merchants
would retain most of the benefits from increased routing choice for
card-not-present debit card transactions rather than passing them to
consumers, while others suggested that the benefits of the proposal
would accrue primarily to large merchants. Some of these commenters
also suggested that the proposal might result in increased fraud for
card-not-present debit card transactions, with merchants bearing some
of the higher fraud burden.
ii. Analysis
The Board believes that the primary way in which the final rule
will benefit merchants will be by providing them the opportunity to
choose to route card-not-present debit card transactions over competing
networks, allowing the merchant to select a network with potentially
lower fees, better fraud-prevention capabilities, or otherwise more
favorable terms from the merchant's perspective. While such benefits
will be greater for those merchants who accept more card-not-present
payments and merchants who optimize their routing decisions, the Board
believes merchants broadly will benefit from more network choices. In
the long term, increased competition for card-not-present debit card
transactions between networks should further increase benefits to
merchants as networks improve their fraud-prevention capabilities and
lower their fees. Finally, the Board expects that merchants in more
competitive markets will pass a greater portion of the benefits to
consumers, relative to those in less competitive markets.
Although a merchant may need to incur adjustment costs to take
advantage of the opportunity to choose between competing networks when
routing card-not-present debit card transactions, a merchant's decision
to incur those costs is at the merchant's discretion.\32\ In
particular, the final rule does not impose any obligations on
merchants, and as such, merchants may continue to use their existing
debit card processing arrangements without incurring any adjustment
costs. Some merchants that choose not to incur adjustment costs may
nevertheless experience increased routing choice through their existing
arrangements as a result of the final rule. However, the Board expects
some merchants to voluntarily adjust their debit card processing
arrangements to capture benefits of the final rule, but only if such
benefits outweigh the costs. These potential costs include modifying
their ecommerce platforms, choosing to incur costs in switching
processors or acquirers, or enhancing their fraud-prevention
capabilities.
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\32\ To extent to which a merchant may be able to realize the
benefits of the final rule, and any costs it may incur, could depend
on decisions of the merchant's acquirer or payment processor, among
other things.
---------------------------------------------------------------------------
(b.) Effects on Issuers \33\
---------------------------------------------------------------------------
\33\ The Board interprets ``financial institutions'' in EFTA
section 904(a)(2) to refer primarily to issuers of debit cards.
---------------------------------------------------------------------------
i. Comments Received
Many commenters, primarily issuers, expressed the view that the
proposal may result in substantial costs and lost revenues for some
issuers. In particular, these commenters suggested that issuers not
already compliant with the proposed rule would bear implementation and
compliance costs, and that such costs could be especially high for
community bank issuers. The commenters also expressed the view that
issuers would realize lower interchange fee revenues and greater fraud
losses as a result of the proposed rule. Some commenters further
suggested that such increased costs may force some issuers to pass on a
portion of the costs to consumers in the form of higher fees and lower
availability of free checking accounts and similar programs; a few
commenters expressed the view that the inability to sufficiently offset
the higher costs may threaten some issuers' survival. Other comments,
primarily merchants, suggest that implementation and adoption costs for
issuers to comply with the proposed rule would be limited because many
issuers, and especially most community bank issuers, are already
compliant with the proposal.
ii. Analysis
Board analysis suggests that the effect of the final rule on
issuers will depend on four key factors. First, the effect will depend
on the number of issuers not already compliant with the final rule
because they have not already enabled at least two unaffiliated
networks to process card-not-present debit card transactions; these
issuers will need to make changes to their debit card programs to
comply with the final rule. Both information received through the
comment process and data collected by the Board suggest that those
affected by the rule may differ by issuer size. In particular, some
comment letters and Board data suggest that some large issuers will
need to make changes to their debit card programs to come into
compliance with the final rule.\34\ By contrast, several comment
letters received in connection with the proposal suggest that many
issuers, and especially most community bank issuers, are already in
compliance with the final rule. In particular, a comment letter
submitted by a major trade association representing community banks
stated that the vast majority of community banks have already enabled
two unaffiliated networks to process card-not-present transactions.
Other comment letters from issuers and merchants stated that many or
most community bank issuers are already compliant with the proposal.
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\34\ As noted previously, according to the Board's most recent
biennial data collection, almost a quarter of issuers with
consolidated assets over $10 billion, representing slightly more
than 50 percent of the total number and value of all debit card
transactions subject to Regulation II's interchange fee standards in
2019, did not process any card-not-present debit card transactions
over single-message networks.
---------------------------------------------------------------------------
Second, the effect of the final rule on issuers will depend on the
costs that issuers not already in compliance with the rule will need to
incur to come into compliance. The Board believes that the costs of
coming into compliance with the rule are likely to differ between
issuers. In particular, implementation and compliance costs are likely
to depend on issuers' current debit card processing arrangements, and
the new arrangements issuers choose to establish to become compliant
with the rule. Importantly, the Board believes issuers
[[Page 61226]]
will be able to choose between multiple solutions available today to
become compliant with the rule, allowing them to select new
arrangements that best suit them. Moreover, as described above, the
final rule permits issuers to use more combinations of networks to
satisfy the prohibition on network exclusivity than are permitted under
current Sec. 235.7(a)(2), which give issuers greater flexibility to
choose how they combine multiple networks to comply with the final
rule.
Third, the effect of the final rule on issuers will depend on the
extent to which the rule will indirectly impact issuers' revenues in
the form of lower interchange fee revenues or higher fraud losses for
issuers with respect to card-not-present debit card transactions. As
mentioned above, increased routing choice will allow merchants to route
card-not-present transactions over networks with lower fees, better
fraud prevention, and other terms that merchants may find desirable. To
the extent that merchants take advantage of increased routing choice
beyond what is already available for card-not-present transactions,
merchants may choose to route a greater number of card-not-present
transactions over networks with lower interchange fees. If these
choices by merchants generate a substantial shift in card-not-present
transaction volumes to networks with lower interchange fees, current
interchange fee levels suggest that community bank issuers exempt from
Regulation II's interchange fee standards that are not already
compliant with the rule in particular may experience lower interchange
fee revenues.\35\ Similarly, a change in the networks over which
merchants route card-not-present transactions may generate a change in
the composition of card-not-present fraud. In particular, fraud losses
experienced by issuers may change depending on fraud-prevention
capabilities and liability rules for networks whose share of card-not-
present transactions increases as a result of the final rule.
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\35\ By contrast, interchange fees for issuers subject to
Regulation II's interchange fee standards currently exhibit less
variation across networks, suggesting that merchant routing
decisions will have less impact on interchange fees received by
those issuers. See Average Debit Card Interchange Fee by Payment
Card Network, available at <a href="https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm">https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm</a>. Nevertheless,
increased merchant routing choice could place downward pressure on
those fees or other fees charged by networks (for example, network
switch fees).
---------------------------------------------------------------------------
Finally, the effect of the final rule on issuers will depend on the
extent to which issuers can and do choose to pass on to their customers
any implementation and compliance costs, and potential changes to their
interchange fee revenues and fraud losses. In particular, issuers could
adjust product terms and fees for their customers in a way that offsets
some or most of the economic impact resulting from the final rule. The
Board expects that issuers in more competitive markets will be less
likely than those in less competitive markers to seek to offset the
economic impact of the final rule in this way.
Thus, the effect of the final rule on issuers will depend on a
variety of factors, including the number of issuers not already
compliant with the final rule, the costs that issuers not already in
compliance with the rule will need to incur to come into compliance
with the final rule, the extent to which the rule will indirectly
impact issuers' revenues, and the extent to which issuers pass on to
their customers any potential costs and foregone revenue. Importantly,
only those issuers not already compliant with the final rule will need
to incur compliance costs and could potentially experience indirect
impacts on their interchange fees revenues and fraud losses. Issuers
that are already compliant with the final rule will not experience
additional compliance costs or the effects of changes in merchant
routing behavior.
(c) Effects on Consumers and Availability of Services to Different
Classes of Consumers
i. Comments Received
Some commenters, primarily issuers and related trade associations,
expressed the view that the proposal would harm consumers. In
particular, commenters suggested that some issuers would pass
incremental implementation and compliance costs associated with the
proposal onto consumers through higher account fees and reduced
availability of free checking accounts and similar programs, curtailing
consumers' access to financial services. Such commenters further
suggested that consumers could also be negatively impacted by higher
fraud levels or increased consumer fraud liability associated with
increased routing of card-not-present transactions over single-message
networks. Finally, some commenters suggested that higher fees and fraud
rates as a result of the proposal would harm consumers if they switch
to financial services provided by nonbank institutions.
Other commenters, primarily merchants and related trade
associations, but also some commenters representing consumers,
expressed the view that the proposal would benefit consumers. In
particular, commenters suggested that competition between merchants
would result in merchants passing on some or most benefits associated
with the proposal to consumers in the form of lower prices, greater
payment method choice, or other service enhancements.
ii. Analysis
The effect of the final rule on consumers will depend on the
behavior of various participants in the debit card industry. Increased
choice for merchants and the resulting ability to route card-not-
present transactions over networks with lower interchange or network
fees could lead to a decrease in merchants' costs of debit card
acceptance, which merchants could in turn pass on to consumers in the
form of lower prices or foregone price increases. Merchants operating
in highly competitive markets with low margins may pass the bulk of
these savings on to consumers, while merchants operating in less
competitive markets may retain a greater portion of the savings. Any
such price reductions would benefit all consumers, not just those
paying with debit cards. In addition, increased choice in how to route
card-not-present transactions could provide merchants with a greater
economic incentive to accept debit cards for card-not-present
transactions, which would benefit consumers by increasing their ability
to use debit cards.
At the same time, as noted above, issuers who are not already
compliant with the rule may seek to offset any implementation and
compliance costs, and potentially lower interchange fee revenues and
any higher fraud losses, by setting higher fees for checking accounts
or reducing availability of free checking accounts. The extent to which
issuers are able to do this, however, will be limited by how sensitive
consumers are to such fee increases and reduced benefits. In
particular, attempts by some issuers to increase fees and lower
benefits may push consumers to switch to issuers with more favorable
pricing, including those issuers who are already compliant with the
rule.
The effect of the rule could differ between particular classes of
consumers in several ways. First, because the most common way to make
card-not-present payments is to do so using a debit card, increasing
the ability to make such payments would benefit consumers without
access to credit cards.\36\ Second,
[[Page 61227]]
issuers' choice to increase checking account fees or reduce the
availability of free checking accounts would have a greater impact on
consumers who are more sensitive to such fees, although competition
between issuers could limit such fee changes.
---------------------------------------------------------------------------
\36\ Federal Reserve Board, Developments in Noncash Payments for
2019 and 2020: Findings from the Federal Reserve Payments Study,
available at <a href="https://www.federalreserve.gov/paymentsystems/december-2021-findings-from-the-federal-reserve-payments-study.htm">https://www.federalreserve.gov/paymentsystems/december-2021-findings-from-the-federal-reserve-payments-study.htm</a>.
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(d) Additional Paperwork
The final rule does not alter the reporting and recordkeeping
requirements that Sec. 235.8 of Regulation II imposes on issuers, and
the section imposes no reporting or recordkeeping requirements on
consumers or merchants. The Board did not receive any comments in
response to the proposal related to paperwork burden.
(e) Effect on Fraud
Although section 904(a)(2) of the EFTA does not require the Board
to consider the impact of the final rule on fraud, the Board believes
it is appropriate to address this topic in light of comments received
in connection with the proposal.
i. Comments Received
As described in the Summary of Public Comments, supra section II,
various commenters, especially issuers, related trade associations, and
dual-message networks, expressed the view that the proposal would, in
practice, require most issuers to enable single-message networks to
process card-not-present debit card transactions, which in turn may
result in increased level of fraud for card-not-present transactions.
These commenters further argued that the proposal casts doubt on
whether an issuer could decline specific transactions for good-faith
fraud concerns. Other commenters, including commenters representing
merchants and single-message networks, argued that the proposal would
not increase card-not-present fraud and that single-message networks
are as effective at mitigating fraud as dual-message networks. A few
commenters stated that single-message networks have an inherent
advantage in preventing card-not-present fraud over dual-message
networks because single-message networks send all information relevant
to the transaction in a single message.
ii. Analysis
EFTA section 920(b)(1)(A) directs the Board to prescribe
regulations providing that an issuer or network shall not directly or
indirectly restrict the number of networks on which a debit card
transaction may be processed to fewer than two unaffiliated networks.
In fulfilling this statutory mandate, the Board acknowledges that
requiring issuers to enable two unaffiliated networks to process card-
not-present transactions may alter the composition of card-not-present
fraud if merchants choose to route card-not-present transactions over
networks that are different from those they use today. In particular,
the Board previously noted that, in 2019, single-message networks
experienced significantly lower fraud losses relative to dual-message
networks, but these lower fraud losses were partially driven by the
fact that single-message networks were rarely used to process card-not-
present transactions in 2019.\37\ Given this fact, and as a result of
the final rule, the Board believes it is likely that the share of card-
not-present fraud attributable to single-message networks will increase
in the coming years relative to dual-message networks, as single-
message networks become a more widespread alternative over which
merchants can route card-not-present debit card transactions. In
addition, the apportionment of fraud losses among various parties to
debit card transactions may change to the extent that single-message
networks' liability rules differ from those of dual-message networks.
---------------------------------------------------------------------------
\37\ See 2019 Data Report at p. 17.
---------------------------------------------------------------------------
Importantly, however, nothing in the final rule requires issuers to
enable any particular network, such as a network with higher levels of
fraud, to process card-not-present debit card transactions. Similarly,
nothing in the final rule requires merchants to choose to route card-
not-present debit card transactions over any particular network. In
addition, even though the Board believes it is likely that the share of
card-not-present fraud attributable to single-message networks will
increase in the coming years relative to dual-message networks, the
Board does not agree with commenters' suggestion that single-message
networks have categorically weaker fraud-prevention capabilities
compared with dual-message networks. In particular, data collected by
the Board does not demonstrate that single-message networks have
overall higher fraud rates or higher card-not-present fraud rates
compared with dual-message networks, and there is nothing to suggest
that card-not-present fraud rates between dual-message networks and
single-message networks will diverge as a result of the final rule.\38\
To the contrary, increased adoption of card-not-present capabilities
among single-message networks in recent years suggests that such
networks have implemented fraud-prevention measures to combat card-not-
present fraud that make them a viable alternative to dual-message
networks. Finally, the Board believes that increased competition
between networks for card-not-present transactions spurred by the final
rule is likely to result in all networks improving their fraud-
prevention capabilities, including fraud-prevention capabilities for
card-not-present transactions.
---------------------------------------------------------------------------
\38\ See 2019 Data Report at p. 28.
---------------------------------------------------------------------------
The Board does not agree with commenters' interpretation that the
proposal (or the final rule) casts doubt on the ability of an issuer to
decline specific debit card transactions for good-faith fraud concerns.
In particular, the final rule does not prohibit an issuer from
declining a specific debit card transaction for such concerns; rather,
it requires that the issuer enable at least two unaffiliated networks
to process such debit card transactions.
(f) Effects Upon Competition in the Provision of Electronic Banking
Services \39\
---------------------------------------------------------------------------
\39\ Although EFTA section 904(a)(2) requires the Board to
consider ``the effects upon competition in the provision of
electronic banking services among large and small financial
institutions,'' the Board is considering the impact of the final
rule on competition generally, including competition between large
and small financial institutions.
---------------------------------------------------------------------------
i. Comments Received
Some commenters, primarily merchants, single-message networks, and
federal agencies, expressed the view that the proposal would promote
greater competition between networks by ensuring at least two
unaffiliated networks are available for card-not-present debit card
transactions. These commenters noted that such a competitive landscape
may be necessary for some of the networks currently in the market to
remain competitive as more debit card transactions move into the card-
not-present environment. At the same time, a few commenters expressed
the view that the proposal is unnecessary because competitive forces
within the debit card industry are strong enough to provide merchants
with routing choice for card-not-present transactions.
ii. Analysis
The Board expects the final rule to increase competition between
networks. By making it possible for merchants to route card-not-present
debit card transactions over two or more unaffiliated networks, the
final rule should encourage greater competition
[[Page 61228]]
between networks for such transactions. There could be multiple
benefits from such increased competition, including lower fees borne by
merchants and enhanced fraud-prevention capabilities among networks.
Importantly, both such effects could benefit not just merchants but
also issuers (through lower fraud rates) and consumers (through lower
prices and fraud rates). Moreover, the final rule gives issuers greater
flexibility to combine multiple networks (including networks that may
operate for a limited geographic area) to satisfy the rule's
requirements. As a consequence, networks whose operations are limited
in one or more dimensions could become more competitive in the
marketplace as a result of the final rule.
In addition, the Board believes that the final rule could promote
competition between issuers of different sizes. As described above,
some comment letters and Board data suggest that several of the largest
issuers have not enabled two unaffiliated networks to process card-not-
present debit card transactions, but most community bank issuers have
already done so. The final rule will thus level the playing field
between issuers of all sizes by requiring all of them to consistently
enable two unaffiliated networks to process card-not-present debit card
transactions.
(g) Consumer Protections and Compliance Costs
As noted above, EFTA section 904(a)(2) requires that, to the extent
practicable, the Board must demonstrate that the consumer protections
of the proposed regulations outweigh the compliance costs imposed upon
consumers and financial institutions. Based on the analysis above, the
Board cannot, at this time, determine whether the benefits to consumers
exceed the possible costs to financial institutions. In particular, the
final rule may yield benefits for consumers; however, as described in
the analysis above, the magnitude of these benefits will depend on the
behavior of various participants in the debit card industry. The final
rule may also impose compliance costs on financial institutions that
have not already enabled at least two unaffiliated networks to process
card-not-present debit card transactions; however, an individual
financial institution's compliance costs, if any, will depend on its
particular circumstances. The overall effects of the final rule on
consumers and on financial institutions are dependent on a variety of
factors, and the Board cannot predict the market response to the final
rule.
B. EFTA Section 904(a) Interagency Consultation Requirement
In addition to the economic analysis provided above, EFTA section
904(a)(2) requires the Board to consult with the other agencies that
have enforcement authority under the EFTA on any rulemakings related to
EFTA section 920.\40\ The Board consulted with each of the relevant
agencies prior to issuing this final rule.
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\40\ These agencies include the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, the National
Credit Union Administration, the Department of Transportation, the
Securities and Exchange Commission, the Consumer Financial
Protection Bureau, and the Federal Trade Commission. See EFTA
section 918.
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C. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320, Appendix A.1), the Board may not conduct
or sponsor, and a respondent is not required to respond to, an
information collection unless it displays a valid Office of Management
and Budget (OMB) control number. The Board reviewed the final rule
under the authority delegated to the Board by the OMB and determined
that it contains no collections of information under the PRA.
Accordingly, there is no paperwork burden associated with the final
rule.
D. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
requires an agency to consider whether its rules will have a
significant economic impact on a substantial number of small entities.
Under the RFA, in connection with a final rule, an agency is generally
required to publish a final regulatory flexibility analysis (FRFA),
unless the head of agency certifies that the rule will not have a
significant economic impact on a substantial number of small entities
and the agency publishes the factual basis supporting such
certification. An FRFA must contain (i) a statement of the need for,
and objectives of, the rule; (ii) a statement of the significant issues
raised by the public comments in response to the initial regulatory
flexibility analysis (IRFA) that was prepared in connection with the
proposed rule, a statement of the assessment of the agency of such
issues, and a statement of any changes made in the proposed rule as a
result of such comments; (iii) the response of the agency to any
comments filed by the Chief Counsel for Advocacy of the Small Business
Administration (SBA) in response to the proposed rule, and a detailed
statement of any change made to the proposed rule in the final rule as
a result of the comments; (iv) a description of and an estimate of the
number of small entities to which the rule will apply or an explanation
of why no such estimate is available; (v) a description of the
projected reporting, recordkeeping and other compliance requirements of
the rule, including an estimate of the classes of small entities that
will be subject to the requirement and the type of professional skills
necessary for preparation of the report or record; and (vi) a
description of the steps the agency has taken to minimize the
significant economic impact on small entities consistent with the
stated objectives of applicable statutes, including a statement of the
factual, policy, and legal reasons for selecting the alternative
adopted in the final rule and why each one of the other significant
alternatives to the rule considered by the agency which affect the
impact on small entities was rejected.
The Board is providing an FRFA with respect to the final rule.
1. Need for and Objectives of the Rule
The first required element of an FRFA--a statement of the need for,
and objectives of, the rule--is provided in the Background, supra
section I.
2. Significant Issues Raised by Public Comments in Response to the IRFA
The Board received seven comment letters from issuers and related
trade associations that explicitly referenced the IRFA that was
published with the proposal. In general, these commenters summarily
stated that the Board's IRFA was insufficiently detailed; a few
commenters stated that it was not possible to evaluate the compliance
burden that the proposal would impose on issuers based on the limited
analysis in the Board's IRFA. However, none of these commenters
provided detailed comments on the Board's IRFA. In addition to these
comments that directly referenced the IRFA, the Board received numerous
comments discussing the proposed rule's impact on entities of all
sizes, including community bank issuers. Further discussion of these
comments is provided in the Summary of Public Comments, supra section
II, Final Rule and Section-by-Section Analysis, supra section III, and
the EFTA Section 904(a) Analysis, supra section IV.A. As described in
the Final Rule and Section-by-Section Analysis, the Board is adopting a
final rule that is substantively consistent with the proposal, but with
certain changes to address issues raised by commenters.
[[Page 61229]]
3. Response to Comments Filed by the Chief Counsel for Advocacy of the
Small Business Administration
The Board transmitted a copy of the IRFA that was published with
the proposal to the SBA's Chief Counsel for Advocacy, as required by
statute. The Board did not receive any comments from the SBA's Chief
Counsel for Advocacy in response to the proposal.
4. Estimate of the Number of Small Entities
The final rule applies to all debit card issuers; thus, the number
of small entities to which the final rule will apply is the number of
debit card issuers that are considered small entities. For this
purpose, the SBA has adopted size standards that provide that card-
issuing institutions with average assets of less than $750 million over
the preceding year (based on the institution's four quarterly financial
statements) are considered small entities.\41\
---------------------------------------------------------------------------
\41\ 13 CFR 121.201 (sector 522210). Although this size standard
applies to credit card-issuing institutions, the Board believes that
the same size standard should apply to debit card-issuing
institutions. Consistent with the General Principles of Affiliation
in 13 CFR 121.103, the Board counts the assets of all domestic and
foreign affiliates when determining whether to classify an
institution as a small entity.
---------------------------------------------------------------------------
Based on this size standard and Call Report data, the Board
estimates that approximately 8,000 small entities will be subject to
the final rule. The Board derived this estimate by (i) identifying
those depository institutions that, together with their affiliates, had
average assets of less than $750 million in 2021 based on the
depository institutions' four quarterly Call Reports (that is, FFIEC
041 and NCUA 5300) and, where applicable, holding company financial
reports (that is, FR Y-9C) in 2021, and (ii) determining the number of
such depository institutions that reported the type of income that
includes debit card interchange fees in 2021. Although the Board
believes that 8,000 small entities is a reasonable estimate of the
number of small entities that will be subject to the final rule, the
Board notes that this estimate may represent an overcount because the
line items in the Call Reports on which the Board's estimate is based
aggregate several types of income, including income other than debit
card interchange fee income, and thus, some of the depository
institutions that report income on these lines may not in fact be debit
card issuers.\42\ On the other hand, the Board's estimate may represent
an undercount because it would not include debit card issuers that are
not depository institutions that are required to file quarterly Call
Reports.\43\
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\42\ The Board considered using other, more specific line items
in the Call Reports as the basis for its estimate. However, the
Board recognizes that different reporting practices among depository
institutions may affect the accuracy and consistency of information
for those more specific line items. For this reason, the Board
determined that it would be more appropriate to use the line items
that aggregate several types of income, including debit card
interchange fee income.
\43\ At this time, the Board is not aware of any debit card
issuers that are not depository institutions.
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5. Description of Reporting, Recordkeeping, and Other Compliance
Requirements
The final rule does not alter the reporting requirements that Sec.
235.8(b) of Regulation II imposes on issuers.
With respect to recordkeeping requirements, Sec. 235.8(c) of
Regulation II requires issuers to retain records to demonstrate
compliance with the requirements of Regulation II for not less than
five years after the end of the calendar year in which the debit card
transaction occurred; if an issuer receives actual notice that it is
subject to an investigation by an enforcement agency, the issuer must
retain the records until final disposition of the matter. The final
rule does not directly alter the requirements of Sec. 235.8(c).
However, as a result of the final rule, an issuer that is not already
compliant with the final rule's requirements will need to retain
records to demonstrate that the issuer has enabled two unaffiliated
networks to process card-not-present transactions performed with the
issuer's debit cards. The Board believes that this additional
recordkeeping burden should not be significant because such issuers
should already be retaining records to demonstrate that they are
complying with the prohibition on network exclusivity under the current
rule and can retain the same types of records to demonstrate that they
are compliant with the requirements of the final rule with respect to
card-not-present transactions. For the same reason, the additional
professional skills necessary for the preparation of such records
should not be significant. The Board did not receive any comments in
response to the proposal related to paperwork burden.
With respect to other compliance requirements, the Board believes
that the impact of the final rule on small entities will vary
significantly depending on the small entity's operations and processing
arrangements. In particular, the Board distinguishes between three
classes of small entities subject to the final rule (that is, small
issuers that process card-not-present transactions): (i) small entities
that are already compliant with the final rule because they have
already enabled at least two unaffiliated networks to process card-not-
present transactions; (ii) small entities that have enabled only one
network (or only multiple affiliated networks) to process card-not-
present transactions, but that already contract with an unaffiliated
network that is capable of processing card-not-present transactions;
and (iii) small entities that have enabled only one network (or only
multiple affiliated networks) to process card-not-present transactions,
and that do not already contract with an unaffiliated network that is
capable of processing card-not-present transactions.\44\
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\44\ As stated previously, an issuer may need to consult with
its payment processor to determine whether card-not-present
transactions performed with its debit cards can already be processed
on at least two unaffiliated networks.
---------------------------------------------------------------------------
Issuers in the first class of small entities subject to the final
rule--small entities that are already complaint with the final rule
because they have already enabled at least two unaffiliated networks to
process card-not-present transactions--would not need to take any
additional steps to comply with the final rule and thus should not bear
any compliance costs associated with the rule. The Board is unable to
estimate the number of small entities in this first class of small
entities.\45\ However, in response to the proposal, the Board received
multiple comment letters representing the interests of both merchants
and issuers--including a comment letter from a major trade association
representing community banks--that indicated that most community bank
issuers are already compliant with the prohibition on network
exclusivity for card-not-present transactions.\46\ For this reason, the
Board believes that it is likely that there is already widespread
compliance with the final rule among small entities subject to the
final rule.
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\45\ Pursuant to its authority in section 235.8(b) of Regulation
II, the Board collects data on an annual or biennial basis only from
payment card networks and ``covered issuers'' with consolidated
assets exceeding $10 billion. Thus, the Board does not collect data
from small entities subject to the final rule.
\46\ The Board notes that these comment letters were likely not
describing the extent of compliance among small entities as defined
for RFA purposes (that is, issuers with average assets of less than
$750 million over the preceding year), but rather were likely
describing the extent of compliance among issuers exempt from
Regulation II's interchange fee standards (that is, issuers with
consolidated assets of less than $10 billion).
---------------------------------------------------------------------------
Issuers in the second class of small entities subject to the final
rule--small entities that have enabled only one
[[Page 61230]]
network (or only multiple affiliated networks) to process card-not-
present transactions, but that already contract with an unaffiliated
network that is capable of processing card-not-present transactions--
may comply with the final rule by enabling one or more of its their
existing networks to process card-not-present transactions. The Board
has considered feedback provided by debit card industry participants,
along with the Board's general understanding of the technical aspects
of the debit card industry. Accordingly, the Board believes that while
there are compliance costs associated with enabling an existing network
to process card-not-present transactions, these costs are generally not
significant.\47\
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\47\ For example, an issuer that begins to accept card-not-
present transactions routed over an existing network may need to
update its internal systems to ensure that the issuer can accept
payment messages associated with card-not-present transactions and
may need to update its fraud-prevention processes to account for
this new type of transaction. However, such an issuer should not
need to take much more costly steps, such as adding or changing
networks or reissuing its debit cards.
---------------------------------------------------------------------------
Issuers in the third class of small entities subject to the final
rule--small entities that have enabled only one network (or only
multiple affiliated networks) to process card-not-present transactions,
and that do not already contract with an unaffiliated network that is
capable of processing card-not-present transactions--will need to
enable a new unaffiliated network to process card-not-present
transactions to comply with the final rule. The Board has considered
feedback provided by debit card industry participants, along with the
Board's general understanding of the technical aspects of the debit
card industry. Accordingly, the Board believes that the compliance
costs associated with this category of small entities could be
significant and will likely vary substantially depending on a small
entity's particular facts and circumstances. However, these small
entities should be able to choose among alternative compliance
arrangements to reduce compliance costs.\48\
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\48\ For example, an issuer that enables a new network to
process card-not-present transactions by directly connecting with
the new network would likely need to make significant updates to its
internal systems in order to accept transactions routed over the new
network and may need to reissue its debit cards to comply with the
new network's technical and branding requirements. Alternatively,
the issuer may be able to reduce compliance costs by enabling a new
network to process card-not-present transactions by indirectly
connecting to such network through one of its existing networks,
which may not require card reissuance.
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For the reasons described above, the Board also is unable to
estimate the number of small entities in the second and third classes
of small entities. However, based on the comments received in response
to the proposal as noted above, the Board believes that there are
significantly fewer small entities in the second and third classes of
small entities compared with the first class of small entities.
6. Steps Taken To Minimize the Significant Economic Impact on Small
Entities and Alternatives Considered
As stated in the Summary of Public Comments, supra section II, EFTA
section 920(b)(1)(A) directs the Board to prescribe regulations
providing that an issuer or network shall not directly or indirectly
restrict the number of networks on which an electronic debit
transaction may be processed to fewer than two unaffiliated networks.
The statute does not exempt, and does not authorize the Board to
exempt, small issuers from the two-network requirement. For this
reason, the Board could not consider an alternative rule that would
have allowed small entities subject to the final rule not to enable at
least two unaffiliated networks to process card-not-present
transactions.
Although the Board lacks the legal authority to exempt small
entities from the final rule, the Board, partly in response to comments
received in connection with the proposal, took other steps to minimize
the economic impact of the final rule on issuers of all sizes,
including small entities. First, as described in the Final Rule and
Section-by-Section Analysis, supra section III, the final rule permits
issuers to use more combinations of networks to satisfy the prohibition
on network exclusivity than are permitted under current Sec.
235.7(a)(2). The Board believes that allowing issuers to use more
combinations of networks to satisfy the final rule will help issuers
minimize compliance costs associated with the final rule because
issuers can choose the lowest-cost combination of networks to comply
with the final rule. Second, as described in the Final Rule and
Section-by-Section Analysis, supra section III, the Board is adopting a
final rule that preserves an issuer's ability to rely on network rules
or policies in determining whether a network may be used to satisfy the
prohibition on network exclusivity. The Board believes that allowing
issuers to continue to rely on network rules or policies in determining
whether a network may be used to satisfy the prohibition on network
exclusivity (as is permitted under current Sec. 235.7(a)(2)) will make
it much easier for issuers to know when they have complied with the
final rule and to demonstrate such compliance, as compared with the
proposal. Finally, as described in the Final Rule and Section-by-
Section Analysis, supra section III, the Board is giving small entities
approximately nine months to comply with the final rule--which is the
same amount of time the Board gave issuers to comply when Sec.
235.7(a) was originally adopted in 2011. The Board believes that, as
when Sec. 235.7(a) was originally adopted, nine months is a sufficient
amount of time for issuers to comply with the final rule.
E. Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471, 12 U.S.C. 4809) requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. The Board has sought to present the final rule in a
simple and straightforward manner.
List of Subjects in 12 CFR Part 235
Banks, banking, Debit card routing, Electronic debit transactions,
Interchange transaction fees.
Authority and Issuance
For the reasons set forth in the preamble, the Board is amending 12
CFR part 235 (Regulation II) as follows:
PART 235--DEBIT CARD INTERCHANGE FEES AND ROUTING (REGULATION II)
0
1. The authority citation for part 235 continues to read as follows:
Authority: 15 U.S.C. 1693o-2.
0
2. Section 235.7 is amended by revising paragraph (a)(2) to read as
follows:
Sec. 235.7 Limitations on payment card restrictions.
(a) * * *
(2) Permitted arrangements. An issuer satisfies the requirements of
paragraph (a)(1) of this section only if the issuer enables at least
two unaffiliated payment card networks to process an electronic debit
transaction--
(i) Where such networks in combination do not, by their respective
rules or policies or by contract with or other restriction imposed by
the issuer, result in the operation of only one network or only
multiple affiliated networks for a geographic area, specific merchant,
particular type of merchant, or particular type of transaction, and
(ii) Where each of these networks has taken steps reasonably
designed to be able to process the electronic debit transactions that
it would reasonably
[[Page 61231]]
expect will be routed to it, based on expected transaction volume.
* * * * *
0
3. Appendix A to part 235 is amended under ``Section 235.7 Limitations
on Payment Card Restrictions'' by revising paragraphs 7(a), 7(b)1 and
2, and 7(b)5 to read as follows:
Appendix A to Part 235--Official Board Commentary on Regulation II
* * * * *
Section 235.7 Limitations on Payment Card Restrictions
* * * * *
7(a) Prohibition on Network Exclusivity
1. Scope of restriction. Section 235.7(a) requires an issuer to
configure each of its debit cards so that each electronic debit
transaction performed with such card can be processed on at least
two unaffiliated payment card networks. In particular, Sec.
235.7(a) requires this condition to be satisfied for each geographic
area, specific merchant, particular type of merchant, and particular
type of transaction for which the issuer's debit card can be used to
perform an electronic debit transaction. As long as the condition is
satisfied for each such case, Sec. 235.7(a) does not require the
condition to be satisfied for each method of cardholder
authentication (e.g., signature, PIN, biometrics, any other method
of cardholder authentication that may be developed in the future, or
the lack of a method of cardholder authentication). For example, it
is sufficient for an issuer to issue a debit card that can perform
signature-authenticated transactions only over one payment card
network and PIN-authenticated transactions only over another payment
card network, as long as the two payment card networks are not
affiliated and each network can be used to process electronic debit
transactions for every geographic area, specific merchant,
particular type of merchant, and particular type of transaction for
which the issuer's debit card can be used to perform an electronic
debit transaction.
2. Issuer's role. Section 235.7(a) does not require an issuer to
ensure that two or more unaffiliated payment card networks will
actually be available to the merchant to process every electronic
debit transaction. To comply with the requirement in Sec. 235.7(a),
it is sufficient for an issuer to configure each of its debit cards
so that each electronic debit transaction performed with such card
can be processed on at least two unaffiliated payment card networks,
even if the networks that are actually available to the merchant for
a particular transaction are limited by, for example, the card
acceptance technologies that a merchant adopts, or the networks that
the merchant accepts.
3. Permitted networks.
i. Network volume capabilities. A payment card network could be
used to satisfy the requirement that an issuer enable two
unaffiliated payment card networks for each electronic debit
transaction if the network was either (a) capable of processing the
volume of electronic debit transactions that it would reasonably
expect to be routed to it or (b) willing to expand its capabilities
to meet such expected transaction volume. If, however, the network's
policy or practice is to limit such expansion, it would not qualify
as one of the two unaffiliated payment card networks.
ii. Reasonable volume expectations. One of the steps a payment
card network can take to form a reasonable expectation of its
transaction volume is to consider factors such as the number of
cards expected to be issued that are enabled by an issuer on the
network and expected card usage patterns.
iii. Examples of permitted arrangements. For each geographic
area (e.g., New York State), specific merchant (e.g., a specific
fast food restaurant chain), particular type of merchant (e.g., fast
food restaurants), and particular type of transaction (e.g., card-
not-present transaction) for which the issuer's debit card can be
used to perform an electronic debit transaction, an issuer must
enable at least two unaffiliated payment card networks, but those
payment card networks do not necessarily have to be the same two
payment card networks for every transaction.
A. Geographic area: An issuer complies with the rule only if,
for each geographic area in which the issuer's debit card can be
used to perform an electronic debit transaction, the issuer enables
at least two unaffiliated payment card networks. For example, an
issuer could comply with the rule by enabling two unaffiliated
payment card networks that can each process transactions in all 50
U.S. states. Alternatively, the issuer could comply with the rule by
enabling three unaffiliated payment card networks, A, B, and C,
where network A can process transactions in all 50 U.S. states,
network B can process transactions in the 48 contiguous United
States, and network C can process transactions in Alaska and Hawaii.
B. Particular type of transaction: An issuer complies with the
rule only if, for each particular type of transaction for which the
issuer's debit card can be used to perform an electronic debit
transaction, the issuer enables at least two unaffiliated payment
card networks. For example, an issuer could comply with the rule by
enabling two unaffiliated payment card networks that can each
process both card-present and card-not-present transactions.
Alternatively, the issuer could comply with the rule by enabling
three unaffiliated payment card networks, A, B, and C, where network
A can process both card-present and card-not-present transactions,
network B can process card-present transactions, and network C can
process card-not-present transactions.
4. Examples of prohibited network restrictions on an issuer's
ability to contract with other payment card networks. The following
are examples of prohibited network restrictions on an issuer's
ability to contract with other payment card networks:
i. Network rules or contract provisions limiting or otherwise
restricting the other payment card networks that an issuer may
enable on a particular debit card, or network rules or contract
provisions that specify the other networks that an issuer may enable
on a particular debit card.
ii. Network rules or guidelines that allow only that payment
card network's (or its affiliated networks') brand, mark, or logo to
be displayed on a particular debit card, or that otherwise limit the
ability of brands, marks, or logos of other payment card networks to
appear on the debit card.
5. Network logos or symbols on card not required. Section
235.7(a) does not require that a debit card display the brand, mark,
or logo of each payment card network over which an electronic debit
transaction may be processed. For example, the rule does not require
a debit card that an issuer enables on two or more unaffiliated
payment card networks to bear the brand, mark, or logo of each such
payment card network.
6. Voluntary exclusivity arrangements prohibited. Section
235.7(a) requires that an issuer enable at least two unaffiliated
payment card networks to process an electronic debit transaction,
even if the issuer is not subject to any rule of, or contract or
other agreement with, a payment card network requiring that all or a
specified minimum percentage of electronic debit transactions be
processed on the network or its affiliated networks.
7. Affiliated payment card networks. Section 235.7(a) does not
prohibit an issuer from enabling two affiliated payment card
networks among the networks on a particular debit card, as long as
at least two of the networks that can be used to process each
electronic debit transaction are unaffiliated.
8. Application of rule regardless of form. The network
exclusivity provisions in Sec. 235.7(a) apply to electronic debit
transactions performed with any debit card as defined in Sec.
235.2, regardless of the form of such debit card. For example, the
requirement applies to electronic debit transactions performed using
a plastic card, a supplemental device such as a fob, information
stored inside an e-wallet on a mobile phone or other device, or any
other form of debit card, as defined in Sec. 235.2, that may be
developed in the future.
7(b) Prohibition on Routing Restrictions
1. Relationship to the network exclusivity restrictions. An
issuer or payment card network is prohibited from inhibiting a
merchant's ability to direct the routing of an electronic debit
transaction over any of the payment card networks that the issuer
has enabled to process electronic debit transactions performed with
a particular debit card. The rule does not require that an issuer
allow a merchant to route a transaction over a payment card network
that the issuer did not enable to process transactions performed
with that debit card.
2. Examples of prohibited merchant restrictions. The following
are examples of issuer or network practices that would inhibit a
merchant's ability to direct the routing of an electronic debit
transaction and that are therefore prohibited under Sec. 235.7(b):
i. Prohibiting a merchant from encouraging or discouraging a
cardholder's use of a particular method of cardholder
authentication, for example prohibiting merchants from favoring a
cardholder's use of one cardholder authentication method over
another, or from discouraging the cardholder's use of any given
cardholder authentication method, as further described in comment
7(a)-1.
[[Page 61232]]
ii. Establishing network rules or designating issuer priorities
directing the processing of an electronic debit transaction on a
specified payment card network or its affiliated networks, or
directing the processing of the transaction away from a specified
payment card network or its affiliates, except as:
(A) A default rule in the event the merchant, or its acquirer or
processor, does not designate a routing preference; or
(B) If required by state law.
iii. Requiring a specific payment card network to be used based
on the form of debit card presented by the cardholder to the
merchant (e.g., plastic card, payment code, or any other form of
debit card as defined in Sec. 235.2).
* * * * *
5. No effect on network rules governing the routing of
subsequent transactions. Section 235.7 does not supersede a payment
card network rule that requires a chargeback or return of an
electronic debit transaction to be processed on the same network
that processed the original transaction.
* * * * *
By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2022-21838 Filed 10-7-22; 8:45 am]
BILLING CODE P
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</html>Indexed from Federal Register on October 11, 2022.
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