[Federal Register Volume 69, Number 99 (Friday, May 21, 2004)]
[Notices]
[Pages 29308-29310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11527]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1196]


Notice of Study

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of study and request for Information.

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SUMMARY: The Board is conducting a study about disclosures of debit 
card fees, at the request of members of the United States Senate 
Committee on Banking, Housing, and Urban Affairs. In connection with 
the study, the Board solicits comment on whether the existing 
disclosures required by the Electronic Fund Transfer Act adequately 
inform consumers of fees imposed by a financial institution that holds 
the consumer's account and has issued a debit card (``account-holding 
institution'') when the debit card is used to make a purchase from a 
merchant (or other provider of services). The Board also seeks the 
public's views on the need for, and the potential benefits of, 
requiring additional disclosures in each periodic account activity 
statement to reflect fees imposed by account-holding institutions for 
debit card use. Lastly, the Board seeks comment on the benefits of 
requiring disclosure of the amount, source, and recipient of each such 
fee, as well as a summary of the total amount of such fees for the 
period, and calendar year-to-date.

DATES: Comments must be received on or before July 23, 2004.

ADDRESSES: You may submit comments, identified by Docket No. OP-1196, 
by any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include docket 
number in the subject line of the message.
     FAX: 202/452-3819 or 202/452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, except as necessary for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Daniel Lonergan, Counsel, Division of 
Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, at (202) 452-3667 or 452-2412. For users of 
Telecommunications Device for the Deaf (``TDD'') only, contact (202) 
263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

    At the request of members of the U.S. Senate Committee on Banking, 
Housing, and Urban Affairs, the Board is initiating a study of the 
disclosure of fees imposed by financial institutions that hold a 
consumer's account and have issued a debit card to access the account 
(``account-holding institution''). The Board is specifically studying 
the fees imposed by such account-holding institutions when consumers 
engage in debit card purchase transactions with a merchant (or other 
provider of services), otherwise known as ``point-of-sale'' or ``POS'' 
transactions. The Board has been asked to consider whether existing 
disclosure requirements are adequate and effective in making consumers 
aware of the imposition of debit card transaction fees by their 
financial institution. Further, the Board has been asked to consider 
the possible benefits of requiring additional disclosures in a 
consumer's periodic account activity statement that would inform the 
consumer of the amount of each fee imposed by the account-holding 
institution in connection with a debit card transaction during the 
statement period, as well as information regarding the source and 
recipient of such fee, along with a summary of the total amount of such 
fees for the period.
    Point-of-Sale Transactions. When a consumer uses a debit card to 
make a point-of-sale purchase, the parties to the transaction are 
typically the consumer, the merchant, the merchant's bank, and the 
consumer's account-holding bank. The consumer presents a debit card to 
the merchant to make a purchase, or ``swipes'' the card through the 
merchant's POS electronic reader to initiate the process of having the 
purchase amount debited from the consumer's checking account. In order 
to enable the account-holding institution to identify the consumer as 
provided by current regulation, and authorize the electronic fund 
transfer, the consumer is asked either to enter a personal 
identification number (``PIN''), for an ``online'' debit, or is asked 
to provide a signature, for an ``offline'' debit. If the transaction is 
successfully processed, the consumer will receive the goods or services 
sought, an account at the consumer's bank will be debited, and the 
merchant's account at the merchant's bank will be credited.
    This is a simplified description of the debit card transaction 
process, as the transaction information described above is commonly 
carried over one or multiple networks to obtain authorization for the 
transaction, and commonly involves additional third-party participants. 
Moreover, the use of such networks and participants can result in the 
imposition of fees such as interchange fees that can result in costs 
to, or revenue for, the various parties involved.
    The number of cards in circulation with a debit function is 
estimated to be approximately 287 million, and the number of POS debit 
card ``readers'' has risen dramatically. Consequently, the use of debit 
cards at point-of-sale--both online (PIN-based) and offline (signature-
based)--has risen sharply since the mid-1990s.\1\ While PIN-based 
debit's share of total debit transactions was greater than signature-
based debit's share in the early-1990s, this is no longer true. Both 
PIN-based debit and signature-based debit continue to show

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strong growth. The differing costs of, and fees generated by, PIN-based 
and signature-based debit transactions have resulted in account-holding 
institutions and merchants favoring, and promoting, different methods 
of debit transactions.
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    \1\ For additional historical and statistical information 
regarding the ATM and debit card industry, as well as information on 
industry structure, pricing, transaction settlement and processing, 
and emerging policy issues, see ``A Guide to the ATM and Debit Card 
Industry,'' F. Hayashi, R. Sullivan, and S. Weiner, Federal Reserve 
Bank of Kansas City, 2003 (available in electronic form from the 
Federal Reserve Bank of Kansas City's Web site, http://www.kc.frb.org under ``Publications & Education Resources'').
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    For instance, as a general matter, an account-holding bank can 
receive greater revenue as a result of the interchange fees paid when a 
consumer chooses a signature-based debit transaction. Thus, these card-
issuing, account-holding banks encourage the use of offline, signature-
based transactions. Merchants, on the other hand, generally prefer that 
consumers choose online, PIN-based debit transactions in order to 
reduce their costs-per-transaction by minimizing the interchange fees 
they may need to pay.
    Congressional Concerns and PIN Fees. In an effort to encourage 
their debit card holders to choose signature-based, offline 
transactions and offset the revenue lost when their account-holding 
customers choose online debit, some account-holding institutions are 
charging their cardholders a fee when the customer uses the 
institution's debit card to make a point of sale purchase and chooses 
the online, PIN-based method (resulting in a ``PIN-use'' fee). The 
recent request by some members of Congress that the Board study the 
issue of debit fees reflects concern that consumers may be unaware, or 
not adequately informed, that their own bank may impose such PIN fees 
when the consumer chooses online debit. It may also reflect the belief 
that, unlike the various fees and surcharges that a consumer may be 
assessed in an ATM transaction, PIN-use fees assessed at the point of 
sale may not be adequately disclosed or timely disclosed at the point 
of sale, or might be inadequately disclosed in the regular account 
statement the consumer receives after the debit purchase date.
    As detailed below, the Board solicits comments from all interested 
parties on these issues. The Board will consider these public comments 
in developing a final report to be submitted to the U.S. Senate 
Committee on Banking, Housing, and Urban Affairs in November 2004, 
which will address these specific questions, as well as additional 
issues expressly identified by the Committee.

II. Existing Fee Disclosure Requirements

    The following summary of current disclosure requirements provides 
context so that commenters may more fully address the adequacy of 
existing disclosures.
    The Electronic Fund Transfers Act (EFTA), 15 U.S.C. 1693 et seq., 
enacted in 1978, sets forth the existing disclosure requirements 
governing electronic fund transfers (EFTs). The general purpose of the 
EFTA is to provide a basic framework for establishing the rights, 
liabilities, and responsibilities of participants in EFT systems. The 
types of transfers covered by the EFTA include transfers initiated 
through an automated teller machine, point-of-sale terminal, automated 
clearinghouse, telephone bill-payment plan, or remote banking program. 
The statute and regulation require the disclosure of terms and 
conditions of an EFT service; the documentation of electronic transfers 
by means of terminal receipts and periodic account statements; 
limitations on consumer liability for unauthorized transfers; 
procedures for the resolution of errors; and certain rights related to 
preauthorized EFTs.
    The EFTA is implemented by the Board's Regulation E (12 CFR part 
205), and these regulatory requirements are interpreted by the Official 
Staff Commentary (12 CFR part 205 (Supp. I)). The Official Staff 
Commentary facilitates compliance and provides protection from civil 
liability, under Sec.  915(d)(1) of the act, for financial institutions 
that act in conformity with it. The commentary is updated periodically, 
as necessary, to address significant questions that arise.
    Generally, the EFTA and Regulation E provide for disclosures to 
consumers about fees related to EFTs (including POS transactions) at 
three points in time:
     In the initial disclosures provided at the time the 
consumer contracts for an EFT under Section 905(a) of the EFTA (which 
includes POS transfers);
     In periodic account statements provided under Section 
906(c); and
     On receipts provided at an electronic terminal at the time 
a transfer is initiated under Section 906(a).
    These express statutory requirements are implemented in detail by 
Regulation E. 12 CFR Sec. Sec.  205.7(b), 205.9(a) and (b).
    Initial Disclosures. Under Sec.  205.7(b), a financial institution 
must make initial disclosures at the time a consumer contracts for an 
EFT service, or before the first EFT is made involving the consumer's 
account. In addition to other information, these disclosures must state 
``[a]ny fees imposed by the financial institution for electronic fund 
transfers or the right to make transfers.'' 12 CFR Sec.  205.7(b)(5). 
As explained in the Official Staff Commentary to this section, the fees 
addressed by this disclosure requirement are those fees imposed on the 
consumer by the account-holding institution. See Comment 7(b)(5)-3. 
Thus, the particular fee that an account-holding institution imposes 
when its customer engages in a POS debit transaction must be disclosed 
under this initial disclosure requirement.
    Periodic Statement Disclosures. Under Sec.  205.9(b), for each 
account to or from which EFT can be made, a financial institution must 
send the consumer a periodic statement. 12 CFR Sec.  205.9(b). This 
statement must be sent for each monthly cycle in which an EFT has 
occurred, and must be sent at least quarterly even if no such transfer 
has occurred. In addition to other information, this statement must set 
forth ``[t]he amount of any fees assessed against the account during 
the statement period for electronic fund transfers, for the right to 
make transfers, or for account maintenance.'' Sec.  205.9(b)(3).
    The Official Staff Commentary to this provision provides additional 
clarification that is relevant to commenters, the goals of the 
requested study, and to consumers. The fees to be disclosed in the 
periodic statement may include fees for EFTs as well as for other, non-
electronic services (both fixed and per-item fees). Significantly, 
these fees may be stated ``as a total or may be itemized in part or in 
full.'' See comment 9(b)(3)-1. Thus, for example, if an account-holding 
institution imposes fees on the consumer for an online POS debit 
transaction, these fees must be disclosed in the periodic statement but 
may be aggregated with other fees; a per-transaction itemization of 
each fee imposed by the card-issuing bank for a POS debit transaction 
is permitted, but not required by the regulations.
    Disclosures Contained in Receipts Provided at Electronic Terminals. 
Under Sec.  205.9(a), financial institutions must make a receipt 
available to a consumer at the time the consumer initiates an EFT ``at 
an electronic terminal,'' which includes a POS terminal. Sec.  
205.2(h). The Official Staff Commentary expressly provides that ``[a]n 
account-holding institution may make terminal receipts available 
through third parties such as merchants or other financial 
institutions.'' See comment 9(a)-2. Consequently, when a debit card is 
used at point-of-sale, the merchant provides a terminal receipt that 
contains the information that the account-holding institution is 
required to provide to the consumer.
    Certain information is required to be provided on the terminal 
receipt. Section 205.9(a)(1) provides that the amount of the transfer 
must be stated, along with other information such as the date the 
transfer is initiated, the type of

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transfer, the terminal location, and other information. A transaction 
fee, however, must be disclosed on the receipt, and additionally 
displayed on or at the terminal, only if the fee is included in the 
amount of the transfer. If such fee is not included in the transfer 
amount, the receipt need not state the fee and the display requirements 
are not triggered.
    Thus, by way of example, assume that an account-holding institution 
charges its customer a $1.00 transaction or PIN-use fee each time the 
customer uses the institution's debit card for an online POS 
transaction. If the debit card is used at point-of-sale to purchase a 
$20 item, and the ``amount of the transfer'' on the receipt is 
identified as ``$21.00'' (that is, the PIN-use fee is included in the 
amount of the transfer), then the $1.00 fee must be disclosed on the 
receipt and displayed on or at the terminal, or on the terminal screen. 
If, however, the ``amount of the transfer'' is identified only as 
``$20.00,'' the Sec.  205.9(a) receipt requirements impose no such 
disclosure obligation. The fees imposed by the account-holding 
institution would still need to be disclosed under the initial 
disclosures under Sec.  205.7(b)(5) however, and in the periodic 
statement sent to the consumer (in either aggregated or segregated form 
along with other fees) under Sec.  205.9(b)(3), both discussed 
above.\2\
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    \2\ This provision of the regulation was originally drafted to 
address fees imposed by entities other than the consumer's own 
institution, but was later amended to also include fees imposed by 
account-holding entities as well. Although the Board lacks specific 
data, it is presumed that those account-holding institutions that 
impose a POS debit transaction fee, or PIN fee, do not include such 
fee in the ``amount of the transfer'' identified on the receipt, and 
thus the Sec.  205.9(a)(1) fee disclosure requirements would not be 
triggered.
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III. Request for Comment

    The Board requests comments on the extent to which these existing 
EFTA and Regulation E disclosures are adequate and effective in making 
consumers aware of the circumstances under which account-holding 
institutions impose a fee, if applicable, when a consumer uses a debit 
card to make a purchase at point-of-sale. In responding to this 
request, commenters are asked to address specifically whether the 
initial disclosures, the disclosures in periodic statements, or any 
disclosures on receipts at electronic terminals, are effective--either 
separately, or cumulatively--in providing consumers with sufficient 
information about such point-of-sale fee practices. To the extent 
commenters believe that enhanced fee disclosures are recommended, 
commenters are asked to consider and address whether such disclosures 
would be more effective as initial disclosures, disclosures provided as 
part of the consumer's periodic account activity statement, or 
disclosures included within information available on a terminal 
receipt. If enhanced disclosures are recommended, commenters are also 
asked to address whether such PIN-use fees should be separately 
disclosed, or whether such fees may be aggregated with other disclosed 
fees.
    The Board also solicits specific comment on the need for, and 
benefits of, requiring additional disclosures in the periodic statement 
provided by the account-holding financial institution to the consumer. 
In particular, if commenters believe that additional periodic statement 
disclosures would be beneficial, commenters are asked to address 
whether the periodic statement should reflect some or all of the 
following:
     The amount of each fee imposed by the account-holding 
financial institution on the consumer in connection with a debit card 
transaction at point-of-sale;
     The source and recipient of any such fee; and
     A summary of the total amount of such fees for that 
reporting period, and calendar year-to-date.

IV. Form of Comment Letters

    Commenter letters should refer to Docket No. OP-1196 and, when 
possible, should use a standard typeface with a font size of 10 or 12; 
this will enable the Board to convert text submitted in paper form to 
machine-readable form through electronic scanning, and will facilitate 
automated retrieval of comments for review. Comments may be mailed 
electronically to [email protected]. If accompanied by 
an original document in paper form, comments may also be submitted on 
3\1/2\ inch computer diskettes in any IBM-compatible DOS- or Windows-
based format.

    By order of the Board of Governors of the Federal Reserve 
System, May 18, 2004.
Jennifer J. Johnson,
Secretary to the Board.
[FR Doc. 04-11527 Filed 5-20-04; 8:45 am]
BILLING CODE 6210-01-P