[Federal Register Volume 86, Number 91 (Thursday, May 13, 2021)]
[Proposed Rules]
[Pages 26189-26195]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10013]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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  Federal Register / Vol. 86, No. 91 / Thursday, May 13, 2021 / 
Proposed Rules  

[[Page 26189]]



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: Notice of proposed rulemaking.

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SUMMARY: The Board of Governors (Board) is seeking comment on a 
proposal to amend Regulation II to clarify 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 requirements that Regulation II imposes on 
debit card issuers to ensure that at least two unaffiliated payment 
card networks have been enabled for debit card transactions, and 
standardize and clarify the use of certain terminology.

DATES: Comments must be received on or before July 12, 2021.

ADDRESSES: You may submit comments, identified by Docket No. R-1748, 
RIN 7100-AG15, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, 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 website at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove 
personally identifiable information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments may also be viewed electronically 
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006, 
between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Jess Cheng, Senior Counsel (202-452-
2309), 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. Users of Telecommunication Device for 
Deaf (TDD) only, call (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Introduction

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 amends the Electronic Fund Transfer Act (EFTA) (15 
U.S.C. 1693 et seq.) to add a new section 920 regarding interchange 
transaction fees for electronic debit transactions and rules for 
payment card transactions.\2\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ EFTA section 920 is codified as 15 U.S.C. 1693o-2. 
Electronic debit transaction (or ``debit card transaction'') is 
defined in EFTA section 920(c)(5) as a transaction in which a person 
uses a debit card.
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    EFTA section 920(b)(1) directs the Board to prescribe regulations 
that limit restrictions that issuers and payment card networks may 
place on the processing of an electronic debit transaction.\3\ An 
electronic debit 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 payment card 
network.\4\ EFTA section 920(b)(1) contains two provisions with respect 
to issuers and payment card 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.'' 
15 U.S.C. 1693o-2.
    \4\ The issuer provides the cardholder with a debit card that is 
enabled to process transactions over various payment card networks. 
The cardholder can initiate a debit card transaction at a merchant 
that accepts the networks enabled on the cardholder's card. To 
process the transaction, the acquirer routes the transaction over 
one of the payment card networks available on the card.
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    First, EFTA section 920(b)(1)(A) directs the Board to prescribe 
regulations to prohibit an issuer or payment card network from imposing 
exclusivity arrangements with respect to the payment card networks over 
which an electronic debit transaction may be processed. In particular, 
the statute directs the Board to prescribe regulations that forbid 
issuers and payment card networks from restricting the number of such 
networks to fewer than two unaffiliated networks (``prohibition on 
network exclusivity''). Absent this prohibition on network exclusivity, 
an issuer could enable only a single payment card network, or only two 
affiliated networks, to process a debit card transaction, thereby 
foreclosing the ability of the merchant or its acquirer to choose among 
multiple competing networks to process the transaction.
    Second, EFTA section 920(b)(1)(B) directs the Board to prescribe 
regulations to prohibit an issuer or payment card network from 
restricting the ability of a merchant or its acquirer to choose among 
the networks enabled on a card when deciding how to route a debit card 
transaction.\5\ Specifically, the statute directs the Board to 
prescribe regulations that forbid issuers and payment card networks 
from directly or indirectly inhibiting any person that accepts debit 
cards for payment from directing the routing of an electronic debit 
transaction over any network that may process that transaction 
(``prohibition on routing restrictions''). Absent this prohibition on 
routing

[[Page 26190]]

restrictions, an issuer or payment card network could establish rules 
or other restrictions that override a merchant's routing preferences, 
thereby preventing the merchant or its acquirer from routing a 
transaction over a network with, for example, lower fees for merchants.
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    \5\ The merchant's choice of network is typically implemented by 
its acquirer or processor. A merchant may have preferences over the 
payment card networks that are available to process a debit card 
transaction, based on, for example, networks' interchange fees or 
other network fees. 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 Requirements

    The Board promulgated its final rule implementing the prohibitions 
on network exclusivity and routing restrictions in July 2011.\6\ These 
prohibitions under Regulation II aim to ensure that merchants or their 
acquirers can choose from at least two unaffiliated networks when 
routing debit card transactions.
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    \6\ 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. The proposed revisions in this notice do not 
concern that provision.
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    Section 235.7(a) implements the prohibition on network exclusivity 
set out in EFTA section 920(b)(1)(A). Specifically, the provision 
prohibits an issuer or payment card network from directly or indirectly 
restricting the number of payment card networks on which an electronic 
debit transaction may be processed to fewer than two unaffiliated 
networks. To comply with the network exclusivity provisions, among 
other things, an issuer must allow an electronic debit transaction to 
be processed on at least two unaffiliated payment card networks, each 
of which (i) must not, by rule or policy, restrict the network's 
operation to a limited geographic area, specific merchant, or 
particular type of merchant or transaction and (ii) must have taken 
steps reasonably designed to enable the network to process the 
electronic debit transactions that the network would reasonably expect 
will be routed to it.
    Section 235.7(b) implements the prohibition on routing restrictions 
set out in EFTA section 920(b)(1)(B). Specifically, the provision 
prohibits any issuer or payment card 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 
electronic debit transactions for processing over any payment card 
network that may process such transactions. Therefore, if an issuer has 
enabled a payment card network to process transactions for a particular 
debit card, then the issuer or payment card network may not inhibit a 
merchant's ability to route an electronic debit transaction over that 
network.

C. Overview of Issue and Proposed Changes

    At the time the Board promulgated Regulation II, for card-not-
present transactions, such as online purchases, the market had not 
developed solutions to broadly support multiple networks over which 
merchants could choose to route those transactions.\7\ In the decade 
since the adoption of Regulation II, technology has evolved to address 
these barriers, and more networks have introduced capabilities to 
process card-not-present transactions. At the same time, card-not-
present transactions have become an increasingly significant portion of 
all debit card transactions. Despite these developments, and in 
contrast to the routing choice that currently exists for card-present 
transactions, merchants are often not able to choose from at least two 
unaffiliated networks when routing card-not-present transactions, 
according to data collected by the Board and information from industry 
participants.
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    \7\ Card-not-present transactions are those in which a 
cardholder initiates a card payment without physically presenting 
the card to a merchant. Card-not-present transactions typically 
involve remote commerce, such as internet, telephone, or mail-order 
purchases.
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    In light of this issue, the Board is proposing changes to 
Regulation II to clarify that debit card issuers should enable, and 
merchants should be able to choose from, at least two unaffiliated 
networks for card-not-present transactions. Specifically, the Board is 
proposing revisions to the commentary to Regulation II that clarify the 
applicability of the prohibition on network exclusivity to card-not-
present transactions. These proposed revisions to the commentary 
clarify that card-not-present transactions are a particular type of 
transaction for which two unaffiliated payment card networks must be 
available. The Board is further proposing revisions to the rule and the 
commentary that clarify the responsibility of the debit card issuer in 
ensuring that at least two unaffiliated networks have been enabled to 
comply with the regulation's prohibition on network exclusivity. In 
addition to these changes, the Board is proposing revisions to 
standardize and clarify certain terms and phrases in the commentary. 
The Board requests comment on all proposed changes to the rule and 
commentary.
    The proposed changes do not affect other parts of Regulation II 
that directly address interchange fees for certain electronic debit 
transactions. The Board will continue to review the regulation in light 
of the most recent data collected by the Board pursuant to EFTA section 
920 and may propose additional revisions in the future.

II. Background on Network Exclusivity Issues for Card-Not-Present Debit 
Card Transactions

    Debit cards are used for a wide variety of payments in the United 
States today, involving both card-present and card-not-present 
transactions.\8\ Over the last decade, card-not-present transactions 
have become an increasingly significant type of debit card transaction. 
Spurred by the growth of online commerce, the number of card-not-
present debit card transactions has increased rapidly in recent years, 
growing approximately 17 percent per year, on average, from 2009 to 
2019, in contrast to the 6 percent average annual growth in card-
present transactions over the same period.\9\ As a result of this 
differential growth, card-not-present transactions comprised almost 23 
percent of all debit card transactions in 2019, up from slightly less 
than 10 percent in 2009. Recent evidence indicates that growth in card-
not-present transactions has accelerated further in the Coronavirus-19 
(COVID-19) environment, as consumers have shifted from in-person to 
remote purchases.\10\
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    \8\ According to the Federal Reserve Payments Study, the number 
of debit card payments in 2018 nearly equaled the combined number of 
credit card, check, and automated clearinghouse payments. See 
https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm.
    \9\ See ``2019 Interchange Fee Revenue, Covered Issuer Costs, 
and Covered Issuer and Merchant Fraud Losses Related to Debit Card 
Transactions,'' (2019 Data Report) available at https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm. 
The data summarized in the report are collected through mandatory 
surveys of debit card issuers subject to the interchange fee 
standard in Regulation II (covered issuers) and payment card 
networks. Covered issuers are those with worldwide assets, including 
affiliates, of $10 billion or more. The Board administers these 
surveys and releases biennial reports pursuant to data collection 
requirements in EFTA section 920.
    \10\ For information about aggregate patterns in e-commerce, see 
``Latest Quarterly E-Commerce Report,'' available at https://www.census.gov/retail/index.html#ecommerce.
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    Like any debit card transaction, card-not-present transactions rely 
on payment card networks to conduct payments. The network used to 
process a transaction depends primarily on the set of networks that the 
issuer has enabled for the transaction and the specific network that 
the merchant or its acquirer chooses to route the transaction out of 
those available.\11\
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    \11\ The network used to process a transaction may also depend 
on other factors, such as whether the merchant can support the 
authentication methods used by the available networks. It may also 
depend on the cardholder's choice of authentication method in 
situations where the merchant has configured its card terminal to 
enable cardholder choice.

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[[Page 26191]]

    Two types of payment card networks currently exist to process debit 
card transactions: Single-message networks and dual-message 
networks.\12\ Single-message networks, which developed from automated 
teller machine (ATM) networks, typically authorize and clear a 
transaction through a single message and have traditionally processed 
transactions authenticated using a cardholder's personal identification 
number (PIN).\13\ 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.\14\
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    \12\ Examples of dual-message and single-message networks can be 
found at https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm. The ``message'' in a card payment 
involves various information related to the payment, such as the 
amount, the account information of the consumer and the merchant, 
the identities of their respective depository institutions, and the 
transaction environment (that is, card-present or card-not-present).
    \13\ Because of their historical reliance on PIN authentication, 
single-message debit card networks were traditionally known as ``PIN 
debit networks.''
    \14\ Because of their historical reliance on signature 
authentication, dual-message debit card networks were traditionally 
known as ``signature debit networks.''
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    Over time, technological developments, spurred by competition among 
networks to improve their capabilities and increase their transaction 
volumes, have allowed both single-message and dual-message networks to 
evolve beyond their traditional methods of authentication. 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.\15\
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    \15\ For example, some traditionally dual-message networks can 
now process certain payments using a single message. Similarly, some 
traditionally single-message networks can use two messages to 
authorize and clear some transactions.
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    There are various combinations of dual-message and single-message 
networks that a debit card issuer could choose to enable on its debit 
cards. However, the market has evolved such that, for card-present 
transactions, the vast majority of issuers choose to enable one dual-
message network and one or more single-message networks on their cards. 
As a result, when a consumer and merchant interact in person, the 
typical debit card arrangement provides the merchant with multiple 
network options to route a transaction. For example, when a consumer 
performs an in-person debit card transaction at a grocery store, the 
grocer has a dual-message network and at least one single-message 
network as options to process the transaction. Such arrangements 
generally comply with Regulation II's prohibition on network 
exclusivity as long as at least two of those networks are unaffiliated. 
In that case, the grocer has at least two unaffiliated networks 
competing to attract its debit card transactions. Regulation II's 
prohibition on routing restrictions further ensures that the grocer (or 
its acquirer) is able to choose among the available networks.
    At the time Regulation II was adopted, for card-not-present 
transactions, the market had not developed solutions to broadly support 
multiple networks for each transaction. While dual-message networks had 
long been able to conduct card-not-present transactions, single-message 
networks had limited ability to process such transactions at that time. 
In particular, as discussed previously, single-message networks 
primarily processed PIN-authenticated transactions, but methods of PIN 
authentication for card-not-present transactions, such as PIN entry in 
an online setting, were not well-established. Because of this 
difficulty, along with the industry practice of enabling only one dual-
message network on each debit card, card-not-present transactions could 
often only be processed on that one dual-message network at the time 
Regulation II was promulgated. The Board explained, however, that it 
expected the market to develop solutions to facilitate the use of 
single-message networks for card-not-present transactions in the years 
following the adoption of Regulation II.\16\
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    \16\ ``Debit Card Interchange Fees and Routing; Final Rule,'' 76 
FR 43393, 43448 (Jul. 20, 2011). Specifically, the Board expressed 
the view that, by requiring two unaffiliated payment card networks 
for each debit card transaction and removing limitations on merchant 
routing choice, Regulation II would promote innovation to facilitate 
the use of single-message networks in additional retail 
environments, including for online purchases.
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    As the Board anticipated, in the decade since Regulation II was 
adopted, various innovations have emerged, and most single-message 
networks are now capable of processing card-not-present 
transactions.\17\ Data on network activity collected by the Board 
confirm that nearly all single-message debit card networks conducted 
card-not-present transactions in 2019. In contrast, fewer than half of 
single-message networks reported such activity when Regulation II was 
adopted in 2011.
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    \17\ For example, as noted previously, many single-message 
networks no longer require PIN entry for some transactions, 
including card-not-present transactions and low-value card-present 
transactions. Industry participants sometimes refer to such 
transactions as ``PINless PIN'' transactions. Technologies have also 
been developed to support PIN entry in different transaction 
environments, such as online purchases. However, the industry has 
not widely adopted those technologies for PIN entry.
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    Despite the widespread adoption of these innovations, the volume of 
card-not-present transactions processed over single-message networks 
remains low. In particular, 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 transactions contrasts sharply 
with their share of card-present transactions, which exceeded 40 
percent in 2019.\18\
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    \18\ See 2019 Data Report.
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    Additional data collected by the Board and information from 
industry participants indicate that the low prevalence of card-not-
present transactions over single-message networks may have occurred 
because issuers have not consistently enabled single-message networks 
for card-not-present transactions. According to responses to the 
Board's survey of covered debit card issuers, issuers that accounted 
for approximately 50 percent of all debit card transactions and 
approximately 50 percent of all card-not-present debit card 
transactions did not conduct any card-not-present transactions over 
single-message networks in 2019.\19\ Information from industry 
participants, including individual merchants, merchant trade 
associations, and representatives of single-message networks, 
corroborates that some issuers do not make single-message networks 
available to process card-not-present transactions on any of their 
cards, while some other issuers make single-message networks available 
to process card-not-present transactions only on a subset of their 
cards.
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    \19\ See 2019 Data Report.
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    A failure by an issuer to enable at least one single-message 
network for card-not-present transactions, combined with the common 
industry approach of only enabling one dual-message network on each 
card, results in only one network--the dual-message network--being 
available to process card-not-present transactions. In this situation, 
merchants do not have routing choice for such transactions. The Board 
views these practices by issuers with respect to card-not-present 
transactions as inconsistent with Regulation II because they restrict 
the number of

[[Page 26192]]

payment card networks on which card-not-present transactions can be 
processed to fewer than two unaffiliated networks.

III. Section-by-Section Analysis

    In light of the issues described in the previous section, the Board 
is proposing revisions to the commentary to Regulation II to clarify 
the applicability of the regulation's prohibition on network 
exclusivity to card-not-present transactions. The Board is specifically 
proposing to clarify that card-not-present transactions are a 
particular type of transaction for which issuers must ensure at least 
two unaffiliated payment card networks have been enabled. The Board is 
further proposing revisions to the rule and commentary to emphasize the 
important role of the issuer in ensuring that at least two unaffiliated 
payment card networks have been enabled for each debit card 
transaction. The Board is also proposing revisions to the commentary to 
standardize and clarify the use of certain terminology and clarify the 
requirements that Regulation II imposes on debit card issuers.

A. Section 235.7 Limitations on Payment Card Restrictions

    The Board is proposing to amend Sec.  235.7 of the regulation 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 regulation's prohibition on network exclusivity. Section 
235.7(a)(2) currently states that an issuer satisfies the prohibition 
on network exclusivity under Sec.  235.7(a)(1) ``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, and 
each of which has taken steps reasonably designed to enable the network 
to process the electronic debit transactions that the network would 
reasonably expect will be routed to it, based on expected transaction 
volume.'' The Board is proposing amendments to this section to reflect 
the role of the issuer in ensuring that the enumerated capabilities of 
networks are, in fact, enabled.
    Specifically, Sec.  235.7(a)(2), with the proposed amendments, 
would provide that an issuer satisfies the requirements of Sec.  
235.7(a)(1) only if, for every particular type of transaction (as well 
as every geographic area, specific merchant, and particular type of 
merchant) for which the issuer's debit card can be used to process an 
electronic debit transaction, the issuer has enabled at least two 
unaffiliated payment card networks to process the transaction. The 
Board does not intend these amendments as a substantive change to the 
section but rather as a clarification of the existing language.

B. Appendix A to Part 235--Official Board Commentary on Regulation II

    The Board is proposing several clarifying revisions to the 
commentary on Sec.  235.7. The proposed changes throughout this 
commentary include revisions to standardize and clarify the use of 
certain terminology. For example, the term ``enabled'' would be revised 
to ``enabled by the issuer,'' to explicitly recognize the role an 
issuer plays in configuring its debit cards and enabling a payment card 
network on a debit card, as described above. The revised terminology 
reflects the fact that the issuer is the entity that configures a debit 
card such that electronic debit transactions initiated with that card 
can be processed over a particular payment card network. New 
standardized terms would include ``payment card network'' (which would 
replace the shorthand ``network'' or ``card network'') and ``method of 
cardholder authentication'' (which would replace variations of 
``authentication'' or ``authorization'').
Comment 235.7(a)-1 Scope of Restriction
    The Board proposes additional revisions to comment 235.7(a)-1. This 
comment currently clarifies the scope of the prohibition of network 
exclusivity under Sec.  235.7(a), including a clarification 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 proposes to update the examples of cardholder authentication 
methods listed in the commentary to better align with current industry 
practices. The proposed revisions add biometrics to the list of 
cardholder authentication methods in the commentary, which currently 
only includes signature and PIN authentication. The Board further 
proposes 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 and that would still be captured by 
Regulation II if they were to be developed. The proposed revisions also 
recognize instances where no method of cardholder authentication is 
used.
    Comment 235.7(a)-2 Permitted Networks
    The Board also proposes revising comment 235.7(a)-2. Comment 
235.7(a)-2 currently clarifies the types of network arrangements that 
may be used to help satisfy the requirement in Sec.  235.7(a) that an 
issuer enable two unaffiliated networks. The proposed revisions add 
titles to each sub-paragraph and make streamlining edits for ease of 
reference.
    The proposed revisions also clarify that, for purposes of Sec.  
235.7, card-not-present debit card transactions are a ``particular type 
of transaction'' for which at least two unaffiliated payment card 
networks must be available. The Board believes this clarification is 
necessary in light of developments in recent years among single-message 
networks that have introduced capabilities to allow them to process 
card-not-present transactions; yet, as noted previously, information 
gathered by the Board suggests that certain issuers continue to enable 
only one dual-message payment card network for such transactions.
    Finally, the Board is proposing to add a new comment 235.7(a)-
2(iii) to provide clear examples of how an issuer could comply with the 
rule by enabling various combinations of networks so that two 
unaffiliated payment card networks that can each process both card-
present and card-not-present transactions are available. The Board is 
proposing additional revisions to comment 235.7(a)-2 to further clarify 
the variety of scenarios in which an issuer could enable two 
unaffiliated payment card networks as examples of permitted 
arrangements under Sec.  235.7.
Comment 235.7(a)-7 Application of Rule Regardless of Form Factor
    The Board proposes revising comment 235.7(a)-7. Comment 235.7(a)-7 
currently clarifies that the network exclusivity provisions in Sec.  
235.7 apply regardless of ``form factor.'' Specifically, the commentary 
currently provides that the prohibition on network exclusivity applies 
regardless of whether the debit card is issued in plastic card form and 
also applies to any supplemental device that is issued in connection 
with a plastic card, even if that plastic card fully complies with the 
rule. The proposed revisions 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 proposes adding ``or another means of access that may be 
developed in the

[[Page 26193]]

future'' to capture means of access that do not yet exist and that 
would still be captured by Regulation II if they were to be developed. 
The proposed revisions further clarify that, for any means of access 
that carries the debit card information, there must be at least two 
unaffiliated payment card networks enabled by the issuer, as required 
by the network exclusivity provisions in Sec.  235.7(a). 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 payment card networks.

IV. Regulatory Analysis

A. EFTA 904(a)

    Section 904(a)(2) of the EFTA requires the Board, in prescribing 
regulations to carry out the purposes of EFTA section 920, to prepare 
an analysis of economic impact which 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 would 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 proposed amendments clarify Regulation II's existing 
requirements by emphasizing the role of the issuer in ensuring that at 
least two unaffiliated networks have been enabled in compliance with 
the regulation's network exclusivity provisions, and by clarifying that 
those provisions apply to card-not-present transactions. Therefore, the 
proposed amendments do not impose additional paperwork requirements 
related to reporting to the Board. With respect to the competitive 
effects of the proposed amendments, the proposed amendments clarify 
that at least two networks must be enabled for card-not-present 
transactions, allowing merchants or their acquirer to choose among 
multiple competing networks to process the transaction. Because the 
proposed amendments apply to all issuers regardless of their size, they 
are unlikely to have an effect upon competition among large and small 
financial institutions in the provision of electronic fund transfer 
services. With respect to the availability of services to different 
classes of consumers, particularly low-income consumers, consumers are 
typically unaware of the networks used to process many debit card 
transactions today, including card-not-present transactions where at 
least two unaffiliated networks are already available. Nevertheless, 
the effect of the proposed rule on the availability of services to 
consumers will likely depend on various factors, including each 
consumer's payment and purchase behavior, as well as market responses 
to the increased availability of multiple networks for card-not-present 
transactions. Ultimately, the costs and benefits of the proposed 
revisions are uncertain and will depend on the adjustments that 
different parties may make and the market response to the proposed 
rule.
    In addition, EFTA section 904(a)(3) provides that in prescribing 
regulations to carry out the purposes of EFTA section 920, to the 
extent practicable, the Board shall demonstrate that the consumer 
protections of the proposed regulations outweigh the compliance costs 
imposed upon consumers and financial institutions. The proposed rule 
does not relate to consumer protections, and therefore the Board 
cannot, at this time, determine whether the benefits to consumers 
exceed the possible costs to financial institutions. Additionally, the 
overall effects of the proposed rule on financial institutions and on 
consumers are dependent on a variety of factors, and the Board cannot 
predict the market response to the proposed rule.
    The Board welcomes comment on the impact of the proposed amendments 
on the various participants in the debit card market and on consumers, 
as well as on all aspects of the analysis under EFTA section 904(a).

B. 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 proposed rule 
under the authority delegated to the Board by the OMB and determined 
that it contains no collections of information under the PRA.\20\ 
Accordingly, there is no paperwork burden associated with the proposed 
rule.
---------------------------------------------------------------------------

    \20\ See 44 U.S.C. 3502(3).
---------------------------------------------------------------------------

C. Regulatory Flexibility Act

    In accordance with section 4 of the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601 et seq., the Board is publishing an initial 
regulatory flexibility analysis for the proposed rule. The RFA 
generally requires an agency to assess the impact a rule is expected to 
have on small entities. The RFA requires an agency either to provide a 
regulatory flexibility analysis or to certify that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities.
    Two of the requirements of an initial regulatory flexibility 
analysis \21\--a description of the reasons the action is being 
considered and a statement of the objectives of, and legal basis for, 
the proposed rule--are contained in the information above. Although 
EFTA section 920 exempts all issuers that, together with affiliates, 
have assets of less than $10 billion from the limitations on 
interchange transaction fees, the prohibition on network exclusivity 
and the prohibition on routing restrictions apply to all issuers, 
including small issuers. There are no reporting provisions or relevant 
federal rules that duplicate, overlap, or conflict with the proposed 
rule, and the Board is not aware of any significant alternatives to the 
final rule that would reduce the economic impact on Board-regulated 
small entities.
---------------------------------------------------------------------------

    \21\ 5 U.S.C. 603(b).
---------------------------------------------------------------------------

    As discussed above in this Supplementary Information section, the 
Board is proposing to amend a particular section of the Regulation II, 
as well as revise portions of the commentary to the regulation, to 
emphasize the role of the issuer in ensuring that at least two 
unaffiliated networks have been enabled in compliance with the 
regulation's network exclusivity provisions and to clarify 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. The proposed amendments would clarify 
existing requirements that already apply to any person that chooses to 
authorize the use of a debit card to perform an electronic debit 
transaction, regardless of that issuer's size. The Board does not 
intend these amendments to be an expansion of coverage to any 
additional small entities that were not already subject to the rule.
    Another requirement for the initial regulatory flexibility analysis 
is a description of, and where feasible, an estimate of, the number of 
small entities to which the proposed rule will apply. Under regulations 
issued by the Small Business Administration, a small entity includes a 
depository institution, bank holding company, savings and loan holding 
company, and credit card issuer with total assets of $600 million or 
less and trust companies with total annual

[[Page 26194]]

receipts of $41.5 million or less.\22\ According to Call Reports and 
other Board reports, there were approximately 472 state member banks, 
2,925 bank holding companies, 132 savings and loan holding companies, 
and 16 Edge and agreement corporations that are small entities.\23\
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    \22\ See 13 CFR 121.201; 84 FR 34261 (July 18, 2019).
    \23\ State member bank data are derived from March 31, 2020 Call 
Reports. Data for bank holding companies and savings and loan 
holding companies are derived from the June 30, 2020, FR Y-9C and FR 
Y-9SP. Data for Edge and agreement corporations are derived from the 
December 31, 2019 and March 31, 2020, FR-2086b.
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    As discussed in preceding sections, the proposed amendments are 
intended to clarify the regulation's existing prohibition on network 
exclusivity, and the Board does not intend these proposed amendments to 
be an expansion of coverage to any additional small entities that were 
not already subject to the rule. For these reasons, the Board believes 
that this proposed rule will not have a significant economic impact on 
a substantial number of small entities. The Board welcomes comment on 
all aspects of its analysis. In particular, the Board requests that 
commenters describe the nature of any impact on small entities and 
provide empirical data to illustrate and support the extent of the 
impact.

D. Solicitation of Comments of 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 proposed rule in a 
simple and straightforward manner and invites comment on the use of 
plain language and whether any part of the proposed rule could be more 
clearly stated.

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 proposing 
to amend Regulation II, 12 CFR part 235, 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, 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, such issuer enables at least two 
unaffiliated payment card networks to process an electronic debit 
transaction, and where each of these networks has taken steps 
reasonably designed to be able to process the electronic debit 
transactions that it would reasonably expect will be routed to it, 
based on expected transaction volume.
* * * * *
0
3. Amend Appendix A to Part 235--Official Board Commentary on 
Regulation II by:
0
a. Revising paragraph 7(a);
0
b. Revising paragraphs 7(b)1., (b)(2), and (b)(5).
    The revisions 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 initiated with such card can be processed on at least 
two unaffiliated payment card networks. In particular, section 
235.7(a) requires this condition to be satisfied 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. 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 process 
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 process an electronic 
debit transaction.
    2. 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 every 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 process 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 every geographic area in which the issuer's debit card can be 
used to process 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 every particular type of transaction for which the 
issuer's debit card can be used to process 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.
    3. Examples of prohibited network restrictions on an issuer's 
ability to contract with other payment card networks. The

[[Page 26195]]

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.
    4. 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.
    5. 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.
    6. 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.
    7. Application of rule regardless of means of access. The 
network exclusivity provisions in Sec.  235.7(a) require that a 
debit card be enabled by the issuer on at least two unaffiliated 
payment card networks for each means of access. The means of access 
that carries the debit card information could be a plastic card, a 
supplemental device such as a fob, information stored inside an e-
wallet on a mobile phone or other device, or another means of access 
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 on that particular debit card. The rule does not permit 
a merchant to route the transaction over a payment card network that 
the issuer did not enable to process transactions using 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.
    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 (i) a default rule 
in the event the merchant, or its acquirer or processor, does not 
designate a routing preference, or (ii) if required by state law.
    iii. Requiring a specific payment card network to be used based 
on the means of access presented by the cardholder to the merchant.
* * * * *
    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 Misback,
Secretary of the Board.

[FR Doc. 2021-10013 Filed 5-12-21; 8:45 am]
BILLING CODE 6210-01-P