[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 [www.gpo.gov]
[FR Doc No: 2022-21838]



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 Rules and Regulations
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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 
https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm [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 https://www.federalreserve.gov/paymentsystems/december-2021-findings-from-the-federal-reserve-payments-study.htm.
    \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 https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm.
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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) 
17
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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.
---------------------------------------------------------------------------

    \20\ See 86 FR 26189, 26192 (May 13, 2021).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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 https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm. 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 https://www.federalreserve.gov/paymentsystems/december-2021-findings-from-the-federal-reserve-payments-study.htm.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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