[Federal Register Volume 88, Number 218 (Tuesday, November 14, 2023)]
[Proposed Rules]
[Pages 78100-78132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-24034]



[[Page 78099]]

Vol. 88

Tuesday,

No. 218

November 14, 2023

Part II





Federal Reserve System





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12 CFR Part 235





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Debit Card Interchange Fees and Routing; Proposed Rule

  Federal Register / Vol. 88 , No. 218 / Tuesday, November 14, 2023 / 
Proposed Rules  

[[Page 78100]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 235

[Regulation II; Docket No. R-1818]
RIN 7100-AG67


Debit Card Interchange Fees and Routing

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Notice of proposed rulemaking.

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SUMMARY: Regulation II implements a provision of the Dodd-Frank Act 
that requires the Board to establish standards for assessing whether 
the amount of any interchange fee received by a debit card issuer is 
reasonable and proportional to the cost incurred by the issuer with 
respect to the transaction. Under the current rule, for a debit card 
transaction that does not qualify for a statutory exemption, the 
interchange fee can be no more than the sum of a base component of 21 
cents, an ad valorem component of 5 basis points multiplied by the 
value of the transaction, and a fraud-prevention adjustment of 1 cent 
if the issuer meets certain fraud-prevention-standards. The Board 
developed the current interchange fee cap in 2011 using data 
voluntarily reported to the Board by large debit card issuers 
concerning transactions performed in 2009. Since that time, data 
collected by the Board every other year on a mandatory basis from large 
debit card issuers show that certain costs incurred by these issuers 
have declined significantly; however, the interchange fee cap has 
remained the same. For this reason, the Board proposes to update all 
three components of the interchange fee cap based on the latest data 
reported to the Board by large debit card issuers. Further, the Board 
proposes to update the interchange fee cap every other year going 
forward by directly linking the interchange fee cap to data from the 
Board's biennial survey of large debit card issuers. Initially, under 
the proposal, the base component would be 14.4 cents, the ad valorem 
component would be 4.0 basis points (multiplied by the value of the 
transaction), and the fraud-prevention adjustment would be 1.3 cents 
for debit card transactions performed from the effective date of the 
final rule to June 30, 2025. The Board also proposes a set of technical 
revisions to Regulation II.

DATES: Comments must be received on or before February 12, 2024.

ADDRESSES: You may submit comments, identified by Docket No. R-1818, 
RIN 7100-AG67, by any of the following methods:
     Agency Website: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments are available from the Board's website at 
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, and will not be modified to remove confidential, contact or 
any identifiable information. Public comments may also be viewed 
electronically or in person in Room M-4365A, 2001 C St. NW, Washington, 
DC 20551, between 9 a.m. and 5 p.m. during Federal business weekdays.

FOR FURTHER INFORMATION CONTACT: Benjamin Snodgrass, Senior Counsel 
(202-263-4877) or Cody Gaffney, Senior Attorney (202-452-2674), Legal 
Division; or Krzysztof Wozniak, Section Chief (202-452-3878) or Elena 
Falcettoni, Senior Economist (202-452-2528), Division of Reserve Bank 
Operations and Payment Systems. For users of TTY-TRS, please call 711 
from any telephone, anywhere in the United States or (202) 263-4869.

SUPPLEMENTARY INFORMATION: 

I. Overview

A. Summary of Proposal

    A section of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act known as the Durbin Amendment requires the Board to 
establish standards for assessing whether the amount of any interchange 
fee received by a debit card issuer is reasonable and proportional to 
the cost incurred by the issuer with respect to the debit card 
transaction.\1\ The Durbin Amendment also authorizes the Board to allow 
for an adjustment to such interchange fee in an amount that is 
reasonably necessary to make allowance for costs incurred by the debit 
card issuer in preventing fraud in relation to debit card transactions 
involving that issuer.
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    \1\ Public Law 110-203, section 1075, 124 Stat. 1376, 2068 
(codified at 15 U.S.C. 1693o-2).
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    The Board implemented these and other provisions of the Durbin 
Amendment in 2011 and 2012 when the Board adopted Regulation II (Debit 
Card Interchange Fees and Routing).\2\ Under the current rule, each 
interchange fee received by a debit card issuer for a debit card 
transaction that does not qualify for a statutory exemption can be no 
more than the sum of (i) 21 cents (the ``base component''), (ii) 5 
basis points multiplied by the value of the transaction (the ``ad 
valorem component''), and (iii) for a debit card issuer that meets 
certain fraud-prevention standards, a ``fraud-prevention adjustment'' 
of 1 cent per transaction. Together, the base component and ad valorem 
component comprise the ``interchange fee standards''; the base 
component, ad valorem component, and fraud-prevention adjustment 
comprise the ``interchange fee cap.''
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    \2\ 12 CFR part 235.
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    The Board developed the current interchange fee cap using data 
reported to the Board by large debit card issuers on a voluntary survey 
that the Board conducted during the original Regulation II rulemaking. 
As such, the current base component, ad valorem component, and fraud-
prevention adjustment are based on the costs incurred by large debit 
card issuers in connection with debit card transactions performed in 
2009. Since that time, the Board has collected data from large debit 
card issuers on a mandatory basis every other year, as required by the 
Durbin Amendment.
    When the Board established the interchange fee standards in current 
Regulation II, the Board stated that it would, over time, adjust the 
interchange fee standards based on reported costs, if appropriate. 
Similarly, with respect to the fraud-prevention adjustment, the Board 
stated that it would take into account data reported by large debit 
card issuers in the future when considering any future revisions to the 
fraud-prevention adjustment. The Board also noted that lower costs 
should result in a lower interchange fee cap as issuers become more 
efficient.
    The data collected by the Board from large debit card issuers since 
the original Regulation II rulemaking show that the costs incurred by 
large debit card issuers in connection with debit card transactions 
have changed significantly over time. In particular, the costs on which 
the Board based the base component have nearly halved, the issuer fraud 
losses on which the Board based the ad valorem component have fallen, 
and the fraud-prevention costs on

[[Page 78101]]

which the Board based the fraud-prevention adjustment have risen, 
according to key metrics of those costs.\3\ As a result, the Board 
believes that the current interchange fee standards may no longer be 
effective for assessing whether, for a debit card transaction subject 
to the standards, the amount of any interchange fee received by a debit 
card issuer is reasonable and proportional to the cost incurred by the 
issuer with respect to the transaction. Further, the Board believes 
that the current fraud-prevention adjustment may not reflect an amount 
that is reasonably necessary to make allowance for costs incurred by 
the debit card issuer in preventing fraud in relation to debit card 
transactions involving that issuer.
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    \3\ As described in section III.A, infra, the costs on which the 
Board based the base component include transaction-processing and 
transaction-monitoring costs.
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    For these reasons, the Board proposes to update all three 
components of the interchange fee cap based on the latest data reported 
to the Board by large debit card issuers concerning transactions 
performed in 2021. Under the proposal, the base component would 
decrease from 21.0 cents to 14.4 cents, the ad valorem component would 
decrease from 5.0 basis points (multiplied by the value of the 
transaction) to 4.0 basis points (multiplied by the value of the 
transaction), and the fraud-prevention adjustment would increase from 
1.0 cents to 1.3 cents. The Board determined the proposed base 
component using a new methodology that is informed by the cumulative 
data reported to the Board every other year since the original 
Regulation II rulemaking. This methodology targets full cost recovery 
over time for a significant majority of transactions across large debit 
card issuers through a formula that relates the base component to a key 
metric of issuer costs. By contrast, the Board determined the proposed 
ad valorem component and proposed fraud-prevention adjustment using 
generally the same methodologies used in the original rulemaking.
    In addition to updating the interchange fee cap for the first time 
since the original rulemaking, the proposed revisions would codify in 
Regulation II an approach for updating the three components of the 
interchange fee cap every other year going forward based on the latest 
data reported to the Board by large debit card issuers. By directly 
linking the interchange fee cap to data collected by the Board from 
large debit card issuers every other year, the proposed approach should 
ensure that the interchange fee cap will reflect changes in the costs 
incurred by debit card issuers. As a result, the Board believes that 
the proposal would ensure that, to the extent practicable, (i) the 
interchange fee standards will be effective going forward for assessing 
whether, for a transaction subject to the interchange fee standards, 
the amount of any interchange fee received by a debit card issuer is 
reasonable and proportional to the cost incurred by the issuer with 
respect to the transaction, and (ii) the fraud-prevention adjustment 
will continue to reflect an amount that is reasonably necessary to make 
allowance for costs incurred by the debit card issuer in preventing 
fraud in relation to debit card transactions involving that issuer. 
These future updates to the interchange fee cap would be implemented in 
accordance with the proposed methodology and would be published without 
inviting public comment.
    The Board has reviewed its construction of the Durbin Amendment and 
original analysis regarding the costs incurred by debit card issuers 
that the Board may consider in establishing the interchange fee 
standards, and believes that this prior analysis remains sound. As 
such, the Board does not propose any changes to the costs considered 
for purposes of determining the base component or the issuer fraud 
losses considered for purposes of determining the ad valorem component. 
The Board also does not propose to modify the fraud-prevention costs 
considered for purposes of determining the fraud-prevention adjustment, 
or the fraud-prevention standards that large debit card issuers must 
meet to receive the fraud-prevention adjustment.

B. Outline of This Preamble

    This preamble is divided into eight sections, including this 
overview section I. Section II provides additional legal background for 
the proposal, including a detailed description of the Durbin Amendment 
and current Regulation II.
    Section III discusses the proposed revisions to the interchange fee 
standards in Sec.  235.3. The Board proposes to determine the base 
component and ad valorem component every other year based on the latest 
data reported to the Board by debit card issuers with consolidated 
assets of $10 billion or more--referred to in this preamble as 
``covered issuers''--on the Board's biennial Debit Card Issuer Survey. 
The base component would be determined using a new methodology that is 
informed by the cumulative data reported to the Board every other year 
since the original Regulation II rulemaking. Specifically, the base 
component would be the product of (i) the transaction-weighted average 
of per-transaction allowable costs (excluding fraud losses) across 
covered issuers based on the latest data reported to the Board, and 
(ii) a fixed multiplier codified in Regulation II.\4\ The Board 
proposes a fixed multiplier of 3.7, which targets full cost recovery 
for 98.5 percent of covered issuer transactions over time based on the 
cumulative data reported to the Board by covered issuers since the 
initial Debit Card Issuer Survey.\5\ The ad valorem component would be 
the median ratio of issuer fraud losses to transaction value among 
covered issuers (multiplied by the value of the debit card 
transaction), which is the same methodology the Board used to determine 
the ad valorem component during the original Regulation II rulemaking.
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    \4\ As described in section III.A, infra, the costs on which the 
Board based the base component include transaction-processing and 
transaction-monitoring costs. These costs may also be referred to as 
``allowable costs (excluding fraud losses)'' or ``base component 
costs.''
    \5\ In this preamble, the term ``covered issuer transactions'' 
refers to debit card transactions performed with debit cards issued 
by covered issuers. By targeting full cost recovery for 98.5 percent 
of covered issuer transactions, the Board expects that, over time, 
the per-transaction allowable costs (excluding fraud losses) of 
around 98.5 percent of covered issuer transactions will be less than 
or equal to the base component. As discussed in section III.B, 
infra, the proposed approach would not guarantee that covered 
issuers will fully recover their allowable costs for the target 
percentage of covered issuer transactions in any particular year.
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    Initially, under the proposal, the base component would be 14.4 
cents and the ad valorem component would be 4.0 basis points 
(multiplied by the value of the transaction) for debit card 
transactions performed from the effective date of the final rule to 
June 30, 2025. Going forward, the Board would determine the base 
component and the ad valorem component for debit card transactions 
performed during the two-year period beginning July 1, 2025, based on 
the data reported to the Board by covered issuers on the Board's next 
Debit Card Issuer Survey, and would thereafter determine these amounts 
for each succeeding two-year period based on data reported to the Board 
on future Debit Card Issuer Surveys.
    Section IV discusses the proposed revisions to the fraud-prevention 
adjustment in Sec.  235.4. As with the interchange fee standards, the 
Board proposes to determine the fraud-prevention adjustment every other 
year based on the latest data reported to the Board by covered issuers 
on the biennial

[[Page 78102]]

Debit Card Issuer Survey. The fraud-prevention adjustment would be the 
median per-transaction fraud-prevention costs among covered issuers, 
which is generally the same methodology the Board used to determine the 
fraud-prevention adjustment in 2012.
    Initially, under the proposal, the fraud-prevention adjustment 
would be 1.3 cents for debit card transactions performed from the 
effective date of the final rule to June 30, 2025. Going forward, the 
Board would determine the fraud-prevention adjustment for debit card 
transactions performed during the two-year period beginning July 1, 
2025, based on the data reported to the Board by covered issuers on the 
Board's next Debit Card Issuer Survey, and would thereafter determine 
the fraud-prevention adjustment for each succeeding two-year period 
based on data reported to the Board on future Debit Card Issuer 
Surveys.
    Section V discusses the proposed technical revisions to Regulation 
II, which are generally intended to make Regulation II clearer. For 
example, the Board proposes to add ``covered issuer'' as a defined term 
in Regulation II and use this term throughout the regulation and the 
Official Board Commentary on Regulation II to refer to debit card 
issuers with consolidated assets of $10 billion or more.
    Section VI discusses the proposed effective date for the revisions. 
The Board proposes that the revisions would, if adopted, take effect on 
the first day of the next calendar quarter that begins at least 60 days 
after the final rule is published in the Federal Register.
    Section VII sets forth the Board's general request for comment, as 
well as specific questions for feedback.
    Section VIII sets forth certain regulatory analyses that the Board 
is required to complete under the Durbin Amendment and certain other 
statutes, such as the Regulatory Flexibility Act and the Paperwork 
Reduction Act.

II. Legal Background

A. Statutory Authority

    The Dodd-Frank Wall Street Reform and Consumer Protection Act (the 
Dodd-Frank Act) was enacted on July 21, 2010.\6\ 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 
fees for debit card transactions and rules for debit card and credit 
card transactions.\7\
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    \6\ See Public Law 111-203, 124 Stat. 1376 (2010).
    \7\ EFTA section 920 is codified at 15 U.S.C. 1693o-2. EFTA 
section 920(c)(2) defines ``debit card'' to mean any card (including 
a general-use prepaid card), or other payment code or device, issued 
or approved for use through a payment card network to debit an asset 
account, regardless of the purpose for which the account is 
established, and regardless of whether authorization is based on 
signature, PIN, or other means. 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 transactions in which 
a person uses a debit card. This preamble uses the term ``debit card 
transaction'' interchangeably with ``electronic debit transaction.'' 
Similarly, this preamble uses the term ``interchange fee'' 
interchangeably with the statutory term ``interchange transaction 
fee.'' EFTA section 905(c)(8) defines ``interchange transaction 
fee'' as any fee established, charged, or received by a payment card 
network for the purpose of compensating an issuer for its 
involvement in an electronic debit transaction. For an overview of 
the debit card industry, see 76 FR 43393, 43395-96 (July 20, 2011).
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    EFTA section 920(a)(2) provides that the amount of any interchange 
fee that an issuer may receive or charge with respect to a debit card 
transaction shall be reasonable and proportional to the cost incurred 
by the issuer with respect to the transaction.\8\ EFTA section 
920(a)(3) requires the Board to establish standards for assessing 
whether the amount of any interchange fee is reasonable and 
proportional to the cost incurred by the issuer with respect to the 
transaction. EFTA section 920(a)(4) sets forth various considerations 
that the Board must take into account when establishing these 
interchange fee standards. Specifically, the Board must consider the 
functional similarity between debit card transactions and checking 
transactions that are required within the Federal Reserve bank system 
to clear at par. The Board must also distinguish between (i) the 
incremental cost incurred by an issuer for the role of the issuer in 
the authorization, clearance, or settlement of a particular debit card 
transaction, which cost shall be considered by the Board; and (ii) 
other costs incurred by an issuer which are not specific to a 
particular debit card transaction, which costs shall not be considered 
by the Board.
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    \8\ ``Issuer'' is defined in EFTA section 920(c)(9) to mean any 
person who issues a debit card, or credit card, or the agent of such 
person with respect to such card.
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    Under EFTA section 920(a)(5)(A), the Board may allow for an 
adjustment to the interchange fee received or charged by an issuer 
under the interchange fee standards if such adjustment is reasonably 
necessary to make allowance for costs incurred by the issuer in 
preventing fraud in relation to debit card transactions involving the 
issuer, provided that the issuer complies with fraud-related standards 
established by the Board. The Board's fraud-related standards must, 
among other things, require issuers to take effective steps to reduce 
the occurrence of, and costs from, fraud in relation to debit card 
transactions, including through the development and implementation of 
cost-effective fraud prevention technology.
    Certain issuers and debit card transactions are exempt from the 
interchange fee standards. EFTA section 920(a)(6) exempts any issuer 
that, together with its affiliates, has assets of less than $10 
billion.\9\ EFTA section 920(a)(7)(A)(i) exempts an interchange fee 
charged or received with respect to a debit card transaction in which a 
person uses a debit card or general-use prepaid card that has been 
provided to a person pursuant to a Federal, State, or local government-
administered payment program, in which the person may only use the 
debit card or general-use prepaid card to transfer or debit funds, 
monetary value, or other assets that have been provided pursuant to 
such program. EFTA section 920(a)(7)(A)(ii) exempts an interchange fee 
charged or received with respect to a debit card transaction in which a 
person uses certain general-use prepaid cards.\10\
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    \9\ For purposes of this exemption, EFTA section 920(a)(6) 
provides that the term ``issuer'' shall be limited to the person 
holding the asset account that is debited through a debit card 
transaction.
    \10\ Specifically, EFTA section 920(a)(7)(A)(ii) exempts an 
interchange fee charged or received with respect to a debit card 
transaction in which a person uses a plastic card, payment code, or 
device that is (i) linked to funds, monetary value, or assets 
purchased or loaded on a prepaid basis; (ii) not issued or approved 
for use to access or debit any account held by or for the benefit of 
the cardholder (other than a subaccount or other method of recording 
or tracking funds purchased or loaded on the card on a prepaid 
basis); (iii) redeemable at multiple, unaffiliated merchants or 
service providers, or automated teller machines; (iv) used to 
transfer or debit funds, monetary value, or other assets; and (v) 
reloadable and not marketed or labeled as a gift card or gift 
certificate.
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    EFTA section 920(a)(3)(B) authorizes the Board to require any 
issuer or payment card network to provide the Board with such 
information as may be necessary to carry out the provisions of EFTA 
section 920(a). This provision additionally requires the Board, in 
issuing rules under EFTA section 920(a) and on at least a biannual 
basis thereafter, to disclose such aggregate or summary information 
concerning the costs incurred, and interchange fees charged or 
received, by issuers or payment card networks in connection with the 
authorization, clearance, or settlement of debit card transactions as

[[Page 78103]]

the Board considers appropriate and in the public interest.\11\
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    \11\ EFTA section 920 contains various other provisions, but the 
proposed revisions to Regulation II discussed in this preamble would 
not substantively amend the provisions of Regulation II that 
implement these other statutory provisions. Specifically, EFTA 
section 920(a)(1) authorizes the Board to prescribe regulations to 
prevent circumvention or evasion of EFTA section 920(a). EFTA 
section 920(a)(8) confers upon the Board additional authority to 
prescribe regulations concerning network fees. EFTA section 920(b) 
requires the Board to prescribe regulations related to the routing 
of debit card transactions.
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B. Regulation II

    The Board adopted a final rule implementing the interchange fee 
standards and an interim final rule implementing the fraud-prevention 
adjustment in July 2011.\12\ In August 2012, the Board adopted a final 
rule amending its interim final rule regarding the fraud-prevention 
adjustment.\13\ These rules were codified as Regulation II.
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    \12\ Regulation II, Debit Card Interchange Fees and Routing, 
codified at 12 CFR part 235. See 76 FR 43393 (July 20, 2011) (final 
rule); 76 FR 43477 (July 20, 2011) (interim final rule).
    \13\ See 77 FR 46258 (Aug. 3, 2012).
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    Section 235.3(a) of Regulation II implements EFTA section 920(a)(2) 
by providing that the amount of any interchange fee that an issuer may 
receive or charge with respect to a debit card transaction shall be 
reasonable and proportional to the cost incurred by the issuer with 
respect to the transaction. Section 235.3(b) implements EFTA section 
920(a)(3) by providing that an issuer complies with the requirements of 
Sec.  235.3(a) only if each interchange fee received or charged by the 
issuer for a debit card transaction is no more than the sum of (i) 21 
cents and (ii) 5 basis points multiplied by the value of the 
transaction.\14\ These amounts, together with any fraud-prevention 
adjustment permitted under Sec.  235.4, comprise the interchange fee 
cap.
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    \14\ The Official Board Commentary on Regulation II, found in 
appendix A to part 235, refers to these amounts as the ``base 
component'' and the ``ad valorem component,'' respectively.
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    Section 235.4 implements the fraud-prevention adjustment permitted 
by EFTA section 920(a)(5). Specifically, Sec.  235.4(a) allows an 
issuer that meets the fraud-prevention standards enumerated in Sec.  
235.4(b) to receive or charge an amount of no more than 1 cent per 
transaction in addition to any interchange fee it receives or charges 
in accordance with Sec.  235.3. Section 235.4(b) provides that to be 
eligible to receive or charge the fraud-prevention adjustment, an 
issuer must develop, implement, and periodically review fraud-related 
policies and procedures meeting certain requirements. Section 235.4(c) 
provides that to be eligible to receive or charge a fraud-prevention 
adjustment, an issuer must annually notify its payment card networks 
that it complies with the fraud-prevention standards in Sec.  235.4(b). 
Section 235.4(d) sets forth rules for when an issuer, or the 
appropriate agency, determines that the issuer is not eligible to 
receive or charge a fraud-prevention adjustment.\15\
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    \15\ The appropriate agency for a particular entity is 
determined pursuant to Sec.  235.9 and EFTA section 918 (15 U.S.C. 
1693o). For example, the Board is the appropriate agency with 
respect to member banks of the Federal Reserve System (other than 
national banks), branches and agencies of foreign banks (other than 
federal branches, federal Agencies, and insured state branches of 
foreign banks), commercial lending companies owned or controlled by 
foreign banks, and organizations operating under section 25 or 25A 
of the Federal Reserve Act.
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    Section 235.5 implements the statutory exemptions from the 
interchange fee standards. Section 235.5(a) generally provides that the 
interchange fee standards do not apply to an interchange fee received 
or charged by an issuer with respect to a debit card transaction if the 
issuer, together with its affiliates, has assets of less than $10 
billion as of the end of the calendar year preceding the date of the 
transaction and holds the account that is debited. Section 235.5(b) 
implements the statutory exemption for government-administered payment 
programs. Section 235.5(c) implements the statutory exemption for 
certain reloadable prepaid cards.
    Section 235.8 implements the data collection provisions in EFTA 
section 920(a)(3)(B). Specifically, Sec.  235.8(a) provides that each 
issuer that is not otherwise exempt from the requirements of this part 
under Sec.  235.5(a) and each payment card network shall file a report 
with the Board.\16\ Section 235.8(b) provides that each entity required 
to file a report with the Board shall submit data in a form prescribed 
by the Board for that entity. Pursuant to this authority, the Board 
collects information from debit card issuers with consolidated assets 
of $10 billion or more every other year through the Debit Card Issuer 
Survey.\17\ The Board also collects information from payment card 
networks every year through the Payment Card Network Survey.\18\ The 
Board has published a summary of findings from these two surveys on a 
biennial basis since 2013, consistent with EFTA section 
920(a)(3)(B).\19\ The Board's most recent biennial report was published 
concurrently with this proposal.\20\
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    \16\ The reference to ``the requirements of this part'' in Sec.  
235.8(a) is erroneous, as debit card issuers that qualify for the 
exemption in Sec.  235.5(a) are not exempt from the requirements of 
Sec.  235.7 (network exclusivity and debit card transaction routing) 
or Sec.  235.8(c) (record retention). As described in section V, 
infra, the Board proposes a technical correction to fix this error.
    \17\ See FR 3064a.
    \18\ See FR 3064b.
    \19\ See Board of Governors of the Federal Reserve System, 2011 
Interchange Fee Revenue, Covered Issuers Costs, and Covered Issuer 
and Merchant Fraud Losses Related to Debit Card Transactions (Mar. 
5, 2013), https://www.federalreserve.gov/paymentsystems/files/debitfees_costs_2011.pdf.
    \20\ The Board's reports may be found on the Board's website. 
See Board of Governors of the Federal Reserve System, Regulation II 
(Debit Card Interchange Fees and Routing): Reports and Data 
Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm. Additionally, on an annual basis, the Board 
publishes average interchange fees by network. See Board of 
Governors of the Federal Reserve System, Regulation II (Debit Card 
Interchange Fees and Routing): Average Debit Card Interchange Fee by 
Payment Card Network, https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm.
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    Appendix A to part 235 is the Official Board Commentary on 
Regulation II. In general, the commentary provides background material 
to explain the Board's intent in adopting a particular part of the 
regulation and examples to aid in understanding how a particular 
requirement is to work.\21\
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    \21\ Other provisions of Regulation II implement provisions of 
EFTA section 920 that are not directly relevant to the proposed 
revisions discussed in this preamble. Specifically, Sec.  235.6 
prohibits circumvention or evasion of the interchange fee 
restrictions in Regulation II and prohibits an issuer from receiving 
net compensation from a payment card network within a calendar year. 
Section 235.7 sets forth rules related to network exclusivity and 
the routing of debit card transactions. To address certain issues 
related to the routing of card-not-present debit card transactions, 
the Board recently revised Sec.  235.7 and the commentary thereto, 
with an effective date of July 1, 2023. See 87 FR 61217 (Oct. 11, 
2022).
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III. Proposed Revisions to the Interchange Fee Standards (Sec.  235.3)

A. Background

    As described above, EFTA section 920(a)(3) directs the Board to 
establish standards for assessing whether the amount of any interchange 
fee is reasonable and proportional to the cost incurred by the issuer 
with respect to the transaction. To fulfill this statutory mandate, the 
Board (i) defined the costs incurred by debit card issuers that the 
Board considers, consistent with the statute (referred to herein as 
``allowable costs''), and (ii) established standards for assessing 
interchange fees relative to allowable costs. A brief overview of how 
the Board developed the interchange fee standards in current Sec.  
235.3 follows.
1. Allowable Costs
    EFTA section 920(a)(4)(B) requires the Board, in establishing 
interchange fee standards, to distinguish between (i) the incremental 
cost incurred by an issuer

[[Page 78104]]

for the role of the issuer in the authorization, clearance, or 
settlement of a particular debit card transaction, which cost shall be 
considered by the Board; and (ii) other costs incurred by an issuer 
which are not specific to a particular debit card transaction, which 
costs shall not be considered by the Board.\22\ When the Board adopted 
current Sec.  235.3 in 2011, the Board identified a third category of 
costs that the Board is permitted, but not required, to consider: costs 
incurred by an issuer that are specific to a particular debit card 
transaction but are not incremental costs related to a debit card 
issuer's role in authorization, clearance, and settlement.\23\
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    \22\ EFTA section 920(a)(4)(a) also requires the Board to 
consider the functional similarity between debit card transactions 
and checking transactions that are required within the Federal 
Reserve bank system to clear at par. For a discussion of this 
requirement, see section VIII.B, infra.
    \23\ The Board observed in 2011 that EFTA does not define 
``other costs incurred by an issuer which are not specific to a 
particular electronic debit transaction,'' which the Board is 
prohibited from considering. See 76 FR 43393, 43426 (July 20, 2011). 
In 2010, the Board initially proposed to exclude costs that could 
not be attributed to any identified debit card transaction (referred 
to as ``fixed costs'' in the proposal), even if those costs were 
specific to effecting debit card transactions as a whole. See 75 FR 
81721, 81735-36 (Dec. 28, 2010). After considering public comments, 
the Board at the final rule stage interpreted the category of 
prohibited costs to include only those costs that are not incurred 
in the course of effecting any debit card transaction. See 76 FR at 
43426. Further, the Board noted that the statute is silent on those 
costs that are not incremental costs related to a debit card 
issuer's role in authorization, clearance, and settlement, but that 
are specific to a particular debit card transaction. See id. The 
Board determined that EFTA section 920(a)(4)(B) did not specifically 
instruct the Board to consider this third category of costs but did 
not prohibit their consideration. See id. The Board's interpretation 
of the statute was upheld by the U.S. Court of Appeals for the 
District of Columbia Circuit. See NACS v. Board of Governors of the 
Federal Reserve System, 746 F.3d 474, 488-89 (D.C. Cir. 2014). See 
also 80 FR 48684 (Aug. 14, 2015) (clarifying the treatment of 
transaction-monitoring costs, as required by the D.C. Circuit).
---------------------------------------------------------------------------

    Using this framework, the Board defined the allowable costs that 
the Board considered in establishing the interchange fee standards set 
forth in Sec.  235.3. For reasons explained in the preamble 
accompanying the 2011 final rule, allowable costs comprise (i) 
transaction-processing costs, including fixed and variable 
authorization, clearance, and settlement costs, network processing fees 
(e.g., switch fees), and the costs of processing chargebacks and other 
non-routine transactions; (ii) transaction-monitoring costs; and (iii) 
issuer fraud losses.\24\ Allowable costs do not include other costs 
incurred by debit card issuers in connection with their debit card 
programs, such as corporate overhead and account-relationship costs, 
general debit card program costs (e.g., card production and delivery 
costs, marketing costs, and research and development costs), or costs 
of non-sufficient funds handling, cardholder rewards, and cardholder 
inquiries.\25\
---------------------------------------------------------------------------

    \24\ See 76 FR at 43429-31.
    \25\ See 76 FR at 43427-29.
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    The Board has reviewed its construction of the statute and prior 
analysis regarding the allowable costs that the Board considered in 
establishing the interchange fee standards, and believes that this 
prior analysis remains sound. As such, the Board does not propose any 
changes to the allowable costs considered for purposes of the 
interchange fee standards.
    As described below, the Board established the base component based 
on transaction-processing and transaction-monitoring costs, but 
separately assessed issuer fraud losses through the ad valorem 
component. Transaction-processing and transaction-monitoring costs are 
collectively referred to in this preamble as ``base component costs.''
2. Interchange Fee Standards
    For reasons explained in the preamble accompanying the 2011 final 
rule, the Board adopted a uniform, transaction-level standard that, 
subject to any fraud-prevention adjustment that a covered issuer may be 
permitted to receive or charge under Sec.  235.4, establishes the 
maximum permissible interchange fee that a covered issuer may receive 
for a debit card transaction subject to the interchange fee 
standards.\26\ This maximum interchange fee is the sum of a base 
component and an ad valorem component.
---------------------------------------------------------------------------

    \26\ See 76 FR at 43431-35.
---------------------------------------------------------------------------

    To determine the base component, the Board referred to the data 
that the Board had collected shortly after the Dodd-Frank Act was 
signed into law via a voluntary survey of covered issuers concerning 
debit card transactions performed in the 2009 calendar year.\27\ Based 
on these data, the Board computed the per-transaction base component 
costs of each covered issuer that reported such costs by summing the 
base component costs reported by the covered issuer and dividing this 
sum by the total number of debit card transactions reported by the 
covered issuer. The Board then arranged these per-transaction costs in 
ascending order from lowest- to highest-cost covered issuer.\28\
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    \27\ See Board of Governors of the Federal Reserve System, 2009 
Debit Card Issuer Survey (Sep. 13, 2010), https://www.federalreserve.gov/paymentsystems/files/payment_card_network_survey_20100920.pdf. The survey respondents 
included 66 covered issuers, representing about 57 percent of total 
debit card transactions by volume and 60 percent of total debit card 
transactions by value in 2009. However, because some covered issuers 
did not respond to the voluntary survey, the proportion of total 
debit card transactions performed in 2009 that are attributable to 
covered issuers (including respondents and non-respondents) was 
greater than 57 percent (by volume) and 60 percent (by value). The 
Board discussed preliminary summary findings from this survey in its 
2010 proposal to establish interchange fee standards. See 75 FR at 
81724-26. The Board subsequently published a report summarizing the 
data collected from the survey. See Board of Governors of the 
Federal Reserve System, 2009 Interchange Fee Revenue, Covered Issuer 
Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit 
Card Transactions (June 2011), https://www.federalreserve.gov/paymentsystems/files/debitfees_costs.pdf.
    \28\ See 76 FR at 43433.
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    The Board observed that this distribution of per-transaction base 
component costs across covered issuers was quite skewed. These costs 
ranged from 3 cents to 66 cents per transaction, with a considerable 
majority of covered issuers concentrated in the range of costs below 21 
cents, and a scattered set of covered issuers having significantly 
higher costs above 21 cents. Further, below 21 cents, the difference 
between the per-transaction base component costs of adjacently ranked 
covered issuers was small, but at around 21 cents, the distribution 
showed a marked discontinuity, with base component costs varying more 
significantly across these higher-cost covered issuers.
    The Board concluded that establishing interchange fee standards to 
accommodate these higher-cost covered issuers would not be reasonable 
or proportional to the overall cost experience of the substantial 
majority of covered issuers.\29\ For that reason, the Board adopted a 
base component of 21 cents per transaction. Had that base component 
been in effect in 2009, approximately 80 percent of covered issuers 
that responded to the Board's voluntary survey would have fully 
recovered their base component costs.\30\
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    \29\ See id.
    \30\ In other words, for approximately 80 percent of covered 
issuers that responded to the Board's voluntary survey, the covered 
issuer's base component costs in 2009 were less than or equal to the 
product of 21 cents and the number of transactions involving that 
issuer's debit cards in 2009. However, the Board did not indicate 
that the Board was adopting any particular cost-recovery target 
across covered issuers (i.e., that 80 percent of covered issuers 
should fully recover their base component costs) or across covered 
issuer transactions.
---------------------------------------------------------------------------

    The Board recognized that issuer fraud losses are distinct from the 
other types of allowable costs in that the amount of a fraud loss 
varies with the

[[Page 78105]]

amount of the transaction.\31\ For this reason, the Board determined 
that these fraud losses were best assessed through a separate ad 
valorem component. To determine the ad valorem component, the Board 
computed the ratio of issuer fraud losses to transaction value for each 
covered issuer that reported such costs in response to the voluntary 
survey.\32\ Specifically, for each such issuer, the Board divided (i) 
the issuer fraud losses by (ii) the total value of the issuer's debit 
card transactions. The Board then sorted these ratios, expressed in 
basis points, in ascending order from lowest to highest.
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    \31\ See 76 FR at 43431.
    \32\ In the preamble accompanying the 2011 final rule, the Board 
used the term ``per-transaction fraud losses'' for this metric, but 
the Board now believes that ``ratio of issuer fraud losses to 
transaction value'' is a more accurate description.
---------------------------------------------------------------------------

    The resulting distribution showed that the ratio of issuer fraud 
losses to transaction value varied considerably among covered issuers, 
ranging from 0.9 to 19.6 basis points, but the distribution was not 
skewed like that of per-transaction base component costs. For the 
reasons explained in the preamble accompanying the 2011 final rule, the 
Board adopted an ad valorem component of 5 basis points of the 
transaction value, which corresponded to the median ratio of issuer 
fraud losses to transaction value among covered issuers, rounded to the 
nearest basis point, based on the Board's voluntary survey.\33\
---------------------------------------------------------------------------

    \33\ See 76 FR at 43434.
---------------------------------------------------------------------------

    The Board described the foregoing methodologies for determining the 
base component and ad valorem component in the preamble accompanying 
the 2011 final rule. The Board did not, however, codify these 
methodologies in Sec.  235.3. Rather, Sec.  235.3(b) simply provides 
that each interchange fee received or charged by a debit card issuer 
for a debit card transaction shall be no more than the sum of 21 cents 
and 5 basis points multiplied by the value of the transaction.

B. Rationale for Proposal

    When the Board established the interchange fee standards in current 
Sec.  235.3, the Board stated that it would regularly collect data on 
the costs incurred by covered issuers in connection with debit card 
transactions and, over time, would adjust the interchange fee standards 
based on reported costs, if appropriate. The Board also noted that 
lower costs should result in a lower interchange fee cap as issuers 
become more efficient.\34\ To date, the Board has not proposed or 
finalized any adjustments to the interchange fee standards in Sec.  
235.3.\35\
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    \34\ See 76 FR at 43432.
    \35\ In December 2022, two trade associations representing 
merchants submitted a rulemaking petition to the Board regarding the 
interchange fee standards in Regulation II. Specifically, the 
petitioners requested that the Board initiate a rulemaking to lower 
the base component from 21 cents to 9.7 cents, and eliminate or 
substantially reduce the ad valorem component and the fraud-
prevention adjustment. The Board views the rulemaking petition as an 
additional consideration related to the proposal; however, the 
Board's rationale for the proposal is discussed in this section 
III.B.
---------------------------------------------------------------------------

    Consistent with EFTA section 920(a)(3)(B), the Board has surveyed 
covered issuers on a mandatory basis every other year since the 
reporting requirements in Sec.  235.8 of Regulation II were adopted. 
Through these biennial surveys, the Board has collected data from 
covered issuers concerning the costs incurred by those issuers in 
connection with debit card transactions performed in calendar years 
2011, 2013, 2015, 2017, 2019, and 2021. The Board has reviewed the 
interchange fee standards in Sec.  235.3 in light of both the most 
recently collected data from 2021 and the cumulative data collected 
from covered issuers since the original Regulation II rulemaking. As a 
result of this analysis, and as described below, the Board believes 
that revisions to the current interchange fee standards are appropriate 
at this time.
    While the interchange fee standards have remained the same since 
Sec.  235.3 was adopted, several data points show that the allowable 
costs incurred by covered issuers have fallen significantly since the 
original Regulation II rulemaking. In particular, the Board monitors 
one especially important metric that approximates the base component 
costs of the average covered issuer transaction: the transaction-
weighted average of per-transaction base component costs across covered 
issuers.\36\ That metric was 3.9 cents in 2021, which represents a 
decline of nearly 50 percent since 2009 (7.7 cents) and over 23 percent 
since 2011 (5.1 cents), the first year for which the Board collected 
data on a mandatory basis.
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    \36\ The Board computes the transaction-weighted average of per-
transaction base component costs across covered issuers by (i) 
summing base component costs across covered issuers that reported 
these costs; and (ii) dividing this sum by the sum of the total 
number of debit card transactions across covered issuers that 
reported base component costs. The transaction-weighted average of 
per-transaction base component costs across covered issuers can be 
viewed as a broad measure of whether covered issuers collectively 
are becoming more or less efficient at processing debit card 
transactions. Specifically, this metric corresponds to the average 
base component costs of a debit card transaction for covered issuers 
as a whole. The Board believes that, for skewed distributions like 
the distribution of per-transaction base component costs, the 
transaction-weighted average is preferable to alterative metrics, 
such as the unweighted average across covered issuers, or a given 
percentile across covered issuers. In particular, the transaction-
weighted average is less affected than these alternative metrics by 
outliers, including covered issuers with low transaction volumes but 
per-transaction base component costs considerably greater than the 
vast majority of covered issuers. Further, for skewed distributions 
like the distribution of per-transaction base component costs, the 
transaction-weighted average is preferable to the median because, 
unlike that metric, its value depends on all covered issuers' per-
transaction base component costs, rather than only on whether such 
values fall above or below the median. For example, a reduction in 
the per-transaction base component costs of the less efficient 50 
percent of covered issuers (e.g., due to the adoption of a new 
transaction-processing technology by these issuers) would cause a 
decline in the transaction-weighted average but may not affect the 
median.
---------------------------------------------------------------------------

    The Board also monitors issuer fraud losses, on which the Board 
based the ad valorem component. The median ratio of issuer fraud losses 
to transaction value among covered issuers declined by around 15 
percent from 2011 (4.7 basis points, or 5.0 basis points if rounded to 
the nearest basis point) to 2021 (4.0 basis points).
    Taken together, these declines in base component costs and issuer 
fraud losses have resulted in a substantial increase in the percentage 
of covered issuers that fully recovered their allowable costs from 2011 
(61.1 percent) to 2021 (77.4 percent).\37\
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    \37\ A covered issuer is considered to have fully recovered its 
allowable costs if the covered issuer's allowable costs in a 
particular year were less than or equal to the aggregate amount of 
interchange fees permitted under the interchange fee cap for 
transactions involving that issuer's debit cards in the particular 
year. In contrast to the increase in the percentage of covered 
issuers that fully recovered their allowable costs from 2011 to 
2021, the percentage of covered issuer transactions for which 
covered issuers fully recovered their allowable costs was the same 
in 2021 as it was in 2011 (99.5 percent).
---------------------------------------------------------------------------

    As a result of the significant decline in the allowable costs 
incurred by covered issuers since 2009, the Board believes that the 
current interchange fee standards in Sec.  235.3 may no longer be 
effective for assessing whether, for a debit card transaction subject 
to the interchange fee standards, the amount of any interchange fee 
received or charged by a debit card issuer is reasonable and 
proportional to the cost incurred by the issuer with respect to the 
transaction, as required by EFTA section 920(a)(2). As such, the Board 
believes it is necessary to revise the interchange fee standards to 
reflect the decline since 2009 in base component costs and the decline 
over time in the ratio of issuer fraud losses to transaction value for 
covered issuers.
    Furthermore, the Board believes that, as much as practicable, the 
base component and ad valorem component should be updated regularly and

[[Page 78106]]

predictably to reflect changes in the allowable costs incurred by 
covered issuers as those changes occur. Such an approach would avoid 
long periods during which the interchange fee standards may not be 
effective for assessing whether, for a debit card transaction subject 
to the interchange fee standards, the amount of any interchange fee 
received or charged by a debit card issuer is reasonable and 
proportional to the cost incurred by the issuer with respect to the 
transaction. In addition, directly linking the interchange fee 
standards to the data reported to the Board by covered issuers on the 
Board's biennial survey would capture changes in allowable costs as 
quickly as practicable. Further, the Board believes that the patterns 
observed in the cumulative data collected by the Board since the 
original rulemaking, described further below, are consistent over time 
and thus support the establishment at this time of a repeatable process 
that directly links the interchange fee standards to the data reported 
on the Debit Card Issuer Survey. Finally, this approach would create 
predictability for the debit card industry regarding how and when 
updates to the interchange fee cap would occur.
    For these reasons, and as described below, the Board proposes to 
determine the base component and ad valorem component in Sec.  235.3 
every other year based on the latest data reported to the Board by 
covered issuers. The Board believes that, under this approach, the 
interchange fee standards in Sec.  235.3 will be effective going 
forward for assessing whether, for a debit card transaction subject to 
the interchange fee standards, the amount of any interchange fee 
received or charged by a debit card issuer is reasonable and 
proportional to the cost incurred by the issuer with respect to the 
transaction.\38\
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    \38\ In lieu of directly linking the interchange fee standards 
to data from the Board's biennial survey of covered issuers going 
forward, the Board could consider adopting a one-time update to the 
base component and ad valorem component in Sec.  235.3. Following 
such an approach, the Board would continue to monitor changes in the 
allowable costs incurred by covered issuers and would propose 
further updates to the base component and ad valorem component in 
the future, if appropriate. However, such ad hoc updates to the base 
component and ad valorem component would not be predictable, and 
they could result in periods during which the interchange fee 
standards may not be effective for assessing whether, for a debit 
card transaction subject to the interchange fee standards, the 
amount of any interchange fee received or charged by a debit card 
issuer is reasonable and proportional to the cost incurred by the 
issuer with respect to the transaction.
---------------------------------------------------------------------------

    The Board also proposes a new methodology for determining the base 
component. As described above, in 2011, the Board adopted a base 
component of 21 cents per transaction. The Board selected 21 cents 
because that value was the site of a clear discontinuity in the 
distribution of per-transaction base component costs across covered 
issuers, arranged from lowest- to highest-cost covered issuer, for 
debit card transactions performed in 2009.\39\ The Board has reviewed 
the distribution of per-transaction base component costs across covered 
issuers, arranged from lowest- to highest-cost covered issuer, from 
each biennial survey of covered issuers conducted since Regulation II 
was adopted. In some survey years, the distribution contained no clear 
discontinuity; in other survey years, there were multiple apparent 
discontinuities. In addition, in some cases, the amount corresponding 
to a particular discontinuity did not reflect the overall trend in the 
transaction-weighted average of per-transaction base component costs 
across covered issuers. For these reasons, the Board believes that the 
original methodology that the Board used to determine the base 
component by reference to a clear discontinuity in the distribution of 
per-transaction base component costs across covered issuers, arranged 
from lowest- to highest-cost covered issuer, is not appropriate for 
determining the base component at this time and, going forward, would 
not facilitate the regular and predictable updates to the interchange 
fee standards that the Board proposes.
---------------------------------------------------------------------------

    \39\ As described above, the Board noted that, had the current 
base component been in effect in 2009, approximately 80 percent of 
covered issuers would have fully recovered their base component 
costs through the base component. However, the Board did not 
indicate that the Board was selecting a cost-recovery target of 80 
percent of covered issuers (or any other cost-recovery target across 
covered issuers or covered issuer transactions) and did not codify 
in Regulation II an approach for updating the base component to 
reflect any particular cost-recovery target.
---------------------------------------------------------------------------

    Instead, as described below, the Board proposes to determine the 
base component as a function of the transaction-weighted average of 
per-transaction base component costs across covered issuers. Under this 
methodology, any change in the base component costs of the average 
covered issuer transaction would result in a proportional change to the 
base component. As such, this methodology will ensure that the maximum 
interchange fee that a covered issuer may receive will be proportional 
to the base component costs incurred by covered issuers with respect to 
the average covered issuer transaction, consistent with the Durbin 
Amendment. Combined with the Board's proposal to determine the base 
component every other year based on the latest data reported to the 
Board by covered issuers, this approach is designed to ensure that, to 
the extent practicable, any interchange fee that a covered issuer 
receives or charges will remain proportional to the costs incurred by 
covered issuers with respect to the average debit card transaction over 
time.\40\
---------------------------------------------------------------------------

    \40\ In 2011, the Board rejected a mathematical interpretation 
of the word ``proportional'' that would have required a constant 
proportion between allowable costs and interchange fees. See 76 FR 
43393, 43423 (July 20, 2011). The Board continues to believe that 
the statute requires only that the interchange fees must have a 
relationship to allowable costs, as the Board stated in 2011. See 
id. Determining the base component as a fixed multiple of the 
transaction-weighted average of per-transaction base component costs 
across covered issuers is thus consistent with the statute, and is 
desirable because it will enable the Board, going forward, to 
determine the base component based on the latest data reported to 
the Board by covered issuers.
---------------------------------------------------------------------------

    More specifically, the Board proposes to determine the base 
component as the product of a fixed multiplier and the transaction-
weighted average of per-transaction base component costs across covered 
issuers. Under this formula, the fixed multiplier would be codified in 
Regulation II and would remain constant. The fixed multiplier would 
correspond to a target selected by the Board for a reasonable 
percentage of covered issuer transactions for which covered issuers 
should fully recover their base component costs over time, consistent 
with the Durbin Amendment.
    Consistent patterns that the Board has observed in the data 
collected from covered issuers since 2009 related to per-transaction 
base component costs make it possible to derive such a formula. 
Specifically, while the transaction-weighted average of per-transaction 
base component costs across covered issuers has declined significantly 
since the original Regulation II rulemaking, the shape of the 
distribution of per-transaction costs across covered issuer 
transactions has not changed markedly between the data collections.\41\ 
Importantly, this particular shape can be well-characterized by a 
probability

[[Page 78107]]

distribution with a key property: the value of per-transaction base 
component costs at a target percentile across covered issuer 
transactions is a multiple of the transaction-weighted average of per-
transaction base component costs across covered issuers.\42\ The 
stability of the shape of the distribution over time means that the 
Board can identify a fixed multiplier that, when multiplied by the 
transaction-weighted average of per-transaction base component costs in 
each year, should yield full cost recovery for the target percentage of 
covered issuer transactions over time.\43\
---------------------------------------------------------------------------

    \41\ The Board generates the distribution of per-transaction 
base component costs across covered issuer transactions as follows. 
For each covered issuer that reported base component costs, the 
Board first determines the per-transaction base component costs of 
the covered issuer by (i) summing the base component costs reported 
by the covered issuer and (ii) dividing this sum by the total number 
of debit card transactions reported by the covered issuer. The Board 
then assigns this result to each of the covered issuer's 
transactions. Finally, the Board arranges the per-transaction base 
component costs of all covered issuer transactions in ascending 
order from lowest- to highest-cost covered issuer transaction.
    \42\ In particular, the data on per-transaction base component 
costs across covered issuer transactions, arranged from lowest- to 
highest-cost covered issuer transaction, for each year closely 
approximates the Weibull distribution. The Weibull distribution, 
commonly used in social sciences and engineering, has the property 
that the value of the distribution at a particular percentile is a 
fixed multiple of the average value of the distribution. The Weibull 
distribution captures a number of key features of the data on 
covered issuer transactions, including the existence of a small 
number of high-cost transactions associated with relatively low-
volume, high-cost covered issuers.
    \43\ A particular Weibull distribution is described by two 
parameters: (i) its scale, which determines the magnitude of the 
values along the distribution; and (ii) its shape, which determines 
the degree to which the distribution is skewed to one side. The 
Board's analysis determined that the consistent patterns in the 
distribution of per-transaction base component costs across covered 
issuer transactions for each set of survey data collected since 2009 
can be best captured using the Weibull distribution with (i) a scale 
parameter that is proportional to the transaction-weighted average 
of per-transaction base component costs across covered issuers for 
each year, and (ii) a shape parameter that is stable over time. The 
Board's analysis did not find a statistically significant 
improvement in the fit of the Weibull distribution to the data when 
the shape parameter is allowed to differ across years.
---------------------------------------------------------------------------

    The stability of the shape of the distribution observed in data 
collected from covered issuers since 2009 suggests that there are 
features inherent to the covered issuer segment of the debit card 
market that persist over time. For this reason, the Board believes 
that, in future data collections, the distribution of per-transaction 
base component costs across covered issuer transactions will continue 
to exhibit a similar shape. Thus, the fixed multiplier derived from the 
cumulative data collected by the Board since 2009 should continue to 
yield full cost recovery over time for the target percentage of covered 
issuer transactions going forward.
    Although the proposed fixed multiplier would correspond to a target 
percentage of covered issuer transactions for which covered issuers 
should fully recover their base component costs over time, the proposed 
approach would not guarantee this precise level of cost recovery in any 
particular year. Rather, in some years, covered issuers may fully 
recover their base component costs for more than the target percentage 
of covered issuer transactions; in other years, covered issuers may 
fully recover their base component costs for less than the target 
percentage of covered issuer transactions. Over time, however, the 
Board expects the actual cost recovery of covered issuer transactions 
to be close to the Board's cost-recovery target.\44\ The Board intends 
to monitor over time the actual cost recovery of covered issuer 
transactions relative to the Board's cost-recovery target, and in the 
future may seek comment on potential adjustments to improve the 
proposed methodology for determining the base component, if 
appropriate. For example, adjustments to the proposed methodology may 
be appropriate in the event of fundamental changes to the debit card 
industry that significantly change the shape of the distribution of 
per-transaction base component costs across covered issuer transactions 
relative to the consistent patterns the Board has observed in the 
cumulative data collected from covered issuers since 2009.
---------------------------------------------------------------------------

    \44\ The Board assesses how close actual cost recovery is to the 
cost-recovery target for a particular fixed multiplier by 
evaluating, for each year, the extent to which actual cost recovery 
would have diverged from the target had the relevant base component 
been in effect, and then considering the average deviation over time 
resulting from these calculations. Specifically, the Board first 
calculates the difference between the cost-recovery target and the 
percentage of covered issuer transactions performed in 2009 for 
which covered issuers would have fully recovered their base 
component costs if, in 2009, the base component had been the product 
of (i) the transaction-weighted average of per-transaction base 
component costs across covered issuers in 2009, and (ii) the fixed 
multiplier. Second, the Board performs the same calculation for 
transactions performed in 2011. The Board then takes the simple 
average of the differences calculated for each year (i.e., for 2009 
and 2011). Third, the Board repeats this process for transactions 
performed in 2013, 2015, 2017, 2019, and 2021, in each case taking 
the average of the differences calculated for each year so far. 
These averages represent the extent to which actual cost recovery 
would have diverged over time from the target had the relevant base 
components been in effect.
     For the fixed multiplier that the Board proposes (i.e., 3.7, as 
described below), using the measure of closeness described above, 
the Board found that the actual cost-recovery rate drew nearer to 
the target cost-recovery rate with each subsequent data collection 
that was incorporated into the Board's analysis. In other words, the 
simple average of the differences for 2009-13 transactions improved 
on that for 2009-11 transactions, which improved on the difference 
for 2009, and so on. This result suggests that, while for a 
particular data collection the actual cost-recovery rate may diverge 
from the target cost-recovery rate, over time actual cost recovery 
is likely to be close to the cost-recovery target.
---------------------------------------------------------------------------

    To ensure that, for a debit card transaction subject to the 
interchange fee standards, the amount of any interchange fee received 
or charged by a debit card issuer is reasonable, the Board proposes a 
cost-recovery target of 98.5 percent of covered issuer transactions, 
which corresponds to a fixed multiplier of 3.7 based on the cumulative 
data collected from covered issuers since 2009. The Board believes that 
this cost-recovery target, and the base component that would result 
from multiplying this fixed multiplier and the transaction-weighted 
average of per-transaction base component costs, is reasonable because 
it would allow covered issuers to fully recover their base component 
costs over time for a significant majority of covered issuer 
transactions. At the same time, this target acknowledges that full cost 
recovery for the highest-cost covered issuer transactions would not be 
reasonable.\45\
---------------------------------------------------------------------------

    \45\ In 2011, the Board stated that the term ``reasonable'' 
implies that, above some amount, an interchange fee is not 
reasonable, and noted that common definitions of the term 
``reasonable'' include ``fair, proper, or moderate'' and ``not 
excessive.'' See 76 FR at 43423. The Board also noted that the Board 
did not believe that it was consistent with the statutory purpose to 
permit networks to set interchange fees in order to accommodate 100 
percent of the average per-transaction costs of the highest-cost 
issuers. See 76 FR at 43433.
---------------------------------------------------------------------------

    A useful measure of the difference between covered issuer 
transactions above the target percentile (for which the Board believes 
full cost recovery would be unreasonable) and covered issuer 
transactions below the target percentile (for which the Board believes 
full cost recovery would be reasonable) is the efficiency gap with 
respect to transaction processing between covered issuers whose 
transactions are above and below the target percentile. This efficiency 
gap may be represented by the ratio of the transaction-weighted average 
of per-transaction base component costs for covered issuers whose 
transactions are above the target percentile to that for covered 
issuers whose transactions are below the target percentile. The Board 
computed this ratio for a range of potential cost-recovery targets 
using each set of data collected from covered issuers since 2009.\46\ 
For the proposed cost-recovery target of 98.5 percent of covered issuer 
transactions, the average value of this ratio across these data 
collections is approximately 5.2, meaning that covered issuers whose 
transactions are above the 98.5 percentile are, on average, more than 
five times less efficient than covered issuers whose transactions are 
below the 98.5

[[Page 78108]]

percentile. Accordingly, the Board believes that targeting full cost 
recovery over time for 98.5 percent of covered issuers transactions is 
reasonable.
---------------------------------------------------------------------------

    \46\ See section VII, infra, for the average value of this ratio 
across these data collections for a range of potential cost-recovery 
targets.
---------------------------------------------------------------------------

    Although the proposed new methodology for determining the base 
component would ultimately rely on a simple formula (i.e., the 
transaction-weighted average of per-transaction base component costs 
across covered issuers multiplied by 3.7), the Board appreciates that 
the underlying statistical analysis is complex. The Board considered 
other methodologies for determining the base component. For example, 
the Board considered setting the base component equal to the 
transaction-weighted average of per-transaction base component costs 
across covered issuers (i.e., effectively with a fixed multiplier of 
1.0), but determined that this methodology would result in an 
unreasonably low percentage of covered issuers fully recovering their 
costs.\47\ The Board also considered determining the base component by 
reference to a target percentile in (i) the distribution of per-
transaction base component costs, arranged from lowest- to highest-cost 
covered issuer, or (ii) the distribution of per-transaction base 
component costs across covered issuer transactions. In both cases, 
however, the Board determined that these methodologies could result in 
a base component that does not reflect changes over time in the 
transaction-weighted average of per-transaction base component costs 
across covered issuers due to the sensitivity of these alternative 
methodologies to low-volume, high-cost covered issuers. Finally, the 
Board considered adopting a tiered approach that would establish 
different base components for high-volume, low-cost covered issuers and 
low-volume, high-cost covered issuers. However, the Board determined 
that such an approach would create numerous practical challenges for 
both the Board and debit card industry participants and could 
disincentivize covered issuers in the tier with the higher base 
component from growing their debit card programs.\48\
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    \47\ Specifically, setting the base component equal to the 
transaction-weighted average of per-transaction base component costs 
across covered issuers would have resulted in only around 15 percent 
of covered issuers, on average across the biennial data collections, 
fully recovering their base component costs. Such a methodology 
would, however, permit covered issuers as a whole to recover their 
aggregate base component costs.
    \48\ For example, a tiered base component approach would require 
the Board to demarcate different tiers of issuers, and the Board's 
demarcations would likely need to be adjusted over time. In 
addition, networks would need to track covered issuers by tier to 
ensure that the interchange fees received by each covered issuer do 
not exceed the interchange fee standards.
---------------------------------------------------------------------------

    Whereas the Board proposes a new methodology to determine the base 
component, the Board does not propose to revise the original 
methodology that the Board used to determine the ad valorem component 
(i.e., the median ratio of issuer fraud losses to transaction value 
among covered issuers, multiplied by the value of the transaction). 
Since the Board adopted the interchange fee standards in 2011, the 
Board has observed an overall increase in fraud losses to all parties 
related to covered issuer transactions, but the share of such fraud 
losses absorbed by covered issuers (i.e., issuer fraud losses) has 
declined during that time. Accordingly, as noted above, the median 
ratio of issuer fraud losses to transaction value among covered issuers 
has declined from 2011 to 2021, despite the overall increase in fraud 
losses to all parties.\49\ The Board originally determined the ad 
valorem component using only those fraud losses absorbed by covered 
issuers, and analysis of the data collected by the Board since the 
original Regulation II rulemaking shows that, despite these changes in 
the fraud environment, the median ratio of issuer fraud losses to 
transaction value among covered issuers remains a representative metric 
of the cost of fraud incurred by covered issuers. Therefore, for the 
reasons explained in the preamble accompanying the 2011 final rule, the 
Board believes that the original methodology continues to be 
appropriate for determining the ad valorem component.\50\
---------------------------------------------------------------------------

    \49\ For additional information regarding fraud losses with 
respect to covered issuer transactions, see section VIII.C, infra.
    \50\ See 76 FR at 43431 and 43434. The Board recognizes that 
some aspects of the fraud environment have changed with, for 
example, the introduction of increased security for in-person card 
payments through the issuance of chip-based EMV cards and the growth 
of ecommerce and remote fraud. As discussed in section VIII.C, 
infra, covered issuers now absorb a smaller percentage of fraud 
losses from covered issuer transactions than they did in 2009, with 
both cardholders and merchants absorbing larger proportions of such 
losses over time. Notwithstanding these changes, the Board believes 
that its conclusions with respect to the ad valorem component remain 
sound. Furthermore, because the methodology for determining the ad 
valorem component is based on actual fraud losses absorbed by 
covered issuers, any future decrease or increase in the median ratio 
of issuer fraud losses to transaction value among covered issuers 
would, pursuant to the Board's proposed methodology, result in a 
corresponding future reduction or increase to the ad valorem 
component.
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C. Description of Proposal

    The Board proposes to determine, for every two-year period, the 
base component and the ad valorem component using the latest data 
reported to the Board by covered issuers on the Debit Card Issuer 
Survey. Further, the Board proposes a new methodology for determining 
the base component. Initially, under the proposed approach, the base 
component would be 14.4 cents and the ad valorem component would be 4.0 
basis points (multiplied by the value of the transaction) for debit 
card transactions performed from the effective date of the final rule 
to June 30, 2025. The Board does not propose to modify the allowable 
costs considered for purposes of determining the base component and the 
ad valorem component, or the original methodology used to determine the 
ad valorem component.
    Proposed Sec.  235.3(b)(1) would provide that the current base 
component of 21.0 cents and the current ad valorem component of 5.0 
basis points (multiplied by the value of the transaction) would 
continue to apply for debit card transactions performed from October 1, 
2011 (the original effective date of Sec.  235.3) until the calendar 
day prior to the effective date of the final rule. Proposed Sec.  
235.3(b)(2) would establish the base component and the ad valorem 
component that would apply for debit card transactions performed from 
the effective date of the final rule to June 30, 2025. Specifically, 
for these transactions, the base component would be 14.4 cents, and the 
ad valorem component would be 4.0 basis points (multiplied by the value 
of the transaction). As described in section III.B, supra, the proposed 
base component of 14.4 cents is the transaction-weighted average of 
per-transaction allowable costs (excluding fraud losses) across covered 
issuers based on the data reported on the 2021 Debit Card Issuer Survey 
(3.9 cents) multiplied by the fixed multiplier of 3.7 and rounded to 
the nearest tenth of one cent. The proposed ad valorem component of 4.0 
basis points (multiplied by the value of the transaction) is the median 
ratio of issuer fraud losses to transaction value among covered issuers 
based on the data reported on the 2021 Debit Card Issuer Survey, 
rounded to the nearest quarter of one basis point.\51\
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    \51\ The Board proposes to round the ad valorem component to the 
nearest quarter of one basis point to achieve a similar degree of 
accuracy as for the base component, which the Board proposes to 
round to the nearest tenth of one cent. Specifically, for a $50 
debit card transaction subject to the interchange fee standards, a 
change in the ad valorem component of one quarter of one basis point 
would result in a change of around one tenth of one cent to the 
maximum interchange fee permitted under the interchange fee 
standards.

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[[Page 78109]]

    The Board proposes a set of conforming revisions to comments 
235.3(b)-2 and 235.3(b)-3 of the Official Commentary to make clear that 
the base component and the ad valorem component for a particular 
transaction depend on the date on which the transaction is performed. 
Proposed new comment 235.3(b)-4 would provide that, for this purpose, a 
debit card transaction is considered to be performed on the date on 
which the transaction is settled on an interbank basis.
    Proposed new paragraph (c) to Sec.  235.3 would set forth the basis 
for determining the amounts in proposed Sec.  235.3(b). Specifically, 
proposed Sec.  235.3(c) would provide that, for every two-year period, 
beginning with the period from July 1, 2025, to June 30, 2027, the 
Board will determine the base component and the ad valorem component 
using the approach described in a new proposed appendix B to Regulation 
II. Paragraph (a) to proposed appendix B would similarly state that the 
Board will determine the base component and the ad valorem component 
for each ``applicable period'' (i.e., every two-year period beginning 
with the period from July 1, 2025, to June 30, 2027) using the approach 
described in proposed appendix B.
    Paragraph (b) of proposed appendix B would set forth the data that 
the Board would use to determine the base component and ad valorem 
component for each applicable period--namely, the latest data reported 
to the Board by covered issuers on the Debit Card Issuer Survey. 
Specifically, paragraph (b) would provide that the Board will determine 
the base component and the ad valorem component for each applicable 
period using the data reported to the Board by covered issuers pursuant 
to Sec.  235.8 concerning transactions performed during the calendar 
year that is two years prior to the year in which that applicable 
period begins. For example, in the case of the applicable period 
beginning July 1, 2025, the Board would use the data reported to the 
Board by covered issuers on the Debit Card Issuer Survey concerning 
debit card transactions performed in calendar year 2023, which the 
Board will collect in 2024.
    Paragraph (c)(1) of proposed appendix B would establish the formula 
that the Board would use to determine the base component for each 
applicable period. Specifically, for each applicable period, the base 
component would be the product of the transaction-weighted average of 
per-transaction allowable costs (excluding fraud losses) across covered 
issuers and 3.7, rounded to the nearest tenth of one cent.\52\ 
Paragraph (c)(2) would define ``allowable costs (excluding fraud 
losses)''--which is synonymous with the term ``base component costs'' 
used elsewhere in this preamble--as the sum of the costs of 
authorization, clearance, and settlement, as reported on the Debit Card 
Issuer Survey,\53\ and transaction-monitoring costs tied to 
authorization, as reported on the Debit Card Issuer Survey.\54\ 
Paragraph (c)(3) would set forth how the Board calculates the 
transaction-weighted average of per-transaction allowable costs 
(excluding fraud losses) across issuers. Specifically, using the latest 
data reported to the Board by covered issuers, the Board would (i) sum 
allowable costs (excluding fraud losses) across covered issuers that 
reported allowable costs (excluding fraud losses); (ii) divide this sum 
by the sum of the total number of debit card transactions across 
covered issuers that reported allowable costs (excluding fraud losses); 
and (iii) round this result to the nearest tenth of one cent.\55\
---------------------------------------------------------------------------

    \52\ Section III.B, supra, describes the Board's rationale for 
proposing 3.7 as the fixed multiplier for determining the base 
component.
    \53\ These costs are reported on line 3a of section II of the 
Debit Card Issuer Survey as ``costs of authorization, clearance, and 
settlement.'' See FR 3064a.
    \54\ These costs are reported on line 5a.1 of section II of the 
Debit Card Issuer Survey as ``transactions monitoring costs tied to 
authorization.'' See id.
    \55\ The total number of debit card transactions attributable to 
a covered issuer is reported on line 1a of section II of the Debit 
Card Issuer Survey as the volume of ``settled purchase transactions 
(excluding pre-authorizations, denials, adjustments, returns, and 
cash back amounts).'' See id.
---------------------------------------------------------------------------

    Paragraph (d)(1) of proposed appendix B would establish the metric 
that the Board would use to determine the ad valorem component for each 
applicable period. Specifically, for each applicable period, the ad 
valorem component for a particular debit card transaction would be the 
median ratio of issuer fraud losses to transaction value among covered 
issuers, rounded to the nearest quarter of one basis point, multiplied 
by the value of the debit card transaction. Paragraph (d)(2) would 
define ``ratio of issuer fraud losses to transaction value'' as the 
value of fraud losses incurred by the covered issuer, as reported on 
the Debit Card Issuer Survey,\56\ divided by the total value of debit 
card transactions, as reported on the Debit Card Issuer Survey.\57\ 
Paragraph (d)(3) would set forth how the Board calculates the median 
ratio of issuer fraud losses to transaction value among covered 
issuers. Specifically, using the latest data reported to the Board by 
covered issuers, the Board would (i) determine the ratio of issuer 
fraud losses to transaction value for each covered issuer that reported 
issuer fraud losses, (ii) sort these ratios in ascending order, and 
(iii) select the ratio in the middle (if the number of ratios is odd) 
or calculate the simple average of the two ratios in the middle (if the 
number of ratios is even).
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    \56\ These costs are reported on line 8b of section II of the 
Debit Card Issuer Survey as ``losses incurred by issuer'' (i.e., 
gross value of fraudulent transactions, less fraud-related 
chargebacks to acquirers net of representments, and less losses 
absorbed by cardholders). See id.
    \57\ The total value of debit card transactions attributable to 
a covered issuer is reported on line 1a of section II of the Debit 
Card Issuer Survey as the value of ``settled purchase transactions 
(excluding pre-authorizations, denials, adjustments, returns, and 
cash back amounts).'' See id.
---------------------------------------------------------------------------

    Paragraph (f) of proposed appendix B would establish the timing of 
the publication of the base component and ad valorem component for an 
applicable period. Specifically, the Board would publish these amounts 
in the Federal Register no later than March 31 of the calendar year in 
which the applicable period begins. Because the Board would determine 
these amounts by applying the approach described in proposed appendix B 
and using the latest data reported to the Board by covered issuers, the 
Board would not intend to seek public comment on future updates to 
these amounts.\58\
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    \58\ See, e.g., 5 U.S.C. 553(b)(3)(B) (exempting agencies from 
notice and comment rulemaking when the agency for good cause finds 
that such procedures are impracticable, unnecessary, or contrary to 
the public interest). The Board believes that future determinations 
of the base component and the ad valorem component should qualify 
for the good cause exemption from notice and comment rulemaking 
because such determinations would involve the ministerial 
application of the approach described in proposed appendix B, and 
the Board would not be exercising any discretion in connection with 
such determinations. The Board would seek public comment on any 
future substantive changes to the proposed approach.
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IV. Proposed Revisions to Fraud Prevention Adjustment (Sec.  235.4)

A. Background

    As described above, under EFTA section 920(a)(5)(A), the Board may 
allow for an adjustment to the interchange fee received or charged by 
an issuer under the interchange fee standards if such adjustment is 
reasonably necessary to make allowance for costs incurred by the issuer 
in preventing fraud in relation to debit card transactions involving 
the issuer, provided that the issuer complies with fraud-related 
standards established by the Board. The Board's fraud-related standards 
must (i) be designed to ensure that any fraud-prevention adjustment is 
limited to the amount that is reasonably necessary to make allowance 
for costs

[[Page 78110]]

incurred by the issuer in preventing fraud in relation to debit card 
transactions involving the issuer and takes into account any fraud-
related reimbursements (including amounts from chargebacks) received 
from consumers, merchants, or payment card networks in relation to 
debit card transactions involving the issuer; and (ii) require issuers 
to take effective steps to reduce the occurrence of, and costs from, 
fraud in relation to debit card transactions, including through the 
development and implementation of cost-effective fraud prevention 
technology.\59\ EFTA section 920(a)(5)(B) requires the Board to 
prescribe regulations to establish standards for making any such fraud-
prevention adjustment.\60\
---------------------------------------------------------------------------

    \59\ EFTA section 920(a)(5)(A)(ii). The Board does not propose 
revisions to the current fraud-prevention standards in Sec.  
235.4(b). For the reasons explained in the preamble accompanying the 
2012 final rule, the Board adopted a non-prescriptive approach to 
these standards. See 77 FR 46258, 46268-75 (Aug. 3, 2012). The 
fraud-prevention standards require issuers to develop and implement 
policies and procedures reasonably designed to take effective steps 
to reduce the occurrence of, and costs to all parties from, 
fraudulent debit card transactions, including through the 
development and implementation of cost-effective fraud-prevention 
technology. See Sec.  235.4(b)(1). Specifically, an issuer's 
policies and procedures must address: (i) methods to identify and 
prevent fraudulent debit card transactions; (ii) monitoring of the 
volume and value of its fraudulent debit card transactions; (iii) 
appropriate responses to suspicious debit card transactions in a 
manner designed to limit the costs to all parties from and prevent 
the occurrence of future fraudulent debit card transactions; (iv) 
methods to secure debit card and cardholder data; and (v) such other 
factors as the issuer considers appropriate. See Sec.  235.4(b)(2). 
An issuer must review, at least annually, its fraud-prevention 
policies and procedures, and their implementation, and update them 
as necessary in light of: (i) their effectiveness in reducing the 
occurrence of, and costs to all parties from, fraudulent debit card 
transactions involving the issuer; (ii) their cost-effectiveness; 
and (iii) changes in the types of fraud, methods used to commit 
fraud, and available methods for detecting and preventing fraudulent 
debit card transactions that the issuer identifies from (A) its own 
experience or information, (B) information provided to the issuer by 
its payment card networks, law enforcement agencies, and fraud-
monitoring groups in which the issuer participates, and (C) 
applicable supervisory guidance. See Sec.  235.4(b)(3). In order to 
charge or receive the fraud-prevention adjustment, an issuer must 
annually notify its payment card networks that it complies with the 
Board's fraud-prevention standards, and must notify its payment card 
networks if it is no longer eligible to receive or charge the fraud-
prevention adjustment. See Sec.  235.4(c) and (d).
    \60\ In issuing regulations to implement any fraud-prevention 
adjustment, the Board must consider certain factors set forth in 
EFTA section 920(a)(5)(B)(ii), which are discussed in section 
VIII.C, infra.
---------------------------------------------------------------------------

    The Board adopted a fraud-prevention adjustment and fraud-
prevention standards in Sec.  235.4 of Regulation II.\61\ In adopting 
the fraud-prevention adjustment, the Board (i) defined the fraud-
prevention costs that issuers incur and (ii) structured the fraud-
prevention adjustment to allow issuers to recover a portion of these 
costs. A brief overview of how the Board developed the fraud-prevention 
adjustment in current Sec.  235.4 follows.
---------------------------------------------------------------------------

    \61\ Section 235.4 was initially adopted via an interim final 
rule in July 2011. See 76 FR 43477 (July 20, 2011). The Board 
subsequently issued a final rule that made various amendments to the 
interim final rule. See 77 FR 46258 (Aug. 3, 2012).
---------------------------------------------------------------------------

1. Fraud-Prevention Costs
    EFTA section 920 does not specify types of fraud-prevention costs 
incurred by issuers that the Board may or may not consider in 
determining the fraud-prevention adjustment. When the Board adopted 
current Sec.  235.4, the Board explained that fraud prevention involves 
a broad range of activities in which an issuer may engage before, 
during, or after a debit card transaction.\62\ Accordingly, and for 
reasons explained in the preamble accompanying the 2012 final rule, the 
Board considered costs incurred by debit card issuers associated with a 
variety of activities that contribute to preventing fraud, including 
research and development of new fraud-prevention technologies, card 
reissuance due to fraudulent activity, data security, card activation, 
and merchant blocking. However, the Board did not consider transaction-
monitoring costs to be a fraud-prevention cost for purposes of 
determining the fraud-prevention adjustment because the Board included 
transaction-monitoring costs in allowable costs for purposes of the 
interchange fee standards.\63\ The Board also did not consider costs 
incurred to prevent fraud to a cardholder's transaction account through 
means other than debit card transactions, or costs incurred to prevent 
fraud in connection with other payment methods such as credit cards. 
Additionally, fraud losses, lost revenue attributable to cardholders 
waiting for replacement cards, fraud-loss insurance, and recovering 
losses were not included in fraud-prevention costs.\64\
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    \62\ 77 FR 46258, 46264 (Aug. 3, 2012).
    \63\ See id.; see also 76 FR 43393, 43431 (July 20, 2011) 
(noting that the types of fraud-prevention activities considered in 
connection with the fraud-prevention adjustment are those activities 
that prevent fraud with respect to debit card transactions at times 
other than when the issuer is effecting the transaction); 80 FR 
48684, 48685 (Aug. 14, 2015) (same).
    \64\ 77 FR at 46264.
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2. Fraud-Prevention Adjustment
    When the Board adopted the fraud-prevention adjustment as an 
interim final rule in 2011, the Board noted that the statute does not 
specify what amount, or range of amounts, is reasonably necessary to 
make allowance for an issuer's fraud-prevention costs. The Board 
concluded that an amount that makes allowance for an issuer's fraud-
prevention costs is one that gives consideration to those costs and 
allows a reasonable recovery of those costs based on the considerations 
set forth in EFTA section 920(a)(5)(B)(ii).\65\
---------------------------------------------------------------------------

    \65\ 76 FR at 43482. The Board rejected an interpretation that 
would require a direct connection between the fraud-prevention 
adjustment and actual issuer costs. The Board also did not interpret 
the statute to require the fraud-prevention adjustment to permit 
each (or any) issuer to fully recover its fraud-prevention costs. 
See id.
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    For the reasons explained in the preamble accompanying the 2012 
final rule, the Board adopted a fraud-prevention adjustment of 1 cent 
per transaction.\66\ This amount corresponded to the difference, 
rounded to the nearest whole cent, between the median per-transaction 
fraud-prevention costs aggregated with transaction-monitoring costs 
among covered issuers (1.8 cents) and the median per-transaction 
transaction-monitoring costs among covered issuers (0.7 cents), based 
on the data collected on the Board's voluntary survey.\67\
---------------------------------------------------------------------------

    \66\ 77 FR at 46265-66.
    \67\ 77 FR at 46263.
---------------------------------------------------------------------------

    The Board described the foregoing methodology for determining the 
fraud-prevention adjustment in the preamble accompanying the 2012 final 
rule. The Board did not, however, codify this methodology in Sec.  
235.4. Rather, Sec.  235.4(a) simply provides that, subject to 
compliance with the Board's fraud-prevention standards, an issuer may 
receive or charge an amount of no more than 1.0 cent per transaction in 
addition to any interchange fee it receives or charges in accordance 
with Sec.  235.3.

B. Rationale for Proposal

    When the Board adopted the fraud-prevention adjustment in current 
Sec.  235.4, the Board stated that it would take into account data from 
future Debit Card Issuer Surveys when considering any future revisions 
to the fraud-prevention adjustment.\68\ Consistent with EFTA section 
920(a)(3)(B), the Board has surveyed covered issuers on a mandatory 
basis every other year since the reporting requirements in Sec.  235.8 
of Regulation II were adopted. Through these biennial surveys, the 
Board has collected data from covered issuers concerning the costs 
incurred by covered issuers in connection with debit card transactions 
performed in calendar years 2011, 2013, 2015, 2017, 2019, and

[[Page 78111]]

2021. These data show that fraud-prevention costs have risen since 
2009. Specifically, the median per-transaction fraud-prevention costs 
among covered issuers was 1.3 cents in 2021.\69\
---------------------------------------------------------------------------

    \68\ 77 FR at 46266.
    \69\ The Board computes the median per-transaction fraud-
prevention among covered issuers by (i) for each covered issuer that 
reported fraud-prevention costs, dividing the covered issuer's 
fraud-prevention costs by the total number of debit card 
transactions reported by the covered issuer; (ii) sorting these 
values in ascending order; and (iii) selecting the value in the 
middle (if the number of values is odd) or calculating the simple 
average of the two values in the middle (if the number of values is 
even).
---------------------------------------------------------------------------

    Given this development, the Board believes it is necessary to 
revise the fraud-prevention adjustment to reflect the increase since 
2009 in fraud-prevention costs. In addition--and for the reasons 
explained in section III.B, supra, in connection with the interchange 
fee standards--the Board believes that, as much as practicable, the 
fraud-prevention adjustment should be updated regularly and predictably 
to reflect changes in the fraud-prevention costs incurred by covered 
issuers as those changes occur. Accordingly, the Board proposes to 
determine the fraud-prevention adjustment in Sec.  235.4 every other 
year based on the latest data reported to the Board by covered issuers. 
The Board believes that, under this approach, the fraud-prevention 
adjustment in Sec.  235.4 will continue over time to reflect an amount 
that is reasonably necessary to make allowance for costs incurred by an 
issuer in preventing fraud in relation to debit card transactions 
involving that issuer.
    The Board also proposes to modify the original methodology used to 
determine the fraud-prevention adjustment. When the Board adopted 
current Sec.  235.4, the Board's objective was to determine the fraud-
prevention adjustment as the median per-transaction fraud-prevention 
costs among covered issuers. However, due to limitations in the data 
reported to the Board by covered issuers on the Board's voluntary 
survey, the Board did not directly calculate this metric, but rather 
approximated it by calculating the difference between (i) the median 
per-transaction fraud-prevention costs aggregated with transaction-
monitoring costs among covered issuers, and (ii) the median per-
transaction transaction-monitoring costs among covered issuers, rounded 
to the nearest cent.\70\ However, these limitations no longer persist 
in the data collected since the reporting requirements in Sec.  235.8 
of Regulation II were adopted.\71\ As a result, the Board is now able 
to directly calculate this metric. Therefore, as described below, the 
Board proposes to determine the fraud-prevention adjustment as the 
median per-transaction fraud-prevention costs among covered issuers, 
rounded to the nearest tenth of one cent.
---------------------------------------------------------------------------

    \70\ Specifically, the Board's voluntary survey asked covered 
issuers to report (i) their fraud-prevention costs aggregated with 
transaction-monitoring costs, and also to break out, if possible, 
(ii) their transaction-monitoring costs. Some covered issuers 
reported the first figure but not the second. Instead of directly 
calculating the median per-transaction fraud-prevention costs among 
covered issuers--which would have required the Board to rely on a 
smaller data set comprised only of those covered issuers that 
reported both figures--the Board approximated this metric by 
calculating the difference between (i) the median per-transaction 
fraud-prevention costs aggregated with transaction-monitoring costs 
among covered issuers that reported their fraud prevention costs 
aggregated with transaction-monitoring costs, and (ii) the median 
per-transaction transaction-monitoring costs among covered issuers 
that broke out their transaction-monitoring costs.
    \71\ Specifically, beginning with the first mandatory Debit Card 
Issuer Survey, a more representative number of covered issuers have 
reported their fraud-prevention costs disaggregated from their 
transaction-monitoring costs.
---------------------------------------------------------------------------

    The Board believes that the original methodology, with the proposed 
modification, continues to be an appropriate methodology for 
determining the fraud-prevention adjustment, both for the reasons 
explained in the preamble accompanying the 2012 final rule, and in 
light of the factors set forth in EFTA section 920(a)(5)(B)(ii), which 
are discussed in section VIII.C, infra.

C. Description of Proposal

    The Board proposes to determine, for every two-year period, the 
fraud-prevention adjustment based on the latest data reported to the 
Board by covered issuers on the Debit Card Issuer Survey. Further, the 
Board proposes to modify the original methodology used to determine the 
fraud-prevention adjustment. The Board does not propose to modify the 
fraud-prevention costs considered for purposes of determining the 
fraud-prevention adjustment, or the fraud-prevention standards that 
covered issuers must meet to receive the fraud-prevention adjustment.
    Proposed Sec.  235.4(a)(1) would provide that the fraud-prevention 
adjustment of 1.0 cents would continue to apply for debit card 
transactions performed from October 1, 2011 (the original effective 
date of Sec.  235.4) until the calendar day prior to the effective date 
of the final rule. Proposed Sec.  235.4(a)(2) would establish the 
fraud-prevention adjustment (1.3 cents) that would apply for debit card 
transactions performed from the effective date of the final rule to 
June 30, 2025. Proposed new comment 235.4(a)-1 would provide that, for 
purposes of Sec.  235.4(a), a debit card transaction is considered to 
be performed on the date on which the transaction is settled on an 
interbank basis.
    Proposed new paragraph (b) to Sec.  235.4 would set forth the basis 
for determining the fraud-prevention adjustment in proposed Sec.  
235.4(a). Specifically, proposed Sec.  235.4(b) would provide that, for 
every two-year period, beginning with the period from July 1, 2025, to 
June 30, 2027, the Board will determine the fraud-prevention adjustment 
using the approach described in proposed appendix B to Regulation II. 
Paragraph (a) to proposed appendix B similarly would state that the 
Board will determine the fraud-prevention adjustment for each 
``applicable period'' (i.e., every two-year period beginning with the 
period from July 1, 2025, to June 30, 2027) using the approach 
described in proposed appendix B.
    Paragraph (b) of proposed appendix B would set forth the data that 
the Board would use to determine the fraud-prevention adjustment for 
each applicable period--namely, the latest data reported to the Board 
by covered issuers on the Debit Card Issuer Survey. Specifically, 
paragraph (b) would provide that the Board will determine the fraud-
prevention adjustment for each applicable period using the data 
reported to the Board by covered issuers pursuant to Sec.  235.8 
concerning transactions performed during the calendar year that is two 
years prior to the year in which that applicable period begins. For 
example, in the case of the applicable period beginning July 1, 2025, 
the Board would use the data reported to the Board by covered issuers 
on the Debit Card Issuer Survey concerning debit card transactions 
performed in calendar year 2023, which the Board will collect in 2024.
    Paragraph (e)(1) of proposed appendix B would establish the metric 
that the Board would use to determine the fraud-prevention adjustment 
for each applicable period. Specifically, for each applicable period, 
the fraud-prevention adjustment would be the median per-transaction 
fraud-prevention costs among covered issuers, rounded to the nearest 
tenth of one cent. Paragraph (e)(2) would define ``per-transaction 
fraud-prevention costs'' as fraud-prevention costs, as reported on the 
Debit Card Issuer Survey,\72\ divided by

[[Page 78112]]

the total number of debit card transactions, as reported on the Debit 
Card Issuer Survey.\73\ Paragraph (e)(3) would set forth how the Board 
calculates the median per-transaction fraud-prevention costs among 
covered issuers. Specifically, using the latest data reported to the 
Board by covered issuers, the Board would (i) determine the per-
transaction fraud-prevention costs for each covered issuer that 
reported fraud-prevention costs, (ii) sort these values in ascending 
order, and (iii) select the value in the middle (if the number of 
values is odd) or calculate the simple average of the two values in the 
middle (if the number of values is even).
---------------------------------------------------------------------------

    \72\ Fraud-prevention costs are (i) ``total fraud-prevention and 
data-security costs,'' as reported on line 5a of section II of the 
Debit Card Issuer Survey, minus (ii) ``transactions monitoring costs 
tied to authorization,'' as reported on line 5a.1 of section II of 
the Debit Card Issuer Survey. See FR 3064a.
    \73\ The total number of debit card transactions attributable to 
a covered issuer is reported on line 1a of section II of the Debit 
Card Issuer Survey as the volume of ``settled purchase transactions 
(excluding pre-authorizations, denials, adjustments, returns, and 
cash back amounts).'' See id.
---------------------------------------------------------------------------

    Paragraph (f) of proposed appendix B would set forth the timing of 
the publication of the fraud-prevention adjustment for an applicable 
period. Specifically, the Board would publish the fraud-prevention 
adjustment in the Federal Register no later than March 31 of the 
calendar year in which the applicable period begins. Because the Board 
would determine the fraud-prevention adjustment by applying the 
methodology described in proposed appendix B and using the latest data 
reported to the Board by covered issuers, the Board would not intend to 
seek public comment on future updates to the fraud-prevention 
adjustment.\74\
---------------------------------------------------------------------------

    \74\ As with future determinations of the base component and the 
ad valorem component, the Board believes that future determinations 
of the fraud-prevention adjustment should qualify for the good cause 
exemption from notice and comment rulemaking. See supra note 58.
---------------------------------------------------------------------------

V. Other Proposed Revisions

    In addition to the proposed revisions to the interchange fee 
standards in Sec.  235.3 and the fraud-prevention adjustment in Sec.  
235.4, the Board proposes a set of technical revisions to Regulation 
II. In general, these proposed revisions are intended to make 
Regulation II clearer. Additionally, some of the proposed revisions are 
intended to ensure the text of the regulation directly incorporates the 
Board's current construction of the rule.
    First, to improve the readability of Regulation II, the Board 
proposes to add ``covered issuer'' as a defined term in Sec.  235.2. 
Under the proposal, ``covered issuer'' would mean, for a particular 
calendar year, an issuer that, together with its affiliates, has assets 
of $10 billion or more as of the end of the preceding calendar 
year.\75\ Further, the Board proposes certain conforming revisions to 
the regulation to reflect the addition of ``covered issuer'' as a 
defined term. For example, the Board proposes to move current comment 
235.5(a)-1, which describes which assets do and do not count toward the 
$10 billion threshold, to the commentary under Sec.  235.2. In 
addition, the Board proposes to incorporate the defined term ``covered 
issuer'' where relevant in other sections of Regulation II, 
particularly in Sec.  235.5(a) (the small issuer exemption) and Sec.  
235.8(a) (reporting requirements) and the commentary thereto. The Board 
does not intend the addition and incorporation of the defined term 
``covered issuer'' to be a substantive change.
---------------------------------------------------------------------------

    \75\ The proposed definition is derived from current Sec.  
235.5(a)(1)(ii).
---------------------------------------------------------------------------

    Second, the Board identified three sentences in the commentary to 
current Sec.  235.2(k) (definition of ``issuer'') that relate to an 
issuer's eligibility for the small issuer exemption in Sec.  235.5(a). 
The Board proposes to move the substance of these sentences into the 
commentary to Sec.  235.5(a). The Board does not intend this proposed 
revision to modify the definition of ``issuer'' or alter any issuer's 
eligibility for the small issuer exemption.
    Third, the Board proposes minor revisions to add specificity to 
Sec.  235.8 (reporting requirements and record retention) and the 
commentary thereto. Specifically, the Board proposes to specify in 
Sec.  235.8(a) that each covered issuer must file a report with the 
Board on a biennial basis, and that each payment card network must file 
a report with the Board on an annual basis, consistent with the Board's 
survey practices since 2011. Further, the Board proposes to add new 
comment 235.8(a)-1 to specify that the reports referred to in proposed 
Sec.  235.8(a) are the Board's biennial Debit Card Issuer Survey and 
annual Payment Card Network Survey, and that each survey collects 
information concerning debit card transactions performed during the 
previous calendar year. In addition, the Board proposes to add new 
comment 235.8(a)-2 to specify that newly covered issuers are exempt 
from the Debit Card Issuer Survey, consistent with the current 
instructions to that survey.\76\ The Board believes that these proposed 
revisions are helpful in light of the significance of the data 
collected on the Debit Card Issuer Survey to the proposed approach for 
determining the base component, the ad valorem component, and the 
fraud-prevention adjustment.
---------------------------------------------------------------------------

    \76\ The General Instructions to the Debit Card Issuer Survey 
currently provide that ``[i]f an issuer that is covered by the 
interchange fee standards in Regulation II at the time of this data 
collection was not also covered in [the previous calendar year], it 
does not need to file a report . . . .'' See FR 3064a.
---------------------------------------------------------------------------

    Fourth, the Board proposes to remove Sec.  235.7(c), the commentary 
to Sec.  235.7(c), and Sec.  235.10 of Regulation II. These sections of 
the regulation specify the original effective date of Regulation II 
(October 1, 2011) and give debit card issuers and networks additional 
time to comply with the requirements in Sec.  235.7(a) for certain 
types of debit cards, such as general-use prepaid cards and debit cards 
that use point-of-sale transaction qualification or substantiation 
systems for verifying the eligibility of purchased goods or services. 
Both the original effective date of Regulation II and these extended 
compliance dates have long since passed. As such, the Board believes 
that these provisions of Regulation II are no longer necessary.\77\ In 
addition, deleting these provisions would avoid the potential for 
confusion regarding the effective date of any future revisions to the 
requirements in Sec.  235.7(a).\78\
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    \77\ For the same reason, the Board proposes to remove Sec.  
235.5(a)(4), which temporarily modified the application of the small 
issuer exemption due the COVID-19 pandemic. See 85 FR 77345 (Dec. 2, 
2020). Because the last debit card transactions to which Sec.  
235.5(a)(4) applied were performed on December 31, 2021, the Board 
proposes to remove Sec.  235.5(a)(4) with an effective date of 
January 1, 2027, which is after the five-year record retention 
requirement prescribed in Sec.  235.8(c)(1) will have elapsed with 
respect to these transactions. The effective date of the other 
proposed revisions described in this preamble is discussed in 
section VI, infra.
    \78\ The Board does not anticipate any future revisions to Sec.  
235.7(a) at this time. However, questions regarding the effective 
date arose in connection with the Board's recent revisions to Sec.  
235.7(a) and the commentary thereto. See 87 FR 61217 (Oct. 11, 
2022).
---------------------------------------------------------------------------

    Fifth, the Board proposes minor revisions to Sec.  235.4 (in 
addition to those described in section IV.C, supra) and the commentary 
to Sec.  235.3(b) (in addition to those described in section III.C, 
supra) to clarify the relationship between the interchange fee 
standards in Sec.  235.3 and the fraud-prevention adjustment in Sec.  
235.4. Specifically, the Board proposes to modify the first sentence of 
Sec.  235.4(a) to clarify that the fraud-prevention adjustment is in 
addition to any interchange fee an issuer receives or charges in 
accordance with Sec.  235.3. Further, the Board proposes to add a 
sentence in both comments 235.3(b)-1 and 235.3(b)-3 stating that, in 
addition to the base component and ad valorem component, an issuer may 
be permitted to receive a fraud-prevention adjustment under Sec.  
235.4.

[[Page 78113]]

Although the Board does not believe that debit card industry 
participants currently misunderstand the relationship between the 
interchange fee standards in Sec.  235.3 and the fraud-prevention 
adjustment in Sec.  235.4, the proposed revisions would eliminate any 
doubt that the maximum permissible interchange fee amount that a 
covered issuer may receive for a transaction subject to the interchange 
fee standards is the sum of the base component, the ad valorem 
component, and, if the covered issuer is eligible, the fraud-prevention 
adjustment.
    Finally, the Board proposes to remove the first clause of Sec.  
235.5(a)(1), which cross-references Sec.  235.5(a)(3) (transition 
period for newly covered issuers) and characterizes the latter 
paragraph as an exception to the small issuer exemption in Sec.  
235.5(a)(1). The Board believes that characterizing Sec.  235.5(a)(3) 
as an exception to Sec.  235.5(a)(1) is potentially confusing, as Sec.  
235.5(a)(3) adds to, rather than subtracts from, the relief provided in 
Sec.  235.5(a)(1) by providing additional, temporary relief to newly 
covered issuers that would not otherwise qualify for the relief 
provided in Sec.  235.5(a)(1). The proposed revision would clarify the 
relationship between these two paragraphs in Sec.  235.5(a) but is not 
intended to alter any issuer's eligibility for the small issuer 
exemption.

VI. Effective Date of Proposed Revisions

    With one exception,\79\ the Board proposes that the revisions 
would, if adopted, take effect on the first day of the next calendar 
quarter that begins at least 60 days after the final rule is published 
in the Federal Register.\80\ Such an implementation period would be 
similar to the implementation period of the current interchange fee 
standards, which the Board published on July 20, 2011, and became 
effective on October 1, 2011.\81\
---------------------------------------------------------------------------

    \79\ Unlike the other proposed revisions described in this 
preamble, the proposed deletion of Sec.  235.5(a)(4) would, if 
adopted, take effect on January 1, 2027. See supra note 77.
    \80\ Section 302 of the Riegle Community Development and 
Regulatory Improvement Act, Public Law 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. See 12 U.S.C. 4802.
    \81\ The Board notes that, compared with the original rulemaking 
in which the Board adopted current Sec.  235.3, the proposed 
revisions would represent a significantly smaller reduction in the 
amount of interchange fees that covered issuers may receive for 
transactions subject to the interchange fee standards. In addition, 
at the time of the original rulemaking, there was significant 
uncertainty as to whether payment card networks would implement 
different interchange fee schedules for transactions subject to and 
exempt from the interchange fee cap. Since that time, all networks 
have established different interchange fee schedules for 
transactions subject to and exempt from the interchange fee cap.
---------------------------------------------------------------------------

    Once the proposed revisions are effective, and as described in 
sections III.C and IV.C, supra, the proposed base component (14.4 
cents), ad valorem component (4.0 basis points multiplied by the value 
of the transaction), and fraud-prevention adjustment (1.3 cents) would 
be in effect through June 30, 2025. On July 1, 2025, a new base 
component, ad valorem component, and fraud-prevention adjustment would 
take effect. The Board would determine these amounts using the approach 
described in proposed appendix B based on the data reported to the 
Board by covered issuers on the Debit Card Issuer Survey in 2024 
(concerning debit card transactions performed in calendar year 2023), 
and would publish these values in the Federal Register no later than 
March 31, 2025.

VII. Request for Comment

    The Board invites comment on all aspects of the proposed 
revisions.\82\ In addition, the Board invites feedback on the following 
specific questions related to the proposal:
---------------------------------------------------------------------------

    \82\ As noted in section III.A, supra, the Board has reviewed 
its construction of the statute and prior analysis regarding the 
allowable costs that the Board considered in establishing the 
interchange fee standards, and believes that this prior analysis 
remains sound. As such, the Board is not inviting comments on the 
allowable costs considered for purposes of the interchange fee 
standards.
    \83\ The transaction-weighted average of per-transaction base 
component costs across covered issuers, rounded to the nearest tenth 
of one cent, for transactions performed in 2021 was 3.9 cents. For 
purposes of comparison, the same average for transactions performed 
in 2009 and 2011 was 7.7 cents and 5.1 cents, respectively. The base 
component values listed are the product of 3.9 cents and the 
relevant fixed multiplier.
    \84\ As described in section III.B, supra, this efficiency gap 
is represented by the ratio of the transaction-weighted average of 
per-transaction base component costs for covered issuers whose 
transactions are above the target percentile to that for covered 
issuers whose transactions are below the target percentile.
---------------------------------------------------------------------------

    1. As stated in paragraph (a) of proposed appendix B to Regulation 
II, the Board would determine the base component, ad valorem component, 
and fraud-prevention adjustment for every two-year period, beginning 
with the period from July 1, 2025, to June 30, 2027. Is the proposed 
two-year cadence appropriate, or should the Board determine these 
amounts more or less frequently?
    2. As described in paragraph (c)(1) of proposed appendix B to 
Regulation II, the Board would determine the base component as a fixed 
multiple of the transaction-weighted average of per-transaction base 
component costs (i.e., allowable costs (excluding fraud losses)) across 
covered issuers. As described in section III.B, supra, the fixed 
multiplier corresponds to the percentage of covered issuer transactions 
for which the Board believes covered issuers should fully recover their 
base component costs over time. Should the Board select an alternative 
cost-recovery target from among the possibilities below, or another 
cost-recovery target not included below? If so, why?
    3.

----------------------------------------------------------------------------------------------------------------
                                                                  Efficiency gap with     Percentage of covered
 Cost-recovery                                    Decline in     respect to transaction  issuers that would have
    target                      Base component  base component     processing between     fully recovered their
(percentage of       Fixed      (based on 2021    relative to    covered issuers whose   base component costs in
covered issuer    multiplier      data) \83\    current (based   transactions are above   2021 had the relevant
 transactions)                      (cents)      on 2021 data)    and below the  cost-    base component been in
      (%)                                             (%)        recovery target (based   effect in 2021 (based
                                                                   on 2021 data) \84\       on 2021 data) (%)
----------------------------------------------------------------------------------------------------------------
       Current  ..............            21.0  ..............  .......................                       77
          99.5             4.5            17.6              16                      7.7                       76
          99.0             4.0            15.6              26                      5.8                       71
        * 98.5             3.7            14.4              31                      5.2                       66
          98.0             3.5            13.7              35                      4.7                       63
          95.0             2.7            10.5              50                      3.8                       52
----------------------------------------------------------------------------------------------------------------
* Proposal.


[[Page 78114]]

    4. As described in paragraph (d)(1) of proposed appendix B to 
Regulation II, the Board would determine the ad valorem component, for 
a particular debit card transaction, as the median ratio of issuer 
fraud losses to transaction value among covered issuers, multiplied by 
the value of the transaction. Should the Board adopt an alternative 
methodology for determining the ad valorem component? If so, why?
    5. As described in paragraph (e)(1) of proposed appendix B to 
Regulation II, the Board would determine the fraud-prevention 
adjustment as the median per-transaction fraud-prevention costs among 
covered issuers. Should the Board adopt an alternative methodology for 
determining the fraud-prevention adjustment? If so, why?
    6. As described in paragraphs (c)(1), (d)(1), and (e)(1) of 
proposed appendix B to Regulation II, respectively, the Board proposes 
to round the base component to the nearest tenth of one cent, the ad 
valorem component to the nearest quarter of one basis point, and the 
fraud-prevention adjustment to the nearest tenth of one cent. Further, 
as described in paragraph (c)(3) of proposed appendix B to Regulation 
II, in determining the base component, the Board proposes to round the 
transaction-weighted average of per-transaction allowable costs 
(excluding fraud losses) across covered issuers to the nearest tenth of 
one cent. Do these rounding conventions provide an appropriate degree 
of precision? If not, what alternative rounding conventions should the 
Board adopt?
    7. As described in paragraphs (c) through (e) of proposed appendix 
B to Regulation II, the Board would determine the base component, ad 
valorem component, and fraud-prevention adjustment for an applicable 
period using data reported on lines 1a, 3a, 5a, 5a.1, and 8b of the 
Debit Card Issuer Survey (FR 3064a).
    a. Are there any reporting challenges or data quality issues 
associated with these line items of which the Board should be aware? If 
so, how could the Board address these challenges or issues?
    b. Should the Board amend Sec.  235.8 of Regulation II to specify 
that a covered issuer is required to retain records supporting the data 
that the covered issuer reports on the Debit Card Issuer Survey? Would 
this record retention requirement be duplicative of any existing 
recordkeeping requirements for covered issuers? If not, what would be 
the estimated additional annual burden of this requirement, in terms of 
hours and cost, for covered issuers?
    8. As described in section VI, with one exception, the Board 
proposes that the revisions would take effect on the first day of the 
next calendar quarter that begins at least 60 days after the final rule 
is published in the Federal Register. Would this proposed effective 
date provide sufficient notice to covered issuers, payment card 
networks, and other industry stakeholders to prepare for the initial 
changes to the base component, ad valorem component, and fraud-
prevention adjustment?
    9. As stated in paragraph (f) of proposed appendix B to Regulation 
II, going forward, the Board would publish the base component, ad 
valorem component, and fraud-prevention adjustment in the Federal 
Register no later than March 31 for an applicable period beginning July 
1. Would this timeline provide sufficient notice to covered issuers, 
payment card networks, and other industry stakeholders to prepare for 
changes to these amounts? Should the Board increase or decrease the 
period between publication of these values and the beginning of the 
next applicable period?
    10. Proposed comments 235.3(b)-4 and 235.4(b)-1 would provide that, 
for purposes of determining in which two-year period a debit card 
transaction is considered to be performed, a debit card transaction is 
considered to be performed on the date on which it is settled on an 
interbank basis. Is this proposed convention sufficiently clear? For 
example, should the Board specify which time zone is controlling for 
purposes of determining the date on which a transaction is settled on 
an interbank basis? Should the Board adopt an alternative standard, 
such as considering a transaction to be performed on the date on which 
the cardholder presents the debit card to the merchant for payment?
    11. Would any of the proposed technical revisions described in 
section V, which are generally intended to make Regulation II clearer, 
create unintended consequences?
    12. Does the Board's economic analysis of the proposal, set forth 
in section VIII.A, appropriately describe the likely impact of the 
proposal on various participants in the debit card market? Are there 
additional impacts of the proposal that the Board has not considered?

VIII. Regulatory Analyses

A. EFTA Section 904(a) Analysis

1. Statutory Requirement
    Section 904(a)(2) of the EFTA requires the Board, in prescribing 
regulations to carry out the purposes of EFTA section 920, to prepare 
an economic analysis 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. EFTA section 904(a)(2) 
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. The 
Board interprets these requirements as applying with respect to both 
proposed and final rules implementing EFTA section 920.
    In analyzing the potential effects of the proposal, the Board 
considered predictions of economic theory, information regarding debit 
card industry structure and practices, and issues raised during the 
original Regulation II rulemaking. The analysis also incorporates the 
experience of debit card industry participants since the current 
interchange fee cap was adopted in 2011.
2. Cost/Benefit Analysis
(a) Effects on Merchants \85\
---------------------------------------------------------------------------

    \85\ The Board interprets ``other users of electronic fund 
transfer services'' in EFTA section 904(a)(2) to refer primarily to 
merchants.
---------------------------------------------------------------------------

    The Board believes that the primary way in which the proposal would 
impact merchants is by lowering their costs of accepting debit card 
transactions. The proposal would generally decrease the interchange fee 
paid by an acquirer (i.e., a merchant's depository institution) on an 
average transaction performed using a debit card issued by a covered 
issuer, which would in turn decrease a merchant's costs by decreasing 
the merchant discount that the merchant pays to its acquirer for a 
debit card transaction.\86\ Although the precise extent to which 
acquirers would pass on savings from lower debit card interchange fees 
to merchants may vary, competition between acquirers in the industry 
should generally result in acquirers passing on savings from lower

[[Page 78115]]

interchange fees to their merchant customers.\87\
---------------------------------------------------------------------------

    \86\ Data collected by the Board show that, since adoption of 
the current interchange fee cap, actual per-transaction interchange 
fees for transactions subject to the interchange fee standards have 
been close in value to the amount permitted under the interchange 
fee cap. Thus, the Board expects that the proposed revisions to the 
interchange fee cap will directly lower per-transaction interchange 
fees for most transactions subject to the interchange fee standards.
    \87\ The extent to which an acquirer passes on savings from 
lower interchange fees to a merchant may depend on many factors, 
including the merchant's type and size.
---------------------------------------------------------------------------

    Merchants that experience a decrease in the costs of accepting 
debit card transactions may pass on some or all these savings to 
consumers in the form of lower prices, foregone future price increases, 
or improved products or services.\88\ The extent to which merchants 
would pass on such savings to consumers may depend on many factors. For 
example, merchants in more competitive markets would be likely to pass 
on more of their cost savings to consumers compared with merchants 
facing less competition.
---------------------------------------------------------------------------

    \88\ In addition, merchants may use savings from lower costs of 
accepting debit card transactions to enhance their operations, for 
example, by adding staff, improving their facilities, or 
implementing new technology.
---------------------------------------------------------------------------

    Measuring the extent to which merchants pass on cost savings to 
consumers, including any decrease in the costs of accepting certain 
forms of payment, is generally difficult.\89\ Efforts to measure the 
extent to which merchants passed on to consumers any savings associated 
with the decrease in the costs of accepting debit card transactions in 
the period following the adoption of the current interchange fee cap in 
2011 have yielded a wide range of results. For example, in response to 
a survey conducted soon after the introduction of the interchange fee 
cap, merchants did not consistently report making adjustments to their 
prices in response to the interchange fee cap.\90\ By contrast, later 
research efforts analyzing data from longer time periods found evidence 
that merchants passed on to consumers a portion of their debit card 
acceptance costs (e.g., by adjusting their prices) and that the degree 
of pass-through depended on merchant size.\91\
---------------------------------------------------------------------------

    \89\ Potential challenges include (i) a lack of detailed price 
and cost data at the merchant level, (ii) contemporaneous changes in 
other costs for merchants, (iii) the small magnitude of cost 
variation due to changes in interchange fees relative to total 
price, and (iv) asymmetric price stickiness in the short term, 
meaning that merchants are more likely to increase prices in 
response to cost increases than to lower prices in response to cost 
decreases. For an overview of research looking to measure merchant 
cost pass-through, see Howard Chang, David S. Evans & Daniel D. 
Garcia Swartz, The Effect of Regulatory Intervention in Two-Sided 
Markets: An Assessment of Interchange-Fee Capping in Australia, 4 
Review of Network Economics 328 (2005), https://doi.org/10.2202/1446-9022.1080.
    \90\ See Wang, Zhu, Scarlett Schwartz, & Neil Mitchell, The 
Impact of the Durbin Amendment on Merchants: A Survey Study, 100 
Federal Reserve Bank of Richmond Economic Quarterly 183 (2014), 
https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/economic_quarterly/2014/q3/pdf/wang.pdf.
    \91\ See, e.g., Vladmir Mukharlyamov & Natasha Sarin, Price 
Regulation in Two-Sided Markets: Empirical Evidence from Debit Cards 
(last rev. Nov. 28, 2022) (unpublished manuscript), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3328579; Efraim 
Berkovich & Zheli He, Rewarding the Rich: Cross Subsidies from 
Interchange Fees (Hispanic Leadership Fund, May 3, 2022), https://hispanicleadershipfund.org/wp-content/uploads/2022/05/HLF_Report_RewardingTheRich-InterchangeFees_03May22.pdf.
---------------------------------------------------------------------------

    Finally, the decrease in costs of accepting debit card transactions 
may incentivize some merchants that until now have not accepted debit 
cards as a form of payment to begin doing so. In particular, while 
debit card acceptance is already high for most in-person transactions, 
the proposal may encourage greater adoption of debit cards in market 
segments where acceptance may be lower, such as card-not-present (e.g., 
ecommerce) transactions. Another market segment for which merchants may 
increase debit card acceptance are small-dollar purchases because, for 
this market segment, the proposed decrease in the base component would 
substantially reduce debit card acceptance costs as a proportion of the 
transaction value. Faced with lower debit card acceptance costs, some 
merchants may also look to provide incentives to their customers, or 
otherwise steer them, to pay with debit cards over alternative payment 
methods.
(b) Effects on Debit Card Issuers \92\
---------------------------------------------------------------------------

    \92\ The Board interprets ``financial institutions'' in EFTA 
section 904(a)(2) to refer primarily to issuers of debit cards.
---------------------------------------------------------------------------

    The Board believes that the proposal would have a direct effect on 
covered issuers but would not directly affect debit card issuers exempt 
from the interchange fee cap (exempt issuers).
    The primary way in which the proposal would affect covered issuers 
would be by lowering their revenue from debit card transactions. In 
particular, covered issuers' interchange fee revenue would decline as 
the proposal would decrease the average interchange fee they collect on 
debit card transactions subject to the interchange fee standards. This 
reduction in covered issuers' total debit card interchange fee revenue 
could be offset to some extent by the likely continued growth in total 
debit card volume, with the offset potentially varying between 
different issuers. Debit card popularity has grown substantially since 
the current interchange fee cap was adopted; over this period, debit 
cards have become the most commonly used noncash payment method in the 
United States.\93\ As noted above, further reduction in interchange fee 
levels may support continued growth in debit card volumes to the extent 
that more merchants accept debit cards as a form of payment or 
encourage their customers to use debit cards.
---------------------------------------------------------------------------

    \93\ Board of Governors of the Federal Reserve System, The 
Federal Reserve Payments Study: 2022 Triennial Initial Data Release, 
https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm.
---------------------------------------------------------------------------

    Faced with lower interchange revenue from debit card transactions, 
covered issuers may offset some or all lost interchange fee revenue 
through a combination of customer fee increases and issuer cost 
reductions (e.g., improvements to transaction-processing 
efficiency).\94\ Depending on a variety of factors, such adjustments 
may make covered issuers' checking account and debit card programs less 
attractive to consumers. In response to these adjustments, consumers 
may switch to checking account or debit card programs offered by exempt 
issuers, or to alternative payment methods such as credit cards and 
digital payment methods, potentially leading to a further reduction in 
covered issuers' revenues from debit cards.\95\
---------------------------------------------------------------------------

    \94\ An issuer seeking to reduce costs may reduce transaction-
processing costs and/or other types of costs. Under the proposed 
approach, the former could result in a reduction to the interchange 
fee cap once data collected by the Board show a reduction in the 
transaction-weighted average of per-transaction transaction-
processing costs across covered issuers. Although another way in 
which covered issuers could offset a loss in interchange fee revenue 
could be through reductions in debit card reward programs, data 
collected by the Board show that following the adoption of the 
current interchange fee cap, covered issuers significantly limited 
or eliminated such programs, suggesting that issuers may not be able 
to reduce such programs much further. See generally Board of 
Governors of the Federal Reserve System, Regulation II (Debit Card 
Interchange Fees and Routing): Reports and Data Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm.
    \95\ In addition, the reduction in covered issuers' interchange 
fee revenue could theoretically lead some covered issuers, 
particularly those serving niche market segments, such as high net-
worth individuals, to downsize or potentially discontinue their 
debit card programs.
---------------------------------------------------------------------------

    The experience following the introduction of the current 
interchange fee cap in 2011 provides information about how covered 
issuers may adjust their debit card programs in response to the 
proposal. Research shows that the adoption of the current interchange 
fee cap resulted in covered issuers increasing customer fees on 
checking accounts more than they otherwise would have, although these 
increases offset the reduction in interchange fee revenue only 
partially.\96\ Furthermore,

[[Page 78116]]

the continued growth in debit card popularity since the adoption of 
Regulation II, and the lack of a pronounced shift by consumers from 
covered issuers' to exempt issuers' debit card programs, suggest that 
such fee increases and other adjustments to checking accounts and debit 
card programs offered by covered issuers did not make them 
substantially less attractive to consumers.\97\ Finally, the Board is 
not aware of any evidence that the adoption of the current interchange 
fee cap led any covered issuers to discontinue their debit card 
programs.
---------------------------------------------------------------------------

    \96\ Benjamin S. Kay, Mark D. Manuszak & Cindy M. Vojtech, 
Competition and Complementarities in Retail Banking: Evidence from 
Debit Card Interchange Regulation, 34 Journal of Financial 
Intermediation 91 (2018); Mark D. Manuszak & Krzysztof Wozniak, The 
Impact of Price Controls in Two-Sided Markets: Evidence from US 
Debit Card Interchange Fee Regulation, Finance and Economics 
Discussion Series 2017-074, https://www.federal6reserve.gov/econres/feds/files/2017074pap.pdf; Vladmir Mukharlyamov & Natasha Sarin, 
Price Regulation in Two-Sided Markets: Empirical Evidence from Debit 
Cards (last rev. Nov. 28, 2022) (unpublished manuscript), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3328579.
    \97\ See generally Board of Governors of the Federal Reserve 
System, Regulation II (Debit Card Interchange Fees and Routing): 
Reports and Data Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm.
---------------------------------------------------------------------------

    By contrast, the proposal would not directly or, the Board 
believes, indirectly affect exempt issuers (i.e., those with 
consolidated assets under $10 billion).\98\ The experience following 
the introduction of the current interchange fee cap in 2011 provides 
information about whether exempt issuers are likely to be affected by 
the proposal. First, the adoption of the current interchange fee cap 
and the statutory exemptions for certain issuers and debit card 
transactions led all debit card networks to adopt pricing structures 
with different interchange fees for covered and exempt issuers. Second, 
data collected by the Board demonstrate that average per-transaction 
interchange fees for exempt issuers across all payment card networks 
did not decline after the current interchange fee cap was introduced in 
2011 and have not declined since then.\99\ Average per-transaction 
interchange fees for exempt issuers have remained at a level 
substantially higher than average per-transaction interchange fees for 
covered issuers, with the latest data collected by the Board 
documenting that average per-transaction interchange fees for exempt 
issuers increased in 2020 and 2021.\100\
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    \98\ The Board collects and reports annual information from 
payment card networks about their interchange fees for transactions 
subject to and exempt from the interchange fee cap. See Board of 
Governors of the Federal Reserve System, Regulation II (Debit Card 
Interchange Fees and Routing): Average Debit Card Interchange Fee by 
Payment Card Network, https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm. The Board also annually publishes 
lists of covered and exempt institutions that issuers, payment card 
networks, and other market participants can use to determine which 
issuers qualify for the small issuer exemption. See Board of 
Governors of the Federal Reserve System, Interchange Fee Standards: 
Small Issuer Exemption, https://www.federalreserve.gov/paymentsystems/regii-interchange-fee-standards.htm.
    \99\ See Board of Governors of the Federal Reserve System, 
Regulation II (Debit Card Interchange Fees and Routing): Average 
Debit Card Interchange Fee by Payment Card Network, https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm.
    \100\ See id.
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(c) Effects on Consumers and Availability of Services to Different 
Classes of Consumers
    As discussed above in the context of effects on merchants and debit 
card issuers, the proposal could affect consumers in two main ways. On 
the one hand, consumers could benefit if merchants pass on savings 
associated with the decrease in costs of accepting debit card 
transactions in the form of lower prices, forgone future price 
increases, or improvements in product or service quality. On the other 
hand, consumers could be negatively affected if covered issuers 
increase fees on debit cards or checking accounts, or make other 
adjustments that make these products less attractive to consumers.
    The net effect on consumers, both individually and in the 
aggregate, will depend on which of these two effects predominates, 
which would in turn depend on many factors and is thus difficult to 
predict. As noted above, merchants in more competitive markets would 
likely pass on a larger portion of their cost savings to consumers. In 
a similar way, in response to declines in interchange fee revenue, 
covered issuers in more competitive markets would be less likely to 
increase fees or make other changes that negatively affect consumers. 
Covered issuers that face strong competition from exempt issuers may be 
less likely to raise fees, as doing so could increase the probability 
that customers switch to these competing institutions.
    In addition, the effect of the proposal could differ between 
particular classes of consumers in several ways. First, if the proposal 
results in merchants further increasing debit card acceptance (e.g., 
for card-not-present transactions), consumers' ability to make such 
payments could increase, generating benefits to consumers without 
access to alternative non-cash payment methods, such as credit cards. 
Second, if the proposal results in covered issuers increasing fees, 
banking services could become less accessible to lower-income consumers 
who may be more sensitive to such fees.\101\
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    \101\ However, the Board notes that the unbanked rate in the 
United States has been steadily declining over time, including after 
the introduction of the current interchange fee cap in 2011. 
According to the data collected by the Federal Deposit Insurance 
Corporation, the rate of unbanked in the population fell from 8.2 
percent in 2011 to an all-time low of 4.5 percent in 2021. See 
Federal Deposit Insurance Corporation, 2021 FDIC National Survey of 
Unbanked and Underbanked Households, https://www.fdic.gov/analysis/household-survey/2021report.pdf.
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(d) Additional Paperwork
    The proposal would not substantively alter the reporting and 
recordkeeping requirements that Sec.  235.8 of Regulation II imposes on 
covered issuers and networks, and would not alter the recordkeeping 
requirement for exempt issuers.\102\ Regulation II does not impose any 
reporting or recordkeeping requirements on consumers or merchants.
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    \102\ However, the Board requests comment on whether Sec.  235.8 
of Regulation II should be amended to specify that a covered issuer 
is required to retain records supporting the data that the covered 
issuer reports on the Debit Card Issuer Survey. See section VII, 
supra (Question 6(b)).
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(e) Effects Upon Competition in the Provision of Electronic Banking 
Services 103
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    \103\ 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.
---------------------------------------------------------------------------

    The proposal could affect competition between covered and exempt 
issuers by reducing the average per-transaction debit card interchange 
fee received by covered issuers without affecting the amount received 
by exempt issuers. As noted above, the competitive effect of any 
adjustments made by covered issuers to their fee structures in response 
to the reduction in interchange fee revenue would depend on the degree 
of substitution between exempt and covered issuers. Research suggests 
that competition between smaller and larger depository institutions is 
weaker than competition between large depository institutions or 
competition between small depository institutions, likely because these 
institutions serve different customer bases.\104\ In addition,

[[Page 78117]]

data collected by the Board indicates that the proportion of debit card 
transactions attributable to covered and exempt issuers did not 
significantly change before and after the adoption of the current 
interchange fee cap.\105\ In light of this evidence, the Board does not 
expect the proposal to have a significant impact on competitive 
dynamics between the two groups of issuers. The Board further does not 
believe that the proposal would affect competition between debit card 
networks.
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    \104\ See, e.g., Robert M. Adams, Kenneth P. Brevoort & 
Elizabeth K. Kiser, Who Competes with Whom? The Case of Depository 
Institutions, 55 Journal of Industrial Economics 141 (2007); Andrew 
M. Cohen & Michael J. Mazzeo, Market Structure and Competition Among 
Retail Depository Institutions, 89 Review of Economics and 
Statistics 60 (2007); Timothy H. Hannan & Robin A. Prager, The 
Profitability of Small Single-Market Banks in an Era of Multi-Market 
Banking, 33 Journal of Banking and Finance 263 (2009).
    \105\ See generally Board of Governors of the Federal Reserve 
System, Regulation II (Debit Card Interchange Fees and Routing): 
Reports and Data Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm.
---------------------------------------------------------------------------

(f) Consumer Protection and Compliance Costs 106
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    \106\ To the extent that the interchange fee standards and 
fraud-prevention adjustment constitute consumer protections, the 
Board believes that the aim of those protections is broadly to 
benefit consumers, rather than to address specific consumer rights. 
As such, the Board has, to the extent practicable, considered 
broadly whether the overall benefits of the proposed revisions to 
consumers outweigh other costs imposed on consumers or financial 
institutions.
---------------------------------------------------------------------------

    Based on the analysis above, the Board cannot, at this time, 
determine whether the potential benefits of the proposal to consumers 
exceed the possible costs imposed on consumers and financial 
institutions. As described above, the proposal may yield benefits for 
consumers, but the magnitude of these benefits will depend on the 
behavior of various participants in the debit card industry. The 
proposal may also impose costs on consumers and financial institutions, 
but the net effect on any individual or entity will depend on its 
particular circumstances. Because the overall effects of the proposal 
on consumers and on financial institutions are dependent on a variety 
of factors, the Board cannot determine at this time whether the 
potential benefits of the proposal to consumers exceed the possible 
costs imposed on consumers and financial institution.

B. Statutory Considerations for Proposed Revisions to the Interchange 
Fee Standards

    In prescribing regulations to establish interchange fee standards, 
EFTA section 920(a)(4) requires the Board to consider the functional 
similarity between debit card transactions and checking transactions 
that are required within the Federal Reserve bank system to clear at 
par.\107\
---------------------------------------------------------------------------

    \107\ The same provision of the statute additionally requires 
the Board to (i) distinguish between certain types of costs incurred 
by debit card issuers and (ii) consult with certain other agencies. 
The allowable costs that the Board considered in establishing the 
interchange fee standards are discussed in section III.A, supra. The 
interagency consultation requirement is discussed in section VIII.D, 
infra.
---------------------------------------------------------------------------

    The Board considered the functional similarity between debit card 
transactions and checking transactions when the Board adopted 
Regulation II, and this analysis informed certain decisions the Board 
made when the Board established the interchange fee standards.\108\ The 
similarities noted by the Board included the fact that both types of 
transactions result in a debit to an asset account; both involve 
electronic processing and deposit; both involve processing fees paid by 
merchants to banks and other intermediaries; and both have similar 
settlement timeframes. The differences noted by the Board included the 
closed nature of debit card systems compared to the open check clearing 
and collection system (and limitations on routing a debit card 
transaction based on the set of networks the issuer has enabled or that 
the merchant accepts); the payment authorization that is an integral 
part of debit card transactions (but not check transactions), which 
generally guarantees that the transaction will not be returned for 
insufficient funds or certain other reasons (e.g., a closed account); 
processing and collection costs incurred by the issuer (analogous to 
the payor's bank) for debit card transactions but not for check 
transactions; par clearance in the check system; payee deposit and 
availability; the amount of time in which a payor may reverse a 
transaction (which is much longer in the case of a debit card 
transaction compared to a check); and the increasing popularity of 
debit card payments (and declining use of check).
---------------------------------------------------------------------------

    \108\ See 76 FR 43393, 43399 (July 20, 2011). For example, 
similarities and differences between debit card transactions and 
check transactions were factors in the Board's decision to include 
or exclude from allowable costs a number of types of costs incurred 
by debit card issuers. See 76 FR at 43428 (July 20, 2011).
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    The Board has reviewed its analysis from 2011 regarding the 
functional similarity between debit card transactions and checking 
transactions and believes that the factual predicates underlying that 
analysis remain unchanged. For that reason, the Board continues to 
believe that its prior analysis remains sound.

C. Statutory Considerations for Proposed Revisions to the Fraud 
Prevention Adjustment 109
---------------------------------------------------------------------------

    \109\ All data used in this section have been sourced from the 
Board's Debit Card Issuer Surveys and Payment Card Network Surveys. 
Reports and data tables published by the Board, as well as notes 
regarding the figures cited in this section, may be found on the 
Board's website. See Board of Governors of the Federal Reserve 
System, Regulation II (Debit Card Interchange Fees and Routing): 
Reports and Data Collections, https://www.federalreserve.gov/paymentsystems/regii-data-collections.htm.
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1. Statutory Requirement
    EFTA section 920(a)(5)(B)(ii) requires the Board, in prescribing 
regulations for any fraud-prevention adjustment, to consider (i) the 
nature, type, and occurrence of fraud in debit card transactions; (ii) 
the extent to which the occurrence of fraud depends on whether 
authorization in a debit card transaction is based on signature, 
personal identification number (PIN), or other means; (iii) the 
available and economical means by which fraud on debit card 
transactions may be reduced; (iv) the fraud-prevention and data-
security costs expended by each party involved in debit card 
transactions (including consumers, persons who accept debit cards as a 
form of payment, financial institutions, retailers, and payment card 
networks); (v) the costs of fraudulent transactions absorbed by each 
party involved in such transactions (including consumers, persons who 
accept debit cards as a form of payment, financial institutions, 
retailers, and payment card networks); (vi) the extent to which 
interchange fees have in the past reduced or increased incentives for 
parties involved in debit card transactions to reduce fraud on such 
transactions; and (vii) such other factors as the Board considers 
appropriate.\110\ The Board has considered the factors set forth in 
EFTA section 920(a)(5)(B)(ii) in light of the latest data from covered 
issuers from 2021 and the cumulative data collected from covered 
issuers since the original Regulation II rulemaking.
---------------------------------------------------------------------------

    \110\ EFTA section 920(a)(5)(B)(ii) does not specify precisely 
how the Board should evaluate each of these factors.
---------------------------------------------------------------------------

    When the Board adopted the current fraud-prevention adjustment of 
1.0 cent, the Board focused on one factor in particular: the fraud-
prevention costs expended by various parties involved in debit card 
transactions.\111\ As discussed below, the Board believes that all 
parties continue to incur fraud-prevention costs and that the Board's 
proposed methodology for determining the fraud-prevention adjustment 
appropriately considers those costs.
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    \111\ See 77 FR 46258, 46265 (Aug. 3, 2012). The Board also 
considered the costs of losses absorbed by different parties to 
fraudulent transactions when it developed the fraud-prevention 
standards, which the Board does not propose to revise. See 77 FR at 
46270. The Board additionally considered certain other factors in 
connection with the overall structure of the fraud-prevention 
adjustment, such as the incentives created by the adjustment. See 76 
FR 43477, 43483 (July 20, 2011).

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[[Page 78118]]

    Notably, as described below, data reported by covered issuers since 
the adoption of Regulation II show that the incidence, types, and 
relative rates of absorption of fraud losses have changed. As noted in 
section III.B, supra, in connection with the Board's proposed revisions 
to the ad valorem component, the Board has observed an overall increase 
in fraud losses to all parties related to covered issuer transactions, 
but the share of such fraud losses absorbed by covered issuers has 
declined. Changes in the median ratio of issuer fraud losses to 
transaction value among covered issuers would be reflected in the 
Board's proposed revisions to the ad valorem component.
2. Factors
(a) Nature, Type, and Occurrence of Fraud
    With respect to covered issuer transactions, fraud losses to all 
parties as a share of transaction value increased from 9.0 basis points 
in 2009 to 17.5 basis points in 2021, and have displayed an upward 
trend since 2011 (the first year for which the Debit Card Issuer Survey 
was mandatory). In 2021, the most commonly reported and highest-value 
fraud types for covered issuer transactions were card-not-present 
fraud, lost and stolen card fraud, and counterfeit fraud. Card-not-
present fraud, at 8.6 basis points of transaction value, accounted for 
almost half of overall fraud in 2021. Lost and stolen card fraud 
accounted for 4.6 basis points of transaction value, and counterfeit 
card fraud accounted for 3.4 basis points of transaction value. In 
2009, counterfeit card fraud, card-not-present fraud, and lost and 
stolen card fraud accounted for 4.3 basis points, 1.8 basis points, and 
1.5 basis points, respectively, as a share of transaction value.
(b) Extent to Which the Occurrence of Fraud Depends on Authentication 
Mechanism
    Overall fraud incidence for covered issuer transactions 
approximately doubled from 2009 to 2021, and dual-message 
(traditionally mainly signature-authenticated) debit card transactions 
exhibited a considerably higher fraud incidence than single-message 
(traditionally mainly PIN-authenticated) debit card transactions, as 
has been the case since 2009. In 2021, 0.11 percent of covered issuer 
transactions were reported as fraudulent. Covered issuers reported as 
fraudulent 0.13 percent of dual-message transactions and 0.02 percent 
of single-message transactions. Across all covered issuer transactions, 
the average loss for dual-message transactions was 8.6 cents per 
transaction and represented 17.5 basis points of transaction value. For 
single-message transactions, the average loss was 1.9 cents per 
transaction and represented 4.2 basis points of transaction value. In 
2009, 0.04 percent of covered issuer transactions were reported as 
fraudulent. The average loss for dual-message transactions was 4.7 
cents per transaction and represented 12.7 basis points of transaction 
value. The average loss for single-message transactions was 1.3 cent 
per transaction and represented approximately 3.2 basis points of 
transaction value.
    The differential in fraud losses between single- and dual-message 
transactions can be explained in part by differences in the use of 
single- and dual-message networks for card-not-present transactions. As 
noted above, card-not-present fraud accounted for almost half of 
overall fraud on covered issuer transactions in 2021, and single 
message networks continue to be used relatively rarely for card-not-
present transactions. In 2021, the percentage of card-not-present 
transactions out of the total number and value of all debit card 
transactions processed over single-message networks, at 6.1 and 6.7 
percent, respectively, continued to be significantly lower than the 
analogous percentages for dual-message networks, at 44.2 and 60.7 
percent, respectively.
(c) Available and Economical Means by Which Fraud May Be Reduced
    In response to the Board's voluntary survey of covered issuers 
concerning transactions performed in 2009, covered issuers identified 
several categories of activities used to detect, prevent, and mitigate 
fraudulent debit card transactions, including transaction monitoring; 
merchant blocking; card activation and authentication systems; PIN 
customization; system and application security measures, such as 
firewalls and virus protection software; and ongoing research and 
development focused on making fraud-prevention activities more 
effective.\112\ Since that time, the Board identified tokenization as 
an important emerging fraud-prevention technique, and added it to the 
list of fraud-prevention activities starting from the 2019 Debit Card 
Issuer Survey.\113\
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    \112\ See 77 FR 46258, 46261 (Aug. 3, 2012).
    \113\ See 84 FR 65815 (Nov. 29, 2019).
---------------------------------------------------------------------------

(d) Fraud-Prevention Costs Expended by Parties Involved in Debit Card 
Transactions
    When the Board adopted current Sec.  235.4 in 2012, the Board 
reviewed fraud-prevention costs expended by parties involved in debit 
card transactions.\114\ The Board continues to believe that all parties 
involved in debit card transactions incur fraud-prevention costs. For 
example, some consumers routinely monitor their accounts for 
unauthorized debit card purchases, but the opportunity cost of 
consumers' time to monitor their account is difficult to put into 
monetary terms. Merchants and acquirers incur costs for fraud-
prevention tools, such as terminals that enable merchants to use 
various card- and cardholder-authentication mechanisms, address 
verification, geolocation services, and data-encryption technologies. 
Merchants may purchase services from third parties and may also develop 
their own fraud-prevention tools. In addition, merchants may also take 
steps and incur costs to secure data and comply with Payment Card 
Industry Data Security Standards (PCI-DSS) and other fraud-prevention 
standards.
---------------------------------------------------------------------------

    \114\ See 77 FR at 46261-62.
---------------------------------------------------------------------------

    As discussed in section IV of this preamble, supra, the Board has 
collected data from covered issuers concerning the costs incurred by 
covered issuers in connection with debit card transactions performed in 
calendar years 2011, 2013, 2015, 2017, 2019, and 2021. These data show 
that fraud-prevention costs incurred by covered issuers have risen 
since 2009, such that the median per-transaction fraud-prevention costs 
among covered issuers was 1.3 cents in 2021.
(e) Costs of Fraudulent Transactions Absorbed by Different Parties 
Involved in Fraudulent Transactions
    Most fraud losses associated with covered issuer transactions in 
2021 were borne by covered issuers and merchants. In 2009, covered 
issuers, merchants, and cardholders bore 61.2 percent, 38.3 percent, 
and 0.5 percent of these fraud losses, respectively. In 2021, covered 
issuers, merchants, and cardholders bore 33.5 percent, 47.0 percent, 
and 19.5 percent of fraud losses, respectively. This shift reflects a 
number of factors. First, card-not-present transactions grew from 9.8 
percent of covered issuer transactions in 2009 to 32.1 percent of 
covered issuer transactions in 2021. Second, card-not-present fraud 
accounted for almost half of overall fraud in 2021, and merchants bear 
a greater share of fraud losses for this type of transactions (almost 
two-thirds of card-not-present fraud in 2021). Third, merchants 
absorbed an increasing share of fraud losses across almost all 
transaction categories and fraud types in

[[Page 78119]]

2021, relative to 2009. For example, merchants' share of fraud losses 
has also increased over time for single-message transactions, from 
around 4 percent in 2009 to 31.9 percent in 2021.
(f) Extent to Which Interchange Transaction Fees Have in the Past 
Affected Fraud-Prevention Incentives
    In 2012, the Board noted that issuers have a strong incentive to 
protect cardholders and reduce fraud independently of interchange fees, 
and that competition among issuers for cardholders suggested that 
protecting cardholders from fraud is good business practice for 
issuers. At the time, merchants commented that, historically, higher 
interchange fee revenue for signature debit relative to PIN debit may 
have encouraged issuers to promote the use of signature debit over PIN 
debit, even though signature debit had substantially higher rates of 
fraud.\115\
---------------------------------------------------------------------------

    \115\ 77 FR at 46262.
---------------------------------------------------------------------------

    The Board continues to believe that covered issuers have an 
incentive to protect cardholders and reduce fraud, despite a reduction 
in the proportion of fraud losses borne by covered issuers and an 
increase in the proportion born by cardholders. Covered issuers 
continue to bear more than a quarter of all fraud losses, which means 
that their efforts to reduce fraud rates translate directly into lower 
fraud losses. Moreover, competition with other debit card issuers 
continues to provide downward pressure on the proportion of fraud 
losses that an issuer passes on to its cardholders, as passing on more 
fraud losses to cardholders increases the likelihood that they switch 
to competing issuers. Notwithstanding the adoption of the interchange 
fee standards and the fraud-prevention adjustment, the median per-
transaction fraud-prevention costs among covered issuers has risen 
since 2009, to 1.3 cents per transaction in 2021.
    Furthermore, data collected by the Board show that interchange fees 
on most transactions subject to the interchange fee cap are at or close 
to the cap, including for different authentication methods, which 
suggests that covered issuers have no incentives to promote the use of 
networks or authentication mechanisms that have higher rates of fraud.

D. Interagency Consultation

    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.\116\ Separately, EFTA section 920(a)(4)(C) requires 
the Board to consult with certain other agencies in prescribing 
regulations under EFTA section 920(a)(3)(A).\117\ The Board consulted 
with each of the relevant agencies prior to issuing this proposal.
---------------------------------------------------------------------------

    \116\ These agencies include the Office of the Comptroller of 
the Currency (OCC), the Federal Deposit Insurance Corporation 
(FDIC), the National Credit Union Administration (NCUA), the 
Department of Transportation, the Securities and Exchange 
Commission, the Consumer Financial Protection Bureau (CFPB), and the 
Federal Trade Commission. See EFTA section 918.
    \117\ These agencies include the OCC, FDIC, Office of Thrift 
Supervision, NCUA, Small Business Administration (SBA), and CFPB.
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E. Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
requires an agency to consider the impact of its rules on small 
entities. In connection with a proposed rule, the RFA generally 
requires an agency to prepare an Initial Regulatory Flexibility 
Analysis (IRFA) describing the impact of the rule on small entities, 
unless the head of the agency certifies that the proposal will not have 
a significant economic impact on a substantial number of small entities 
and publishes such certification along with a statement providing the 
factual basis for such certification in the Federal Register. An IRFA 
must contain (i) a description of the reasons why action by the agency 
is being considered; (ii) a succinct statement of the objectives of, 
and legal basis for, the proposal; (iii) a description of, and, where 
feasible, an estimate of the number of small entities to which the 
proposal will apply; (iv) a description of the projected reporting, 
recordkeeping, and other compliance requirements of the proposal, 
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; (v) an 
identification, to the extent practicable, of all relevant Federal 
rules that may duplicate, overlap with, or conflict with the proposal; 
and (vi) a description of any significant alternatives to the proposal 
that accomplish its stated objectives.
    The Board is providing an IRFA with respect to the proposal. The 
Board invites comment on all aspects of this IRFA.
1. Reasons Action Is Being Considered
    The Board proposes revisions to the interchange fee standards in 
Sec.  235.3 and the fraud-prevention adjustment in Sec.  235.4 of 
Regulation II.\118\ Under the proposal, the Board would determine, for 
every two-year period, the base component, ad valorem component, and 
fraud-prevention adjustment based on the latest data reported to the 
Board by covered issuers on the Debit Card Survey using the methodology 
described in proposed appendix B. Initially, the base component and the 
ad valorem component would decrease to 14.4 cents and 4.0 basis points 
(multiplied by the value of the transaction), respectively, while the 
fraud-prevention adjustment would increase to 1.3 cents, for debit card 
transactions performed from the effective date of the final rule to 
June 30, 2025.
---------------------------------------------------------------------------

    \118\ As described in section V, supra, the Board additionally 
proposes a set of technical revisions to Regulation II. Because 
these proposed revisions are not intended to be substantive changes, 
the Board's IRFA does not address these aspects of the proposal.
---------------------------------------------------------------------------

    As described in section III.B, supra, one key rationale for the 
proposal is the significant decline in the average cost of a debit card 
transaction, as measured by the transaction-weighted average of per-
transaction base component costs across covered issuers, since the 
Board first adopted Sec.  235.3. In addition, in lieu of an ad hoc 
approach to updating the interchange fee cap components, the Board 
believes that, as much as practicable, these components should be 
updated regularly and predictably to reflect changes in the allowable 
costs and fraud-prevention costs incurred by covered issuers as those 
changes occur.
2. Objectives of and Legal Basis for the Proposal
    Consistent with EFTA section 920(a)(3), the proposed revisions to 
Sec.  235.3 are intended to ensure that the interchange fee standards 
will be effective going forward for assessing whether, for a debit card 
transaction subject to the interchange fee standards, the amount of any 
interchange fee received or charged by a debit card issuer is 
reasonable and proportional to the cost incurred by the issuer with 
respect to the transaction. Consistent with EFTA section 920(a)(5), the 
proposed revisions to Sec.  235.4 are intended to ensure that eligible 
covered issuers receive an adjustment to any interchange fee permitted 
under Sec.  235.3 in an amount that is reasonably necessary to make 
allowance for the costs incurred by the covered issuer in preventing 
fraud in relation to debit card transactions involving that issuer.
3. Description and Estimate of the Number of Small Entities
    The proposed revisions to Sec.  235.3 and Sec.  235.4 apply to 
debit card issuers subject to the interchange fee standards

[[Page 78120]]

(i.e., covered issuers). Pursuant to EFTA section 920(a)(6) and Sec.  
235.5(a), a debit card issuer that, together with its affiliates, has 
assets of less than $10 billion as of the end of the calendar year 
preceding the date of the debit card transaction is exempt from the 
interchange fee standards, provided that such issuer holds the account 
that is debited.
    The Board generally uses the industry-specific size standards 
adopted by the SBA for purposes of estimating the number of small 
entities to which a proposal would apply.\119\ The SBA has adopted size 
standards that provide that card-issuing institutions with average 
assets of less than $850 million over the preceding year (based on the 
institution's four quarterly financial statements) are considered small 
entities.\120\ Because all such issuers would qualify for the exemption 
from the interchange fee standards in Sec.  235.5(a) provided that they 
hold the account that is debited, the proposed revisions would not 
apply to any small entities.
---------------------------------------------------------------------------

    \119\ See 13 CFR 121.210. Consistent with the SBA's General 
Principles of Affiliation, the Board generally includes the assets 
of all domestic and foreign affiliates toward the applicable size 
threshold when determining whether to classify a particular entity 
as a small entity. See 13 CFR 121.103.
    \120\ See 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.
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4. Description of Compliance Requirements
    The proposal would not substantively alter the reporting or 
recordkeeping requirements that apply to debit card issuers and payment 
card networks in Sec.  235.8 of Regulation II.\121\ Rather, the 
proposed revisions would adjust the amount of any interchange fee that 
a covered issuer may receive or charge with respect to a debit card 
transaction subject to the interchange fee standards. Because 
interchange fees are collected by networks from acquirers and paid to 
issuers, a covered issuer should not need to make any changes to its 
systems to ensure that the amount of any interchange fee does not 
exceed the amount permitted under Regulation II.
---------------------------------------------------------------------------

    \121\ However, the Board requests comment on whether Sec.  235.8 
of Regulation II should be amended to specify that a covered issuer 
is required to retain records supporting the data that the covered 
issuer reports on the Debit Card Issuer Survey. See section VII, 
supra (Question 6(b)).
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5. Duplicative, Overlapping, and Conflicting Rules
    The Board is not aware of any federal rules that may duplicate, 
overlap with, or conflict with the proposal.
6. Significant Alternatives Considered
    As described in section III.B, supra, the Board considered several 
alternative methodologies for determining the base component. In 
addition, the Board considered a variety of different cost-recovery 
targets from which the fixed multiplier for determining the base 
component under the proposed formula is derived. However, due to the 
statutory exemption from the interchange fee standards for debit card 
issuers with consolidated assets under $10 billion that hold the 
account that is debited, the Board does not believe that any of the 
alternatives considered by the Board would have affected the economic 
impact of the proposal on small entities.

F. Paperwork Reduction Act

    Regulation II contains ``collections of information'' within the 
meaning of the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501-
3521). In accordance with the requirements of the PRA, the Board may 
not conduct or sponsor, and a respondent is not required to respond to, 
an information collection unless it displays a currently valid Office 
of Management and Budget (OMB) control number. The Board reviewed the 
proposal under the authority delegated to the Board by OMB.
    Sections 235.8(a) and (b) of Regulation II (12 CFR 235.8(a) and 
(b)) currently require the reporting of information to the Board, and 
this reporting requirement is conducted in the form of two surveys 
collected by the Board: the Debit Card Issuer Survey (FR 3064a; OMB No. 
7100-0344) and Payment Card Network Survey (FR 3064b; OMB No. 7100-
0344). The proposal would amend section 235.8(a) of Regulation II to 
reflect the reporting frequency of the FR 3064a and FR 3064b surveys. 
No revisions to these surveys are being proposed at this time, but the 
Board is proposing to extend the FR 3064a and FR 3064b for three years.
    However, the Board requests comment on whether Sec.  235.8 of 
Regulation II should be amended to specify that a covered issuer is 
required to retain records supporting the data that the covered issuer 
reports on the Debit Card Issuer Survey. See section VII.6, supra 
(Question 6(b)). The Board may revise Sec.  235.8 of Regulation II 
based on comments received in response to this question.
    Comments are invited on the following:
    (a) Whether the collections of information are necessary for the 
proper performance of the Board's functions, including whether the 
information has practical utility;
    (b) The accuracy of the Board's estimates of the burden of the 
information collections, including the validity of the methodology and 
assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Comments on aspects of this document that may affect reporting, 
recordkeeping, or disclosure requirements and burden estimates should 
be sent to the addresses listed in the ADDRESSES section. A copy of the 
comments may also be submitted to the OMB desk officer for the 
Agencies: By mail to U.S. Office of Management and Budget, 725 17th 
Street NW, #10235, Washington, DC 20503 or by facsimile to (202) 395-
5806, Attention, Federal Banking Agency Desk Officer.
Proposed Extension, Without Revision, of the Following Information 
Collection
    (1) Collection title: Interchange Transaction Fees Survey.
    Collection identifier: FR 3064.
    OMB control number: 7100-0344.
    General description of report: This information collection 
comprises the following reports:
    Debit Card Issuer Survey (FR 3064a) collects data from issuers of 
debit cards (including general-use prepaid cards) that, together with 
their affiliates, have assets of $10 billion or more, including 
information regarding the volume and value of debit card transactions; 
chargebacks and returns; costs of authorization, clearance, and 
settlement of debit card transactions; other costs incurred in 
connection with particular debit card transactions; fraud prevention 
costs and fraud losses; and interchange fee revenue.
    Payment Card Network Survey (FR 3064b) collects data from payment 
card networks, including the volume and value of debit card 
transactions; interchange fees; network fees; and payments and 
incentives paid by

[[Page 78121]]

networks to acquirers, merchants, and issuers.
    The data from the FR 3064a and FR 3064b are used to fulfill a 
statutory requirement that the Board disclose certain information 
regarding debit card transactions on a biennial basis. In addition, the 
Board uses data from the Payment Card Network Survey (FR 3064b) to 
publicly report on an annual basis the extent to which networks have 
established separate interchange fees for exempt and covered issuers.
    Frequency: Annual and biennial.
    Affected public: Businesses or other for-profit.
    Respondents: Debit card issuers and payment card networks.
    Estimated number of respondents:
    FR 3064a--534.
    FR 3064b--15.
    Estimated average hours per response:
    FR 3064a--160.
    FR 3064b--75.
    Estimated annual burden hours:
    FR 3064a--85,440.
    FR 3064b--1,125.

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

H. Providing Accountability Through Transparency Act of 2023

    The Providing Accountability Through Transparency Act of 2023 (5 
U.S.C. 553(b)(4)) requires that a notice of proposed rulemaking include 
the internet address of a summary of not more than 100 words in length 
of the proposed rule, in plain language, that shall be posted on the 
internet website under section 206(d) of the E-Government Act of 2002 
(44 U.S.C. 3501 note).
    In summary, the Board requests comment on a proposal to update the 
debit card interchange fee cap, which the Board established in 2011, 
based on the latest data reported to the Board concerning the costs 
incurred by large debit card issuers. The Board also requests comment 
on a proposal to establish an approach for updating the interchange fee 
cap every other year going forward.
    The proposal and such a summary can be found at https://www.regulations.gov and https://www.federalreserve.gov/supervisionreg/reglisting.htm.

List of Subjects in 12 CFR Part 235

    Banks, banking, Debit card routing, Electronic debit transactions, 
Interchange transaction fees.

Authority and Issuance

    For the reasons set forth in the preamble, the Board is proposing 
to revise Regulation II, 12 CFR part 235, as follows:

PART 235--DEBIT CARD INTERCHANGE FEES AND ROUTING (REGULATION II)

Sec.
235.1 Authority and purpose.
235.2 Definitions.
235.3 Reasonable and proportional interchange transaction fees.
235.4 Fraud-prevention adjustment.
235.5 Exemptions.
235.6 Prohibition on circumvention, evasion, and net compensation.
235.7 Limitations on payment card restrictions.
235.8 Reporting requirements and record retention.
235.9 Administrative enforcement.
Appendix A to Part 235--Official Board Commentary on Regulation II
Appendix B to Part 235--Determination of Base Component, Ad Valorem 
Component, and Fraud-Prevention Adjustment

    Authority: 15 U.S.C. 1693o-2.


Sec.  235.1  Authority and purpose.

    (a) Authority. This part is issued by the Board of Governors of the 
Federal Reserve System (Board) under section 920 of the Electronic Fund 
Transfer Act (EFTA) (15 U.S.C. 1693o-2, as added by section 1075 of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 
111-203, 124 Stat. 1376 (2010)).
    (b) Purpose. This part implements the provisions of section 920 of 
the EFTA, including standards for reasonable and proportional 
interchange transaction fees for electronic debit transactions, 
standards for receiving a fraud-prevention adjustment to interchange 
transaction fees, exemptions from the interchange transaction fee 
limitations, prohibitions on evasion and circumvention, prohibitions on 
payment card network exclusivity arrangements and routing restrictions 
for debit card transactions, and reporting requirements for debit card 
issuers and payment card networks.


Sec.  235.2  Definitions.

    For purposes of this part:
    (a) Account:
    (1) Means transaction, savings, or other asset account (other than 
an occasional or incidental credit balance in a credit plan) 
established for any purpose and that is located in the United States; 
and
    (2) Does not include an account held under a bona fide trust 
agreement that is excluded by section 903(2) of the Electronic Fund 
Transfer Act and rules prescribed thereunder.
    (b) Acquirer means a person that contracts directly or indirectly 
with a merchant to provide settlement for the merchant's electronic 
debit transactions over a payment card network. An acquirer does not 
include a person that acts only as a processor for the services it 
provides to the merchant.
    (c) Affiliate means any company that controls, is controlled by, or 
is under common control with another company.
    (d) Cardholder means the person to whom a debit card is issued.
    (e) Control of a company means:
    (1) Ownership, control, or power to vote 25 percent or more of the 
outstanding shares of any class of voting security of the company, 
directly or indirectly, or acting through one or more other persons;
    (2) Control in any manner over the election of a majority of the 
directors, trustees, or general partners (or individuals exercising 
similar functions) of the company; or
    (3) The power to exercise, directly or indirectly, a controlling 
influence over the management or policies of the company, as the Board 
determines.
    (f) Covered issuer means, for a particular calendar year, an issuer 
that, together with its affiliates, has assets of $10 billion or more 
as of the end of the preceding calendar year.
    (g) Debit card:
    (1) Means any card, or other payment code or device, issued or 
approved for use through a payment card network to debit an account, 
regardless of whether authorization is based on signature, personal 
identification number (PIN), or other means, and regardless of whether 
the issuer holds the account, and
    (2) Includes any general-use prepaid card; and
    (3) Does not include:
    (i) Any card, or other payment code or device, that is redeemable 
upon presentation at only a single merchant or an affiliated group of 
merchants for goods or services; or
    (ii) A check, draft, or similar paper instrument, or an electronic 
representation thereof.
    (h) Designated automated teller machine (ATM) network means either:
    (1) All ATMs identified in the name of the issuer; or

[[Page 78122]]

    (2) Any network of ATMs identified by the issuer that provides 
reasonable and convenient access to the issuer's customers.
    (i) Electronic debit transaction:
    (1) Means the use of a debit card by a person as a form of payment 
in the United States to initiate a debit to an account, and
    (2) Does not include transactions initiated at an ATM, including 
cash withdrawals and balance transfers initiated at an ATM.
    (j) General-use prepaid card means a card, or other payment code or 
device, that is--
    (1) Issued on a prepaid basis in a specified amount, whether or not 
that amount may be increased or reloaded, in exchange for payment; and
    (2) Redeemable upon presentation at multiple, unaffiliated 
merchants for goods or services.
    (k) Interchange transaction fee means any fee established, charged, 
or received by a payment card network and paid by a merchant or an 
acquirer for the purpose of compensating an issuer for its involvement 
in an electronic debit transaction.
    (l) Issuer means any person that authorizes the use of a debit card 
to perform an electronic debit transaction.
    (m) Merchant means any person that accepts debit cards as payment.
    (n) Payment card network means an entity that:
    (1) Directly or indirectly provides the proprietary services, 
infrastructure, and software that route information and data to an 
issuer from an acquirer to conduct the authorization, clearance, and 
settlement of electronic debit transactions; and
    (2) A merchant uses in order to accept as a form of payment a brand 
of debit card or other device that may be used to carry out electronic 
debit transactions.
    (o) Person means a natural person or an organization, including a 
corporation, government agency, estate, trust, partnership, 
proprietorship, cooperative, or association.
    (p) Processor means a person that processes or routes electronic 
debit transactions for issuers, acquirers, or merchants.
    (q) Route means to direct and send information and data to an 
unaffiliated entity or to an affiliated entity acting on behalf of an 
unaffiliated entity.
    (r) United States means the States, territories, and possessions of 
the United States, the District of Columbia, the Commonwealth of Puerto 
Rico, or any political subdivision of any of the foregoing.


Sec.  235.3  Reasonable and proportional interchange transaction fees.

    (a) In general. The amount of any interchange transaction fee that 
an issuer may receive or charge with respect to an electronic debit 
transaction shall be reasonable and proportional to the cost incurred 
by the issuer with respect to the electronic debit transaction.
    (b) Reasonable and proportional fees. An issuer complies with the 
requirements of paragraph (a) of this section only if each interchange 
transaction fee received or charged by the issuer for an electronic 
debit transaction is no more than the sum of--
    (1) For an electronic debit transaction performed from October 1, 
2011, to [one calendar day prior to effective date of final rule], a 
base component of 21.0 cents, and an ad valorem component of 5.0 basis 
points multiplied by the value of the transaction; and
    (2) For an electronic debit transaction performed from [effective 
date of final rule], to June 30, 2025, a base component of 14.4 cents, 
and an ad valorem component of 4.0 basis points multiplied by the value 
of the transaction.
    (c) Determination of base component and ad valorem component. For 
every two-year period, beginning with the period from July 1, 2025, to 
June 30, 2027, the Board will determine the base component and the ad 
valorem component using the approach described in appendix B to this 
part.


Sec.  235.4  Fraud-prevention adjustment.

    (a) In general. In addition to any interchange transaction fee an 
issuer receives or charges in accordance with Sec.  235.3, and subject 
to paragraph (c) of this section, an issuer may receive or charge an 
amount of no more than--
    (1) For an electronic debit transaction performed from October 1, 
2011, to [one calendar day prior to effective date of final rule], a 
fraud-prevention adjustment of 1.0 cent; and
    (2) For an electronic debit transaction performed from [effective 
date of final rule], to June 30, 2025, a fraud-prevention adjustment of 
1.3 cents.
    (b) Determination of fraud-prevention adjustment. For every two-
year period, beginning with the period from July 1, 2025, to June 30, 
2027, the Board will determine the fraud-prevention adjustment using 
the approach described in appendix B to this part.
    (c) Issuer standards. (1) To be eligible to receive or charge the 
fraud-prevention adjustment in paragraph (a) of this section, an issuer 
must develop and implement policies and procedures reasonably designed 
to take effective steps to reduce the occurrence of, and costs to all 
parties from, fraudulent electronic debit transactions, including 
through the development and implementation of cost-effective fraud-
prevention technology.
    (2) An issuer's policies and procedures must address--
    (i) Methods to identify and prevent fraudulent electronic debit 
transactions;
    (ii) Monitoring of the volume and value of its fraudulent 
electronic debit transactions;
    (iii) Appropriate responses to suspicious electronic debit 
transactions in a manner designed to limit the costs to all parties 
from and prevent the occurrence of future fraudulent electronic debit 
transactions;
    (iv) Methods to secure debit card and cardholder data; and
    (v) Such other factors as the issuer considers appropriate.
    (3) An issuer must review, at least annually, its fraud-prevention 
policies and procedures, and their implementation and update them as 
necessary in light of--
    (i) Their effectiveness in reducing the occurrence of, and cost to 
all parties from, fraudulent electronic debit transactions involving 
the issuer;
    (ii) Their cost-effectiveness; and
    (iii) Changes in the types of fraud, methods used to commit fraud, 
and available methods for detecting and preventing fraudulent 
electronic debit transactions that the issuer identifies from--
    (A) Its own experience or information;
    (B) Information provided to the issuer by its payment card 
networks, law enforcement agencies, and fraud-monitoring groups in 
which the issuer participates; and
    (C) Applicable supervisory guidance.
    (d) Notification. To be eligible to receive or charge a fraud-
prevention adjustment, an issuer must annually notify its payment card 
networks that it complies with the standards in paragraph (c) of this 
section.
    (e) Change in status. An issuer is not eligible to receive or 
charge a fraud-prevention adjustment if the issuer is substantially 
non-compliant with the standards set forth in paragraph (c) of this 
section, as determined by the issuer or the appropriate agency under 
Sec.  235.9. Such an issuer must notify its payment card networks that 
it is no longer eligible to receive or charge a fraud-prevention 
adjustment no later than 10 days after determining or receiving 
notification from the appropriate agency under Sec.  235.9 that the 
issuer is substantially non-compliant with the standards set forth in 
paragraph (c) of this section. The issuer must stop

[[Page 78123]]

receiving and charging the fraud-prevention adjustment no later than 30 
days after notifying its payment card networks.


Sec.  235.5  Exemptions.

    (a) Exemption for small issuers--(1) In general. Sections 235.3, 
235.4, and 235.6 do not apply to an interchange transaction fee 
received or charged by an issuer that--
    (i) Holds the account that is debited; and
    (ii) Is not a covered issuer when the electronic debit transaction 
is performed.
    (2) Determination of issuer asset size. A person may rely on lists 
published by the Board to determine whether an issuer is a covered 
issuer for a particular calendar year.
    (3) Change in status. If an issuer qualifies for the exemption in 
paragraph (a)(1) of this section in a particular calendar year, but, as 
of the end of that calendar year the issuer, together with its 
affiliates, has assets of $10 billion or more, the issuer must begin 
complying with Sec. Sec.  235.3, 235.4, and 235.6 no later than July 1 
of the succeeding calendar year.
    (b) Exemption for government-administered programs. Except as 
provided in paragraph (d) of this section, Sec. Sec.  235.3, 235.4, and 
235.6 do not apply to an interchange transaction fee received or 
charged by an issuer with respect to an electronic debit transaction 
if--
    (1) The electronic debit transaction is made using a debit card 
that has been provided to a person pursuant to a Federal, State, or 
local government-administered payment program; and
    (2) The cardholder may use the debit card only to transfer or debit 
funds, monetary value, or other assets that have been provided pursuant 
to such program.
    (c) Exemption for certain reloadable prepaid cards--(1) In general. 
Except as provided in paragraph (d) of this section, Sec. Sec.  235.3, 
235.4, and 235.6 do not apply to an interchange transaction fee 
received or charged by an issuer with respect to an electronic debit 
transaction using a general-use prepaid card that is--
    (i) Not issued or approved for use to access or debit any account 
held by or for the benefit of the cardholder (other than a subaccount 
or other method of recording or tracking funds purchased or loaded on 
the card on a prepaid basis);
    (ii) Reloadable and not marketed or labeled as a gift card or gift 
certificate; and
    (iii) The only means of access to the underlying funds, except when 
all remaining funds are provided to the cardholder in a single 
transaction.
    (2) Temporary cards. For purposes of this paragraph (c), the term 
``reloadable'' includes a temporary non-reloadable card issued solely 
in connection with a reloadable general-use prepaid card.
    (d) Exception. The exemptions in paragraphs (b) and (c) of this 
section do not apply to any interchange transaction fee received or 
charged by an issuer on or after July 21, 2012, with respect to an 
electronic debit transaction if any of the following fees may be 
charged to a cardholder with respect to the card:
    (1) A fee or charge for an overdraft, including a shortage of funds 
or a transaction processed for an amount exceeding the account balance, 
unless the fee or charge is imposed for transferring funds from another 
asset account to cover a shortfall in the account accessed by the card; 
or
    (2) A fee imposed by the issuer for the first withdrawal per 
calendar month from an ATM that is part of the issuer's designated ATM 
network.


Sec.  235.6  Prohibition on circumvention, evasion, and net 
compensation.

    (a) Prohibition of circumvention or evasion. No person shall 
circumvent or evade the interchange transaction fee restrictions in 
Sec. Sec.  235.3 and 235.4.
    (b) Prohibition of net compensation. An issuer may not receive net 
compensation from a payment card network with respect to electronic 
debit transactions or debit card-related activities within a calendar 
year. Net compensation occurs when the total amount of payments or 
incentives received by an issuer from a payment card network with 
respect to electronic debit transactions or debit card-related 
activities, other than interchange transaction fees passed through to 
the issuer by the network, during a calendar year exceeds the total 
amount of all fees paid by the issuer to the network with respect to 
electronic debit transactions or debit card-related activities during 
that calendar year. Payments and incentives paid by a network to an 
issuer, and fees paid by an issuer to a network, with respect to 
electronic debit transactions or debit card related activities are not 
limited to volume-based or transaction-specific payments, incentives, 
or fees, but also include other payments, incentives or fees related to 
an issuer's provision of debit card services.


Sec.  235.7  Limitations on payment card restrictions.

    (a) Prohibition on network exclusivity--(1) In general. An issuer 
or payment card network shall not directly or through any agent, 
processor, or licensed member of a payment card network, by contract, 
requirement, condition, penalty, or otherwise, restrict the number of 
payment card networks on which an electronic debit transaction may be 
processed to less than two unaffiliated networks.
    (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 expect will be routed to it, based on expected 
transaction volume.
    (3) Prohibited exclusivity arrangements by networks. For purposes 
of paragraph (a)(1) of this section, a payment card network may not 
restrict or otherwise limit an issuer's ability to contract with any 
other payment card network that may process an electronic debit 
transaction involving the issuer's debit cards.
    (4) Subsequent affiliation. If unaffiliated payment card networks 
become affiliated as a result of a merger or acquisition such that an 
issuer is no longer in compliance with paragraph (a) of this section, 
the issuer must add an unaffiliated payment card network through which 
electronic debit transactions on the relevant debit card may be 
processed no later than six months after the date on which the 
previously unaffiliated payment card networks consummate the 
affiliation.
    (b) Prohibition on routing restrictions. An issuer or payment card 
network shall not, directly or through any agent, processor, or 
licensed member of the network, by contract, requirement, condition, 
penalty, or otherwise, inhibit the ability of any person that accepts 
or honors debit cards for payments to direct the routing of electronic 
debit transactions for processing over any payment card network that 
may process such transactions.

[[Page 78124]]

Sec.  235.8  Reporting requirements and record retention.

    (a) Entities required to report. Each covered issuer shall file a 
report with the Board on a biennial basis in accordance with this 
section. Each payment card network shall file a report with the Board 
on an annual basis in accordance with this section.
    (b) Report. Each entity required to file a report with the Board 
shall submit data in a form prescribed by the Board for that entity. 
Data required to be reported may include, but may not be limited to, 
data regarding costs incurred with respect to an electronic debit 
transaction, interchange transaction fees, network fees, fraud-
prevention costs, fraud losses, and transaction value, volume, and 
type.
    (c) Record retention. (1) An issuer subject to this part shall 
retain evidence of compliance with the requirements imposed by this 
part for a period of not less than five years after the end of the 
calendar year in which the electronic debit transaction occurred.
    (2) Any person subject to this part having actual notice that it is 
the subject of an investigation or an enforcement proceeding by its 
enforcement agency shall retain the records that pertain to the 
investigation, action, or proceeding until final disposition of the 
matter unless an earlier time is allowed by court or agency order.


Sec.  235.9  Administrative enforcement.

    (a) Appropriate agency. (1) Compliance with the requirements of 
this part shall be enforced under--
    (i) Section 8 of the Federal Deposit Insurance Act, by the 
appropriate Federal banking agency, as defined in section 3(q) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(q)), with respect to--
    (A) National banks, Federal savings associations, and Federal 
branches and Federal agencies of foreign banks;
    (B) Member banks of the Federal Reserve System (other than national 
banks), branches and agencies of foreign banks (other than federal 
branches, federal Agencies, and insured state branches of foreign 
banks), commercial lending companies owned or controlled by foreign 
banks, and organizations operating under section 25 or 25A of the 
Federal Reserve Act;
    (C) Banks and state savings associations insured by the Federal 
Deposit Insurance Corporation (other than members of the Federal 
Reserve System), and insured state branches of foreign banks;
    (ii) The Federal Credit Union Act (12 U.S.C. 1751 et seq.), by the 
Administrator of the National Credit Union Administration (National 
Credit Union Administration Board) with respect to any Federal credit 
union;
    (iii) The Federal Aviation Act of 1958 (49 U.S.C. 40101 et seq.), 
by the Secretary of Transportation, with respect to any air carrier or 
foreign air carrier subject to that Act; and
    (iv) The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), 
by the Securities and Exchange Commission, with respect to any broker 
or dealer subject to that Act.
    (2) The terms used in paragraph (a)(1) of this section that are not 
defined in this part or otherwise defined in section 3(s) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the 
meaning given to them in section 1(b) of the International Banking Act 
of 1978 (12 U.S.C. 3101).
    (b) Additional powers. (1) For the purpose of the exercise by any 
agency referred to in paragraphs (a)(1)(i) through (iv) of this section 
of its power under any statute referred to in those paragraphs, a 
violation of this part is deemed to be a violation of a requirement 
imposed under that statute.
    (2) In addition to its powers under any provision of law 
specifically referred to in paragraphs (a)(1)(i) through (iv) of this 
section, each of the agencies referred to in those paragraphs may 
exercise, for the purpose of enforcing compliance under this part, any 
other authority conferred on it by law.
    (c) Enforcement authority of Federal Trade Commission. Except to 
the extent that enforcement of the requirements imposed under this 
title is specifically granted to another government agency under 
paragraphs (a)(1)(i) through (iv) of this section, and subject to 
subtitle B of the Consumer Financial Protection Act of 2010, the 
Federal Trade Commission has the authority to enforce such 
requirements. For the purpose of the exercise by the Federal Trade 
Commission of its functions and powers under the Federal Trade 
Commission Act, a violation of this part shall be deemed a violation of 
a requirement imposed under the Federal Trade Commission Act. All of 
the functions and powers of the Federal Trade Commission under the 
Federal Trade Commission Act are available to the Federal Trade 
Commission to enforce compliance by any person subject to the 
jurisdiction of the Federal Trade Commission with the requirements of 
this part, regardless of whether that person is engaged in commerce or 
meets any other jurisdictional tests under the Federal Trade Commission 
Act.

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

    The following commentary to Regulation II (12 CFR part 235) 
provides background material to explain the Board's intent in 
adopting a particular part of the regulation. The commentary also 
provides examples to aid in understanding how a particular 
requirement is to work.

Section 235.2--Definitions

2(a)--Account

    1. Types of accounts. The term ``account'' includes accounts 
held by any person, including consumer accounts (i.e., those 
established primarily for personal, family or household purposes) 
and business accounts. Therefore, the limitations on interchange 
transaction fees and the prohibitions on network exclusivity 
arrangements and routing restrictions apply to all electronic debit 
transactions, regardless of whether the transaction involves a debit 
card issued primarily for personal, family, or household purposes or 
for business purposes. For example, an issuer of a business-purpose 
debit card is subject to the restrictions on interchange transaction 
fees and is also prohibited from restricting the number of payment 
card networks on which an electronic debit transaction may be 
processed under Sec.  235.7.
    2. Bona fide trusts. This part does not define the term bona 
fide trust agreement; therefore, institutions must look to state or 
other applicable law for interpretation. An account held under a 
custodial agreement that qualifies as a trust under the Internal 
Revenue Code, such as an individual retirement account, is 
considered to be held under a trust agreement for purposes of this 
part.
    3. Account located in the United States. This part applies only 
to electronic debit transactions that are initiated to debit (or 
credit, for example, in the case of returned goods or cancelled 
services) an account located in the United States. If a cardholder 
uses a debit card to debit an account held outside the United 
States, then the electronic debit transaction is not subject to this 
part.

2(b)--Acquirer

    1. In general. The term ``acquirer'' includes only the 
institution that contracts, directly or indirectly, with a merchant 
to provide settlement for the merchant's electronic debit 
transactions over a payment card network (referred to as acquiring 
the merchant's electronic debit transactions). In some acquiring 
relationships, an institution provides processing services to the 
merchant and is a licensed member of the payment card network, but 
does not settle the transactions with the merchant (by crediting the 
merchant's account) or with the issuer. These institutions are not 
``acquirers'' because they do not provide credit to the merchant for 
the transactions or settle the merchant's transactions with the 
issuer. These institutions are considered processors and in some 
circumstances may be considered payment card networks for purposes 
of this part (See Sec. Sec.  235.2(n), 235.2(p), and commentary 
thereto).

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2(c)--Affiliate

    1. Types of entities. The term ``affiliate'' includes any bank 
and nonbank affiliates located in the United States or a foreign 
country.
    2. Other affiliates. For commentary on whether merchants are 
affiliated, see comment 2(g)-7.

2(d)--Cardholder

    1. Scope. In the case of debit cards that access funds in 
transaction, savings, or other similar asset accounts, ``the person 
to whom a card is issued'' generally will be the named person or 
persons holding the account. If the account is a business account, 
multiple employees (or other persons associated with the business) 
may have debit cards that can access the account. Each employee that 
has a debit card that can access the account is a cardholder. In the 
case of a prepaid card, the cardholder generally is either the 
purchaser of the card or a person to whom the purchaser gave the 
card, such as a gift recipient.

2(e)--Control [Reserved]

2(f)--Covered Issuer

    1. Asset size determination. An issuer would qualify as a 
covered issuer in a particular calendar year if its total worldwide 
banking and nonbanking assets, including assets of affiliates, other 
than trust assets under management, are at least $10 billion, as of 
December 31 of the preceding calendar year.

2(g)--Debit Card

    1. Card, or other payment code or device. The term ``debit 
card'' as defined in Sec.  235.2(g) applies to any card, or other 
payment code or device, even if it is not issued in a physical form. 
Debit cards include, for example, an account number or code that can 
be used to access funds in an account to make internet purchases. 
Similarly, the term ``debit card'' includes a device with a chip or 
other embedded mechanism, such as a mobile phone or sticker 
containing a contactless chip that links the device to funds stored 
in an account, and enables an account to be debited. The term 
``debit card,'' however, does not include a one-time password or 
other code if such password or code is used for the purposes of 
authenticating the cardholder and is used in addition to another 
card, or other payment code or device, rather than as the payment 
code or device.
    2. Deferred debit cards. The term ``debit card'' includes a 
card, or other payment code or device, that is used in connection 
with deferred debit card arrangements in which transactions are not 
immediately posted to and funds are not debited from the underlying 
transaction, savings, or other asset account upon settlement of the 
transaction. Instead, the funds in the account typically are held 
and made unavailable for other transactions for a period of time 
specified in the issuer-cardholder agreement. After the expiration 
of the time period, the cardholder's account is debited for the 
value of all transactions made using the card that have been 
submitted to the issuer for settlement during that time period. For 
example, under some deferred debit card arrangements, the issuer may 
debit the consumer's account for all debit card transactions that 
occurred during a particular month at the end of the month. 
Regardless of the time period between the transaction and account 
posting, a card, or other payment code or device, that is used in 
connection with a deferred debit arrangement is considered a debit 
card for purposes of the requirements of this part.
    3. Decoupled debit cards. Decoupled debit cards are issued by an 
entity other than the financial institution holding the cardholder's 
account. In a decoupled debit arrangement, transactions that are 
authorized by the card issuer settle against the cardholder's 
account held by an entity other than the issuer, generally via a 
subsequent ACH debit to that account. The term ``debit card'' 
includes any card, or other payment code or device, issued or 
approved for use through a payment card network to debit an account, 
regardless of whether the issuer holds the account. Therefore, 
decoupled debit cards are debit cards for purposes of this part.
    4. Hybrid cards.
    i. Some cards, or other payment codes or devices, may have both 
credit- and debit-like features (``hybrid cards''). For example, 
these cards may enable a cardholder to access a line of credit, but 
select certain transactions for immediate repayment (i.e., prior to 
the end of a billing cycle) via a debit to the cardholder's account, 
as the term is defined in Sec.  235.2(a), held either with the 
issuer or at another institution. If a card permits a cardholder to 
initiate transactions that debit an account or funds underlying a 
prepaid card, the card is considered a debit card for purposes of 
this part. Not all transactions initiated by such a hybrid card, 
however, are electronic debit transactions. Rather, only those 
transactions that debit an account as defined in this part or funds 
underlying a prepaid card are electronic debit transactions. If the 
transaction posts to a line of credit, then the transaction is a 
credit transaction.
    ii. If an issuer conditions the availability of a credit or 
charge card that permits pre-authorized repayment of some or all 
transactions on the cardholder maintaining an account at the issuer, 
such a card is considered a debit card for purposes of this part.
    5. Virtual wallets. A virtual wallet is a device (e.g., a mobile 
phone) that stores several different payment codes or devices 
(``virtual cards'') that access different accounts, funds underlying 
the card, or lines of credit. At the point of sale, the cardholder 
may select from the virtual wallet the virtual card he or she wishes 
to use for payment. The virtual card that the cardholder uses for 
payment is considered a debit card under this part if the virtual 
card that initiates a transaction meets the definition of debit 
card, notwithstanding the fact that other cards in the wallet may 
not be debit cards.
    6. General-use prepaid card. The term ``debit card'' includes 
general-use prepaid cards. See Sec.  235.2(j) and related commentary 
for information on general-use prepaid cards.
    7. Store cards. The term ``debit card'' does not include prepaid 
cards that may be used at a single merchant or affiliated merchants. 
Two or more merchants are affiliated if they are related by either 
common ownership or by common corporate control. For purposes of the 
``debit card'' definition, franchisees are considered to be under 
common corporate control if they are subject to a common set of 
corporate policies or practices under the terms of their franchise 
licenses.
    8. Checks, drafts, and similar instruments. The term ``debit 
card'' does not include a check, draft, or similar paper instrument 
or a transaction in which the check is used as a source of 
information to initiate an electronic payment. For example, if an 
account holder provides a check to buy goods or services and the 
merchant takes the account number and routing number information 
from the MICR line at the bottom of a check to initiate an ACH debit 
transfer from the cardholder's account, the check is not a debit 
card, and such a transaction is not considered an electronic debit 
transaction. Likewise, the term ``debit card'' does not include an 
electronic representation of a check, draft, or similar paper 
instrument.
    9. ACH transactions. The term ``debit card'' does not include an 
account number when it is used by a person to initiate an ACH 
transaction that debits that person's account. For example, if an 
account holder buys goods or services over the internet using an 
account number and routing number to initiate an ACH debit, the 
account number is not a debit card, and such a transaction is not 
considered an electronic debit transaction. However, the use of a 
card to purchase goods or services that debits the cardholder's 
account that is settled by means of a subsequent ACH debit initiated 
by the card issuer to the cardholder's account, as in the case of a 
decoupled debit card arrangement, involves the use of a debit card 
for purposes of this part.

2(h)--Designated Automated Teller Machine (ATM) Network

    1. Reasonable and convenient access clarified. Under Sec.  
235.2(h)(2), a designated ATM network includes any network of ATMs 
identified by the issuer that provides reasonable and convenient 
access to the issuer's cardholders. Whether a network provides 
reasonable and convenient access depends on the facts and 
circumstances, including the distance between ATMs in the designated 
network and each cardholder's last known home or work address, or if 
a home or work address is not known, where the card was first 
issued.

2(i)--Electronic Debit Transaction

    1. Debit an account. The term ``electronic debit transaction'' 
includes the use of a card to debit an account. The account debited 
could be, for example, the cardholder's asset account or the account 
that holds the funds used to settle prepaid card transactions.
    2. Form of payment. The term ``electronic debit transaction'' 
includes the use of a card as a form of payment that may be made in 
exchange for goods or services, as a charitable contribution, to 
satisfy an obligation (e.g., tax liability), or for other purposes.
    3. Subsequent transactions. The term ``electronic debit 
transaction'' includes both

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the cardholder's use of a debit card for the initial payment and any 
subsequent use by the cardholder of the debit card in connection 
with the initial payment. For example, the term ``electronic debit 
transaction'' includes using the debit card to return merchandise or 
cancel a service that then results in a debit to the merchant's 
account and a credit to the cardholder's account.
    4. Cash withdrawal at the point of sale. The term ``electronic 
debit transaction'' includes a transaction in which a cardholder 
uses the debit card both to make a purchase and to withdraw cash 
(known as a ``cash-back transaction'').
    5. Geographic limitation. This regulation applies only to 
electronic debit transactions that are initiated at a merchant 
located in the United States. If a cardholder uses a debit card at a 
merchant located outside the United States to debit an account held 
in the United States, the electronic debit transaction is not 
subject to this part.

2(j)--General-Use Prepaid Card

    1. Redeemable upon presentation at multiple, unaffiliated 
merchants. A prepaid card is redeemable upon presentation at 
multiple, unaffiliated merchants if such merchants agree to honor 
the card.
    2. Selective authorization cards. Selective authorization cards, 
(e.g., mall cards) are generally intended to be used or redeemed for 
goods or services at participating retailers within a shopping mall 
or other limited geographic area. Selective authorization cards are 
considered general-use prepaid cards, regardless of whether they 
carry the mark, logo, or brand of a payment card network, if they 
are redeemable at multiple, unaffiliated merchants.

2(k)--Interchange Transaction Fee

    1. In general. Generally, the payment card network is the entity 
that establishes and charges the interchange transaction fee to the 
acquirers or merchants. The acquirers then pay to the issuers any 
interchange transaction fee established and charged by the network. 
Acquirers typically pass the interchange transaction fee through to 
merchant-customers.
    2. Compensating an issuer. The term ``interchange transaction 
fee'' is limited to those fees that a payment card network 
establishes, charges, or receives to compensate the issuer for its 
role in the electronic debit transaction. By contrast, payment card 
networks generally charge issuers and acquirers fees for services 
the network performs. Such fees are not interchange transaction fees 
because the payment card network is charging and receiving the fee 
as compensation for services it provides.
    3. Established, charged, or received. Interchange transaction 
fees are not limited to those fees for which a payment card network 
sets the value. A fee that compensates an issuer is an interchange 
transaction fee if the fee is set by the issuer but charged to 
acquirers by virtue of the network determining each participant's 
net settlement position.

2(l)--Issuer

    1. In general. A person issues a debit card by authorizing the 
use of debit card by a cardholder to perform electronic debit 
transactions. That person may provide the card directly to the 
cardholder or indirectly by using a third party (such as a 
processor, or a telephone network or manufacturer) to provide the 
card, or other payment code or device, to the cardholder. The 
following examples illustrate the entity that is the issuer under 
various card program arrangements.
    2. Traditional debit card arrangements. In a traditional debit 
card arrangement, the bank or other entity holds the cardholder's 
funds and authorizes the cardholder to use the debit card to access 
those funds through electronic debit transactions, and the 
cardholder receives the card directly or indirectly (e.g., through 
an agent) from the bank or other entity that holds the funds (except 
for decoupled debit cards, discussed below). In this system, the 
bank or entity holding the cardholder's funds is the issuer.
    3. BIN-sponsor arrangements. Payment card networks assign Bank 
Identification Numbers (BINs) to member-institutions for purposes of 
issuing cards, authorizing, clearing, settling, and other processes. 
In exchange for a fee or other financial consideration, some members 
of payment card networks permit other entities to issue debit cards 
using the member's BIN. The entity permitting the use of its BIN is 
referred to as the ``BIN sponsor'' and the entity that uses the BIN 
to issue cards is often referred to as the ``affiliate member.'' BIN 
sponsor arrangements can follow at least two different models:
    i. Sponsored debit card model. In some cases, a community bank 
or credit union may provide debit cards to its account holders 
through a BIN sponsor arrangement with a member institution. In 
general, the bank or credit union will authorize its account holders 
to use debit cards to perform electronic debit transactions that 
access funds in accounts at the bank or credit union. The bank or 
credit union's name typically will appear on the debit card. The 
bank or credit union may directly or indirectly provide the cards to 
cardholders. Under these circumstances, the bank or credit union is 
the issuer for purposes of this part. Although the bank or credit 
union may distribute cards through the BIN sponsors, the BIN sponsor 
does not enter into the agreement with the cardholder that 
authorizes the cardholder to use the card to perform electronic 
debit transactions that access funds in the account at the bank or 
credit union, and therefore the BIN sponsor is not the issuer.
    ii. Prepaid card model. A member institution may also serve as 
the BIN sponsor for a prepaid card program. Under these 
arrangements, a program manager distributes prepaid cards to the 
cardholders and the BIN-sponsoring institution generally holds the 
funds for the prepaid card program in an omnibus or pooled account. 
Either the BIN sponsor or the prepaid card program manager may keep 
track of the underlying funds for each individual prepaid card 
through subaccounts. While the cardholder may receive the card 
directly from the program manager or at a retailer, the BIN sponsor 
authorizes the cardholder to use the card to perform electronic 
debit transactions that access the funds in the pooled account and 
the cardholder's relationship generally is with the BIN sponsor. 
Accordingly, under these circumstances, the BIN sponsor, or the bank 
holding the pooled account, is the issuer.
    4. Decoupled debit cards. In the case of decoupled debit cards, 
an entity other than the bank holding the cardholder's account 
enters into a relationship with the cardholder authorizing the use 
of the card to perform electronic debit transactions. The entity 
authorizing the use of the card to perform electronic debit 
transaction typically arranges for the card to be provided directly 
or indirectly to the cardholder and has a direct relationship with 
the cardholder with respect to the card. The bank holding the 
cardholder's account has agreed generally to permit ACH debits to 
the account, but has not authorized the use of the debit card to 
access the funds through electronic debit transactions. Under these 
circumstances, the entity authorizing the use of the debit card, and 
not the account-holding institution, is considered the issuer.

2(m)--Merchant [Reserved]

2(n)--Payment Card Network

    1. In general. An entity is a considered a payment card network 
with respect to an electronic debit transaction for purposes of this 
rule if it routes information and data to the issuer from the 
acquirer to conduct authorization, clearance, and settlement of the 
electronic debit transaction. By contrast, if an entity receives 
transaction information and data from a merchant and authorizes and 
settles the transaction without routing the information and data to 
another entity (i.e., the issuer or the issuer's processor) for 
authorization, clearance, or settlement, that entity is not 
considered a payment card network with respect to the electronic 
debit transaction.
    2. Three-party systems. In the case of a three-party system, 
electronic debit transactions are processed by an entity that acts 
as system operator and issuer, and may also act as the acquirer. The 
entity acting as system operator and issuer that receives the 
transaction information from the merchant or acquirer also holds the 
cardholder's funds. Therefore, rather than directing the transaction 
information to a separate issuer, the entity authorizes and settles 
the transaction based on the information received from the merchant. 
As these entities do not connect (or ``network'') multiple issuers 
and do not route information to conduct the transaction, they are 
not ``payment card networks'' with respect to these transactions. 3. 
Processors as payment card networks. A processor is considered a 
payment card network if, in addition to acting as processor for an 
acquirer and issuer, the processor routes transaction information 
and data received from a merchant or the merchant's acquirer to an 
issuer. For example, if a merchant uses a processor in order to 
accept any, some, or all brands of debit cards and the processor 
routes transaction information and data to the issuer

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or issuer's processor, the merchant's processor is considered a 
payment card network with respect to the electronic debit 
transaction. If the processor establishes, charges, or receives a 
fee for the purpose of compensating an issuer, that fee is 
considered an interchange transaction fee for purposes of this part.
    4. Automated clearing house (ACH) operators. An ACH operator is 
not considered a payment card network for purposes of this part. 
While an ACH operator processes transactions that debit an account 
and provides for interbank clearing and settlement of such 
transactions, a person does not use the ACH system to accept as a 
form of payment a brand of debit card.
    5. ATM networks. An ATM network is not considered a payment card 
network for purposes of this part. While ATM networks process 
transactions that debit an account and provide for interbank 
clearing and settlement of such transactions, a cash withdrawal from 
an ATM is not a payment because there is no exchange of money for 
goods or services, or payment made as a charitable contribution, to 
satisfy an obligation (e.g., tax liability), or for other purposes.

2(o)--Person [Reserved]

2(p)--Processor

    1. Distinction from acquirers. A processor may perform all 
transaction-processing functions for a merchant or acquirer, but if 
it does not acquire (that is, settle with the merchant for the 
transactions), it is not an acquirer. The entity that acquires 
electronic debit transactions is the entity that is responsible to 
other parties to the electronic debit transaction for the amount of 
the transaction.
    2. Issuers. A processor may perform services related to 
authorization, clearance, and settlement of transactions for an 
issuer without being considered to be an issuer for purposes of this 
part.

2(q)--Route

    1. An entity routes information if it both directs and sends the 
information to an unaffiliated entity (or affiliated entity acting 
on behalf of the unaffiliated entity). This other entity may be a 
payment card network or processor (if the entity directing and 
sending the information is a merchant or an acquirer) or an issuer 
or processor (if the entity directing and sending the information is 
a payment card network).

2(r)--United States [Reserved]

Section 235.3--Reasonable and Proportional Interchange Transaction Fees

3(a)--[Reserved]

3(b)--Reasonable and Proportional Fees

    1. Two components. The standard for the maximum permissible 
interchange transaction fee that an issuer may receive consists of 
two components: a base component that does not vary with a 
transaction's value and an ad valorem component. The amount of any 
interchange transaction fee received or charged by an issuer may not 
exceed the sum of these components. In addition, an issuer may be 
permitted to receive or charge a fraud-prevention adjustment under 
Sec.  235.4 of this part. 2. Variation in interchange fees. An 
issuer is permitted to charge or receive, and a network is permitted 
to establish, interchange transaction fees that vary based on, for 
example, the transaction value or the type of transaction or 
merchant, provided the amount of any interchange transaction fee for 
any transaction does not exceed the sum of the base component and 
the ad valorem component.
    3. Examples. For a $50 electronic debit transaction performed on 
June 30, 2023, the maximum permissible interchange transaction fee 
is 23.5 cents (21.0 cents plus 5.0 basis points multiplied by $50). 
For a $50 electronic debit transaction performed on July 1, 2023, 
the maximum permissible interchange transaction fee is 16.4 cents 
(14.4 cents plus 4.0 basis points multiplied by $50). In addition, 
an issuer may be permitted to receive a fraud-prevention adjustment 
under Sec.  235.4 of this part.
    4. Performance of an electronic debit transaction. For purposes 
of Sec.  235.3(b), an electronic debit transaction is considered to 
be performed on the date on which such transaction is settled on an 
interbank basis. For example, an electronic debit transaction that 
is authorized and cleared on June 30, 2023, but is settled on an 
interbank basis on July 1, 2023, is considered to be performed on 
July 1, 2023.

3(c)--[Reserved]

Section 235.4--Fraud-Prevention Adjustment

4(a)--Fraud-Prevention Adjustment Amount

    1. Performance of an electronic debit transaction. For purposes 
of Sec.  235.4(a), an electronic debit transaction is considered to 
be performed on the date on which such transaction is settled on an 
interbank basis. For example, an electronic debit transaction that 
is authorized and cleared on June 30, 2023, but is settled on an 
interbank basis on July 1, 2023, is considered to be performed on 
July 1, 2023.

4(b)--[Reserved]

4(c)(1)--Issuer Standards

    1. An issuer's policies and procedures should address fraud 
related to debit card use by unauthorized persons. Examples of use 
by unauthorized persons include, but are not limited to, the 
following:
    i. A thief steals a cardholder's wallet and uses the debit card 
to purchase goods, without the authority of the cardholder.
    ii. A cardholder makes a purchase at a merchant. Subsequently, 
the merchant's employee uses information from the debit card to 
initiate a subsequent transaction, without the authority of the 
cardholder.
    iii. A hacker steals cardholder account information from the 
issuer or a merchant processor and uses the stolen information to 
make unauthorized card-not-present purchases or to create a 
counterfeit card to make unauthorized card-present purchases.
    2. An issuer's policies and procedures must be designed to 
reduce fraud, where cost effective, across all types of electronic 
debit transactions in which its cardholders engage. Therefore, an 
issuer should consider whether its policies and procedures are 
effective for each method used to authenticate the card (e.g., a 
chip or a code embedded in the magnetic stripe) and the cardholder 
(e.g., a signature or a PIN), and for different sales channels 
(e.g., card-present and card-not-present).
    3. An issuer's policies and procedures must be designed to take 
effective steps to reduce both the occurrence of and costs to all 
parties from fraudulent electronic debit transactions. An issuer 
should take steps reasonably designed to reduce the number and value 
of its fraudulent electronic debit transactions relative to its non-
fraudulent electronic debit transactions. These steps should reduce 
the costs from fraudulent transactions to all parties, not merely 
the issuer. For example, an issuer should take steps to reduce the 
number and value of its fraudulent electronic debit transactions 
relative to its non-fraudulent transactions whether or not it bears 
the fraud losses as a result of regulations or network rules.
    4. For any given issuer, the number and value of fraudulent 
electronic debit transactions relative to non-fraudulent 
transactions may vary materially from year to year. Therefore, in 
certain circumstances, an issuer's policies and procedures may be 
effective notwithstanding a relative increase in the transactions 
that are fraudulent in a particular year. However, continuing 
increases in the share of fraudulent transactions would warrant 
further scrutiny.
    5. In determining which fraud-prevention technologies to 
implement or retain, an issuer must consider the cost-effectiveness 
of the technology, that is, the expected cost of the technology 
relative to its expected effectiveness in controlling fraud. In 
evaluating the cost of a particular technology, an issuer should 
consider whether and to what extent other parties will incur costs 
to implement the technology, even though an issuer may not have 
complete information about the costs that may be incurred by other 
parties, such as the cost of new merchant terminals. In evaluating 
the costs, an issuer should consider both initial implementation 
costs and ongoing costs of using the fraud-prevention method.
    6. An issuer need not develop fraud-prevention technologies 
itself to satisfy the standards in Sec.  235.4(c). An issuer may 
implement fraud-prevention technologies that have been developed by 
a third party that the issuer has determined are appropriate under 
its own policies and procedures.

4(c)(2)--Elements of Fraud-Prevention Policies and Procedures

    1. In general. An issuer may tailor its policies and procedures 
to address its particular debit card program, including the size of 
the program, the types of transactions in which its cardholders 
commonly engage, fraud types and methods experienced by the issuer, 
and the cost of implementing new fraud-prevention methods in light 
of the expected fraud reduction.

[[Page 78128]]

4(c)(2)(i)--Methods To Identify and Prevent Fraudulent Debit Card 
Transactions

    1. In general. Examples of policies and procedures reasonably 
designed to identify and prevent fraudulent electronic debit 
transactions include the following:
    i. Practices to help determine whether a card is authentic and 
whether the user is authorized to use the card at the time of a 
transaction. For example, an issuer may specify the use of 
particular authentication technologies or methods, such as dynamic 
data, to better authenticate a card and cardholder at the time of 
the transaction, to the extent doing so does not inhibit the ability 
of a merchant to direct the routing of electronic debit transactions 
for processing over any payment card network that may process such 
transactions. (See Sec.  235.7 and commentary thereto.)
    ii. An automated mechanism to assess the risk that a particular 
electronic debit transaction is fraudulent during the authorization 
process (i.e., before the issuer approves or declines an 
authorization request). For example, an issuer may use neural 
networks to identify transactions that present increased risk of 
fraud. As a result of this analysis, the issuer may decide to 
decline to authorize these transactions. An issuer may not be able 
to determine whether a given transaction in isolation is fraudulent 
at the time of authorization, and therefore may have implemented 
policies and procedures that monitor sets of transactions initiated 
with a cardholder's debit card. For example, an issuer could compare 
a set of transactions initiated with the card to a customer's 
typical transactions in order to determine whether a transaction is 
likely to be fraudulent. Similarly, an issuer could compare a set of 
transactions initiated with a debit card and common fraud patterns 
in order to determine whether a transaction or future transaction is 
likely to be fraudulent.
    iii. Practices to support reporting of lost and stolen cards or 
suspected incidences of fraud by cardholders or other parties to a 
transaction. As an example, an issuer may promote customer awareness 
by providing text alerts of transactions in order to detect 
fraudulent transactions in a timely manner. An issuer may also 
report debit cards suspected of being fraudulent to their networks 
for inclusion in a database of potentially compromised cards.

4(c)(2)(ii)--Monitoring of the Issuer's Volume and Value of 
Fraudulent Electronic Debit Transactions

    1. Tracking its fraudulent electronic debit transactions over 
time enables an issuer to assess whether its policies and procedures 
are effective. Accordingly, an issuer must include policies and 
procedures designed to monitor trends in the number and value of its 
fraudulent electronic debit transactions. An effective monitoring 
program would include tracking issuer losses from fraudulent 
electronic debit transactions, fraud-related chargebacks to 
acquirers, losses passed on to cardholders, and any other 
reimbursements from other parties. Other reimbursements could 
include payments made to issuers as a result of fines assessed to 
merchants for noncompliance with Payment Card Industry (PCI) Data 
Security Standards or other industry standards. An issuer should 
also establish procedures to track fraud-related information 
necessary to perform its reviews under Sec.  235.4(c)(3) and to 
retain and report information as required under Sec.  235.8.

4(c)(2)(iii)--Appropriate Responses to Suspicious Electronic Debit 
Transactions

    1. An issuer may identify transactions that it suspects to be 
fraudulent after it has authorized or settled the transaction. For 
example, a cardholder may inform the issuer that the cardholder did 
not initiate a transaction or transactions, or the issuer may learn 
of a fraudulent transaction or possibly compromised debit cards from 
the network, the acquirer, or other parties. An issuer must 
implement policies and procedures designed to provide an appropriate 
response once an issuer has identified suspicious transactions to 
reduce the occurrence of future fraudulent electronic debit 
transactions and the costs associated with such transactions. The 
appropriate response may differ depending on the facts and 
circumstances, including the issuer's assessment of the risk of 
future fraudulent electronic debit transactions. For example, in 
some circumstances, it may be sufficient for an issuer to monitor 
more closely the account with the suspicious transactions. In other 
circumstances, it may be necessary to contact the cardholder to 
verify a transaction, reissue a card, or close an account. An 
appropriate response may also require coordination with industry 
organizations, law enforcement agencies, and other parties, such as 
payment card networks, merchants, and issuer or merchant processors.

4(c)(2)(iv)--Methods To Secure Debit Card and Cardholder Data

    1. An issuer must implement policies and procedures designed to 
secure debit card and cardholder data. These policies and procedures 
should apply to data that are transmitted by the issuer (or its 
service provider) during transaction processing, that are stored by 
the issuer (or its service provider), and that are carried on media 
(e.g., laptops, transportable data storage devices) by employees or 
agents of the issuer. This standard may be incorporated into an 
issuer's information security program, as required by Section 501(b) 
of the Gramm-Leach-Bliley Act.

4(c)(3)--Review of and Updates to Policies and Procedures

    1. i. An issuer's assessment of the effectiveness of its 
policies and procedures should consider whether they are reasonably 
designed to reduce the number and value of fraudulent electronic 
debit transactions relative to non-fraudulent electronic debit 
transactions and are cost effective. (See comment 4(c)(1)-3 and 
comment 4(c)(1)-5).
    ii. An issuer must also assess its policies and procedures in 
light of changes in fraud types (e.g., the use of counterfeit cards, 
lost or stolen cards) and methods (e.g., common purchase patterns 
indicating possible fraudulent behavior), as well as changes in the 
available methods of detecting and preventing fraudulent electronic 
debit transactions (e.g., transaction monitoring, authentication 
methods) as part of its periodic review of its policies and 
procedures. An issuer's review of its policies and procedures must 
consider information from the issuer's own experience and that the 
issuer otherwise identified itself; information from payment card 
networks, law enforcement agencies, and fraud-monitoring groups in 
which the issuer participates; and supervisory guidance. For 
example, an issuer should consider warnings and alerts it receives 
from payment card networks regarding compromised cards and data 
breaches.
    2. An issuer should review its policies and procedures and their 
implementation more frequently than annually if the issuer 
determines that more frequent review is appropriate based on 
information obtained from monitoring its fraudulent electronic debit 
transactions, changes in the types or methods of fraud, or available 
methods of detecting and preventing fraudulent electronic debit 
transactions. (See Sec.  235.4(c)(1)(ii) and commentary thereto.)
    3. In light of an issuer's review of its policies and 
procedures, and their implementation, the issuer may determine that 
updates to its policies and procedures, and their implementation, 
are necessary. Merely determining that updates are necessary does 
not render an issuer ineligible to receive or charge the fraud-
prevention adjustment. To remain eligible to receive or charge a 
fraud-prevention adjustment, however, an issuer should develop and 
implement such updates as soon as reasonably practicable, in light 
of the facts and circumstances.

4(d)--Notification

    1. Payment card networks that plan to allow issuers to receive 
or charge a fraud-prevention adjustment can develop processes for 
identifying issuers eligible for this adjustment. Each issuer that 
wants to be eligible to receive or charge a fraud-prevention 
adjustment must notify annually the payment card networks in which 
it participates of its compliance through the networks' processes.

Section 235.5--Exemptions for Certain Electronic Debit Transactions

    1. Eligibility for multiple exemptions. An electronic debit 
transaction may qualify for one or more exemptions. For example, a 
debit card that has been provided to a person pursuant to a Federal, 
State, or local government-administered payment program may be 
issued by an issuer that is not a covered issuer. In this case, an 
electronic debit transaction made using that card may qualify for 
the exemption under Sec.  235.5(a) for small issuers or for the 
exemption under Sec.  235.5(b) for government-administered payment 
programs. A payment card network establishing interchange fees for 
transactions that qualify for more than one exemption need only 
satisfy itself that the issuer's transactions qualify for at least 
one of the exemptions in order to exempt the electronic debit 
transaction from the interchange fee restrictions.
    2. Certification process. Payment card networks that plan to 
allow issuers to receive

[[Page 78129]]

higher interchange fees than permitted under Sec. Sec.  235.3 and 
235.4 pursuant to one of the exemptions in Sec.  235.5 could develop 
their own processes for identifying issuers and products eligible 
for such exemptions. Section 235.5(a)(2) permits payment card 
networks to rely on lists published by the Board to help determine 
eligibility for the small issuer exemption set forth in Sec.  
235.5(a)(1).

5(a)--Exemption for Small Issuers

    1. Account that is debited. An issuer that is not a covered 
issuer is exempt under Sec.  235.5(a) only if the issuer holds the 
account that is debited. For example, in the case of the sponsored 
debit card model described in comment 235.2(l)-3(i), if the bank or 
credit union is not a covered issuer, then that bank or credit union 
is exempt from the interchange fee restrictions because the issuer 
holds the account that is debited. However, in the case of the 
decoupled debit card described in comment 235.2(l)-4, the issuer of 
a decoupled debit card is not exempt under Sec.  235.5(a), 
regardless of asset size, because it does not hold the account that 
is debited.
    2. Change in status. If an exempt issuer becomes a covered 
issuer based on its and its affiliates assets at the end of a 
calendar year, that issuer must begin complying with the interchange 
fee standards (Sec.  235.3), the fraud-prevention adjustment 
standards (to the extent the issuer wishes to receive a fraud-
prevention adjustment) (Sec.  235.4), and the provisions prohibiting 
circumvention, evasion, and net compensation (Sec.  235.6) no later 
than July 1.

5(b)--Exemption for Government-Administered Payment Programs

    1. Government-administered payment program. A program is 
considered government-administered regardless of whether a Federal, 
State, or local government agency operates the program or outsources 
some or all functions to third parties so long as the program is 
operated on behalf of the government agency. In addition, a program 
may be government-administered even if a Federal, State, or local 
government agency is not the source of funds for the program it 
administers. For example, child support programs are government-
administered programs even though a Federal, State, or local 
government agency is not the source of funds. A tribal government is 
considered a local government for purposes of this exemption.

5(c)--Exemption for Certain Reloadable Prepaid Cards

    1. Subaccount clarified. A subaccount is an account within an 
account, opened in the name of an agent, nominee, or custodian for 
the benefit of two or more cardholders, where the transactions and 
balances of individual cardholders are tracked in such subaccounts. 
An account that is opened solely in the name of a single cardholder 
is not a subaccount.
    2. Reloadable. A general-use prepaid card is ``reloadable'' if 
the terms and conditions of the agreement permit funds to be added 
to the general-use prepaid card at any time after the initial 
purchase or issuance. A general-use prepaid card is not 
``reloadable'' merely because the issuer or processor is technically 
able to add functionality that would otherwise enable the general-
use prepaid card to be reloaded.
    3. Marketed or labeled as a gift card or gift certificate.
    i. Electronic debit transactions made using a reloadable 
general-use prepaid card are not exempt from the interchange fee 
restrictions if the card is marketed or labeled as a gift card or 
gift certificate. The term ``marketed or labeled as a gift card or 
gift certificate'' means directly or indirectly offering, 
advertising or otherwise suggesting the potential use of a general-
use prepaid card as a gift for another person. Whether the exclusion 
applies generally does not depend on the type of entity that makes 
the promotional message. For example, a card may be marketed or 
labeled as a gift card or gift certificate if anyone (other than the 
purchaser of the card), including the issuer, the retailer, the 
program manager that may distribute the card, or the payment network 
on which a card is used, promotes the use of the card as a gift card 
or gift certificate. A general-use prepaid card is marketed or 
labeled as a gift card or gift certificate even if it is only 
occasionally marketed as a gift card or gift certificate. For 
example, a network-branded general purpose reloadable card would be 
marketed or labeled as a gift card or gift certificate if the issuer 
principally advertises the card as a less costly alternative to a 
bank account but promotes the card in a television, radio, 
newspaper, or internet advertisement, or on signage as ``the perfect 
gift'' during the holiday season.
    ii. The mere mention of the availability of gift cards or gift 
certificates in an advertisement or on a sign that also indicates 
the availability of exempted general-use prepaid cards does not by 
itself cause the general-use prepaid card to be marketed as a gift 
card or a gift certificate. For example, the posting of a sign in a 
store that refers to the availability of gift cards does not by 
itself constitute the marketing of otherwise exempted general-use 
prepaid cards that may also be sold in the store along with gift 
cards or gift certificates, provided that a person acting reasonably 
under the circumstances would not be led to believe that the sign 
applies to all cards sold in the store. (See, however, comment 5(c)-
4.ii.)
    4. Examples of marketed or labeled as a gift card or gift 
certificate.
    i. The following are examples of marketed or labeled as a gift 
card or gift certificate:
    A. Using the word ``gift'' or ``present'' on a card or 
accompanying material, including documentation, packaging and 
promotional displays;
    B. Representing or suggesting that a card can be given to 
another person, for example, as a ``token of appreciation'' or a 
``stocking stuffer,'' or displaying a congratulatory message on the 
card or accompanying material;
    C. Incorporating gift-giving or celebratory imagery or motifs, 
such as a bow, ribbon, wrapped present, candle, or a holiday or 
congratulatory message, on a card, accompanying documentation, or 
promotional material;
    ii. The term does not include the following:
    A. Representing that a card can be used as a substitute for a 
checking, savings, or deposit account;
    B. Representing that a card can be used to pay for a consumer's 
health-related expenses--for example, a card tied to a health 
savings account;
    C. Representing that a card can be used as a substitute for 
travelers checks or cash;
    D. Representing that a card can be used as a budgetary tool, for 
example, by teenagers, or to cover emergency expenses.
    5. Reasonable policies and procedures to avoid marketing as a 
gift card. The exemption for a general-use prepaid card that is 
reloadable and not marketed or labeled as a gift card or gift 
certificate in Sec.  235.5(c) applies if a reloadable general-use 
prepaid card is not marketed or labeled as a gift card or gift 
certificate and if persons involved in the distribution or sale of 
the card, including issuers, program managers, and retailers, 
maintain policies and procedures reasonably designed to avoid such 
marketing. Such policies and procedures may include contractual 
provisions prohibiting a reloadable general-use prepaid card from 
being marketed or labeled as a gift card or gift certificate, 
merchandising guidelines or plans regarding how the product must be 
displayed in a retail outlet, and controls to regularly monitor or 
otherwise verify that the general-use prepaid card is not being 
marketed as a gift card. Whether a general-use prepaid card has been 
marketed as a gift card or gift certificate will depend on the facts 
and circumstances, including whether a reasonable person would be 
led to believe that the general-use prepaid card is a gift card or 
gift certificate. The following examples illustrate the application 
of Sec.  235.5(c):
    i. An issuer or program manager of prepaid cards agrees to sell 
general-purpose reloadable cards through a retailer. The contract 
between the issuer or program manager and the retailer establishes 
the terms and conditions under which the cards may be sold and 
marketed at the retailer. The terms and conditions prohibit the 
general-purpose reloadable cards from being marketed as a gift card 
or gift certificate, and require policies and procedures to 
regularly monitor or otherwise verify that the cards are not being 
marketed as such. The issuer or program manager sets up one 
promotional display at the retailer for gift cards and another 
physically separated display for exempted products under Sec.  
235.5(c), including general-purpose reloadable cards, such that a 
reasonable person would not believe that the exempted cards are gift 
cards. The exemption in Sec.  235.5(c) applies because policies and 
procedures reasonably designed to avoid the marketing of the 
general-purpose reloadable cards as gift cards or gift certificates 
are maintained, even if a retail clerk inadvertently stocks or a 
consumer inadvertently places a general-purpose reloadable card on 
the gift card display.
    ii. Same facts as in comment 5(c)-5.i, except that the issuer or 
program manager sets up a single promotional display at the retailer 
on which a variety of prepaid cards are sold, including store gift 
cards and general-purpose reloadable cards. A sign stating ``Gift 
Cards'' appears prominently at

[[Page 78130]]

the top of the display. The exemption in Sec.  235.5(c) does not 
apply with respect to the general-purpose reloadable cards because 
policies and procedures reasonably designed to avoid the marketing 
of exempted cards as gift cards or gift certificates are not 
maintained.
    iii. Same facts as in comment 5(c)-5.i, except that the issuer 
or program manager sets up a single promotional multi-sided display 
at the retailer on which a variety of prepaid card products, 
including store gift cards and general-purpose reloadable cards are 
sold. Gift cards are segregated from exempted cards, with gift cards 
on one side of the display and exempted cards on a different side of 
a display. Signs of equal prominence at the top of each side of the 
display clearly differentiate between gift cards and the other types 
of prepaid cards that are available for sale. The retailer does not 
use any more conspicuous signage suggesting the general availability 
of gift cards, such as a large sign stating ``Gift Cards'' at the 
top of the display or located near the display. The exemption in 
Sec.  235.5(c) applies because policies and procedures reasonably 
designed to avoid the marketing of the general-purpose reloadable 
cards as gift cards or gift certificates are maintained, even if a 
retail clerk inadvertently stocks or a consumer inadvertently places 
a general-purpose reloadable card on the gift card display.
    iv. Same facts as in comment 5(c)-5.i, except that the retailer 
sells a variety of prepaid card products, including store gift cards 
and general-purpose reloadable cards, arranged side-by-side in the 
same checkout lane. The retailer does not affirmatively indicate or 
represent that gift cards are available, such as by displaying any 
signage or other indicia at the checkout lane suggesting the general 
availability of gift cards. The exemption in Sec.  235.5(c) applies 
because policies and procedures reasonably designed to avoid 
marketing the general-purpose reloadable cards as gift cards or gift 
certificates are maintained.
    6. On-line sales of prepaid cards. Some websites may prominently 
advertise or promote the availability of gift cards or gift 
certificates in a manner that suggests to a consumer that the 
website exclusively sells gift cards or gift certificates. For 
example, a website may display a banner advertisement or a graphic 
on the home page that prominently states ``Gift Cards,'' ``Gift 
Giving,'' or similar language without mention of other available 
products, or use a web address that includes only a reference to 
gift cards or gift certificates in the address. In such a case, a 
consumer acting reasonably under the circumstances could be led to 
believe that all prepaid products sold on the website are gift cards 
or gift certificates. Under these facts, the website has marketed 
all such products as gift cards or gift certificates, and the 
exemption in Sec.  235.5(c) does not apply to any products sold on 
the website.
    7. Temporary non-reloadable cards issued in connection with a 
general-use reloadable card. Certain general-purpose prepaid cards 
that are typically marketed as an account substitute initially may 
be sold or issued in the form of a temporary non-reloadable card. 
After the card is purchased, the cardholder is typically required to 
call the issuer to register the card and to provide identifying 
information in order to obtain a reloadable replacement card. In 
most cases, the temporary non-reloadable card can be used for 
purchases until the replacement reloadable card arrives and is 
activated by the cardholder. Because the temporary non-reloadable 
card may only be obtained in connection with the reloadable card, 
the exemption in Sec.  235.5(c) applies so long as the card is not 
marketed as a gift card or gift certificate.

5(d)--Exception

    1. Additional ATM access. Some debit cards may be used to 
withdraw cash from ATMs that are not part of the issuer's designated 
ATM network. An electronic debit card transaction may still qualify 
for the exemption under Sec. Sec.  235.5(b) or (c) with a respect to 
a card for which a fee may be imposed for a withdrawal from an ATM 
that is outside of the issuer's designated ATM network as long as 
the card complies with the condition set forth in Sec.  235.5(d)(2) 
for withdrawals within the issuer's designated ATM network. The 
condition with respect to ATM fees does not apply to cards that do 
not provide ATM access.

Section 235.6--Prohibition on Circumvention, Evasion, and Net 
Compensation

6(a)--Prohibition of Circumvention or Evasion

    1. Finding of circumvention or evasion. A finding of evasion or 
circumvention will depend on all relevant facts and circumstances. 
Although net compensation may be one form of circumvention or 
evasion prohibited under Sec.  235.6(a), it is not the only form.
    2. Examples of circumstances that may constitute circumvention 
or evasion. The following examples do not constitute per se 
circumvention or evasion, but may warrant additional supervisory 
scrutiny to determine whether the totality of the facts and 
circumstances constitute circumvention or evasion:
    i. A payment card network decreases network processing fees paid 
by issuers for electronic debit transactions by 50 percent and 
increases the network processing fees charged to merchants or 
acquirers with respect to electronic debit transactions by a similar 
amount. Because the requirements of this subpart do not restrict or 
otherwise establish the amount of fees that a network may charge for 
its services, the increase in network fees charged to merchants or 
acquirers and decrease in fees charged to issuers is not a per se 
circumvention or evasion of the interchange transaction fee 
standards, but may warrant additional supervisory scrutiny to 
determine whether the facts and circumstances constitute 
circumvention or evasion.
    ii. An issuer replaces its debit cards with prepaid cards that 
are exempt from the interchange limits of Sec. Sec.  235.3 and 
235.4. The exempt prepaid cards are linked to its customers' 
transaction accounts and funds are swept from the transaction 
accounts to the prepaid accounts as needed to cover transactions 
made. Again, this arrangement is not per se circumvention or 
evasion, but may warrant additional supervisory scrutiny to 
determine whether the facts and circumstances constitute 
circumvention or evasion.

6(b)--Prohibition of Net Compensation

    1. Net compensation. Net compensation to an issuer through the 
use of network fees is prohibited.
    2. Consideration of payments or incentives provided by the 
network in net compensation determination.
    i. For purposes of the net compensation determination, payments 
or incentives paid by a payment card network to an issuer with 
respect to electronic debit transactions or debit card related 
activities could include, but are not limited to, marketing 
incentives; payments or rebates for meeting or exceeding a specific 
transaction volume, percentage share, or dollar amount of 
transactions processed; or other payments for debit card related 
activities. For example, signing bonuses paid by a network to an 
issuer for the issuer's debit card portfolio would also be included 
in the total amount of payments or incentives received by an issuer 
from a payment card network with respect to electronic debit 
transactions. A signing bonus for an entire card portfolio, 
including credit cards, may be allocated to the issuer's debit card 
business based on the proportion of the cards or transactions that 
are debit cards or electronic debit transactions, as appropriate to 
the situation, for purposes of the net compensation determination.
    ii. Incentives paid by the network with respect to multiple-year 
contracts may be allocated over the life of the contract.
    iii. For purposes of the net compensation determination, 
payments or incentives paid by a payment card network with respect 
to electronic debit transactions or debit card-related activities do 
not include interchange transaction fees that are passed through to 
the issuer by the network, or discounts or rebates provided by the 
network or an affiliate of the network for issuer-processor 
services. In addition, funds received by an issuer from a payment 
card network as a result of chargebacks, fines paid by merchants or 
acquirers for violations of network rules, or settlements or 
recoveries from merchants or acquirers to offset the costs of 
fraudulent transactions or a data security breach do not constitute 
incentives or payments made by a payment card network.
    3. Consideration of fees paid by an issuer in net compensation 
determination.
    i. For purposes of the net compensation determination, fees paid 
by an issuer to a payment card network with respect to electronic 
debit transactions or debit card related activities include, but are 
not limited to, membership or licensing fees, network administration 
fees, and fees for optional network services, such as risk 
management services.
    ii. For purposes of the net compensation determination, fees 
paid by an issuer to a payment card network with respect to

[[Page 78131]]

electronic debit transactions or debit card-related activities do 
not include network processing fees (such as switch fees and network 
connectivity fees) or fees paid to an issuer processor affiliated 
with the network for authorizing, clearing, or settling an 
electronic debit transaction.
    4. Example of circumstances not involving net compensation to 
the issuer. The following example illustrates circumstances that 
would not indicate net compensation by the payment card network to 
the issuer:
    i. Because of an increase in debit card transactions that are 
processed through a payment card network during a calendar year, an 
issuer receives an additional volume-based incentive payment from 
the network for that period. Over the same period, however, the 
total network fees (other than processing fees) the issuer pays the 
payment card network with respect to debit card transactions also 
increase so that the total amount of fees paid by the issuer to the 
network continue to exceed incentive payments by the network to the 
issuer. Under these circumstances, the issuer does not receive net 
compensation from the network for electronic debit transactions or 
debit card related activities.

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, section 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, section 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.

[[Page 78132]]

    2. Examples of prohibited merchant restrictions. The following 
are examples of issuer or network practices that would inhibit a 
merchant's ability to direct the routing of an electronic debit 
transaction and that are therefore prohibited under Sec.  235.7(b):
    i. Prohibiting a merchant from encouraging or discouraging a 
cardholder's use of a particular method of cardholder 
authentication, for example prohibiting merchants from favoring a 
cardholder's use of one cardholder authentication method over 
another, or from discouraging the cardholder's use of any given 
cardholder authentication method, as further described in comment 
7(a)-1.
    ii. Establishing network rules or designating issuer priorities 
directing the processing of an electronic debit transaction on a 
specified payment card network or its affiliated networks, or 
directing the processing of the transaction away from a specified 
payment card network or its affiliates, except as (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).
    3. Merchant payments not prohibited. A payment card network does 
not restrict a merchant's ability to route transactions over 
available payment card networks in violation of Sec.  235.7(b) by 
offering payments or other incentives to encourage the merchant to 
route electronic debit card transactions to the network for 
processing.
    4. Real-time routing decision not required. A merchant need not 
make network routing decisions on a transaction-by-transaction 
basis. A merchant and its acquirer or processor may agree to a pre-
determined set of routing choices that apply to all electronic debit 
transactions that are processed by the acquirer or processor on 
behalf of the merchant.
    5. No effect on network rules governing the routing of 
subsequent transactions. Section 235.7 does not supersede a payment 
card network rule that requires a chargeback or return of an 
electronic debit transaction to be processed on the same network 
that processed the original transaction.

Section 235.8--Reporting Requirements and Record Retention

8(a)--Entities Required To Report

    1. Two surveys. The Board conducts a survey of covered issuers 
on a biennial basis using FR 3064a (OMB No. 7100-0344) and a survey 
of payment card networks on an annual basis using FR 3064b (OMB No. 
7100-0344). Each survey collects information concerning electronic 
debit transactions performed during the previous calendar year.
    2. Change in status. An issuer that is a covered issuer during 
the year in which the Board conducts a survey of covered issuers but 
was not a covered issuer during the previous calendar year is exempt 
from the reporting requirement in Sec.  235.8.

8(b)--[Reserved]

8(c)--[Reserved]

Section 235.9--Administrative Enforcement

[Reserved]

Appendix B to Part 235--Determination of Base Component, Ad Valorem 
Component, and Fraud-Prevention Adjustment

    (a) In general. For every two-year period beginning with the 
period from July 1, 2025, to June 30, 2027 (each an ``applicable 
period''), the Board will determine the base component and the ad 
valorem component as set forth in Sec.  235.3 and the fraud-
prevention adjustment as set forth in Sec.  235.4 using the approach 
described in this appendix B.
    (b) Basis for determination. The Board will determine the 
amounts described in paragraph (a) of this appendix for an 
applicable period using the data reported to the Board by covered 
issuers pursuant to Sec.  235.8 concerning transactions performed 
during the calendar year that is two years prior to the year in 
which the applicable period begins.
    (c) Base component--(1) Formula. The base component for an 
applicable period is the product of the transaction-weighted average 
of per-transaction allowable costs (excluding fraud losses) across 
covered issuers, based on the data described in paragraph (b) of 
this appendix, and 3.7, rounded to the nearest tenth of one cent.
    (2) Allowable costs (excluding fraud losses). For purposes of 
paragraph (c)(1) of this appendix, allowable costs (excluding fraud 
losses) are the sum of costs of authorization, clearance, and 
settlement, as reported on line 3a of section II of FR 3064a (OMB 
No. 7100-0344), and transactions monitoring costs tied to 
authorization, as reported on line 5a.1 of section II of FR 3064a 
(OMB No. 7100-0344).
    (3) Transaction-weighted average of per-transaction allowable 
costs (excluding fraud losses) across covered issuers. For purposes 
of paragraph (c)(1) of this appendix, the Board determines the 
transaction-weighted average of per-transaction allowable costs 
(excluding fraud losses) across covered issuers by:
    (i) Summing allowable costs (excluding fraud losses) across 
covered issuers that reported allowable costs (excluding fraud 
losses);
    (ii) Dividing this sum by the sum of the total number of 
electronic debit transactions, as reported on line 1a of section II 
of FR 3064a (OMB No. 7100-0344), across covered issuers that 
reported allowable costs (excluding fraud losses); and
    (iii) Rounding this result to the nearest tenth of one cent.
    (d) Ad valorem component--(1) Metric. The ad valorem component 
for an applicable period is, for a particular electronic debit 
transaction, the median ratio of issuer fraud losses to transaction 
value among covered issuers, based on the data described in 
paragraph (b) of this appendix, rounded to the nearest quarter of 
one basis point, multiplied by the value of the electronic debit 
transaction.
    (2) Ratio of issuer fraud losses to transaction value. For 
purposes of paragraph (d)(1) of this appendix, issuer fraud losses 
are the value of fraud losses incurred by the covered issuer, as 
reported on line 8b of section II of FR 3064a (OMB No. 7100-0344). 
The ratio of issuer fraud losses to transaction value is issuer 
fraud losses divided by the total value of electronic debit 
transactions reported on line 1a of section II of FR 3064a (OMB No. 
7100-0344).
    (3) Median ratio of issuer fraud losses to transaction value 
among covered issuers. For purposes of paragraph (d)(1) of this 
appendix, the Board determines the median ratio of issuer fraud 
losses to transaction value among covered issuers by:
    (i) For each covered issuer that reported issuer fraud losses, 
determining the ratio of issuer fraud losses to transaction value;
    (ii) Sorting these ratios in ascending order; and
    (iii) Selecting the ratio in the middle (if the number of ratios 
is odd) or calculating the simple average of the two ratios in the 
middle (if the number of ratios is even).
    (e) Fraud-prevention adjustment--(1) Metric. The fraud-
prevention adjustment for an applicable period is the median per-
transaction fraud-prevention costs among covered issuers, based on 
the data described in paragraph (b) of this appendix, rounded to the 
nearest tenth of one cent.
    (2) Per-transaction fraud-prevention costs. For purposes of 
paragraph (e)(1) of this appendix, fraud-prevention costs are total 
fraud-prevention and data-security costs, as reported on line 5a of 
section II of FR 3064a (OMB No. 7100-0344), minus transactions 
monitoring costs tied to authorization, as reported on line 5a.1 of 
section II of FR 3064a (OMB No. 7100-0344). Per-transaction fraud-
prevention costs are fraud-prevention costs divided by the total 
number of electronic debit transactions reported on line 1a of 
section II of FR 3064a (OMB No. 7100-0344).
    (3) Median per-transaction fraud-prevention costs among covered 
issuers. For purposes of paragraph (e)(1) of this appendix, the 
Board determines the median per-transaction fraud-prevention costs 
among covered issuers by:
    (i) For each covered issuer that reported fraud-prevention 
costs, determining per-transaction fraud-prevention costs;
    (ii) Sorting these values in ascending order; and
    (iii) Selecting the value in the middle (if the number of values 
is odd) or calculating the simple average of the two values in the 
middle (if the number of values is even).
    (f) Publication of applicable amounts. The Board will publish in 
the Federal Register the amounts described in paragraph (a) of this 
appendix for an applicable period no later than March 31 of the 
calendar year in which the applicable period begins.

    By order of the Board of Governors of the Federal Reserve 
System.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2023-24034 Filed 11-13-23; 8:45 am]
BILLING CODE 6210-01-P