When the Federal Reserve released its proposed rule (Regulation II) implementing Section 1075 of the Dodd-Frank Act (DFA) on Debit-Card Interchange Fees and Routing, it unleashed a firestorm of comments from the banking industry opposing the rule. Some have estimated that the new regulations would reduce banks’ income from fees by $13 billion. Last week, the House Financial Services Committee held a hearing on the issue.
What Regulation II does, broadly speaking, is that it seeks reduce the amount of fees that debit-card bank issuers can charge merchants with the intent that such reductions would result in lower retail prices for consumers. It does so in two ways: (1) by enacting a prohibition on network exclusivity arrangements and routing restrictions, and (2) establishing an interchange fee standard.
Seen more as a market-based approach, the prohibition on Network Exclusivity Arrangements and Routing Restrictions prohibit issuers and payment card networks from restricting the number of networks on which a debit card transaction may be processed to fewer than two unaffiliated networks. In Federal Reserve Governor Sarah Raskin’s recent testimony on the proposed rule, there are two possible interpretations of the prohibition: Read the rest of this entry »