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Action Alert: Federal Reserve Proposed Interchange Rule   (Misc News: January 10, 2011)

The MCUL and CUNA have recently created an action alert on the Federal Reserve Board’s proposed rule regarding the regulation of debit interchange fee income, as mandated by the Dodd-Frank Act. The new rule, as proposed by the Fed, raises many serious concerns: The proposal references an exemption for small issuers with assets under $10 billion from the interchange fee rate setting, but does not include provisions to enforce the exemption.

The Fed is proposing two possible alternatives with respect to interchange fee rate setting that would apply to credit unions with $10 billion or more in assets but could essentially apply to all credit unions issuing debit cards if the establishment and maintenance by the payment card networks of a two-tiered interchange fee structure cannot be assured:

(1) “Alternative 1,” under which an issuer could only recover the greater of 7 cents per transaction (the “safe harbor”) or its actual costs of the electronic authorization and settlement of the transaction up to a maximum 12 cents per transaction; or
(2) “Alternative 2,” which would allow interchange fees that vary with the value of the transaction up to a 12 cents per transaction cap.

While the Fed has made some efforts to address a few credit union issues, the new proposal raises many serious concerns. As a result of the lack of enforcement for the exemption, small issuers may be subject to the fees that will be required for large issuers under the proposal. Also, credit unions with $10 billion or more in assets will be subject to the rate setting aspects of the proposal (there are three credit unions in this category).

The proposal also does not exempt small institutions from other aspects of the rule regarding network exclusivity and routing. No debit card issuers, including credit unions, are exempt for the parts of the proposal that prohibit exclusive networks and allow merchants to choose how a transaction is processed. With respect to network exclusivity, the Fed proposes to adopt either: (A) “Alternative A,” which would require a credit union to issue debit cards that could be processed by two unaffiliated networks, such as one PIN network and one unaffiliated network using signature authorization (or two unaffiliated PIN networks, or two unaffiliated signature networks); or (B) “Alternative B,” which would require a credit union to issue debit cards that could be processed on at least two unaffiliated PIN networks and also on at least two unaffiliated signature networks. Of these alternatives, Alternative A would be preferable.

Please contact the Federal Reserve with your concerns as soon as possible. A suggested letter is available for your use at the Credit Union Grassroots Action Center,  We urge you to personalize the suggested talking points with facts about your own credit union’s debit card program and costs, and send it to the Fed via email or print and fax a letter. Further talking points on this issue are also attached for your review.  As always, the MCUL will issue a formal comment call on this issue at a later date; this action alert is just the first step in our grassroots advocacy on this issue. 

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