Interchange: Fed Watered-Down Interchange Caps
- The US Federal Reserve finally set the cap at 21 cents per debit card transaction, rather than the 12 cents limit proposed in its January consultations. To this set element, 0.05% of the paid amount must also be added, as well as a one cent charge for fraud losses. This reform was planned by the Durbin Amendment of the July 2010 Dodd-Frank Act. It will come into effect on 1st October 2011 and will lead to a 50% cut in issuer revenue, rather than the originally expected 75% reduction.
- New rules are also added to impose competition in PIN-debit routing. Issuers must be equally accessible by two unaffiliated networks. They can no longer mingle in merchant choices regarding the accepted brands or the network they use.
- The issuer must implement a certain number of listed fraud prevention measures to be granted the dedicated one cent. According to the Federal Reserve, if he does and considering the average amount spent in the US (38 dollars) he receives 0.24 dollar interchange.
- This tripartite formula is more granular than most of the previous decisions made by the regulators worldwide. In general, they impose a new interchange rate or amount. At best, they plan a scaled decrease. The regulation drafted by the Fed is based on some 11,000 contributions it received and reminds one of the “CB” scheme’s CIP. Both these formulas take into account and discriminate fraud prevention, investment and functioning. However, here, there is no dynamic link between the fraud prevention component and its effective level, as is the case with the French TICO (now renamed TBTB).
- Eventually, even if the US regulator claims he is irritated by this drawback, merchants are still victorious.