Are you familiar with recent government regulation changes with respect to payment processing? In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. A major element of that is known as the Durbin Amendment. In essence, the government is intervening and creating price controls with regard to payment card transactions.

July 2010- law signed

October 2010- Changes to minimum transaction amount rules in effect. Discount option available to merchants.

July 2011- Dept of Justice settles with Visa and MasterCard over card steering and discounts, specifically addressing compliance with this Act.

October 2011- new debit card interchange standards go into effect. See also Comments for merchants on debit interchange final rule
Final text of Durbin Amendment as contained in the Dodd Frank Act

‘‘SEC. 920. REASONABLE FEES AND RULES FOR PAYMENT CARD TRANSACTIONS.

‘‘(a) REASONABLE INTERCHANGE TRANSACTION FEES FOR ELECTRONIC DEBIT TRANSACTIONS.—

“(1) REGULATORY AUTHORITY OVER INTERCHANGE TRANSACTION FEES.—The Board may prescribe regulations, pursuant to section 553 of title 5, United States Code, regarding any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction, to implement this subsection (including related definitions), and to prevent circumvention or evasion of this subsection.

‘‘(2) REASONABLE INTERCHANGE TRANSACTION FEES.—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 transaction.

‘‘(3) RULEMAKING REQUIRED.—

‘‘(A) IN GENERAL.—The Board shall prescribe regulations in final form not later than 9 months after the date of enactment of the Consumer Financial Protection Act of 2010, to establish standards for assessing whether the amount of any interchange transaction fee described in paragraph (2) is reasonable and proportional to the cost incurred by the issuer with respect to the transaction.

‘‘(B) INFORMATION COLLECTION.—The Board may require any issuer (or agent of an issuer) or payment card network to provide the Board with such information as may be necessary to carry out the provisions of this subsection and the Board, in issuing rules under subparagraph (A) and on at least a bi-annual basis thereafter, shall disclose such aggregate or summary information concerning the costs incurred, and interchange transaction fees charged or received, by issuers or payment card networks in connection with the authorization, clearance or settlement of electronic debit transactions as the Board considers appropriate and in the public interest.

‘‘(4) CONSIDERATIONS; CONSULTATION.—In prescribing regulations under paragraph (3)(A), the Board shall—

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“(A) consider the functional similarity between—

‘‘(i) electronic debit transactions; and ‘‘(ii) checking transactions that are required within the Federal Reserve bank system to clear at par;

‘‘(B) 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 electronic debit transaction, which cost shall be considered under paragraph (2); and

‘‘(ii) other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered under paragraph (2); and

‘‘(C) consult, as appropriate, with the Comptroller of the Currency, the Board of Directors of the Federal Deposit Insurance Corporation, the Director of the Office of Thrift Supervision, the National Credit Union Administration Board, the Administrator of the Small Business Administration, and the Director of the Bureau of Consumer Financial Protection.

‘‘(5) ADJUSTMENTS TO INTERCHANGE TRANSACTION FEES FOR FRAUD PREVENTION COSTS.—

‘‘(A) ADJUSTMENTS.—The Board may allow for an adjustment to the fee amount received or charged by an issuer under paragraph 25 (2), if—

‘‘(i) such adjustment is reasonably necessary to make allowance for costs incurred by the issuer in preventing fraud in relation to electronic debit transactions involving that issuer; and

‘‘(ii) the issuer complies with the fraud-related standards established by the Board under subparagraph (B), which standards shall—

‘‘(I) be designed to ensure that any fraud-related adjustment of the issuer is limited to the amount described in clause (i) and takes into account any fraud-related reimbursements (including amounts from charge-backs) received from consumers, merchants, or payment card networks in relation to electronic debit transactions involving the issuer; and

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‘‘(II) require issuers to take effective steps to reduce the occurrence of, and costs from, fraud in relation to electronic debit transactions, including through the development and implementation of cost-effective fraud prevention technology.

‘‘(B) RULEMAKING REQUIRED.—

‘‘(i) IN GENERAL.—The Board shall prescribe regulations in final form not later than 9 months after the date of enactment of the Consumer Financial Protection Act of 2010, to establish standards for making adjustments under this paragraph.

‘‘(ii) FACTORS FOR CONSIDERATION.—In issuing the standards and prescribing regulations under this paragraph, the Board shall consider—

‘‘(I) the nature, type, and occurrence of fraud in electronic debit transactions;

‘‘(II) the extent to which the occurrence of fraud depends on whether authorization in an electronic debit transaction is based on signature, PIN, or other means;

‘‘(III) the available and economical means by which fraud on electronic debit transactions may be reduced;

‘‘(IV) the fraud prevention and data security costs expended by each party involved in electronic debit 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 transaction fees have in the past reduced or increased incentives for parties involved in electronic debit transactions to reduce fraud on such transactions; and

‘‘(VII) such other factors as the Board considers appropriate. ‘‘(6) EXEMPTION FOR SMALL ISSUERS.—

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‘‘(A) IN GENERAL.—This subsection shall not apply to any issuer that, together with its affiliates, has assets of less than $10,000,000,000, and the Board shall exempt such issuers from regulations prescribed under paragraph (3)(A).

‘‘(B) DEFINITION.—For purposes of this paragraph, the term ‘‘issuer’’ shall be limited to the person holding the asset account that is debited through an electronic debit transaction.

‘‘(7) EXEMPTION FOR GOVERNMENT-ADMINISTERED PAYMENT PROGRAMS AND RELOADABLE PREPAID CARDS.—

‘‘(A) IN GENERAL.—This subsection shall not apply to an interchange transaction fee charged or received with respect to an electronic debit transaction in which a person uses—

‘‘(i) 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; or

‘‘(ii) a plastic card, payment code, or device that is—

‘‘(I) linked to funds, monetary value, or assets which are 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 card holder (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, naffiliated merchants or service providers, or automated teller machines;

‘‘(IV) used to transfer or debit unds, monetary value, or other assets; and

‘‘(V) reloadable and not marketed or labeled as a gift card or gift certificate.

‘‘(B) EXCEPTION.—Notwithstanding subparagraph (A), after the end of the 1-year period beginning on the effective date provided in paragraph (9) his subsection shall apply to an interchange transaction fee charged or received with respect to an electronic debit transaction described in

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subparagraph (A)(i) in which a person uses a general-use prepaid card, or an electronic debit transaction described in subparagraph (A)(ii), if any of the following fees may be charged to a person with respect to the card:

‘‘(i) A fee for an overdraft, including a shortage of funds or a transaction processed for an amount exceeding the account balance.

‘‘(ii) A fee imposed by the issuer for the first withdrawal per month from an automated teller machine that is part of the issuer’s designated automated teller machine network.

‘‘(C) DEFINITION.—For purposes of subparagraph (B), the term ‘designated automated teller machine network’ means either—

‘‘(i) all automated teller machines identified in the name of the issuer; or

‘‘(ii) any network of automated teller machines identified by the issuer that provides reasonable and convenient access to the issuer’s customers.

‘‘(D) REPORTING.—Beginning 12 months after the date of enactment of the Consumer Financial Protection Act of 2010, the Board shall annually provide a report to the Congress regarding —

‘‘(i) the prevalence of the use of general-use prepaid cards in Federal, State or local government-administered payment programs; and

‘‘(ii) the interchange transaction fees and cardholder fees charged with respect to the use of such general-use prepaid cards.

‘‘(8) REGULATORY AUTHORITY OVER NETWORK FEES.—

‘‘(A) IN GENERAL.—The Board may prescribe regulations, pursuant to section 553 of 22 title 5, United States Code, regarding any network fee.

‘‘(B) LIMITATION.—The authority under subparagraph (A) to prescribe regulations shall be limited to regulations to ensure that—

‘‘(i) a network fee is not used to directly or indirectly compensate an issuer with respect to an electronic debit transaction; and

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‘‘(ii) a network fee is not used to circumvent or evade the restrictions of this subsection and regulations prescribed under such subsection.

‘‘(C) RULEMAKING REQUIRED.—The Board shall prescribe regulations in final form before the end of the 9-month period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010, to carry out the authorities provided under subparagraph (A).

‘‘(9) EFFECTIVE DATE.—This subsection shall take effect at the end of the 12- month period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010.

‘‘(b) LIMITATION ON PAYMENT CARD NETWORK RESTRICTIONS.— ‘‘(1) PROHIBITIONS AGAINST EXCLUSIVITY ARRANGEMENTS.—

‘‘(A) NO EXCLUSIVE NETWORK.—The Board shall, before the end of the 1-year period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010, prescribe regulations providing that 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—

‘‘(i) 1 such network; or

‘‘(ii) 2 or more such networks which are owned, controlled, or otherwise operated by —

‘‘(I) affiliated persons; or

‘‘(II) networks affiliated with such issuer.

‘‘(B) NO ROUTING RESTRICTIONS.—The Board shall, before the end of the 1-year period beginning on the date of the enactment of the Consumer Financial Protection Act of 2010, prescribe regulations providing that an issuer or payment card network shall not, directly or through any agent, processor, or licensed mem ber of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person who accepts debit cards for payments to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions.

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‘‘(2) LIMITATION ON RESTRICTIONS ON OFFERING DISCOUNTS FOR USE OF A FORM OF PAYMENT.—

‘‘(A) IN GENERAL.—A 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 to provide a discount or in-kind incentive for payment by the use of cash, checks, debit cards, or credit cards to the extent that—

‘‘(i) in the case of a discount or in kind incentive for payment by the use of debit cards, the discount or in-kind incenttive does not differentiate on the basis of the issuer or the payment card network;

‘‘(ii) in the case of a discount or in-kind incentive for payment by the use of credit cards, the discount or in-kind incentive does not differentiate on the basis of the issuer or the payment card network; and

‘‘(iii) to the extent required by Federal law and applicable State law, such discount or in-kind incentive is offered to all prospective buyers and disclosed clearly and conspicuously.

‘‘(B) LAWFUL DISCOUNTS.—For purposes of this paragraph, the network may not penalize any person for the providing of a discount that is in compliance with Federal law and applicable State law.

‘‘(3) LIMITATION ON RESTRICTIONS ON SETTING TRANSACTION MINIMUMS OR MAXIMUMS.—

‘‘(A) IN GENERAL.—A 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—

‘‘(i) of any person to set a minimum dollar value for the acceptance by that person of credit cards, to the extent that —

‘‘(I) such minimum dollar value does not differentiate between issuers or between payment card networks; and

‘‘(II) such minimum dollar value does not exceed $10.00; or

‘‘(ii) of any Federal agency or institution of higher education to set a maximum dollar value for the acceptance by that Federal agency or institution of higher education of credit cards, to the extent that such maximum dollar value does not differentiate between issuers or between payment card networks.

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‘‘(B) INCREASE IN MINIMUM DOLLAR AMOUNT.—The Board may, by regulation prescribed pursuant to section 553 of title 5, United States Code, increase the amount of the dollar value listed in subparagraph (A)(i)(II).

‘‘(4) RULE OF CONSTRUCTION:.—No provision of this subsection shall be construed to authorizeany person—

‘‘(A) to discriminate between debit cards within a payment card network on the basis of the issuer that issued the debit card; or

‘‘(B) to discriminate between credit cards within a payment card network on the basis of the issuer that issued the credit card.

‘‘(c) DEFINITIONS.—For purposes of this section, the following definitions shall apply:

‘‘(1) AFFILIATE.—The term ‘affiliate’ means any company that controls, is controlled by, or is under common control with another company.

‘‘(2) DEBIT CARD.—The term ‘debit card’— ‘‘(A) means any 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), whether authorization is based on signature, PIN, or other means;

‘‘(B) includes a general-use prepaid card, as that term is defined in section 915(a)(2)(A); and

‘‘(C) does not include paper checks.

‘‘(3) CREDIT CARD.—The term ‘credit card’ has the same meaning as in section 103 of the Truth in Lending Act.

‘‘(4) DISCOUNT.—The term ‘discount’—

‘‘(A) means a reduction made from the price that customers are informed is the regular price; and

‘‘(B) does not include any means of increasing the price that customers are informed is the regular price.

‘‘(5) ELECTRONIC DEBIT TRANSACTION.—The term ‘electronic debit transaction’ means a transaction in which a person uses a debit card.

‘‘(6) FEDERAL AGENCY.—The term ‘Federal agency’ means—

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‘‘(A) an agency (as defined in section 101of title 31, United States Code); and

‘‘(B) a Government corporation (as defined in section 103 of title 5, United States Code).

‘‘(7) INSTITUTION OF HIGHER EDUCATION.— The term ‘institution of higher education’ has the same meaning as in 101 and 102 of the Higher Education Act of 1965 (20 U.S.C. 1001, 1002).

‘‘(8) INTERCHANGE TRANSACTION FEE.—The term ‘interchange transaction fee’ means 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.

‘‘(9) ISSUER.—The term ‘issuer’ means any person who issues a debit card, or credit card, or the agent of such person with respect to such card.

‘‘(10) NETWORK FEE.—The term ‘network fee’ means any fee charged and received by a payment card network with respect to an electronic debit transaction, other than an interchange transaction fee.

‘‘(11) PAYMENT CARD NETWORK.—The term‘payment card network’ means an entity that directly, or through licensed members, processors, or agents, provides the proprietary services, infrastructure, and software that route information and data to conduct debit card or credit card transaction authorization, clearance, and settlement, and that a person uses in order to accept as a form of payment a brand of debit card, credit card or other device that may be used to carry out debit or credit transactions.

‘‘(d) ENFORCEMENT.—

‘‘(1) IN GENERAL.—Compliance with the requirements imposed under this section shall be enforced under section 918.

‘‘(2) EXCEPTION.—Sections 916 and 917 shall not apply with respect to this section or the requirements imposed pursuant to this section.’’.

(b) AMENDMENT TO THE FOOD AND NUTRITION ACT 8 OF 2008.—Section 7(h)(10) of the Food and Nutrition Act of 2008 (7 U.S.C. 2016(h)(10)) is amended to read as follows: ‘‘(10) FEDERAL LAW NOT APPLICABLE.—Section 920 of the Electronic Fund Transfer Act shall not apply to electronic benefit transfer or reimbursement systems under this Act.’’.

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(c) AMENDMENT TO THE FARM SECURITY AND RURAL INVESTMENT ACT OF 2002.—Section 4402 of the Farm Security and Rural Investment Act of 2002 (7 U.S.C. 3007) is amended by adding at the end the following new subsection:

‘‘(f) FEDERAL LAW NOT APPLICABLE.—Section 920 of the Electronic Fund Transfer Act shall not apply to electronic benefit transfer systems established under this section.’’. (d) AMENDMENT TO THE CHILD NUTRITION ACT OF 1966.— Section 11 of the Child Nutrition Act of 1966 (42 U.S.C. 1780) is amended by adding at the end the following:

‘‘(c) FEDERAL LAW NOT APPLICABLE.—Section 920 of the Electronic Fund Transfer Act shall not apply to electronic benefit transfer systems established under this Act or the Richard B. Russell National School Lunch Act (42 U.S.C. 1751 et seq.).’’.

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July 20, 2011, The United States of America, and other states, announced a final settlement in US vs MasterCard International Inc., and Visa Inc. The antitrust lawsuit said that MasterCard and Visa have rules in place that prevent merchants from offering consumers discounts, rewards and information about card costs, ultimately resulting in consumers paying more for their purchases.

In summary of the settlement, the purpose is to allow merchants to influence consumer payment choices by disclosing information about their costs for using different cards. Merchants can:
- Offer a rebate or discount at the point of sale for using a particular brand or card type, or form of payment.
- Offer a free product at the point of sale for using a particular brand or card type, or form of payment.
- Offer a free, enhanced, or discounted service or at the point of sale for using a particular brand or card type, or form of payment.
- Offer incentives or other benefits.
- Express a preference for different card or payment types.
- Communicate how much it costs them to accept different payment types.

Interestingly, nothing shall prevent a merchant from disparaging either brand.

US Visa International Operating Rules and MasterCard Rules must be updated within 5 days to reflect the new language included in the settlement.

JUSTICE DEPARTMENT SUES AMERICAN EXPRESS, MASTERCARD AND VISA TO ELIMINATE RULES RESTRICTING PRICE COMPETITION; REACHES SETTLEMENT WITH VISA AND MASTERCARD

Department to Litigate Against American Express to Promote Competition Among Credit
Card Networks Enabling Merchants to Benefit Consumers

MONDAY, OCTOBER 4, 2010 WWW.JUSTICE.GOV

WASHINGTON — The Department of Justice announced today that it filed a civil antitrust lawsuit in U.S. District Court for the Eastern District of New York challenging rules that American Express, MasterCard and Visa have in place that prevent merchants from offering consumers discounts, rewards and information about card costs, ultimately resulting in consumers paying more for their purchases. The department also said that the rules increase merchants’ costs of doing business. Joining the department in its lawsuit are the states of Connecticut, Iowa, Maryland, Michigan, Missouri, Ohio and Texas.

At the same time, the department announced that it has filed a proposed settlement with Visa and MasterCard, that, if approved by the court, would require the two companies to allow merchants to offer discounts, incentives, and information to consumers to encourage the use of payment methods that are less costly.

According to the complaint, American Express, MasterCard and Visa maintain rules that prohibit merchants from encouraging consumers to use lower-cost payment methods when making purchases. For example, the rules prohibit merchants from offering discounts or other incentives to consumers in order to encourage them to pay with credit cards that cost the merchant less to accept.

“With today’s lawsuit we are sending a clear message: We will not tolerate anticompetitive practices,” said Attorney General Eric Holder. “We want to put more money in consumers’ pockets, and by eliminating credit card companies’ anticompetitive rules, we will accomplish that.”

“These restrictive rules restrain competition among credit card networks for merchant acceptance and distort the competitive process,” said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. “The proposed settlement with MasterCard and Visa is an important step in bringing more credit card competition to the point of sale. The department’s lawsuit against American Express will continue that effort and, if successful, allow merchants more freedom to benefit their customers.”

Credit card acceptance costs U.S. merchants approximately $35 billion each year. Those costs are collected from merchants in the form of a “swipe fee” they pay every time a credit card is used. American Express has the highest merchant fees of any credit card network. Merchants pass on these billions of dollars in fees to all their consumers in the form of higher retail prices. By preventing merchants from rewarding consumers when they use less expensive credit cards to make a purchase, American Express, MasterCard and Visa have inhibited merchants’ ability to reduce card acceptance costs, and therefore their retail prices to consumers.

The proposed settlement requires MasterCard and Visa to allow their merchants to:

Offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment;
Express a preference for the use of a particular credit card network, low-cost card within that network or other form of payment;
Promote a particular credit card network, low-cost card within that network or other form of payment through posted information or other communications to consumers; and
Communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment.
The proposed settlement allows any merchant that only accepts Visa and MasterCard to take advantage of the relief immediately.

The ongoing litigation against American Express seeks to allow merchants that accept American Express to engage in the same kind of discounting and encouragement that the proposed settlement with MasterCard and Visa allows. Until American Express’s restraints on merchants are lifted, the many merchants that accept American Express, as well as Visa and MasterCard, will not be able to take full advantage of their new options under the proposed settlement, the department said.

American Express Company, the parent of American Express Travel Related Services Company Inc., is a New York corporation, with its principal place of business in New York City. Cardholders used American Express credit and charge cards for $419.8 billion in purchases in 2009. MasterCard is a Delaware corporation with its principal place of business in Purchase, New York. Cardholders used MasterCard credit and charge cards for $476.9 billion in purchases in 2009. Visa is a Delaware corporation with its principal place of business in San Francisco. Cardholders used Visa credit and charge cards for $764.2 billion in purchases in 2009.

The proposed settlement, along with the department’s competitive impact statement, will be published in The Federal Register, as required by the Antitrust Procedures and Penalties Act. Any person may submit written comments concerning the proposed settlement within 60 days of its publication to John R. Read, Chief, Litigation III Section, Antitrust Division, U.S. Department of Justice, 450 Fifth Street N.W., Suite 4000, Washington D.C. 20530. At the conclusion of the 60-day comment period, the court may enter the final judgment as to MasterCard and Visa only upon a finding that it serves the public interest.

The court will determine a pretrial schedule for the case against American Express once American Express files its response to the government’s lawsuit.

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The Federal Reserve Board on Wednesday issued a final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. This rule, Regulation II (Debit Card Interchange Fees and Routing), is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Debit card interchange fees are established by payment card networks and ultimately paid by merchants to debit card issuers for each electronic debit transaction. As required by the statute, the final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers are reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. This provision regarding debit card interchange fees is effective on October 1, 2011.

The Board also approved on Wednesday an interim final rule that allows for an upward adjustment of no more than 1 cent to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve the fraud-prevention standards set out in the interim final rule. If an issuer meets these standards and wishes to receive the adjustment, it must certify its eligibility to receive the adjustment to the payment card networks in which it participates. Comments on the interim final rule are due by September 30, 2011. The fraud-prevention adjustment is effective on October 1, 2011, concurrent with the debit card interchange fee limits. The Board will re-evaluate this adjustment in light of feedback received during this comment period.

When combined with the maximum permissible interchange fee under the interchange fee standards, a covered issuer eligible for the fraud-prevention adjustment could receive an interchange fee of up to approximately 24 cents for the average debit card transaction, which is valued at $38.

In accordance with the statute, issuers that, together with their affiliates, have assets of less than $10 billion are exempt from the debit card interchange fee standards. To assist payment card networks in determining which of the issuers are subject to the debit card interchange fee standards, the Board plans to publish by mid-July and annually thereafter lists of institutions that are above and below the small issuer exemption asset threshold. Also, the Board plans to annually survey the networks and publish a list of the average interchange transaction fees each network provides to its covered and exempt issuers. This information should enable issuers, including small issuers, to more readily compare the interchange revenue they would receive from each network.

The final rule prohibits all issuers and networks from restricting the number of networks over which electronic debit transactions may be processed to less than two unaffiliated networks. The effective date for the network exclusivity prohibition is April 1, 2012, with respect to issuers, and October 1, 2011, with respect to payment card networks. Issuers of certain health-related and other benefit cards and general-use prepaid cards have a delayed effective date of April 1, 2013, or later in certain circumstances.

Issuers and networks are also prohibited from inhibiting a merchant’s ability to direct the routing of the electronic debit transaction over any network that the issuer has enabled to process them. The merchant routing provisions are effective on October 1, 2011.

The Board’s notices for the final rule and the interim final rule that will be published in the Federal Register are attached.

Chairman Ben S. Bernanke testimony on Dodd-Frank Implementation: Monitoring Systemic Risk and Promoting Financial Stability.

Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

May 12, 2011 Chairman Johnson, Ranking Member Shelby, and other members of the Committee, thank you for the opportunity to testify on the Federal Reserve Board’s role in monitoring systemic risk and promoting financial stability, both as a member of the Financial Stability Oversight Council (FSOC) and under our own authority.
Financial Stability Oversight Council
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) created the FSOC to identify and mitigate threats to the financial stability of the United States. During its existence thus far, the FSOC has promoted interagency collaboration and established the organizational structure and processes necessary to execute its duties.¹ The FSOC and its member agencies also have completed studies on limits on proprietary trading and investments in hedge funds and private equity funds by banking firms (the Volcker rule), on financial sector concentration limits, on the economic effects of risk retention, and on the economic consequences of systemic risk regulation. The FSOC is currently seeking public comments on proposed rules that would establish a framework for identifying nonbank financial firms and financial market utilities that could pose a threat to financial stability and that therefore should be designated for more stringent oversight. Importantly, the FSOC has begun systematically monitoring risks to financial stability and is preparing its inaugural annual report.

Additional Financial Stability-Related Reforms at the Federal Reserve
In addition to its role on the FSOC, the Federal Reserve has other significant financial stability responsibilities under the Dodd-Frank Act, including supervisory jurisdiction over thrift holding companies and nonbank financial firms that are designated as systemically important by the council. The act also requires the Federal Reserve (and other financial regulatory agencies) to take a macroprudential approach to supervision and regulation; that is, in supervising financial institutions and critical infrastructures, we are expected to consider the risks to overall financial stability in addition to the safety and soundness of individual firms.

A major thrust of the Dodd-Frank Act is addressing the too-big-to-fail problem and mitigating the threat to financial stability posed by systemically important financial firms. As required by the act, the Federal Reserve is developing more-stringent prudential standards for large banking organizations and nonbank financial firms designated by the FSOC. These standards will include enhanced risk-based capital and leverage requirements, liquidity requirements, and single-counterparty credit limits. The standards will also require systemically important financial firms to adopt so-called living wills that will spell out how they can be resolved in an orderly manner during times of financial distress. The act also directs the Federal Reserve to conduct annual stress tests of large banking firms and designated nonbank financial firms and to publish a summary of the results. To meet the January 2012 implementation deadline for these enhanced standards, we anticipate putting out a package of proposed rules for comment this summer. Our goal is to produce a well-integrated set of rules that meaningfully reduces the probability of failure of our largest, most complex financial firms, and that minimizes the losses to the financial system and the economy if such a firm should fail.

The Federal Reserve is working with other U.S. regulatory agencies to implement Dodd-Frank reforms in additional areas, including the development of risk retention requirements for securitization sponsors, margin requirements for noncleared over-the-counter derivatives, incentive compensation rules, and risk-management standards for central counterparties and other financial market utilities.

The Federal Reserve has made significant organizational changes to better carry out its responsibilities. Even before the enactment of the Dodd-Frank Act, we were strengthening our supervision of the largest, most complex financial firms. We created a centralized multidisciplinary body called the Large Institution Supervision Coordinating Committee to oversee the supervision of these firms. This committee uses horizontal, or cross-firm, evaluations to monitor interconnectedness and common practices among firms that could lead to greater systemic risk. It also uses additional and improved quantitative methods for evaluating the performance of firms and the risks they might pose. And it more efficiently employs the broad range of skills of the Federal Reserve staff to supplement supervision. We have established a similar body to help us effectively carry out our responsibilities regarding the oversight of systemically important financial market utilities.

More recently, we have also created an Office of Financial Stability Policy and Research at the Federal Reserve Board. This office coordinates our efforts to identify and analyze potential risks to the broader financial system and the economy. It also helps evaluate policies to promote financial stability and serves as the Board’s liaison to the FSOC.

International Regulatory Coordination
As a complement to those efforts under Dodd-Frank, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for internationally active banking firms. These efforts resulted in the agreements reached in the fall of 2010 on the major elements of the new Basel III prudential framework for globally active banks. The requirements under Basel III that such banks hold more and better-quality capital and more-robust liquidity buffers should make the financial system more stable and reduce the likelihood of future financial crises. We are working with the other U.S. banking agencies to incorporate the Basel III agreements into U.S. regulations.

More remains to be done at the international level to strengthen the global financial system. Key tasks ahead for the Basel Committee and the Financial Stability Board include determining how to further increase the loss-absorbing capacity of systemically important banking firms and strengthening resolution regimes to minimize adverse systemic effects from the failure of large, complex banks. As we work with our international counterparts, we are striving to keep international regulatory standards as consistent as possible, to ensure that multinational firms are adequately supervised, and to maintain a level international playing field.

Thank you. I would be pleased to take your questions.

 

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1. The FSOC’s internal structure consists of a Deputies Committee–composed of personnel from all of the voting and nonvoting members–and six other standing committees, each with its own specific duties. The Deputies Committee, under the direction of the FSOC members, coordinates the work of the six committees and aims to ensure that the FSOC fulfills its mission in an effective and timely manner.

On May 10th, Iowa Gov. Culver (D) signed a bill (S.F. 2308) that requires businesses and government agencies to notify state residents if the unauthorized access of their computerized personal information is likely to do financial harm.

The new Iowa data breach notification law takes effect July 1, 2011.

Iowa is the 43rd state with some sort of data breach law on the books.

Unlike most state data breach laws, S.F. 2308 does not exempt personal information that is encrypted or redacted from the types of computerized data requiring notice. The new Iowa law, however, contains a risk of harm trigger.

Under S.F. 2308, breach notice “is not required if, after an appropriate investigation or after consultation with the relevant federal, state, or local agencies responsible for law enforcement, the person determined that no reasonable likelihood of financial harm to the consumers whose personal information has been acquired has resulted or will result from the breach.”

The proposed law would allow the state attorney general to seek actual damages on behalf of individuals affected by a data breach incident requiring notification.

A provision in the Iowa bill as introduced which would have made retailers liable to banks for their costs associated with breaches of credit and debit card transaction data was removed from the measure in committee before its formal introduction in the Senate.

Due to the large response for public comment on debit interchange provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act  Federal Reserve proposes debit card interchange fee standards, Bernanke announces a delay in issuing standards, due April 21. He also states they are committed to completing rulemaking for the July 21 mandated implementation date.

March 29, 2011 Bernanke letter to Senate Banking Committee (pdf).

The Credit Union National Association responded with their own press release:

Credit unions have urged Fed Chairman Ben Bernanke to support a congressionally mandated delay in the implementation of the debit interchange law, due to take effect July 21, to allow for “much-needed time” to consider many concerns raised about the new law, and to give the Fed time to “develop rules that will ensure the outcome Congress intended for consumers and issuers, as well as for merchants.”

In a letter, CUNA President and CEO Bill Cheney notedl the Federal Reserve Board chairman’s “candid assessment” by the Fed that the agency would not meet the statutory April 21 deadline for the issuance of debit interchange fee standards.

However, Cheney also pointed out that, as a result, the final rule will now be issued much closer to the implementation date of July 21 – and that’s problematic for credit unions and others. “We are very concerned there will be insufficient time for institutions, networks, and the marketplace to prepare for compliance with the final rule,” Cheney said.

The complete text of CUNA’s letter to the Fed’s Bernanke follows:

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March 30, 2011

The Honorable Ben S. Bernanke
Chairman
Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, DC

Dear Chairman Bernanke:

On behalf of the Credit Union National Association, I wanted to communicate with you following your recent statements and letters to Congress yesterday regarding the regulation of debit card interchange fees.   CUNA represents about 90% of the nation’s 7,600 state and federal credit unions which serve approximately 93 million members.

We applaud your willingness to try to help small issuers, as you indicated last week at a meeting of the Independent Community Bankers Association.  Also, we appreciate your candid assessment to Congress that it is not possible to meet the statutory April 21 deadline for the issuance of debit interchange fee standards.

However, because the Board’s final rule will now be promulgated closer to the July 21 effective date for the interchange standards and the issuance date for the routing and exclusivity provisions, we are very concerned there will be insufficient time for institutions, networks, and the marketplace to prepare for compliance with the final rule.

In light of all the concerns about the regulation of debit interchange fees, we firmly believe that a congressionally-mandated delay is not only reasonable but also necessary in order to ensure small issuers will not be harmed and consumers that rely on them will not be disadvantaged.

We urge the Board to work with Congress to support legislation that would delay implementation, allowing much needed time to consider these issues and develop rules that will ensure the outcome Congress intended for consumers and issuers, as well as for merchants.

Thank you for your attention to this very serious matter.

Best regards,
Bill Cheney
President and CEO
Credit Union Natl. Assn. (CUNA)
Washington, DC

cc: Secretary of the Treasury Timothy Geithner
Senate Banking Committee Chairman Tim Johnson
Senate Banking Committee Ranking Member Richard Shelby
House Financial Services Chairman Spencer Bachus
House Financial Services Committee Ranking Member Barney Frank
Special Advisor to the President Elizabeth Warren

 

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Comments:

“Credit unions have urged Fed Chairman Ben Bernanke to support a congressionally mandated delay in the implementation of the debit interchange law”. There is a HUGE lobbying effort to  delay the law from being implemented, and 17 senators have signed a bill to  delay the new rule by two years and require a one-year study. Since there were years of study prior to the law being signed by President Obama, and the committee has had many months to prepare the standards, you have to wonder how our leaders could have gotten it so grievously wrong that nothing can be done for years.

The biggest problem most banks have is the governement setting a maximum fee they believe is too low.  I think that is a critical area that needs to be focused on. In Florida, FPL, our local utility is allowed to make 9-11% profit. The banks are not being given the same consideration.

At a minimum, implementation may need to be delayed to enable the marketplace adequate time to meet compliance. My thoughts? The lobbyists have so much traction, there will be no debit fee relief for merchants in 2010. This will result in even higher profits for banks in 2011. Why? Because the debit network fees have been gradually increased in anticipation of future cuts.

Merchants who want to reduce costs by increasing debit, which is still cheaper than credit, can do so with CenPOS. CenPOS technology gives merchants the ability to offer discount incentives on customer purchases for using debit cards. Discounts are  automatically calculated and put on the customer receipt.

CenPOS sales: 954-942-0483

CenPOS videos: youtube.com/3dmerchant

CenPOS information request:

At the Independent Community Bankers of America National Convention, San Diego, California

March 23, 2011

Community Banking in a Period of Recovery and Change

It’s a pleasure to have the opportunity to speak once again before the Independent Community Bankers of America (ICBA). This is the sixth consecutive year that I’ve met with you at this event, and the themes of my remarks over the years tell a story not only about the financial and economic upheaval that we have all experienced, but also about some of the very difficult issues that continue to confront both bankers and policymakers today. Back in 2006, less than two months after I started as Chairman, I spoke to you about the strong performance of community banks as well as about some important longer-term challenges. In subsequent years, my remarks touched on the need to strengthen regulation and supervision of Fannie Mae and Freddie Mac, approaches to reducing preventable mortgage foreclosures, community banking and the financial crisis, and then last year, the need to address the problem of financial institutions that are “too big to fail.” My themes today are the vital role that community banks need to play in the economic recovery, the value that the Federal Reserve places on insights from community banks, and the evolving regulatory environment.

Community Banks and the Economic Recovery
To me, the title of the 2009 ICBA annual report, Empowering Main Street, is a concise and accurate description of the critical role that community banks play in the U.S. economy. Community bankers live and work where they do business, and their institutions have deep roots, sometimes established over several generations. They know their customers and the local economy. Relationship banking is therefore at the core of community banking. The largest banks typically rely heavily on statistical models to assess borrowers’ capital, collateral, and capacity to repay, and those approaches can add value, but banks whose headquarters and key decisionmakers are hundreds or thousands of miles away inevitably lack the in-depth local knowledge that community banks use to assess character and conditions when making credit decisions. This advantage for community banks is fundamental to their effectiveness and cannot be matched by models or algorithms, no matter how sophisticated. The IBM computer program Watson may play a mean game of Jeopardy, but I would not trust it to judge the creditworthiness of a fledgling local business or to build longstanding personal relationships with customers and borrowers.

Given the important role that community banks play in their local economies, we at the Federal Reserve are keenly interested in their health and their collective future. Local communities, ranging from small towns to urban neighborhoods, are the foundation of the U.S. economy and communities need community banks to help them grow and prosper. As I’m sure you are all too aware, the financial crisis and its aftermath have hit some community banks especially hard, and those institutions will continue to need time to repair their balance sheets. Although we are not yet where we would like to be, the good news is that many community banks are recovering and reporting stronger performance.

Indeed, despite some of the worst economic conditions since the Great Depression and their own strained balance sheets, community banks have already been doing their part to meet the credit needs of their customers, notably including small business customers. We have been spending a lot of time at the Federal Reserve trying to understand and promote lending to small businesses, and one of the interesting things we have found is that while small business lending contracted overall from mid-2008 through 2010, this contraction was not uniform. In fact, a majority of the smallest banks (in this case, those with assets of $250 million or less) actually increased their small business lending during this period. And while banks with assets between $250 million and $1 billion showed a slight decline in small business lending over this period, the contraction was not nearly as sharp as it was for the largest banks. This hard evidence underscores the important benefits of relationship banking, particularly in periods of unusual economic and financial stress.

Community Banks and the Federal Reserve
You may recall that in my remarks to this group last year, I noted that the decentralized structure of the Federal Reserve System, with 12 Reserve Banks and 24 branches located in cities across the country, was designed to ensure that local insights and information would be incorporated in the deliberations of both the Board and the Federal Open Market Committee. During the debates leading up to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we emphasized that our supervisory responsibility for state-chartered banks that are members of the Federal Reserve System and bank holding companies of all sizes not only provides valuable economic information at the grass-roots level that would be very difficult to replace, it also gives us a fuller picture of the nation’s financial system. At the same time, the range of expertise that the Federal Reserve develops in making monetary policy and in its engagement with the financial system allows us to bring unique insights and value-added to our supervisory activities. Fortunately, the Congress decided to preserve the Federal Reserve’s existing supervisory authority over smaller as well as larger banking organizations. It also broadened the Federal Reserve’s connections to Main Street by adding hundreds of thrift holding companies to the institutions we supervise. We are delighted that, through our supervision, our gathering of economic intelligence, and the activities of our community affairs departments around the country, we will be able to remain fully engaged with grass-roots America.

The Federal Reserve has undertaken several recent initiatives to enhance our interactions with community banks and ensure that we fully take their perspectives and unique characteristics into account in our policymaking. First, for many years, the Board has had a committee of Governors that provides oversight on bank supervisory and regulatory matters. Although many of this committee’s efforts in the wake of the financial crisis have understandably been focused on the largest and most complex banking organizations, the Board believes that it is important to sharpen our focus on smaller banking organizations as well. As a result, we recently established a special supervision subcommittee that focuses on community banks and smaller regional institutions. This subcommittee is chaired by a former longtime community banker, Governor Betsy Duke, and also includes a former state banking commissioner, Governor Sarah Bloom Raskin.

The subcommittee provides leadership and oversight on a variety of matters related specifically to our supervision of community and smaller regional banks.¹ In particular, the subcommittee is reviewing new policy proposals through the lens of the effect those proposals could have on smaller institutions, both in terms of safety and soundness and potential regulatory burden. Among other things, the subcommittee also monitors the Federal Reserve’s working relationship with state banking supervisors, which is particularly important because we share with them supervisory responsibility for state member banks.

We have also undertaken an initiative to solicit feedback from community banks on a more regular basis. In October, the Board announced that it would form a Community Depository Institutions Advisory Council to provide insight and information on the economy, lending conditions, and other issues of interest to community banks.² To make this council as representative as possible, each of the 12 Reserve Banks now has its own local advisory council comprising representatives from banks, thrift institutions, and credit unions; one member from each local council serves on the national council that will meet with the Board twice a year in Washington. Local meetings have already begun, and the first meeting of the national council with the Board will take place soon. Personally, I am looking forward to hearing more from community bankers about issues ranging from their local economies to regulatory reform.

Community Banks and Regulatory Reform
As you know, a key challenge for community banks in the years ahead will be to adapt to the changing regulatory environment, particularly the regulatory reforms contained in the Dodd-Frank Act, as well as the changes that will be associated with the Basel III reforms. We are certainly aware of and appreciate the concerns that community banks have about these regulatory changes, and, as I have just described, we have stepped up our efforts to understand those concerns and to respond to them as appropriate. I think it is worth emphasizing that the changes we will be seeing in the financial regulatory architecture are principally directed at our largest and most complex financial firms, including nonbanks. Consequently, one benefit of the reforms should be the creation of a more level playing field for financial institutions of all sizes.

Focusing reform on our largest, most complex financial firms makes sense. The recent financial crisis highlighted the fact that some financial firms had grown so large, leveraged, and interconnected that their failure could pose a threat to overall financial stability. The sudden collapses of major financial firms were among the most destabilizing events of the crisis. The crisis also demonstrated the inadequacy of the existing framework for supervising, regulating, and otherwise constraining the risks of major financial firms as well as of the toolkit the government had at the time to manage their failure.

As I discussed with you at last year’s meeting, a major thrust of the Dodd-Frank Act is addressing the too-big-to-fail problem and mitigating the threat to financial stability posed by systemically important financial firms. The too-big-to-fail problem is a pernicious one that has a number of substantial harmful effects. Critically, it reduces the incentives of shareholders, creditors, and counterparties of such firms to discipline excessive risk-taking. And it produces competitive distortions by enabling firms with large systemic footprints to fund themselves more cheaply than other firms because of the implicit subsidy of too-big-to-fail status. This competitive distortion is not only unfair to smaller firms and damaging to competition today, but it also spurs further growth by the largest firms and more consolidation and concentration in the financial industry. A financial system dominated by too-big-to-fail firms cannot be a healthy financial system.

The act addresses the too-big-to-fail problem with a multi-pronged approach. Under it, we are developing more-stringent prudential standards for banking firms with assets greater than $50 billion and all nonbank financial firms designated as systemically important by the Financial Stability Oversight Council. These more-stringent standards will include stronger capital and leverage requirements, liquidity requirements, and single-counterparty credit limits, as well as requirements to periodically produce resolution plans and conduct stress tests. Our goal is to produce a well-integrated set of rules that meaningfully reduces the probability of failure of our largest, most complex financial firms and that minimizes the losses to the financial system and the economy if such a firm should fail. In doing so, we aim to force these firms to take into account the costs that they impose on the broader financial system, soak up the implicit subsidy these firms enjoy due to market perceptions of their systemic importance, and give the firms regulatory incentives to shrink their systemic footprint.

Complementing these efforts, the Federal Reserve has been working for some time with other regulatory agencies and central banks around the world to design and implement a stronger set of prudential requirements for large, internationally active banking firms. These efforts include the agreements reached in December on the major elements of the new Basel III prudential framework for large, globally active banks. Basel III should make the financial system more stable and reduce the likelihood of future financial crises by requiring large banks to hold more and better-quality capital and more-robust liquidity buffers. A more stable financial system will benefit all banking institutions and, of course, our economy as a whole. We are working to adopt the Basel III framework in the United States in a timely manner.

A central issue that we and the other banking agencies face in implementing Basel III in the United States is deciding how these capital rules will be applied for banks that are not systemic or internationally active. We recognize the importance of striking the right balance between promoting safety and soundness throughout the banking system and keeping the compliance costs for smaller banking firms as low as possible. Also, to minimize the impact of the new capital rules on credit availability while the global economy is still recovering, we and our international colleagues have agreed to allow long transition periods for the implementation of the new standards.

In addition to stricter regulation and supervision of large financial firms, the Dodd-Frank Act places new checks on the growth by acquisition of our major financial firms. It expands current restraints on acquisitions by bank holding companies to include a broader range of acquired firms (not just banks) and a broader range of liabilities (not just deposits). This expansion reflects a financial system that has changed in important ways since 1994, when the Congress first adopted concentration limits for banks and bank holding companies.

The act also imposes new restrictions on the capital markets activities of banking firms–restrictions that will disproportionately affect the structure and profitability of the largest banking firms. For example, the so-called Volcker rule will restrict the ability of banking firms to engage in proprietary trading of securities and derivatives and to invest in or sponsor private investment funds.

Among the most important aspects of act are the measures that it authorizes to reduce the financial and economic effects of the failure of large firms. A clear lesson of the past few years is that the government must not be forced to choose between bailing out a systemically important firm and having it fail in a disorderly and disruptive manner. Instead, we need the tools to resolve a failing firm in a manner that preserves market discipline–by ensuring that shareholders and creditors incur losses and that culpable managers are replaced–and that at the same time cushions the broader financial system from the possibly destabilizing effects of the firm’s collapse. Of course, such a framework has been in place for banks for several decades now, as you know. The Dodd-Frank Act creates an analogous framework for systemically important nonbank financial firms, including bank holding companies. Resolving a large, multinational financial firm safely will likely always be a difficult challenge, and a great deal of work remains to be done to make these new authorities fully effective. Ultimately, though, these changes will mitigate moral hazard in our financial system by reducing expectations of government support by the creditors and counterparties of large firms. Taken together, the measures I have described should give us a financial system that is safer, more efficient, and more equitable.

In short, two key objectives of financial regulatory reform are, first, addressing the problems that emerged in the largest, most complex financial firms during the crisis and, second, creating a better balance with respect to regulation and oversight between banks and nonbank financial firms. The Federal Reserve believes that these are the right goals for reform. We are committed to working with the other U.S. financial regulatory agencies to implement the act and related reforms in a manner that both achieves the law’s key objectives and appropriately takes into account the risk profiles and business models of smaller banking firms, including community banks.

Before I conclude my remarks, let me say a few words about the transfer of thrift holding company supervisory authority to the Federal Reserve. We have been working closely with the Office of Thrift Supervision, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation to make this transfer as smooth as possible, and progress so far has been good. The Federal Reserve believes that any company that controls a depository institution should be held to appropriate prudential standards, including those for capital, liquidity, and risk management. As such, we intend to create an oversight regime for thrift holding companies that is consistent with, and is as rigorous as, the supervisory regime we apply to bank holding companies. That said, we appreciate that thrift and bank holding companies differ in important ways, play different roles in our economy, and will remain governed by different statutes. We will be mindful of these differences and of the unique characteristics of the thrift industry as we develop our supervisory approach to thrift holding companies.

Conclusion
My colleague, Governor Duke, recently told our examiners that “community bankers are creative, committed, stubborn, and resilient.” I know she won’t mind my repeating that sentiment here, and I’m sure most of the community bankers in this room would wear those words as a badge of honor. Community banks face substantial challenges in the months and years to come, including still-difficult economic conditions, continued uncertainties in real estate and other key markets, and a changing regulatory environment. But community banks have faced difficult times before, and the industry has remained vibrant and resilient. I am confident that community banking will successfully navigate these new challenges as well. Thank you for what you do every day to meet the needs of your communities and to help our economy grow stronger.

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1. For supervisory purposes, the Federal Reserve generally considers banking organizations with assets of $10 billion or less to be community banking organizations and those with assets between $10 billion and $50 billion to be regional banking organizations.

2. This group replaces the former Thrift Institution Advisory Council, which provided the Board with useful information from the perspective of thrift institutions and credit unions.