Board of Governors of the Federal Reserve System

Compliance Guide to Small Entities

Regulation II: Debit Card Interchange Fees and Routing

Debit Card Interchange Fees and Routing--A Small Entity Compliance Guide¹

1. What does section 920 of the Electronic Fund Transfer Act require?
Section 920 of the Electronic Fund Transfer Act (EFTA) was added by Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.² It contains several provisions related to debit cards and electronic debit transactions. First, it requires that the amount of any interchange fee that an issuer of debit cards receives or charges with respect to an electronic debit transaction be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. Section 920 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. This portion of section 920 limiting the interchange fee that an issuer may receive from or charge to a merchant does not apply to interchange fees of debit card issuers with total assets below $10 billion.

Section 920 of the EFTA also directs the Board to prohibit issuers and payment card networks from restricting the number of payment card networks over which an electronic debit transaction may be processed to one network (or two affiliated networks). In addition, it directs the Board to prohibit issuers and networks from inhibiting the ability of a merchant to direct the routing of an electronic debit transaction to any network that may process the transaction. These two provisions do not contain exceptions for small issuers of debit cards.

Regulation II implements the provisions of section 920 of the EFTA that govern debit card interchange fees and network routing and exclusivity limitations.

Section 920 of the EFTA also addresses discounts at the point of sale and transaction minimums. Specifically, section 920 prohibits networks from inhibiting the ability of merchants to provide discounts or in-kind incentives for payments by cash, check, debit card, or credit card. Networks, however, may prohibit discounts and incentives to the extent that the discounts differentiate among issuers or networks. Section 920 also prohibits networks from inhibiting the ability of merchants to set credit card minimums below $10 that do not differentiate among issuers or networks.³ These provisions of section 920 are self-executing and have not been addressed in Regulation II.

2. What does the rule require for issuers subject to the interchange fee standard?
The debit card interchange fee limitations in section 920 of the EFTA and in Regulation II do not apply to issuers with less than $10 billion in assets (discussed further below). Section 920 requires that the amount of any interchange fee that an issuer receives or charges with respect to an electronic debit transaction be reasonable and proportional to the cost incurred by the issuer with respect to the electronic debit transaction. Regulation II provides that an issuer complies with this requirement if the amount of the base level of each interchange fee received or charged by the issuer does not exceed 21 cents plus a variable factor equal to 5 basis points multiplied by the value of the transaction.

In addition to the base interchange fee level, an issuer subject to the interchange fee standards may receive or charge up to 1 cent per transaction provided the issuer meets the fraud-prevention standards described in Regulation II. Those standards require issuers to develop and implement policies and procedures reasonably designed to identify and prevent fraudulent electronic debit transactions, monitor the incidence of fraudulent transactions and losses from fraud, respond appropriately to suspicious electronic debit transactions, and secure debit card and cardholder data. An issuer that receives the fraud-prevention adjustment must review its policies and procedures annually and update them as appropriate.

The rule prohibits an issuer that is subject to the interchange fee standards from circumventing or evading the interchange fee restrictions. A finding of circumvention or evasion will depend on all relevant facts and circumstances. The rule addresses one type of circumvention directly. The rule prohibits an issuer from receiving "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 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.

Regulation II requires issuers that are subject to the interchange fee standards to retain evidence of compliance with the regulation's requirements for not less than 5 years from the end of the calendar year in which the electronic debit transaction occurred. In order to allow the Board to monitor compliance with the requirements of section 920, the rule contemplates that issuers and networks will be required to report to the Board certain information regarding the costs of debit card transactions and the level of debit card interchange fees. This information may include, but is not limited to, information regarding transaction costs, interchange fees received, network fees, fraud-prevention costs, fraud losses, and transaction value, volume, and type.

3. Which issuers are not subject to the interchange fee standards?
The interchange fee standards do not apply to interchange fees charged or received by an issuer that, together with affiliates, has total assets of less than $10 billion and that holds the account being debited. For this purpose, total assets are measured at the end of the calendar year preceding the date of the transaction.⁴ The Board will publish annually lists of institutions with consolidated assets of less than $10 billion and those with consolidated assets of $10 billion or more. For purposes of determining whether an issuer is exempt, networks may rely on the lists published by the Board. These lists are available at http://www.federalreserve.gov/paymentsystems/debitfees.htm. Networks may require an issuer that is not on either list to certify whether it has consolidated assets of less than $10 billion.⁵

Payment card networks are not required by section 920 to establish higher interchange fees for exempt issuers (i.e., establish a two-tier fee structure) though section 920 and Regulation II permit networks to collect higher interchange fees for exempt small issuers. In order to assist small issuers in identifying which networks have implemented two-tier fee structures, the Board will publish annually a list of the average interchange fee each network provides to its covered issuers and exempt issuers.

4. Which fees are not subject to the Board's standards?
In addition to the exemption discussed above for small issuers, section 920 and Regulation II do not apply in certain other situations, regardless of the asset size of the issuer. The interchange fee standards in Regulation II do not apply if the fee meets any one of the following conditions--

• The fee is not an interchange fee. An interchange fee is 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 role in an electronic debit transaction. For example, fees charged by issuers to consumers or fees charged by networks to merchants where the network does not pay or credit that fee to an issuer are not covered by section 920 or Regulation II.
• The fee is not charged or received with respect to a transaction using a debit card to initiate a debit to an account ("electronic debit transaction"). A debit card is any card, or other payment code or device, issued or approved for use through a payment card network to debit an account. For example, fees charged for checks, credit cards, or automated clearing house (ACH) transactions are not covered by section 920 or Regulation II.
• The fee is related to a transaction where either the merchant or the account being debited is outside the United States. Thus, fees charged in connection with transactions wherein either the merchant or the account being debited is located in a foreign country are not covered by section 920 or Regulation II. Regulation II defines "United States" as 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.
• The fee is charged or received with respect to an electronic debit transaction initiated using a card provided pursuant to a Federal, State, or local government-administered payment program and the cardholder may use the card only to transfer or debit funds provided pursuant to such program. For example, fees on cards used for electronic benefit transfer or reimbursement systems in connection with government food assistance programs are not subject to section 920 or Regulation II.
• The fee is charged or received with respect to an electronic debit transaction initiated using a general-use prepaid card that is--
  • Issued on a prepaid basis in a specified amount;
  • Redeemable upon presentation at multiple, unaffiliated merchants for goods or services;
  • Not issued or approved to access an 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);
  • Reloadable, and not marketed or labeled as a gift card; and
  • The only means of access to the underlying funds, except when all remaining funds are provided to the cardholder in a single transaction.

For example, a network-branded general purpose reloadable card that is not marketed at a retailer as a gift card or gift certificate is exempt from the interchange fee restrictions if the funds are only accessible through the card and the card program does not permit the cardholder to access the funds through other means, such as writing checks or initiating ACH transactions.

5. When do the interchange fee standards take effect?
Issuers that receive interchange fees subject to the standards must comply with the standards beginning October 1, 2011.

6. How many payment card networks must be enabled to process an electronic debit transaction?
Section 920 of the EFTA and section 235.7(a) of Regulation II prohibit any issuer or payment card network from directly or indirectly restricting the number of payment card networks on which an electronic debit transaction may be processed to fewer than two unaffiliated networks (the "prohibition on network exclusivity"). To comply with the prohibition, an issuer must enable at least two unaffiliated payment card networks that meet certain requirements (as described in Question 8, below) to process an electronic debit transaction. The prohibition on network exclusivity applies to electronic debit transactions performed with any debit card as defined in section 235.2 of Regulation II, 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 section 235.2, that may be developed in the future.

A payment card network may not restrict an issuer's ability to contract with any payment card network that may process the issuer's electronic debit transactions.

7. Which issuers must enable at least two unaffiliated networks to process an electronic debit transaction?
All debit card issuers as defined in section 235.2 of Regulation II, regardless of asset size, must enable at least two unaffiliated payment card networks that meet certain requirements (as described in Question 8, below) to process an electronic debit transaction.

8. What types of payment card networks may an issuer enable to satisfy the prohibition on network exclusivity?
An issuer may satisfy the prohibition on network exclusivity by enabling any two unaffiliated payment card networks to process an electronic debit transaction so long as the enabled networks meet the following two requirements. First, the enabled networks in combination must 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 (such as card-not-present electronic debit transactions). Second, each enabled network must have 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.

The rule does not require an issuer to enable two unaffiliated payment card networks for each method of authentication. For example, an issuer may enable a signature-based network and an unaffiliated PIN-based network to process an electronic debit transaction so long as the enabled networks meet the requirements described above. Similarly, an issuer may enable two unaffiliated PIN networks (and no signature-based network) to process an electronic debit transaction. An issuer also may enable a signature network and an affiliated PIN network, provided the issuer also enables another unaffiliated PIN or signature network to process an electronic debit transaction. ATM-only networks do not count toward the number of unaffiliated networks enabled to process an electronic debit transaction.

9. How does an issuer know whether a payment card network may be used to satisfy the prohibition on network exclusivity?
An issuer should contact its payment card network (or the payment card network it wishes to enable to process an electronic debit transaction) to determine whether the payment card network has rules or policies that restrict the operation of the network to a limited geographic area, specific merchant, particular type of merchant, or particular type of transaction (such as card-not-present electronic debit transactions). If the operation of the network is restricted in this way, the issuer may nevertheless enable such network to process an electronic debit transaction, but only if all of the networks the issuer has enabled meet (in combination) the requirements described in Question 8, above.

In addition, an issuer should contact its payment card network (or the payment card network it wishes to enable to process an electronic debit transaction) to determine whether the payment card network has taken steps reasonably designed to enable the network to process the electronic debit transactions that the network would reasonably expect will be routed to it, based on expected transaction volume.

10. When must an issuer comply with the prohibition on network exclusivity?
In general, issuers were required to comply with the prohibition on network exclusivity by April 1, 2012. For certain types of debit cards, issuers were not required to comply with the prohibition on network exclusivity until later dates, as follows:

• Debit cards that use transaction qualification or substantiation systems, such as certain health or other benefit cards: April 1, 2013.
• Non-reloadable general-use prepaid cards: April 1, 2013, except that non-reloadable general-use prepaid cards sold prior to April 1, 2013, are not subject to the prohibition on network exclusivity.
• Reloadable general-use prepaid cards: April 1, 2013, except that reloadable general-use prepaid cards sold prior to April 1, 2013, are not subject to the prohibition on network exclusivity unless and until they are reloaded, as follows:
  • If sold and reloaded prior to April 1, 2013: May 1, 2013.
  • If sold prior to April 1, 2013 and reloaded on or after April 1, 2013: 30 days after the date of reloading.

In October 2022, the Board published a final rule to specify that the prohibition on network exclusivity applies to card-not-present electronic debit transactions. The final rule's effective date is July 1, 2023.

11. May payment card networks or card issuers place limitations on debit card transaction routing by merchants?
No. The prohibition on routing restrictions in section 235.7(b) of Regulation II prohibits an issuer or payment card network from directly or indirectly inhibiting the ability of a merchant to direct the routing of an electronic debit transaction for processing over any of the payment card networks that the issuer has enabled to process the electronic debit transaction.

12. When must issuers and networks comply with the prohibition on routing restrictions?
Issuers and networks were required to comply with the prohibition on routing restrictions by October 1, 2011.

13. Is there more guidance on the provisions of Regulation II?
In addition to the rule text, Appendix A to the rule sets forth official Board commentary to certain provisions of the rule.

14. Whom should you contact if you have further questions?
The requirements of this rule will be enforced by your Federal functional regulator. For example, the National Credit Union Administration is responsible for enforcing the rule with respect to federally insured credit unions; the Office of the Comptroller of the Currency is responsible with respect to national banks and federal thrifts; the Federal Reserve Board is responsible with respect to state member banks; and the Federal Deposit Insurance Corporation is responsible with respect to state nonmember banks and state-chartered thrifts. The Federal Trade Commission is responsible for enforcement with respect to other entities not covered by the above regulators. Specific questions with respect to implementation of the rule should be addressed to your Federal functional regulator. General questions regarding section 920 and Regulation II may be addressed to the Federal Reserve Board.

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1. This guide was prepared by the Board of Governors of the Federal Reserve System as a "small entity compliance guide" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended (5 U.S.C. 601 note). The guide summarizes and explains the rule, but is not a substitute for the rule itself. Only the rule itself can provide complete and definitive information regarding its requirements. Return to text

2. Section 920 is codified at 15 U.S.C. 1693o-2. Return to text

3. Section 920 also prohibits networks from inhibiting the ability of any Federal agency or institution of higher education to set maximum dollar values for the acceptance of credit cards, to the extent that such maximum values do not differentiate among issuers or networks. Return to text

4. A small issuer that was exempt from the interchange fee standard in a particular calendar year but loses the exemption because its consolidated assets are $10 billion or more by the end of the year must comply with the interchange fee standard no later than July 1 of the next calendar year. For example, an issuer with total assets (including assets of all affiliates) of less than $10 billion as of December 31, 2010, is exempt from the interchange fee limits for transactions that occur in calendar year 2011. If, as of December 31, 2011, that issuer loses the exemption because its total assets (including assets of affiliates) exceeds $10 billion as of that date, the issuer must conform its debit interchange fees to the requirements of Regulation II no later than July 1, 2012. Return to text

5. If an issuer believes that information in the Board's lists is not accurate, the issuer should file a correction request as instructed on the Board's website. Return to text