Payments – Federal Reserve’s final rule to implement the Durbin Amendment

Payments – Federal Reserve’s final rule to implement the Durbin Amendment

Payment aficionados know the impact of the Durbin act on the mobile payments space. Overnight, it forced ISIS – the mobile operator consortium to reconsider their options. Our friends at Davis Wright Tremaine put together a good summary of the ruling and what it might mean.

Here are the mobile related highlights:

On June 29, 2011, the Board of Governors of the Federal Reserve (Board) released its final rule (Final Rule) to implement Section 920 of the Electronic Fund Transfer Act (EFTA), as enacted by Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act—generally referred to as the “Durbin Amendment.”

Among other things, the Final Rule establishes a cap for interchange fees for electronic debit transactions, clarifies the types of payment products that are exempt from the interchange fee cap, and prohibits certain types of activities such as network exclusivity and circumvention and evasion of the interchange fee cap.

The Board also released an interim final rule and request for comment (Interim Final Rule) on an available one-cent adjustment to interchange transaction fees that allows issuers to recoup a portion of fraud-prevention costs.

This advisory briefly summarizes the Final Rule including: key definitions; interchange fee standards and exceptions; standards regarding network exclusivity and routing; remedies; adjustments for fraud prevention activities; and other matters, including an update on the TCF Bank litigation.

The full text of the Final Rule may be accessed here, and the Interim Final Rule here. The full text of the Dodd-Frank Act may be accessed here.

§235.2(f) defines “debit card” and generally tracks the definition in the EFTA. Thus, §235.2(f)(1) generally defines the term as any card, or other payment code or device, issued or approved for use through a payment card network to debit an account, regardless of whether authorization is signature-based, PIN-based, or other means. The term applies regardless of whether the issuer holds the underlying account. This part generally applies to any card, payment code, or device, even if it is not issued as a physical card form. Similarly, the term “debit card” would include a device with a chip that links the device to funds held in an account, such as a mobile phone or sticker containing a contactless chip that enables the cardholder to debit an account. Comment 2(f)-1 clarifies that cards or other payment codes or devices are not debit cards if used only for purposes of authenticating the cardholder and used in addition to a payment card or device.

I. Issuer. §235.2(k). §235.2(k) incorporates the statute’s definition of “issuer” that defines the term as any person who issues a debit card or the agent of such person with respect to the card. §235.2(k) follows the statutory definition, but removes the phrase “or the agent of such person with respect to the card” as being unnecessary. As agents are held to the same restrictions as their principals, the Board did not believe that removing this clause will have a substantive effect. Under the definition, the identity of the issuer is determined by which entity authorized the cardholder to use the card (as opposed to which entity performs issuer processing). Although the definition does not specifically address mobile payments, the issuer in a mobile payments setting is the entity that provided the device that ultimately accesses the underlying funds.

J. Payment card network. §235.2(m). EFTA §920(c)(11) defines the term “payment card network” as (1) 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 (2) 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. §235.2(m) follows this definition, with revisions for clarity. Because the interchange fee restrictions and network exclusivity and merchant routing provisions of the Dodd-Frank Act do not apply to credit card transactions, the Board believed it is appropriate to exclude from the proposed definition the reference to credit cards in the statutory definition to avoid unnecessary confusion. No substantive change was intended. The Board did not specifically include emerging payment systems, such as those using mobile phones or PayPal, in its definition.

More to come on mobile payments in the coming days so stay tuned.