On August 10, the Board of Governors of the Federal Reserve System (Board) clarified Regulation II (Debit Card Interchange Fees and Routing) regarding the inclusion of transaction-monitoring costs in the interchange fee standard.
Regulation II implements, among other things, standards for assessing whether interchange transaction fees for electronic debit transactions are reasonable and proportional to the cost incurred by the issuer, as required by section 920 of the Electronic Fund Transfer Act (EFTA). On March 21, 2014, the US Court of Appeals for the DC Circuit reversed an earlier decision by the US District Court for the District of Columbia and largely upheld Regulation II against a challenge to the rule by merchant groups. The court of appeals found that one aspect of the rule––the Board’s inclusion of transaction-monitoring costs in the interchange fee standard––required further explanation, and remanded the matter for further proceedings. Specifically, the court of appeals agreed with the Board’s position that “transactions-monitoring costs can reasonably qualify both as costs ‘specific to a particular transaction’ (section 920(a)(4)(B)) and as fraud-prevention costs (section 920(a)(5)).” The court held, however, that the Board had not adequately articulated its reasons for including transactions-monitoring in the interchange fee standard rather than in the fraud-prevention adjustment. Among other rationales, the Board explained the following:
Section 920(a)(4)(B) [of the EFTA] specifically directs the Board to consider in establishing the interchange fee standard the costs “incurred by the issuer for the role of the issuer in the authorization, clearance or settlement of a particular transaction.” Transactions-monitoring is an integral part of the authorization process, so that the costs incurred in that process are part of the authorization costs that the Board is required by the statute to consider when establishing the interchange fee standard.
It remains to be seen what action, if any, various challengers to the rule will take following the issuance of the clarification by the Board.