PayPal Says Mostly Unaffected by Fed Rules on Debit Card Interchange Rates
By Kenneth Corbin
The Federal Reserve Board on Wednesday issued its final rule on restructuring the interchange fees merchants pay debit card issuers for processing payments, arriving at a rate cap system that is far more favorable to the banking industry than the panel's original proposal.
The Fed also moved to prohibit network and routing exclusivity agreements in an effort to give merchants more flexibility in choosing providers and ensure competition in the industry.
The effect on the online retail community will be somewhat mitigated by the Fed's decision to exclude alternative payment providers, such as PayPal, from the new rules. "For this reason, we do not believe PayPal's broader payment service will be subject to the cap on debit card interchange fees," PayPal said in a statement.
The Fed was mandated to address debit card interchange fees owing to an amendment backed by Sen. Dick Durbin (D-Ill.) that was included in the Dodd-Frank financial regulatory reform bill enacted last year (summary of bill's provisions available in PDF format here).
"Congress has directed the Board to accomplish a very difficult task," Fed Chairman Ben Bernanke said at Wednesday's meeting. "I believe the final rule gives careful consideration to the statutory language, the cost data available to us, and the complexities of the debit interchange payment system."
The Fed's Board of Governors approved the final rule by a 4-1 vote. (Final order available in PDF format here.)
Under the new system, which will take effect October 1, rates will be capped at 21 cents percent transaction, plus an assessment of five basis points - defined as 0.05 percent of the total transaction. In addition, card issuers that certify adherence to a set of fraud-prevention standards developed by the Fed will be permitted to charge an additional 1 cent in their interchange fees. The Fed is accepting comments on the fraud-prevention surcharge through September 30. The interim final rule will take effect the following day with the rest of the interchange restrictions, but the Fed said it would re-evaluate the fraud-prevention rule in light of the comments it receives.
In December, the Fed had proposed capping the debit-card interchange rates at 12 cents per transaction. That proposal prompted vocal opposition from the banking industry, whose members currently collect an average of 44 cents for every debit-card transaction.
Under the new rules, the interchange fee for the average debit-card purchase of $38 would be capped at approximately 24 cents if the issuer was eligible for the fraud-prevention increase.
Wednesday's rulemaking drew immediate criticism from the National Retail Federation, a leading industry trade association that had lobbied for lower debit card fees closer to the Fed's original proposal.
"American consumers suffered a major loss today," NRF President and CEO Matthew Shay said in a statement. "We are extremely disappointed that the Federal Reserve chose to be influenced by special interests and ignored the will of Congress and American consumers. While the rate will provide modest relief, it does not go far enough."
PayPal noted that its own co-branded debit card offering will likely take a hit as a result of the rules, but downplayed the impact on its overall revenue stream. "Because the size of the program, we expect this to have an immaterial impact on the business," PayPal said. On the other hand, PayPal said it expected to enjoy a modest benefit from lower debit costs, but given that those payments are a very small part of its business, the impact would be slight.
"We don't expect this ruling to impact the PayPal buyer experience," PayPal said. "Customers shopping on our site will continue to be able to add their debit cards to the PayPal wallet and transact using their debit cards if they have added one."
The new rules also mandate that card issuers and payment card networks allow payments to be processed over at least two unaffiliated networks. Similarly, the rules prohibit issuers and networks from blocking merchants from routing electronic debit transactions over any network the issuer has set up for processing.
The network exclusivity prohibition takes effect October 1 for payment card networks, and April 1, 2012 for issuers. The routing exclusivity prohibition takes effect October 1.
The Fed received more than 11,500 comments on the debit interchange fees as it worked through its rulemaking process.
Card issuers and their affiliates that have less than $10 billion in combined assets are exempt from the new rate caps, in accordance with the Dodd-Frank bill.
About the Author
Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects for more than four years, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here .
About the author:
Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.
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