Compliance Blog

Written by Steve Van Beek

Yesterday, the Federal Reserve released a Compliance Guide to Small Entities on the Interchange Regulation (Regulation II - 12 C.F.R 235).

The Guide explains the impact of Regulation II (which implements the Durbin Amendment) in plain English.  It also uses a very helpful Question and Answer format.  The Guide does a particular good job of explaining the "network exclusivity" provision of Regulation II.  This provision has been getting quite a bit less than the actual fee cap.

The network exclusivity provision applies to all debit card issuers.  Here is from the Guide:

"How many payment card networks must be enabled on each debit card?
Section 920 and 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 less than two unaffiliated networks (i.e., prohibits network exclusivity arrangements). To comply with the rule, an issuer must enable at least two unaffiliated payment card networks on each debit card. In addition to plastic cards, the other payment codes or devices, such as the card number or a key fob, that are issued or approved for use through a payment card network to debit an account must be enabled to process transactions over at least two unaffiliated payment card networks.

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.

Which issuers must enable at least two unaffiliated networks on each debit card?
All debit card issuers (regardless of asset size) must enable at least two unaffiliated networks on each debit card.

What types of payment card networks may an issuer enable to satisfy the two-unaffiliated-networks requirement?
An issuer may satisfy the non-exclusivity requirements by enabling any two networks so long as the networks are unaffiliated and have reasonable capacity. For example, an issuer may enable a signature-based network and an unaffiliated PIN-based network on a debit card. Similarly, an issuer may enable two unaffiliated PIN networks (and no signature-based network). An issuer also may enable a signature network and an affiliated PIN network, provided the issuer also enables another unaffiliated PIN or signature network on the card. ATM-only networks do not count toward the number of unaffiliated networks enabled on the card.

To satisfy the requirement of two unaffiliated payment card networks, each of the two unaffiliated payment card networks—

Must have 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; and  

• Must have 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; and
• Must not, by rule or policy, restrict the operation of the network to a limited geographic area, specific merchant, or particular type of merchant or transaction.

How does an issuer know whether a payment card network is eligible to be one of the unaffiliated networks on a debit card?
An issuer should contact its payment card network (or the payment card network it wishes to enable on its card) to determine whether the payment card network has rules or policies to restrict operation of the network to a limited geographic area, specific merchant, or particular type of merchant or transaction and 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.

When must an issuer comply with the prohibition on network exclusivity?
In general, issuers must enable at least two unaffiliated payment card networks on each debit card by April 1, 2012. Payment card networks may not prohibit an issuer from enabling two unaffiliated networks on each debit card beginning October 1, 2011."