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June 30, 2011 – NAFCU President Fred Becker said Wednesday that the Federal Reserve's final rule on debit interchange fees, with a 21-cent fee cap and allowingan adjustment for fraud costs, still falls short of what credit unions need to recover all the costs of offering debit cards.

The Fed's final rule caps the base fee at 21 cents per transaction and permits issuers to add an additional component equal to 0.05 percent of the value of the transaction; that component is meant to help make up some of the institution's fraud costs.

The board also issued an interim final rule that allows an additional 1 cent to be charged per transaction if the institution has implemented certain fraud prevention measures.

Becker said the final rule means "consumers will ultimately pay a higher price for basic financial services because of the limitations this final rule creates." NAFCU is preparing a Final Regulation for members.

With respect to the price cap (base fee plus fraud-loss adjustment), both the final and interim final rule carry an effective date of Oct. 1. Certain portions of the network exclusivity and routing restriction provisions of the final rule take effect April 1, 2012, and April 1, 2013. Comments on the interim final rule, allowing the additional 1 cent related to fraud prevention, are due Sept. 30. Both rules were included in the draft Federal Register notice released yesterday.

Since issuance of the Fed's proposed rule, Fed Chairman Ben Bernanke and other regulators have expressed doubts that card issuers would be able to recoup all their costs as well as the likely effectiveness of the small-issuer exemption that excuses those with $10 billion or less in assets from the low fee cap.

"We had hoped that Federal Reserve Chairman Bernanke's expressed concerns regarding smaller financial institutions would have helped it structure the final rule in a way that affords credit unions greater protection," said Becker."Regrettably, it is Main Street and consumers that will pay the price for this Draconian rule."

The rule was approved on a vote of 4-1, with Fed Gov. Elizabeth Duke dissenting largely over the lack of any mechanism to enforce the small-issuer exemption and its potential impact on the fees paid by consumers. The final rule provides for ongoing monitoring of debit interchange fees, with a reevaluation of the cap every two years based on cost information collected from issuers.

All five governors also agreed to a "sense of the board" statement that the Fed should establish a system for monitoring the effectiveness of the rule's small-issuer exemption, with reports to be completed six months and 18 months following its effective date.