The Regulation of Interchange Fees by the U.S. Federal Reserve Board: A Primer on Economic Principles

David Evans, Robert Litan, Richard Schmalensee, Mar 30, 2011

The Board of Governors of the Federal Reserve System (“Board”) is the latest of a series of central banks and antitrust authorities to tackle the thorny issues of interchange fees. It did not ask for the job. During the process of drafting financial reform legislation the U.S. Senate passed the “Durbin Amendment,” which required the Board to regulate the amount of interchange fees that banks that issue debit cards could receive. That amendment became part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was passed by Congress and became law on July 21, 2010.

The Durbin Amendment instructed the Board to adopt rules that would ensure the interchange fees banks received were “reasonable and proportional” to cost. The amendment said the Board should consider “the incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular electronic debit transaction” but should not consider “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.” It did not elaborate on what was reasonable. The Board was given until April 21, 2011 to adopt the rules, and the rules are supposed to go into effect on July 21, 2011.

The Board staff started its work shortly after the legislation was signed into law. It appears that the staff focused much of its effort on collecting data and information fro

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