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The Administrative Agency
The Federal Reserve System proposes Debit Card Interchange Fees and Routing which is to be effected by 21st July, 2011. This proposal is of great interest to me since it affects my ability to take advantage of debit card services as well as my business investments in the financial sector.
Debit Card Interchange Fees and Routing
The regulation policy is meant to create standards that would help regulate the interchange fee system. The rates proposed would apply to firms whose assets average above $10 billion (Federal Reserve System, 2010). However, it would not apply to government-administered payment programs as well as prepaid debit cards which are for general use.
The Federal Reserve System also proposes a regulation for controlling the maximum interchange fee to be charged or received by each issuer who is covered by the regulation for every debit card transaction.
The regulation proposes two alternative standards for the interchange fee which would apply to all the debit card issuers. The stand-alone caps are to be based on the issuer’s costs and they are set at 7% and 12% per cost respectively (Federal Reserve System, 2010).
The alternatives are designed to thwart circumvention as well as evasion. The policies forbid the issuing firm getting any net compensation from other network except for the fee it collects for transactions which pass through its network.
The Federal Reserve System Board proposes to create standards for assessing the fee so as to determine the proportionality of the fee charged in relation to the cost incurred by the issuing firm.
It also bans debit card firms as well as networks from limiting the number of networks for carrying out debit card transactions. It also prohibits the issuing firms as well as networks from limiting the merchants’ control over the card routing (Federal Reserve System, 2010).
The proposals are likely to have detrimental effects on us the consumers and even to banking industry where some of us have invested.
The Federal Reserve System would better serve the US citizens and its business people if it were to implement more sound interchange regulation policies which would ensure that even small debit card issuers are also effectively protected from the lower chargers on the interchange fees.
The Federal Reserve System need to critically consider all the costs incurred in operating the debit interchange system. It should take into consideration the cost of fraud prevention since fighting would require adoption of new, more modern technology. I suggest that the Federal Reserve System implement mechanisms which exempt small issuers from rates applied to large issuers.
The provisions governing routing of debit cards transactions exclusively allows merchants to solely determine processing of debit card transactions. I suggest that the Federal Reserve System implement its first alternative for routing regulation which only requires that the debit card issuing firms provide cards which can be used in two unaffiliated networks.
Besides, the requirement by the Federal Reserve System for unlimited cross network transaction is inconsistent with the statutory requirements and as such, it is bound to place unfair regulatory burden on credit card issuers hence reduce the quality of service to consumers (King, 2010).
The other reason as to why I feel that serious adjustments should be made on the proposed law is that lowering the rates to 12% would mean that issuers would have to adjust to meet the costs of operating the interchange system.
Even though some financial institutions are excluded, merchants may refuse to take some debit cards as well as government-benefit debit cards such as Social Security, State Unemployment among other benefits.
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This regulation may force banks to implement or increase the fees for checking accounts and interest rates on the debit cards or impose debit card fee usage. Some banks may even stop offering debit card services to their clients. This law also deprives consumers from choosing the networks they would want their cards to run on.
In my view, I would therefore propose that the Federal Reserve System consider lowering the costs to a level which can enable the issuers to cover the cost of operating the debit card interchange systems without having to increase the cost of their services.
As a US citizen, I expect that the reviewed proposals be made available to the public exactly two months after closure for receiving the comments which would be on 22nd February, 2011.
Thus the reviewed draft should be presented to the public by 22nd April, 2011. This would give us humble time evaluate and provide more proposals to the reviewed draft before it is finally approved and implemented by the board.
Alternatives for Challenging the Proposal
As a patriotic US citizen and honest businessman, I expect that these are just proposals and therefore the Board remains receptive and open-minded to explore my concerns. I believe that the board is committed to improving the proposals by including substantive suggestions such as the ones I have made above.
The board has to realize that the proposed regulation is against its mission of ensuring safe and sound participation of capitalized financial institutions. The proposals only benefit the merchants who play very little role in debit card transaction process and has less benefits to the consumers.
It does not address the financial concerns of the issuers which it is also mandated to protect. Any decision by the board to ignore my concerns which represents the views of most Americans including the business community would seriously undermine the integrity of the Federal Reserve System’s rulemaking process.
This means that I together with other like-minded persons would have no option but to challenge the new policies in a court of law. As members of the Credit Union National Association, we may consider sabotaging the whole process of debit card transactions by stopping our debit card provisions to customers.
Theories of Price Regulation
I strongly believe that the proposal to control the interchange fee that is charged by issuers is not consistent with the Free market Principle.
The attempts by the Federal Reserve System to interfere with the free market mechanism through price-fixing of the interchange fee on debit card transactions is against the principle of free market and is bound to suppress free-market competition (Armstrong, Cowan, & Vickers, 1994).
The Federal Reserve System should reconsider its proposal to implement policies that give merchants such advantages and rewards. The market prices should be left to be decided by the dynamics of the free markets.
Disregarding the concerns of the business community would imply that the Federal Reserve System is inconsistent with the requirements of the Theory of Economic Regulation which states that such decision-makings should involve all stakeholders.
Instead, it would only mean that the board only considered the Capture Theory Regulation which supports the advantages which the proposal is bound to offer to the merchants (Armstrong, Cowan, & Vickers, 1994).
The regulations would only serve to reduce the net returns of the issuers and also reduce advantages to the consumers. Chicago Theory of Regulation is also against regulation of scale economies of productions of organizations.
It states that governments should not regulate the prices and outputs so as to encourage healthy competition (Armstrong, Cowan, & Vickers, 1994).
Implementing these regulations as they are would also mean that the board would have gone against the Principles of Price Cap Regulation which requires that cost for providing services should reflect the efficiency in its operations and that the company should be able to balance the cost of its savings without adversely affecting the consumers’ ability to utilize the services.
Finally, the proposed policy regulations are also against the Applied Theory of Regulation which also supports non-competitive arrangements in achieving economic efficiency (Moore, 1982).
In my view, challenging the regulations in a court of law would be more appropriate since it is legal and as patriots, we have the right to defend fellow Americans and businessmen and women.
The court of law would help overturn the laws so that we all come back the drawing and find better alternatives for regulating the interchange fees and routing processes (Jennings, 2009).
Armstrong, M., Cowan, S. & Vickers, J. (1994). Regulatory reform: economic analysis and the British experience, MIT Press, Cambridge.
Federal Reserve System. (December 28, 2010). Debit card interchange fees and Rooting. Federal Register, 75(248). Available at https://www.regulations.gov/document?D=FRS-2010-0379-0001 on 11th January, 2011.
Jennings, M. (2009). Business: Its legal, ethical, and global environment, 8th Edition. New York: Prentice Hall
King, S. P. (2010). Principles of price cap regulation. Melbourne: The University of Melbourne Press.
Moore, T. G. (1982). The applied theory of regulation: Political economy at the Interstate Commerce Commission, 39(1), 29-32. Hague: Martinus Nijhoff Publishers