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Fed Durbin FAQs Affect GPR Exemption, Routing

rodentia-icons_dialog-question-300pxThe Board of Governors of the Federal Reserve System on Nov. 2 published several updates to its frequently asked questions about Regulation II (Debit Card Interchange Fees and Routing), and one change could be particularly problematic for large issuers that rely on the GPR or government-benefits cards exemption.

In particular, the Federal Reserve updated an FAQ related to the exemption from Regulation II’s interchange fee restrictions contained in Regulation II for certain general-use prepaid cards, added a related additional FAQ, and added a new FAQ regarding Regulation II’s network and routing requirements.

A general-use reloadable prepaid card (GPR Card) is generally exempt from Regulation II’s interchange fee cap so long as the GPR Card, among other things, does not impose an overdraft fee or a fee for the first withdrawal per month from an ATM that is part of the issuer’s designated ATM network. The updated FAQ generally provides that where an ATM or overdraft fee is inadvertently charged to a cardholder, neither the card on which the fee was charged nor the other cards in the program will lose this exemption provided that (i) the issuer develops and implements a policy reasonably designed to prevent charging the prohibited overdraft and ATM fees to cardholders; and (ii) the issuer implements that policy using procedures reasonably designed to ensure compliance. The Federal Reserve’s updated FAQ merely clarifies that the guidance in the FAQ applies to the similar exemption provided in Regulation II for government-administered programs as well as reloadable prepaid cards.

More notably, the Fed also added a new FAQ responding to the question of whether an otherwise exempt GPR Card will lose its exemption from the interchange fee caps if a cardholder may be charged a fee for a transaction that was declined at an ATM. Surprisingly, the answer is yes.  According to the Fed, debit card transactions completed with an otherwise exempt government benefit card or a GPR Card will lose the interchange fee cap exemption when a cardholder is charged an ATM decline fee due to a shortage of funds in the cardholder’s account at the time of an ATM transaction. This new interpretation could have a dramatic impact on large issuers who will be forced to choose between absorbing the third-party costs from ATM decline transactions or losing the interchange fee cap exemption altogether on its affected GPR or government benefits card portfolios.

The Fed also added a new FAQ with respect to Regulation II’s exclusivity and network routing requirements. The new FAQ seeks to address an issue that has arisen in the wake of EMV implementation, where payment networks have suggested or required point of sale messaging that prompts a consumer to choose between the debit network owned by the card brand appearing on the face of the card or a broad second category such as “US Debit” or “Other Debit.” The new FAQ clarifies that such a requirement by a payment network violates Regulation II’s network and routing requirements because it prevents a merchant from directing the route of a transaction and instead prompts the consumer to make that choice.

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