>> thank you for coming. we have four months to go. in light of the problems out there which you talked about, we are looking forward to working with you right up to the end. and do what we can to see if we get one more person employed and one more person into a house without a foreclosures or want to thank you for your service and your testimony here today. we will be open for one weeks of the panel may submit questions to the record. this hearing is adjourned.

[inaudible conversations] >> this weekend on booktv rose mary looks at the history of women serving in the u.s. armed forces. the life of a lutheran pastor and allied spy executed following a failed plot to assassinate hitler. on afterwards, former chairman of the joint chiefs of staff on his new book without hesitation:the odyssey of an american warrior. he is interviewed by former defense secretary william cohen. find a complete schedule at booktv.org and sign up to get our schedule to your in box with our booktv alert. the united states versus richard nixon today on c-span radio's went work supreme court case.

>> what are want to do is simple but important, 8 issue the administration of criminal justice which the president can withhold material evidence from the court. the assertion that the evidence involves confidential communication. >> listen to the arguments on c-span radio in washington d.c. at 90.1 fm, nationwide on 132 end of line on c-spanradio.org. >> on thursday the federal reserve proposed the fees charged to merchants to accept credit card payments even if it is $0.12 for a transaction. this was part of the dodd frank financial regulation bill passed earlier this year. this is an hour. >> the board requests public comment on those rules implementing section 1075 of the dodd frank act. this provision deals with regulation of interchange fees of debit cards and related matters. u.s. financial regulatory

agencies have been given significant new responsibilities under dodd frank. in a number of cases the law requires the board and other agencies to address complex and challenging issues within a short time frame. this is certainly true with respect to this particular rulemaking. it is important for us to act expeditiously to meet the requirements of the law and establish regulatory clarity as soon as possible the proposal to date is one that deserves careful attention in light of debit cards increasingly important role in the u.s. patent system. we gather great deal of information bearing on this rulemaking and look forward to receiving the public's comments. let me turn to the vice chair who yields boat committee on clearing and settlement which reviews the proposal. >> as you noted, and staff will consider staff's proposal for

implementing the credit card interchange fee and transaction routing provision of the dodd frank act. it is important to note its prominent role in our payments system. the result of a new federal reserve survey published earlier this month showed that nearly forty-eight billion debit card payments were made in the united states in 2009. debit cards are used in 35% of noncash transactions. this eclipse checks as the most frequently used non-cash payment method. the dodd frank act specifically directs the board to set standards for debit card interchange fees. these fees are established by

networks and paid by merchants, card issuers for each debit card transaction. overtime interchange fees have grown for the number of debit card transactions with interchange fee rates have risen. this is precipitated national and international debate over the appropriate level. in 2009, debit card interchange fees total over $16 billion in the united states. payments clearing and settlement committee has discussed with staff numerous difficult issues involved in developing this proposed rule. i believe staff's proposal reflects a reasonable approach to implementing the requirements of dodd frank. we have included a number of

questions in the federal register notice that alternative approaches to implementing different parts of the rule. we will be interested in reviewing comments or in part on the proposal as we determine what is adopted as a final rule. unlike to now turn to mandy sacked who will discuss the proposal. >> how to discuss the new regulation which will govern debit card interchange? this proposed regulation which implements section 1075 of the dodd frank act has two components. first established standards for the maximum permissible level of the card change fees that issue worse they receive and prohibits exclusivity arrangements and richard rahn restrictions. we have helped numerous meetings with the card issuers and payment card networks and

acquirers, merchant, industry trade associations and consumer groups to deepen our understanding of the debit card industry. these organizations provide information about the structure and mechanics of the debit card system, fraud losses at litigation activities and fees associated with a debit card transactions. we reviewed written submissions by interested parties that highlighted issues to be considered in implementing the statute. we posted a written submissions on the board's web site. to obtain further input we surveyed the the card issuers and payment card networks and large acquirers. we requested information about the volume, cost legal fees and fraud prevention activities associated with the but card transactions. we also asked about route restrictions. the information has informed the proposal today. let's turn to the substance of

our recommended proposed rule. i will summarize each statutory requirement and propose to implement it including alternative approaches to consider. the first major aspect of the proposed rule, an issue where receives debit card transaction, reasonably proportional to the cost with respect to the transaction. the board is required to establish standards for assessing whether interchange meet reasonable and proportional requirements. certain issuers and cards with restrictions on interchange fees. they do not apply to issue work is that together with affiliate's have assets of less than $10 billion. they do not apply to debit cards used in certain government administered payment organizations and general use prepaid cards. to implement this portion of the statute we determines which issuer costs are allowable and how to measure them. in determining which is where

costs are allowable we looked to two considerations and the statue for the interchange fee standards. the first instructs the board to consider functional similarity between debit card transactions and checks. the second obstructs the board to consider incremental costs that authorize clearance on a particular transaction and not to consider costs that are not specific to a particular transaction. we recommend an issuer's allowable cost be limited to those costs that are attributable to the issue were's role in authorizing settle in the transaction. this includes only those costs that are specifically mentioned in the statute. we consider limiting allowable costs to include only those costs associated with authorizing the debit card transaction. this approach would reflect the key distinction between -- card and check transactions. the fact that a debit card transaction is issue word and the other transaction is not all the merchants may purchase a

third party check guarantee service. because the statutes instruct the board to consider clearing settlement costs in addition to authorization costs we believe it is appropriate to include those costs rather than limiting the authorization cost only. we also considered including other costs associated with a particular transaction that are not associated with authorized and settle in a transaction. such costs might include for example the cost of providing cardholder rewards and the cost of responding to cardholder inquiries regarding specific transactions. given the statute's mandate on functional similarity between debit card and check transactions we recommend the board proposed to limit allowable costs to those the statute explicitly references for considerable action. the statute directs us to consider the incremental cost of a particular transaction. there is no single generally accepted definition of incremental cost. we propose to interpret the

incremental cost as average variable cost. this measure which is relatively easy to calculate using costs yields the cost of a typical or average transaction. we considered interpreting incremental costs as marginal cost but determined this would be impractical because marginal cost could not be identified for accounting data. we know that if marginal cost is not materially over the relevant volume range, average variable cost would provide a close approximation to marginal cost. in measuring is work cost would consider the appropriate treatment of six costs and overhead costs. we recommend fixed costs of the but card transactions be excluded from measurement of allowable cost. the statute directs us to consider cost of a particular transaction. fixed costs as well as overhead costs could not be avoided by ceasing production of any particular transaction. we recommend work request

comment on two alternative standards for determining if an interchange fee is reasonable and proportional to the issue were's cost. the first alternative adopt a standard based on each issue were's costs with a car and cap. the second alternative adopts standalone cap applicable to all covered issuers. under alternative i an issuer would comply with a standard and receive an interchange fee they did not exceed the lesser of its allowable average variable costs. we recommend that the cap be set at $0.12 per transaction. alternative i would permit an issuer to comply with a standard by receiving an interchange fee that does not exceed the level of safe harbor. if the interchange fee is at or below safe harbor the issuer would not need to determine maximum interchange fee based on a low-cost. we recommend the safe harbor amount be set at $0.07 per transaction. under alternative ii an issue or would comply with the interchange fee standard as long

as it did not receive an interchange the above the cap. we also recommend the cap be set at $0.12 per transaction. we believe both alternatives provide economic incentives for covered issue worse to improve the efficiency of their card operations. we also believe the safe harbor in alternative i and cap in alternative ii reduce administrative compliance burden on industry participants compared to a standard based solely on each issue or's cost. the statute authorized the adjustment to an interchange fee to account for an issuer's cost preventing fraud. provide the issuer comply with standards established by the board relating to fraud prevention activities. the proposed rule does not currently include a specific adjustment to the amount of interchange fees for fraud prevention cost. instead, we recommend work request, general approaches and ask a number of questions related to those alternatives. under the first approach the

fraud adjustment would allow issuers for implementing major innovation for substantial reduction in total industrywide fraud losses. and a the second approach the fraud adjustment would take reasonable steps to obtain effective fraud prevention program. technology must be employed as part of the program. after considering comments we received we recommend the board issue a specific proposal on fraud adjustment for public comment. the statute grants the board authority to prevent certain of the interchange fee standard. under the proposed rule, it will generally depend on facts and circumstances. it provides circumvention occurs. in the form of a senate payment, it exceeds the total amount of

fees the issuer pays -- the net compensation from the network will serve as a transfer to an issuer in excess of the amount allowed under the interchange fee standard. weather network fees charged merchants combined with a corresponding increases in fees charged to issuers should also be considered circumvention or invasion. we decided against this because it would lock in each network's current allocation fees between issuers and merchants and prohibit some payment card networks from changing their fee structures to resemble those employed by others. and did should be addressed in the rule. the statute requires the board to the routing of debit card

transactions. and payment card networks from restricting the networks on which a double card transaction in the process. and they prohibit issuers from inhibiting the ability of the but card transaction over any network that processed such transaction. together, and the debit card transaction may be routed. and prepaid card programs exempt from the interchange fee standards. and we propose two alternatives for the prohibition on exclusivity arrangements. rerouted two initially it networks. and one signature network and

one unaffiliated network in cost but this approach may have limited effectiveness in promoting network competition about six million of the eight million merger locations in the united states that accept debit cards do not have the capability to accept in debit transactions. moreover there are operational or market dependents for using debit for certain transactions. for transactions that cannot be conducted using pin debit this would not provide a viable route angeles to the merchant. the second alternative would require a debit card to have at least we to an affiliated payment card networks for each method of authorization available to the cartholder. a debit card that could be used for signature and pin debit transactions would need to have at least we to unaffiliated signature networks and two unaffiliated pin debit networks. this approach would better insure the routing choice but require insurers to have new

mutual signature debit networks like visa and mastercard unless it only had pin functionality. such a requirement would entail sufficient operational changes by david card networks, issuers, merchants, merchant acquirers and their processors. merchant routings with they provide market discipline and discourage network from setting high interchange fees. the proposed rule prohibits insurers from inhibiting merchant of angeles and includes examples of issue were or network actions that would impede merchant rodding flexibility. such as issue were or network rules that require route of the transaction over a particular network when multiple networks are available. the statute requires the board to establish final interchange fee standards as well as rules preventing circumvention or evasion no later than april 21st, 2011. these rules take effect three months later on july 21st.

the board must issue final rules that prohibit network exclusivity arrangements and robbing restrictions no later than july 21st, 2011, but the statute does not establish an effective date for these rules. the federal register notice provides comment on lead time required to implement prohibitions on network exclusivity and robbing restrictions. the amount of lead time required will depend on the approach the board adopts in its final roll. my colleagues and i would be happy to answer any questions you may have. >> this is a very complex issue and i want to thank staff for a great deal of effort put into this. a lot of outrage to the public. a lot of analysis. thank you for bringing us this proposal. we have an opportunity for some questions. let me start off. there is a presumption that

prices will be set by market competition generally but of course the counterexample such as utilities were government intervention is justified by various reasons. can you help us think about what are the arguments for and against allowing interchange fees to be determined in the market versus having a regulatory intervention? can we think about the economics? >> increased competition leads to lower prices. in payment card markets competition tends to drive interchange fees higher. the reason for this is in these markets the party that the sides what method of payment will be used that is the customer, is different from the party that is

associated with that decision. in general customers don't tend to take into account the cost incurred by merchants resulting in that decision. the networks wind banks to issue their cards and they want customers to use their cards. they provide an incentive to banks to issue cards by offering higher interchange fees. the banks use revenue from these interchange fees to offer more attractive deposit account terms to their customers including in some cases rewards for making payments with debit cards. meanwhile the merchants who ultimately foot the bill for their customers's payment choices have little or no ability to implement the customers's decision with regard to what payment is used. in addition, given the near ubiquity of card acceptance and

the expectations of customers many merchants believe they don't have the option of refusing to accept card payments. so even though merchants would prefer lower interchange fees philosophies are extremely high needing to accept cards and as a result competition in these markets tends to focus on the issue worse and cardholders who prefer higher interchange fees so the result of that competition is to drive those fees up rather than down. >> thank you. i know this is an issue other countries have looked at. have you reviewed the experience of other countries? how does it compare to what other countries have done in this area? >> we have looked at various models of the interchange the regulation including those of the reserve bank of australia and the european commission.

in australia the reserve bank would regulate both credit cards and debit card interchange fees. and broader latitude regarding how to regulate interchange fees than the board has currently. it did use a cost base criteria to arrive at their benchmark interchange fee which is for debit cards in both cents. in europe the european commission initiated an investigation of cross border debit card interchange fees and in recent settlements with visa and mastercard european commission used a different criteria that was not based on issue work cost but rather a merchant cost. from that approach they arrived at the interchange fee of 0.2% which corresponds to $0.08 on a typical double card transaction of $40. the difference in statutory authority and approaches staff

recommendation of $0.07 for safe harbor and $0.12 for the cap are not materially different from what these other authorities determined. >> thank you. vice chair? >> i can think of a number of different ways in which this rule could affect consumers and wonder if you thought through what the likely overall effect of this rule is going to be on consumers? >> we think the effect on consumers is difficult to predict but we do have some observations. passing on the cost of debt but card acceptance which includes interchange transaction fees through consumers's high price conservatives. because merchants generally do not distinguish between the pricing of various forms of payment consumers that use cash or check they pay more than the

cost of card acceptance. given reduction in interchange fees and overall debit card acceptance merchants could choose to pass savings through which could benefit consumers that primarily pay with cash or check as well as debit card users. we expect this would be most likely to happen that lower cost would more likely be passed on to consumers in those markets with lower margins and intensify the competition. are there any savings they might realize? could be offset by fee increases and banks as well as changes in terms that debit card holders deposit accounts. account holders at separate institutions with the big card use or additional account fees and couldn't perceive less favorable terms for accounts from related services. one of the first thing the issue

worse may do is reduce or eliminate debit card reward programs. these changes that may happen at the bank may be more visible to consumers than any savings they realize. overall it is hard to insist what that will be. >> just one other question. in my opening remarks, debit cards in importance, is it possible that this rule with debit cards and payments, something you anticipate? >> you noted in your -- and important method of payment. the way for consumers to track

and control spending. the effect in debit card use overall, consumers respond that is presented by merchants and card issuers on the other. because of the lower interchange fees and the direct customers use debit, they accept debit cards. this puts the market in the direction of greater use of debit cards overall, issuers will see lower revenues from interchange fees. they encourage customers for other forms of payment, and debit cards. on the hole we don't know what the outcome was in the market. consumers respond to the

incentive is. >> thank you, mr. chairman. the board shall establish standards, and houses in the business. a full reading of the statute implies a judgment that price setting will be pro competitive, more useful to the industry with clear rules. can you help those things through the choice on standards? >> we decided to not propose an issue were specific standard but put some actual standard. to avoid negative economic incentive to minimize

administrative burden. the standard for the interchange fee that is the same as costs for authorizing clearing and settling transaction. it would not provide incentives for issuers for efficient operations and control their costs. perry high-cost operation to recruit those costs from the interchange fees but if they implement efficiency improvement and reduce their costs, it was down substantially. that gave us some pause. and safe harbor works and first alternative, and in the second alternative, has positive incentives for issuers, to

reduce costs below the state farber they could reap the difference between their actual costs and safe harbor amounts and alternative ii which is just a tax to the extent that below the task, the difference in their costs. the others thing was administrative compliance burden. to the extent that the safe harbor could rely on, they one need to calculate each year what the average variable costs were authorizing settling transaction recording costs to the network. and the network with no the maximum permissible interchange fee for that issue were to rely

on those numbers. between the economic incentive, and value limits which we requested comment on. >> response to the question of market failures, with data interchange, and incentives within the debit card. can you talk a little bit more broadly about substitutes, an innovative area. and in the next several years we will scene means of payments, and the establishment of prices set by this area. in that context will be utility setting mechanism here the pro

competitive if we think about substitutes that might come along the way. >> if you look today, and debit cards which in have the interchange fee associated with them. there are other forms of payment checks with wire transfers with no interchange fees at all. and a mixed environment where certain forms of transaction has the flow of payment to the paying bank. and other forms of payment. in the future, innovations in the debit card space, more efficient ways to do debit card payments on line. they would be subject to these. a form of payment outside the

definition of payment cards. they would not be subject to this as our number of different forms of transaction accounts. it is difficult to tell how this will change the competitive landscape going forward. >> gov. do? >> talk about the impact of the exemption of small institutions and prepaid cards and government cards so how the existence of these exemptions impact competition and pricing and impact the usefulness of customer cards. >> with regard to small issuers we really don't know the net effect of the rules because it depends on actions to be taken

by networks and merchants. both statute and our proposed rule permits but do not require networks to established higher interchange fees for the exempt issuer than 40 covered issuers. the networks may decide it is too costly or too complicated to maintained two separate interchange fees scheduled and therefore they basically say that everybody is -- can operate on the same interchange fees which comply with our standards. in that case the exempt issuers would face a similar reduction in their interchange fees. if the networks do decide to the established two separate interchange fee schedules and allow higher interchange fees for small issuers it is possible merchants would discriminate against those issuers by declining to accept their cards

because there are higher fees associated with those cards. currently most if not all of the networks would prohibit that kind of discrimination. but it is not house strictly those rules would be enforced or the rules would change in the future. in addition, the exemption for both the small issuers and the government programs do not cover the exclusivity and robbing provisions of the rules. for example, small issuers would be required to ensure their cards can operate on multiple networks and might be costs associated with doing that. if they don't have the ability to be routed over multiple networks, there are costs

associated with exclusivity. likewise for the government cards. the provisions would tend to put downward pressure on interchange fees in general because now the merchants can steer transactions toward lower-cost networks. what we may find is even if the networks establish a higher interchange fee schedule for the issue worse those issuers have some what of an increase in cost and decline in prices that they may experience a reduction in operations. with regard to government programs, away a lot of agencies currently use prepaid cards as a way to at the low cost way to distribute that, and the issuers of those cards typically impose little or no cost on the

agency's for issuing cards. in the current environment they confirm sufficient revenue to interchange fees to cover operating costs. the intent of the exemption of debit cards from the energy change restriction was to allow that to persist and to allow these cards to be issued at low cost to government agencies. however, the small issuers, government cards are not exempt from the exclusivity and robbing provisions so there may be an increase in costs associated with cards operated on multiple networks and there may be some reduction in interchange fees that as market forces coming to play -- you don't know what the magnitude of those adjustments might be. it is possible that they would be large enough that the issuers

of the government cards would no longer cover costs in the interchange fee and might need to recover some thoughts from the agency itself, increase in government cost of administrative programs. just one more question on the exclusivity and rodding provision. on the signature transaction since those are the ones where there are large numbers of transactions and signature is the only method offered, what is the competitive structure of the net work in the signature transfer system? >> you touch on an important point with regard to the tradition for network exclusivity. currently the signature debit networks are proprietary to the card. as i understand it they are in operation today with two signature networks securing the

card. what that means is if a merchant is facing a transaction where the authorization method is signature the merchant has the only option the merchant faces is to route the transaction over the designated signature network. under the exclusivity provisions offering possible alternatives the alternative that would require two signature networks, one network with each method of authorization is the only way by which carries an additional network pressed into service as a competitive alternative in those situations. however, stepping back we would say that the customer will have additional ability to discount in a provision that is entirely separate from the rulemaking we are discussing today. we would say there will be additional pressure on the signature debit network due to the fact that merchants will be

able to have more flexibility to send customers in that direction. >> mr. chairman, in his initial presentation proposed rule, mark noticed there is no well-established economic definition of incremental costs. so you have proposed using average variable costs. in all the comments that you got a you got a lot of them, were there other plausible measures or forms of cost suggested for implementing? >> possible? >> you can limit yourself to the plausible. >> three major alternatives were presented with what i discussed in my presentation. the first would be marginal cost. the second would be along the lines of average variable cost. the third would be average

cost. [talking over each other] >> that is what we concluded about fixed cost. those are the three major alternatives people would propose and we came up with one that was essentially in the middle. >> the comment you propose using marginal cost, what was their argument other than the fact it was probably lower? i get that. >> it was their interpretation. >> what was the legal argument? >> i don't believe we got any comments that were that detailed? just the implementation of cost would be marginal cost where they come from. >> thanks. secondly, you propose using safe harbor and putting aside for a moment the important question of government horse races about whether we should or should not have safe harbor. assuming that we do, why use the

median price as opposed to -- as opposed to lower-cost? >> we looked at a number of different options. we thought about median cost, two forms of average cost. one would be a simple average taking the average cost of each of the issuers and averaging that. another one being weighted average based on the transactions. the simple average is very high because there were some issuers that were very high, in several cases were higher than the interchange fees they received today. and there were some -- when we looked at the weighted average. awaited by transaction, that ended up skewing very low just because there were certain very

large issuers with very low average cost and we thought that if we put the safe harbor down too low, that it would be more unlikely that issuers would want to avail themselves of it. since one of the purposes of the safe harbor is to enabled issuers to avoid the need for calculating their cost, the administrative cost of doing so versus but interchange revenue that they would have by relying on below safe harbor versus a higher amount that they would be able to receive if they were to calculate the cost. it was more a judgment call. >> the question is given that the language of the statute is the amount of interchange fee that an issuer shall receive

shall be proportional to the cost incurred by the issuer with respect to the transaction. safe harbor at $0.07 and the actual issue were's actual cost is 4 sense. is that with the statutory requirement? >> any feet at safe harbor to beat both reasonable and proportional to cost. reasonable in that $0.07 is the median of all and proportion to be successful. >> we are looking at proportional across the experience of issuers more generally. >> reasonable and proportional doesn't mean is different from equal to or less than cost and reasonable proportional, content

to include some profit. it is not disallowing -- we are required to disallow all profits that might come along. the issues weather $0.07 at safe harbor is a reasonable amount and proportional to the cost and the expectation was it is reasonable and the proportion is within the discretion of the board to determine. reasonable to the cost has only applicable to the test which is reasonable. and proportional to the cost. >> the statute doesn't require the proportion to be sustained. >> this is a matter we're getting comment on. a variety of approaches one could take.

this is one. >> my third question is on this issue of fraud prevention. i want to clarify my understanding, make sure i understand correctly. is it currently -- do we currently anticipate that there will be a rule in place by the time statutory deadline on fraud adjustment? fraud prevention and adjustment? >> it is unlikely we will have one by april. we would probably end up based on the comments we received on this proposal we would then go back and propose a specific fraud adjustment that would be much better informed than we are today based on the --

>> you don't think that is going to be done in a sufficiently expeditious fashion that we will get out of the final roll by the time the statutory deadline? >> i think it would be unlikely. >> final question if you could give me a litigation update. this doesn't involve us but there has been a bunch of litigation over the years most of the antitrust. on interchange fees. is there anything still pending? any recent decisions that will affect the economics of the industry against which our role is going to be judged? >> there are some cases pending. i don't really know the current status of those cases. but the cases are generally -- more than doubled cards and credit card interchange fees are

higher. anything we are doing here in our proposal will delay ratification for this. >> there was a recent department of justice settlement involving visa and master card which did the types of things, providing flexibility to direct consumers to pay in certain ways through steering mechanisms. that may also have an effect on the ability of merchants beyond anything having to do with this. >> iowa would like to talk a little bit about the functional similarities between would woul little bit about the functional similarities between debit cards and checks. when somebody uses a debit card and automatically debit from the

consumer's deposit account at their bank. my reading of the statute -- i want to know if this is correct -- shows a purposeful analogy between the appropriate fee for purchase with a debit card to that with a check and we know checks clear value. my question is did you take into account this functional similarity of debit card checks or alternatively did you compare debit cards that feature alternative payment methods? >> we took into consideration the similarity between the would card transactions and check transactions. this entered into our thought process thinking about the allowable cost that an issuer should take into consideration determining the maximum permissible interchange fee they

were able to receive. there are two considerations the statute put forth. one that you just mentioned on the solidarity between jack and debit cards. the other one that directed the board to distinguish between the incremental cost of the authorization settlement of the transaction which we should consider and other costs that don't relate to specific data card transactions that we should not consider. taking those considerations into account, that is how we determine that we should limit the allowable costs just to those functions that were specifically mentioned in the statutes. authorization, clearing and settlement and as mark mentioned earlier we thought about either

limiting that further to just authorization costs because you do compare with checks and a check transaction the paying bank which would be the equivalent of the issuing bank. they incur costs to clear and settle check transactions but don't get reimbursed for those costs from the merchant bank's. we fought since congress explicitly asked us to consider that we would include them in the allowable costs in the proposed rule. we asked whether we should have a more extensive section of allowable costs that would go beyond authorization, clearing and settlement. looking at other costs that are specific to a transaction, those are costs we're silent on and whether to take into consideration or not so the cost associated with rewards programs or the costs that they incur for

inquiries about particular transactions. those are costs that if they were to be incurred in the czech context the bank would not be able to get reimbursement from the bank because of that, be did not put into the bucket of costs that would be considered with the maximum interchange fee. that is how we took that comparison in to consideration. >> are there any other questions? that was very helpful. what have before us today is not the approval of a final rule but rather agreeing that we will take the proposal presented by staff and issue it for further comment after which additional

work ultimately resulting in a final rule. and take positions on but proposal to issue comments by staff. >> i support issuing the proposed rule to come in and i would like to add my staff to yours for all the hard work you put into preparing this proposal. >> i too can support putting the will forward for further comment. we should be bound as many questions suggest by a couple principles. we are looking for a dynamic competitive marketplace for payments broadly. reasoned evidence suggests that we continue to see more convenience and choice for consumers and this is a development that our rules shedding courage rather than discourage. secondly it is a new set of responsibilities for the federal

reserve and i really complement the staff on bringing together a lot of economic analysis, consumer oriented knowledge in terms of how we're going to understand differences in these positions and legal knowledge. is a new set of responsibilities for us and in part because of that we should listen to comments on people's perspectives. it is not our job to substitute our judgment for the judgment of congress. congress has given us some clarity on rules and what our regulations should suggest. with that i do support the proposal. i would be particularly interested in comments on whether there is a viable or more pro competitive alternative to setting prices consistent with the legislation and secondly interested in better

the impact of a proposed rule on the broad set of payment options available to consumers so we continue the trend toward a more dynamic -- >> i support putting forth proposal and would like to add my compliments for the job of identifying issues and gets robust comments. i thank you for the work you put into it and my sympathy for the work you have ahead of you. >> thank you. i too can support issuing the proposed rules but echo in what gov. watch said, we need to be particularly open-minded. sometimes when we put out a proposed rule we are convinced we have to absent something we anticipate coming in. difficulties in implementing this legislation. subtleties of staff already had to deploy to come up with a

proposal suggests to us -- suggests to me we should be more than usually open to a variety of comments on how to implement final roll. >> thank you to staff. i too believe it is critical that the board move forward beginning the process of requesting comments on this proposed rule. a couple things have been brought up through this process. the interchange fee system is one that is pretty much hidden from consumers and the public and most people have no idea that interchange fees exist and that they are paying for services they may not even use. interchange fee is charged by the issuing bank and paid by the merchant and the merchant as you have told us to for consumer and form of higher prices for

underlying product or service and as a result is likely that all consumers whether or not they are using a debit card for their purchase are paying more at the store, paying more at the pump because the interchange fees are being passed on to them. regardless of whether or not they are using the debit card for their purchase or not. in addition to potentially higher prices, been on transparent nature of the interchange fee suggests these interchange fees may or may not be in line with what banks are offering. what this rulemaking is doing is is an attempt to ascertain the costs and determine if they are reasonable or more precisely from terms of the statute if they are reasonable and proportional. that is what is stated in the law. so this process is intended to understand the nature of those costs and determine if they are reasonable and require the interchange fee be in line with

those costs. what we heard in other comments is this, and of regulatory intervention in which a regulator has to intervene in a market to better align pricing with cost is unusual. in my mind the directive for this intervention results from a market that is working less than competitively. from that perspective on would note that the credit card issuing market has become significantly more concentrated in the last few years as numerous card issuers have merged. and the card network also is dominated by a only a few players and they appear to be substantial barriers to entry so these market features have had significant consequences for consumers. we know it is not this rule's intend for what more than congress has suggested so it is

worth noting this regulatory intervention will not be to all the wrongs that may arise from structure of this industry. i want to underscore the case with all regulations that the effectiveness of a particular regulation depends in part on its ability to be complied with, the ability to be enforced and the diligence and care used in that enforcement effort. like all other regulations, once a debit card interchange fee regulation is adopted, the expectation is that it will require enforcement by all the applicable regulators. the bank examiners will need to examine issuing banks for compliance with the final form of this regulation and enforcement actions for non compliance would be expected to follow. thank you. >> i too can support the