c-span3. >> -- important new responsibilities under a this act and we have been working diligently. the interchange rule we're considering this afternoon is one of our most challenging rule makings to date. we have received well over 11,000 comments on our proposed rule. we have taken the time needed to review these comments. they have been very helpful to us and the final rule which affects a number of changes by the commenters. i believe the final rule that we will discuss today gives careful and appropriate consideration to the statutory language, the cost data available to us and the complexities of the debit interchange payment system. the board plans to bonn or the

developments in the market on an ongoing basis. that monitoring will include collecting and publishing data related to debit card costs and interchange fees. these data will help the board as well as issuers both large and small, merchants, networks, consumers and congress assess whether the statute and the rule are effectively accomplishing their intended goals. i know that staff has spent significant time and effort on this rule making and i went to commend them for their hard work and dedication. let me now turn to vice chair who chairs the committee on payments, clearing and settlement, the committee which reviewed the proposal. janet? >> thank you, mr. chairman. debit cards are critical component of the nation's retail payment system. they're an efficient form of payment and provide many benefits to both cardholders and merchants. over the past decade, consumers have substantially changed their

methods of payment and are increasingly using debit cards where they once relied on checks or credit cards. debit cards are accepted at about 8 million merchant locations in the u.s., and have become by a wide margin the most prevalent form of non-cash payments in this country. board staff projects that u.s. debit card volume may exceed 50 billion transactions this year. and recent annual growth continues to be at double-digit rates. the debit card success story has been marred by the level of discord between merchants and issuers on the interchange fee issue which is played out in the courts, in the congress, in more recently here at the board. the continued vitality of the debit card system requires balancing of the legitimate needs of depository institutions

that issue debit cards, merchants that accept them, networks that process them, and very importantly, the consumers with customers of both the banks and the merchants. i hope that the banking industry, the retail industry and the card networks will work together in a collaborative manner to ensure that the debit card system and card systems more broadly are designed in a manner that best balances the needs of all parties. i want to thank the staff who work so tirelessly on this rulemaking. i believe their recommendations reflect a careful consideration of the comments received and appropriate implementation of the statutory requirements. i will now turn to mark manusach who will walk us through the draft final bill. >> thank you. i will be discussing the recommended final rule for regulation i.i. which governs

routing and implements 1075 of the dotd-frank act. the final rule is two main components. first, it establishes standards for assessing whether interchange fees of issuers are reasonable and proportional to the cost to issuers. second, it prohibits exclusivity and routing restrictions. since the release of its proposal last december, the board received input from more than 11,000 commenters including issuers, merchants, consumers, payment card networks, acquirers, processers, trade groups, government agencies and members of congress. these commenters raise numerous and often complex issues related to all facets of the proposed legislation. we have carefully considered the issues raised by the commenters, the comments gave valuable input and led to revisions to the proposed regulation. will provide a brief summary in

my presentation. let me now turn to the substance of our recommended final rule. i'm summarize each major statutory requirement, the approaches to implement each in the proposed rule and comments received on the proposal. for each statutory requirement, i will then describe our recommended final rule. in developing our recommended final rule we considered the comments received, the language and purpose of the statute, the available data and the practical results of various interpretations of the statute. the first major aspect of the final rule is the interchange fee standards. the statute requires the board to establish standards for assessing whether the amount of any interchange fee that an issuer receives for a debit card transaction is reasonable and proportional to the issuers cost with respect to the transaction. based on exemptions contained in the statute the standards do not apply to certain government administered debit cards, certain other prepaid cards or

debit card issuers together with affiliates have assets less than $10 billion. in the proposed rule the board invited comment on two alternative standards for debit card interchange fees. under the first alternative, an issuer would comply with the standard if it receives an interchange fee that does not exceed the lesser of the allowable costs and a cap. an issuer could also comply with the standard receiving an interchange fee that does not exceed the level of a safe harbor. the proposal recommended that the cap initially be set at 12 cents per transaction with the safe harbor set at 7 cents per transaction. under the second alternative an issuer bould comply with the standard as long as it does not receive an interchange fee above a cap, again, recommended to be 12 cents per transaction. for both alternatives the proposal defined the allowable costs to be the average value of authorizing clearing and settling transactions, varied

with the number of transactions performed by the issuer over a calendar year. the average cost of clearance and settlement. the value of the caps in both alternatives and the safe harbor in the first alternative derived from information gathered through a survey of covered debit card issue herbs that the board conducted last fall. the board received numerous comments about all aspects of the proposed standards including the proposed definition of allowable costs and the two approaches. issuers and networks overwhelmingly supported expanded allowable costs to include a wider range of debit card costs beyond the costs of authorization and clearance and settleme settlement. among the costs to be included is fixed possessing costs, network fees and fraud losses, as well as the costs of card production, customer inquiries, rewards and account set-up and maintenance. these commenters noted that debit cards provide a payment

guarantee to protect merchants against insufficient funds and issuers are exposed to the risk of fraudulent transactions. in contrast, they supported the proposal to limit allowable costs to the average variable cost of authorization, clearance and settlement for each transaction. these commenters argued that other debit card-related costs would either be not recouped from a bank in a check transaction or not specific to a specific debit card transaction. they further argued that the payment guarantee on the debit card transaction is not really a guarantee as merchants are frequently subject to chargebacks after the initial transaction and as a result bear fraud losses. after carefully considering the comments submitted staff recommends that a somewhat broader range of costs directly related to affecting debit transactions be included as a basis for establishing the

interchange fee standard. the statute instructs the board not to consider cost that is are not specific to a particular transaction. we have interpreted this provision to exclude costs that a debit card issuer would not incur in the course of affecting any electronic debit transaction such as corporate overhead, general account costs and general debit card program costs, including marketing, research and development and card production and delivery costs. the remaining costs would include those that the statute instructs the board to consider, namely the incremental cost of authorizing, clearing and settling of a transaction, as well as other costs that the board may consider because they're incured in the course of affecting an electronic debit transaction. of these other transaction costs, we recommend that in addition to the costs allowed under the original proposal allowable costs of network processing fees and other transaction processing costs such as the cost of network