Today the Fed has issued their proposed interchange regulations.  They boil down to three key proposals:

1.  The Fed gutted interchange by setting prices at least 80% lower than today.  They proposed two choices for interchange prices, which amount to a giant win for retailers and a commensurate loss for issuers:  Either a flat $0.12 cap, or a $0.12 cap with a $0.07 safe harbor.  This means that each bank would have to justify their fees if over $0.07, and they’d still have a hard cap of $0.12.

2.  They have delayed any decision on fraud prevention.  They aptly pointed out that there are a number of approaches that could lead to improved fraud prevention, and they’re signaling their willingness to give incentives for fraud prevention.  It’s not clear whether the Fed will prescribe certain approaches like EMV, but they leave room for that, and I think signal in their proposal an interest in going that direction.

3.  They punted the big decision on network exclusivity.  The Fed issued two competing proposals for comment and has reserved their judgment on which way to go.  Choice One would require two unaffiliated networks for each card, without regard for whether the two networks are Signature or PIN.  Choice 2 would require two unaffiliated PIN networks AND two unaffiliated Signature networks.  This choice would lead to a big change in the way cards are processed in the US.

There is no doubt that this ruling is heavily weighted towards the retailers side of the argument.  Future posts will explore what the secondary and tertiary effects will be including what will happen to alternative payments, and mobile payments in particular.

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