PART 235—DEBIT CARD INTERCHANGE FEES AND ROUTING (REGULATION II) Authority: 15 U.S.C. 1693o-2. Source: Reg. II, 76 FR 43466, July 20, 2011, unless otherwise noted. § 235.1 Authority and purpose. (a) Authority. (b) Purpose. § 235.2 Definitions. For purposes of this part: (a) Account (2) Does not include an account held under a bona fide trust agreement that is excluded by section 903(2) of the Electronic Fund Transfer Act and rules prescribed thereunder. (b) Acquirer (c) Affiliate (d) Cardholder (e) Control (1) Ownership, control, or power to vote 25 percent or more of the outstanding shares of any class of voting security of the company, directly or indirectly, or acting through one or more other persons; (2) Control in any manner over the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of the company; or (3) The power to exercise, directly or indirectly, a controlling influence over the management or policies of the company, as the Board determines. (f) Debit card (2) Includes any general-use prepaid card; and (3) Does not include— (i) Any card, or other payment code or device, that is redeemable upon presentation at only a single merchant or an affiliated group of merchants for goods or services; or (ii) A check, draft, or similar paper instrument, or an electronic representation thereof. (g) Designated automated teller machine (ATM) network (1) All ATMs identified in the name of the issuer; or (2) Any network of ATMs identified by the issuer that provides reasonable and convenient access to the issuer's customers. (h) Electronic debit transaction (2) Does not include transactions initiated at an ATM, including cash withdrawals and balance transfers initiated at an ATM. (i) General-use prepaid card (1) Issued on a prepaid basis in a specified amount, whether or not that amount may be increased or reloaded, in exchange for payment; and (2) Redeemable upon presentation at multiple, unaffiliated merchants for goods or services. (j) Interchange transaction fee (k) Issuer (l) Merchant (m) Payment card network (1) Directly or indirectly provides the proprietary services, infrastructure, and software that route information and data to an issuer from an acquirer to conduct the authorization, clearance, and settlement of electronic debit transactions; and (2) A merchant uses in order to accept as a form of payment a brand of debit card or other device that may be used to carry out electronic debit transactions. (n) Person (o) Processor (p) Route (q) United States § 235.3 Reasonable and proportional interchange transaction fees. (a) In general. (b) Determination of reasonable and proportional fees. (1) 21 cents and; (2) 5 basis points multiplied by the value of the transaction. § 235.4 Fraud-prevention adjustment. (a) In general. (b) Issuer standards. (2) An issuer's policies and procedures must address— (i) Methods to identify and prevent fraudulent electronic debit transactions; (ii) Monitoring of the volume and value of its fraudulent electronic debit transactions; (iii) Appropriate responses to suspicious electronic debit transactions in a manner designed to limit the costs to all parties from and prevent the occurrence of future fraudulent electronic debit transactions; (iv) Methods to secure debit card and cardholder data; and (v) Such other factors as the issuer considers appropriate. (3) An issuer must review, at least annually, its fraud-prevention policies and procedures, and their implementation and update them as necessary in light of— (i) Their effectiveness in reducing the occurrence of, and cost to all parties from, fraudulent electronic debit transactions involving the issuer; (ii) Their cost-effectiveness; and (iii) Changes in the types of fraud, methods used to commit fraud, and available methods for detecting and preventing fraudulent electronic debit transactions that the issuer identifies from— (A) Its own experience or information; (B) Information provided to the issuer by its payment card networks, law enforcement agencies, and fraud-monitoring groups in which the issuer participates; and (C) Applicable supervisory guidance. (c) Notification. (d) Change in status. [77 FR 46280, Aug. 3, 2012] § 235.5 Exemptions. (a) Exemption for small issuers In general. (i) The issuer holds the account that is debited; and (ii) The issuer, together with its affiliates, has assets of less than $10 billion as of the end of the calendar year preceding the date of the electronic debit transaction. (2) Determination of issuer asset size. (3) Change in status. (4)(i) Temporary relief for 2020 and 2021. (A) The assets of the issuer, together with its affiliates, as of the end of the calendar year 2019; and (B) The assets of the issuer, together with its affiliates, as of the end of the calendar year 2020. (ii) The relief provided under this paragraph (a)(4) does not apply to an issuer if the Board determines that permitting the issuer to determine its assets in accordance with that paragraph would not be commensurate with the asset profile of the issuer. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the issuer since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the issuer has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the issuer. In making a determination pursuant to this paragraph (a)(4)(ii), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202. (b) Exemption for government-administered programs. (1) The electronic debit transaction is made using a debit card that has been provided to a person pursuant to a Federal, State, or local government-administered payment program; and (2) The cardholder may use the debit card only to transfer or debit funds, monetary value, or other assets that have been provided pursuant to such program. (c) Exemption for certain reloadable prepaid cards In general. (i) Not issued or approved for use to access or debit any account held by or for the benefit of the cardholder (other than a subaccount or other method of recording or tracking funds purchased or loaded on the card on a prepaid basis); (ii) Reloadable and not marketed or labeled as a gift card or gift certificate; and (iii) The only means of access to the underlying funds, except when all remaining funds are provided to the cardholder in a single transaction. (2) Temporary cards. (d) Exception. (1) A fee or charge for an overdraft, including a shortage of funds or a transaction processed for an amount exceeding the account balance, unless the fee or charge is imposed for transferring funds from another asset account to cover a shortfall in the account accessed by the card; or (2) A fee imposed by the issuer for the first withdrawal per calendar month from an ATM that is part of the issuer's designated ATM network. [Reg. II, 76 FR 43466, July 20, 2011, as amended at 85 FR 77362, Dec. 2, 2020] § 235.6 Prohibition on circumvention, evasion, and net compensation. (a) Prohibition of circumvention or evasion. (b) Prohibition of net compensation. § 235.7 Limitations on payment card restrictions. (a) Prohibition on network exclusivity In general. (2) Permitted arrangements. (i) Where such networks in combination do not, by their respective rules or policies or by contract with or other restriction imposed by the issuer, result in the operation of only one network or only multiple affiliated networks for a geographic area, specific merchant, particular type of merchant, or particular type of transaction, and (ii) Where each of these networks has taken steps reasonably designed to be able to process the electronic debit transactions that it would reasonably expect will be routed to it, based on expected transaction volume. (3) Prohibited exclusivity arrangements by networks. (4) Subsequent affiliation. (b) Prohibition on routing restrictions. (c) Compliance dates General. (2) Restrictions by payment card networks. (3) Debit cards that use transaction qualification or substantiation systems. (4) General-use prepaid cards. (i) With respect to non-reloadable general-use prepaid cards, the compliance date is April 1, 2013. Non-reloadable general-use prepaid cards sold prior to April 1, 2013 are not subject to paragraph (a) of this section. (ii) With respect to reloadable general-use prepaid cards, the compliance date is April 1, 2013. Reloadable general-use prepaid cards sold prior to April 1, 2013 are not subject to paragraph (a) of this section unless and until they are reloaded, in which case the following compliance dates apply: (A) With respect to reloadable general-use prepaid cards sold and reloaded prior to April 1, 2013, the compliance date is May 1, 2013. (B) With respect to reloadable general-use prepaid cards sold prior to April 1, 2013, and reloaded on or after April 1, 2013, the compliance date is 30 days after the date of reloading. [Reg. II, 76 FR 43466, July 20, 2011, as amended at 87 FR 61230, Oct. 11, 2022] § 235.8 Reporting requirements and record retention. (a) Entities required to report. (b) Report. (c) Record retention. (2) Any person subject to this part having actual notice that it is the subject of an investigation or an enforcement proceeding by its enforcement agency shall retain the records that pertain to the investigation, action, or proceeding until final disposition of the matter unless an earlier time is allowed by court or agency order. § 235.9 Administrative enforcement. (a) (1) Compliance with the requirements of this part shall be enforced under— (i) Section 8 of the Federal Deposit Insurance Act, by the appropriate Federal banking agency, as defined in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)), with respect to— (A) National banks, federal savings associations, and federal branches and federal agencies of foreign banks; (B) Member banks of the Federal Reserve System (other than national banks), branches and agencies of foreign banks (other than federal branches, federal Agencies, and insured state branches of foreign banks), commercial lending companies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act; (C) Banks and state savings associations insured by the Federal Deposit Insurance Corporation (other than members of the Federal Reserve System), and insured state branches of foreign banks; (ii) The Federal Credit Union Act (12 U.S.C. 1751 et seq. (iii) The Federal Aviation Act of 1958 (49 U.S.C. 40101 et seq. (iv) The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq. (2) The terms used in paragraph (a)(1) of this section that are not defined in this part or otherwise defined in section 3(s) of the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the meaning given to them in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101). (b) Additional powers. (2) In addition to its powers under any provision of law specifically referred to in paragraphs (a)(1)(i) through (a)(1)(iv) of this section, each of the agencies referred to in those paragraphs may exercise, for the purpose of enforcing compliance under this part, any other authority conferred on it by law. (c) Enforcement authority of Federal Trade Commission. § 235.10 Effective and compliance dates. Except as provided in § 235.7, this part becomes effective and compliance is mandatory on October 1, 2011. Appendix A to Part 235—Official Board Commentary on Regulation II Introduction The following commentary to Regulation II (12 CFR part 235) provides background material to explain the Board's intent in adopting a particular part of the regulation. The commentary also provides examples to aid in understanding how a particular requirement is to work. Section 235.2 Definitions 2(a) Account 1. Types of accounts. i.e., 2. Bona fide trusts. 3. Account located in the United States. 2(b) Acquirer 1. In general. See 2(c) Affiliate 1. Types of entities. 2. Other affiliates. 2(d) Cardholder 1. Scope. 2(e) Control [Reserved] 2(f) Debit Card 1. Card, or other payment code or device. 2. Deferred debit cards. 3. Decoupled debit cards. 4. Hybrid cards. i. Some cards, or other payment codes or devices, may have both credit- and debit-like features (“hybrid cards”). For example, these cards may enable a cardholder to access a line of credit, but select certain transactions for immediate repayment ( i.e., ii. If an issuer conditions the availability of a credit or charge card that permits pre-authorized repayment of some or all transactions on the cardholder maintaining an account at the issuer, such a card is considered a debit card for purposes of this part. 5. Virtual wallets. e.g., 6. General-use prepaid card. 7. Store cards. 8. Checks, drafts, and similar instruments. 9. ACH transactions. 2(g) Designated Automated Teller Machine (ATM) Network 1. Reasonable and convenient access clarified. 2(h) Electronic Debit Transaction 1. Debit an account. 2. Form of payment. e.g., 3. Subsequent transactions. 4. Cash withdrawal at the point of sale. 5. Geographic limitation. 2(i) General-Use Prepaid Card 1. Redeemable upon presentation at multiple, unaffiliated merchants. 2. Selective authorization cards. e.g., 2(j) Interchange Transaction fee 1. In general. 2. Compensating an issuer. 3. Established, charged, or received. 2(k) Issuer 1. In general. 2. Traditional debit card arrangements. e.g., 3. BIN-sponsor arrangements. i. Sponsored debit card model. ii. Prepaid card model. 4. Decoupled debit cards. 2(l) Merchant [Reserved] 2(m) Payment Card Network 1. In general. i.e., 2. Three-party systems. 3. Processors as payment card networks. 4. Automated clearing house (ACH) operators. 5. ATM networks. e.g., 2(n) Person [Reserved] 2(o) Processor 1. Distinction from acquirers. 2. Issuers. 2(p) Route 1. An entity routes information if it both directs and sends the information to an unaffiliated entity (or affiliated entity acting on behalf of the unaffiliated entity). This other entity may be a payment card network or processor (if the entity directing and sending the information is a merchant or an acquirer) or an issuer or processor (if the entity directing and sending the information is a payment card network). 2(q) United States [Reserved] Section 235.3 Reasonable and Proportional Interchange Transaction Fees 3(a) [Reserved] 3(b) Determining Reasonable and Proportional Fees 1. Two components. ad valorem 2. Variation in interchange fees. ad valorem 3. Example. ad valorem Section 235.4 Fraud-Prevention Adjustment 4(b) Issuer Standards Section 235.4 Fraud-prevention adjustment 4(a) [Reserved] 4(b)(1) Issuer standards 1. An issuer's policies and procedures should address fraud related to debit card use by unauthorized persons. Examples of use by unauthorized persons include, but are not limited to, the following: i. A thief steals a cardholder's wallet and uses the debit card to purchase goods, without the authority of the cardholder. ii. A cardholder makes a purchase at a merchant. Subsequently, the merchant's employee uses information from the debit card to initiate a subsequent transaction, without the authority of the cardholder. iii. A hacker steals cardholder account information from the issuer or a merchant processor and uses the stolen information to make unauthorized card-not-present purchases or to create a counterfeit card to make unauthorized card-present purchases. 2. An issuer's policies and procedures must be designed to reduce fraud, where cost effective, across all types of electronic debit transactions in which its cardholders engage. Therefore, an issuer should consider whether its policies and procedures are effective for each method used to authenticate the card ( e.g., e.g., 3. An issuer's policies and procedures must be designed to take effective steps to reduce both the occurrence of and costs to all parties from fraudulent electronic debit transactions. An issuer should take steps reasonably designed to reduce the number and value of its fraudulent electronic debit transactions relative to its non-fraudulent electronic debit transactions. These steps should reduce the costs from fraudulent transactions to all parties, not merely the issuer. For example, an issuer should take steps to reduce the number and value of its fraudulent electronic debit transactions relative to its non-fraudulent transactions whether or not it bears the fraud losses as a result of regulations or network rules. 4. For any given issuer, the number and value of fraudulent electronic debit transactions relative to non-fraudulent transactions may vary materially from year to year. Therefore, in certain circumstances, an issuer's policies and procedures may be effective notwithstanding a relative increase in the transactions that are fraudulent in a particular year. However, continuing increases in the share of fraudulent transactions would warrant further scrutiny. 5. In determining which fraud-prevention technologies to implement or retain, an issuer must consider the cost-effectiveness of the technology, that is, the expected cost of the technology relative to its expected effectiveness in controlling fraud. In evaluating the cost of a particular technology, an issuer should consider whether and to what extent other parties will incur costs to implement the technology, even though an issuer may not have complete information about the costs that may be incurred by other parties, such as the cost of new merchant terminals. In evaluating the costs, an issuer should consider both initial implementation costs and ongoing costs of using the fraud-prevention method. 6. An issuer need not develop fraud-prevention technologies itself to satisfy the standards in § 235.4(b). An issuer may implement fraud-prevention technologies that have been developed by a third party that the issuer has determined are appropriate under its own policies and procedures. Paragraph 4(b)(2) Elements of fraud-prevention policies and procedures. 1. In general. Paragraph 4(b)(2)(i). Methods to identify and prevent fraudulent debit card transactions. 1. In general. i. Practices to help determine whether a card is authentic and whether the user is authorized to use the card at the time of a transaction. For example, an issuer may specify the use of particular authentication technologies or methods, such as dynamic data, to better authenticate a card and cardholder at the time of the transaction, to the extent doing so does not inhibit the ability of a merchant to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions. ( See ii. An automated mechanism to assess the risk that a particular electronic debit transaction is fraudulent during the authorization process ( i.e., iii. Practices to support reporting of lost and stolen cards or suspected incidences of fraud by cardholders or other parties to a transaction. As an example, an issuer may promote customer awareness by providing text alerts of transactions in order to detect fraudulent transactions in a timely manner. An issuer may also report debit cards suspected of being fraudulent to their networks for inclusion in a database of potentially compromised cards. Paragraph 4(b)(2)(ii). Monitoring of the issuer's volume and value of fraudulent electronic debit transactions. 1. Tracking its fraudulent electronic debit transactions over time enables an issuer to assess whether its policies and procedures are effective. Accordingly, an issuer must include policies and procedures designed to monitor trends in the number and value of its fraudulent electronic debit transactions. An effective monitoring program would include tracking issuer losses from fraudulent electronic debit transactions, fraud-related chargebacks to acquirers, losses passed on to cardholders, and any other reimbursements from other parties. Other reimbursements could include payments made to issuers as a result of fines assessed to merchants for noncompliance with Payment Card Industry (PCI) Data Security Standards or other industry standards. An issuer should also establish procedures to track fraud-related information necessary to perform its reviews under § 235.4(b)(3) and to retain and report information as required under § 235.8. Paragraph 4(b)(2)(iii). Appropriate responses to suspicious electronic debit transactions. 1. An issuer may identify transactions that it suspects to be fraudulent after it has authorized or settled the transaction. For example, a cardholder may inform the issuer that the cardholder did not initiate a transaction or transactions, or the issuer may learn of a fraudulent transaction or possibly compromised debit cards from the network, the acquirer, or other parties. An issuer must implement policies and procedures designed to provide an appropriate response once an issuer has identified suspicious transactions to reduce the occurrence of future fraudulent electronic debit transactions and the costs associated with such transactions. The appropriate response may differ depending on the facts and circumstances, including the issuer's assessment of the risk of future fraudulent electronic debit transactions. For example, in some circumstances, it may be sufficient for an issuer to monitor more closely the account with the suspicious transactions. In other circumstances, it may be necessary to contact the cardholder to verify a transaction, reissue a card, or close an account. An appropriate response may also require coordination with industry organizations, law enforcement agencies, and other parties, such as payment card networks, merchants, and issuer or merchant processors. Paragraph 4(b)(2)(iv). Methods to secure debit card and cardholder data. 1. An issuer must implement policies and procedures designed to secure debit card and cardholder data. These policies and procedures should apply to data that are transmitted by the issuer (or its service provider) during transaction processing, that are stored by the issuer (or its service provider), and that are carried on media ( e.g., Paragraph 4(b)(3) Review of and updates to policies and procedures. 1. i. An issuer's assessment of the effectiveness of its policies and procedures should consider whether they are reasonably designed to reduce the number and value of fraudulent electronic debit transactions relative to non-fraudulent electronic debit transactions and are cost effective. ( See ii. An issuer must also assess its policies and procedures in light of changes in fraud types ( e.g., e.g., e.g., 2. An issuer should review its policies and procedures and their implementation more frequently than annually if the issuer determines that more frequent review is appropriate based on information obtained from monitoring its fraudulent electronic debit transactions, changes in the types or methods of fraud, or available methods of detecting and preventing fraudulent electronic debit transactions. ( See 3. In light of an issuer's review of its policies and procedures, and their implementation, the issuer may determine that updates to its policies and procedures, and their implementation, are necessary. Merely determining that updates are necessary does not render an issuer ineligible to receive or charge the fraud-prevention adjustment. To remain eligible to receive or charge a fraud-prevention adjustment, however, an issuer should develop and implement such updates as soon as reasonably practicable, in light of the facts and circumstances. 4(c) Notification. 1. Payment card networks that plan to allow issuers to receive or charge a fraud-prevention adjustment can develop processes for identifying issuers eligible for this adjustment. Each issuer that wants to be eligible to receive or charge a fraud-prevention adjustment must notify annually the payment card networks in which it participates of its compliance through the networks' processes. Section 235.5 Exemptions for Certain Electronic Debit Transactions 1. Eligibility for multiple exemptions. 2. Certification process. 5(a) Exemption for Small Issuers 1. Asset size determination. 2. Change in status. 5(b) Exemption for Government-Administered Payment Programs 1. Government-administered payment program. 5(c) Exemption for Certain Reloadable Prepaid Cards 1. Subaccount clarified. 2. Reloadable. 3. Marketed or labeled as a gift card or gift certificate. ii. The mere mention of the availability of gift cards or gift certificates in an advertisement or on a sign that also indicates the availability of exempted general-use prepaid cards does not by itself cause the general-use prepaid card to be marketed as a gift card or a gift certificate. For example, the posting of a sign in a store that refers to the availability of gift cards does not by itself constitute the marketing of otherwise exempted general-use prepaid cards that may also be sold in the store along with gift cards or gift certificates, provided that a person acting reasonably under the circumstances would not be led to believe that the sign applies to all cards sold in the store. ( See, however, 4. Examples of marketed or labeled as a gift card or gift certificate. i. The following are examples of marketed or labeled as a gift card or gift certificate: A. Using the word “gift” or “present” on a card or accompanying material, including documentation, packaging and promotional displays; B. Representing or suggesting that a card can be given to another person, for example, as a “token of appreciation” or a “stocking stuffer,” or displaying a congratulatory message on the card or accompanying material; C. Incorporating gift-giving or celebratory imagery or motifs, such as a bow, ribbon, wrapped present, candle, or a holiday or congratulatory message, on a card, accompanying documentation, or promotional material; ii. The term does not include the following: A. Representing that a card can be used as a substitute for a checking, savings, or deposit account; B. Representing that a card can be used to pay for a consumer's health-related expenses—for example, a card tied to a health savings account; C. Representing that a card can be used as a substitute for travelers checks or cash; D. Representing that a card can be used as a budgetary tool, for example, by teenagers, or to cover emergency expenses. 5. Reasonable policies and procedures to avoid marketing as a gift card. i. An issuer or program manager of prepaid cards agrees to sell general-purpose reloadable cards through a retailer. The contract between the issuer or program manager and the retailer establishes the terms and conditions under which the cards may be sold and marketed at the retailer. The terms and conditions prohibit the general-purpose reloadable cards from being marketed as a gift card or gift certificate, and require policies and procedures to regularly monitor or otherwise verify that the cards are not being marketed as such. The issuer or program manager sets up one promotional display at the retailer for gift cards and another physically separated display for exempted products under § 235.5(c), including general-purpose reloadable cards, such that a reasonable person would not believe that the exempted cards are gift cards. The exemption in § 235.5(c) applies because policies and procedures reasonably designed to avoid the marketing of the general-purpose reloadable cards as gift cards or gift certificates are maintained, even if a retail clerk inadvertently stocks or a consumer inadvertently places a general-purpose reloadable card on the gift card display. ii. Same facts as in comment 5(c)-5.i, except that the issuer or program manager sets up a single promotional display at the retailer on which a variety of prepaid cards are sold, including store gift cards and general-purpose reloadable cards. A sign stating “Gift Cards” appears prominently at the top of the display. The exemption in § 235.5(c) does not apply with respect to the general-purpose reloadable cards because policies and procedures reasonably designed to avoid the marketing of exempted cards as gift cards or gift certificates are not maintained. iii. Same facts as in comment 5(c)-5.i, except that the issuer or program manager sets up a single promotional multi-sided display at the retailer on which a variety of prepaid card products, including store gift cards and general-purpose reloadable cards are sold. Gift cards are segregated from exempted cards, with gift cards on one side of the display and exempted cards on a different side of a display. Signs of equal prominence at the top of each side of the display clearly differentiate between gift cards and the other types of prepaid cards that are available for sale. The retailer does not use any more conspicuous signage suggesting the general availability of gift cards, such as a large sign stating “Gift Cards” at the top of the display or located near the display. The exemption in § 235.5(c) applies because policies and procedures reasonably designed to avoid the marketing of the general-purpose reloadable cards as gift cards or gift certificates are maintained, even if a retail clerk inadvertently stocks or a consumer inadvertently places a general-purpose reloadable card on the gift card display. iv. Same facts as in comment 5(c)-5.i, except that the retailer sells a variety of prepaid card products, including store gift cards and general-purpose reloadable cards, arranged side-by-side in the same checkout lane. The retailer does not affirmatively indicate or represent that gift cards are available, such as by displaying any signage or other indicia at the checkout lane suggesting the general availability of gift cards. The exemption in § 235.5(c) applies because policies and procedures reasonably designed to avoid marketing the general-purpose reloadable cards as gift cards or gift certificates are maintained. 6. On-line sales of prepaid cards. 7. Temporary non-reloadable cards issued in connection with a general-use reloadable card. 5(d) Exception 1. Additional ATM access. Section 235.6 Prohibition on Circumvention, Evasion, and Net Compensation 1. No applicability to exempt issuers or electronic debit transactions. 6(a) Prohibition of Circumvention or Evasion 1. Finding of circumvention or evasion. 2. Examples of circumstances that may constitute circumvention or evasion. The following examples do not constitute per se circumvention or evasion, but may warrant additional supervisory scrutiny to determine whether the totality of the facts and circumstances constitute circumvention or evasion: i. A payment card network decreases network processing fees paid by issuers for electronic debit transactions by 50 percent and increases the network processing fees charged to merchants or acquirers with respect to electronic debit transactions by a similar amount. Because the requirements of this subpart do not restrict or otherwise establish the amount of fees that a network may charge for its services, the increase in network fees charged to merchants or acquirers and decrease in fees charged to issuers is not a per se circumvention or evasion of the interchange transaction fee standards, but may warrant additional supervisory scrutiny to determine whether the facts and circumstances constitute circumvention or evasion. ii. An issuer replaces its debit cards with prepaid cards that are exempt from the interchange limits of §§ 235.3 and 235.4. The exempt prepaid cards are linked to its customers' transaction accounts and funds are swept from the transaction accounts to the prepaid accounts as needed to cover transactions made. Again, this arrangement is not per se circumvention or evasion, but may warrant additional supervisory scrutiny to determine whether the facts and circumstances constitute circumvention or evasion. 6(b) Prohibition of Net Compensation 1. Net compensation. 2. Consideration of payments or incentives provided by the network in net compensation determination. i. For purposes of the net compensation determination, payments or incentives paid by a payment card network to an issuer with respect to electronic debit transactions or debit card related activities could include, but are not limited to, marketing incentives; payments or rebates for meeting or exceeding a specific transaction volume, percentage share, or dollar amount of transactions processed; or other payments for debit card related activities. For example, signing bonuses paid by a network to an issuer for the issuer's debit card portfolio would also be included in the total amount of payments or incentives received by an issuer from a payment card network with respect to electronic debit transactions. A signing bonus for an entire card portfolio, including credit cards, may be allocated to the issuer's debit card business based on the proportion of the cards or transactions that are debit cards or electronic debit transactions, as appropriate to the situation, for purposes of the net compensation determination. ii. Incentives paid by the network with respect to multiple-year contracts may be allocated over the life of the contract. iii. For purposes of the net compensation determination, payments or incentives paid by a payment card network with respect to electronic debit transactions or debit card-related activities do not include interchange transaction fees that are passed through to the issuer by the network, or discounts or rebates provided by the network or an affiliate of the network for issuer-processor services. In addition, funds received by an issuer from a payment card network as a result of chargebacks, fines paid by merchants or acquirers for violations of network rules, or settlements or recoveries from merchants or acquirers to offset the costs of fraudulent transactions or a data security breach do not constitute incentives or payments made by a payment card network. 3. Consideration of fees paid by an issuer in net compensation determination. i. For purposes of the net compensation determination, fees paid by an issuer to a payment card network with respect to electronic debit transactions or debit card related activities include, but are not limited to, membership or licensing fees, network administration fees, and fees for optional network services, such as risk management services. ii. For purposes of the net compensation determination, fees paid by an issuer to a payment card network with respect to electronic debit transactions or debit card-related activities do not include network processing fees (such as switch fees and network connectivity fees) or fees paid to an issuer processor affiliated with the network for authorizing, clearing, or settling an electronic debit transaction. 4. Example of circumstances not involving net compensation to the issuer. i. Because of an increase in debit card transactions that are processed through a payment card network during a calendar year, an issuer receives an additional volume-based incentive payment from the network for that period. Over the same period, however, the total network fees (other than processing fees) the issuer pays the payment card network with respect to debit card transactions also increase so that the total amount of fees paid by the issuer to the network continue to exceed incentive payments by the network to the issuer. Under these circumstances, the issuer does not receive net compensation from the network for electronic debit transactions or debit card related activities. Section 235.7 Limitations on Payment Card Restrictions 1. Application of small issuer, government-administered payment program, and reloadable card exemptions to payment card network restrictions. 7(a) Prohibition on Network Exclusivity 1. Scope of restriction. e.g., 2. Issuer's role. 3. Permitted networks. i. Network volume capabilities. ii. Reasonable volume expectations. iii. Examples of permitted arrangements. e.g., e.g., e.g., e.g., A. Geographic area: B. Particular type of transaction: 4. Examples of prohibited network restrictions on an issuer's ability to contract with other payment card networks. i. Network rules or contract provisions limiting or otherwise restricting the other payment card networks that an issuer may enable on a particular debit card, or network rules or contract provisions that specify the other networks that an issuer may enable on a particular debit card. ii. Network rules or guidelines that allow only that payment card network's (or its affiliated networks') brand, mark, or logo to be displayed on a particular debit card, or that otherwise limit the ability of brands, marks, or logos of other payment card networks to appear on the debit card. 5. Network logos or symbols on card not required. 6. Voluntary exclusivity arrangements prohibited. 7. Affiliated payment card networks. 8. Application of rule regardless of form. 7(b) Prohibition on Routing Restrictions 1. Relationship to the network exclusivity restrictions. 2. Examples of prohibited merchant restrictions. i. Prohibiting a merchant from encouraging or discouraging a cardholder's use of a particular method of cardholder authentication, for example prohibiting merchants from favoring a cardholder's use of one cardholder authentication method over another, or from discouraging the cardholder's use of any given cardholder authentication method, as further described in comment 7(a)-1. ii. Establishing network rules or designating issuer priorities directing the processing of an electronic debit transaction on a specified payment card network or its affiliated networks, or directing the processing of the transaction away from a specified payment card network or its affiliates, except as: (A) A default rule in the event the merchant, or its acquirer or processor, does not designate a routing preference; or (B) If required by state law. iii. Requiring a specific payment card network to be used based on the form of debit card presented by the cardholder to the merchant ( e.g., 3. Merchant payments not prohibited. 4. Real-time routing decision not required. 5. No effect on network rules governing the routing of subsequent transactions. 7(c) Effective Date 1. Health care and employee benefit cards. Section 235.8 Reporting Requirements and Record Retention [Reserved] Section 235.9 Administrative Enforcement [Reserved] Section 235.10 Effective and Compliance Dates [Reserved] [Reg. II, 76 FR 43466, July 20, 2011, as amended at 76 FR 43467, July 20, 2011; 77 FR 46280, Aug. 3, 2012; 87 FR 61231, Oct. 11, 2022]