Acting on requirements in the Dodd-Frank Act, the Federal Reserve is proposing new restrictions on debit-cards, most notably with respect to the fees issuers may charge when cards are used for retail transactions and how merchants may select payment-service providers in this area. Although proposing several alternatives, the Board is considering use of its Dodd-Frank authority to set hard ceilings on interchange fees, for the first time expressly regulating the price financial providers may charge. The rules would also strictly implement statutory requirements that end network exclusivity for debit cards and give merchants far more choice in selecting payment routing. All of these changes will dramatically affect the business model and related profitability in this area. For consumers, it could mean lower retail prices and greater payment choice, but also fewer reward programs associated with debit cards and/or higher fees on debit cards and other retail financial products. For debit-card issuers, the profit impact will likely be severe due to the strict requirements proposed by the FRB. Large payment-network providers will also see significant adverse profit impact as their ability to control debit-card transactions diminishes and competitive pressure on them to add value for hard-strapped issuers increases.

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