Dan Fisher

With over 35 years in the financial industry, Dan M. Fisher has proven himself as a leader in the financial industry holding roles as the former director of the Federal Reserve Bank of Minneapolis and former Chairman of the ABA Payment Committee.

The Battle Over Interchange & The Marginalizing of Community Financial Institutions

Sparks are really starting to fly over debit card interchange and it is getting personal. Recently, the North Dakota Retailers Association and the North Dakota Petroleum Marketers Association filed a lawsuit in Federal Court (Bismarck, ND) against the Federal Reserve for not enforcing Regulation II. Right behind them, the North Dakota Grocers Association also complained about Covered institutions in their comments on the Regulation to the Fed and proposed changes to Regulation II.

In the lawsuit, all three associations are accusing covered financial institutions ($10 billion in assets or greater) of not complying with Regulation II. Covered institutions are circumventing the Regulation and charging more than the allowed interchange.

The Federal Reserve also proposed changes to Regulation II (See Docket No. R-1748) with a comment deadline in July they just recently extended. In addition, on July 24th last year, Senator Richard Durbin and Representative Peter Welch wrote a letter to the Fed Chairman Jerome Powell complaining about the same phenomenon illustrated above: How some covered institutions are circumventing the regulation. This time, that the Fed needs to do something about this.

Clearly the issue is receiving some rather serious attention all the while community financial institutions are largely being ignored. The American Bankers association has raised some issues, but ICBA and the CUNA have looked the other way and completely ignored the plight of the exempt institution. I agree, and have written many times that covered financial institutions have had an unfair advantage with a cap on interchange merely by not participating in PINLess Debit Transactions (card present and card not present). Unfortunately, exempt financial institutions do not have this option.

The PINLess Debit transaction (card present in particular) literally defeats the PIN technology contained in the EMV Chip all financial institutions were required to implement. Furthermore, due to the rules unilaterally written by the vendor, the fraud liability is shifted from the merchant to the issuer. This means the issuer cannot charge the fraud loss back to the merchant. Because of this, exempt issuers are losing hundreds of dollars at a time to fraud losses beyond their control. These losses can add up to millions of dollars over time. The merchant of course could not care less, however the small financial institutions feel taken advantage of watching their interchange income plumet and fraud losses increase.

By the way, the same processors that own card payment networks also own the merchant/acquirer networks and write their own rules. The exempt bank or credit union can’t do anything about it. Nobody is listening. It is time that community financial institutions say, “Enough!” and raise their hands asking the Federal Reserve to put an end to this.

The best way you can do this is to tell the Fed that community financial institutions have a voice ready to be heard. Stop acting marginalized and make your stance known.

Below is a proposed letter and a suggestion on who you should send it to. Let them know that you want change. Furthermore, send a copy to your Senator and your Representative, too.

Community financial institutions need to take action now to get their attention. Failure to do so, means millions upon millions of dollars that are not going into your communities. They are not being seen via lower prices certainly being siphoned from your community financial institution business model. It is time they hear you and time you send the letter.

You have the opportunity. Don’t be silent any longer. Say enough is enough and take it to the Fed. It is the only way you will be heard and will be the first step to taking back control of your debit card portfolio away from vendors that tell you every day that they want to be your partner while at the same time picking your debit card pocket.

Download our recommended letter here to customize it to your bank or credit union:
Letter to the Federal Reserve

Preview it below:


Letter to the Federal Reserve

   (send on your letterhead)


Ann E. Misback


Board of Governors of the Federal Reserve System

20th Street and Constitutional Avenue NW

Washington, DC 20551

Via Electronic Mail (to regs.comments@federalreserve.gov)

Re: Docket No. R-1748 – Request for Extension of NPRM on Debit Card Interchange Fees and Routing and expansion of the Scope of the Proposed Rules

Re: Federal Reserve Proposed Amendments to Regulation II (Proposed April 30, 2021) Statutory Authority provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act (enacted July 21, 2010)

Dear Ms. Misback,

Community Financial institutions are largely being ignored. Regulation II in regard to exempt financial institutions is being manipulated to adversely impact the community financial institutions (exempt Banks and Credit Unions) by increasing their fraud losses, and reducing their interchange income using PINLess Debit Rules (Card Present Transactions).

Dodd-Frank (The Wall Street Reform and Consumer Protection Act) never gave processors the authority to eliminate the use of the PIN. The same act did not authorize processors to shift fraud liability to the issuer, but this is what is occurring.

Note: Merchants love this feature because they have no risk.

The community financial institutions (Regulation II Exempt Institutions) need change and now.

Needed Reforms (Community Financial Institutions)

  1. Financial processors should not be allowed to own Merchant Acquirer Networks and Card Payment Networks at the same time.
  2. Exempt Financial institutions should have the right to join any network they choose, and only the networks they choose.
  3. Exempt Financial institutions should have the right to select how their debit card payments are processed, and the order in which it’s processed as long as it complies with Regulation II. Card payment networks should not be allowed to usurp these preferences or enable merchants to go around through processing back-doors.


Example: Special contracted switching relationships via merchant acquirer networks when a card payment network is owned by the same vendor. Because of this, that vendor diverts transactions through the manipulation of its own network operating rules.

  1. PINLess Debit Transactions (Card Present) that unilaterally shift transaction liability from the merchant to the issuer should be banned. If the exempt institution does not want to participate in this product that should have the right to opt out (no charge-no penalty).
  2. Linkage Language in membership agreements and Network Operating Rules that force financial institutions to join Card Payment Networks that they do not choose should be banned.
  3. Exempt financial institutions should have the option to require the use of a PIN on all Card Present POS transactions. Covered financial institutions have this option and they insist that a PIN be used at the P.O.S. for card present transactions which gives them a distinct advantage of exempt institutions.

Federal Reserve System 12 CFR Part 235 (Regulation II: Docket No. R-1748) Proposed Rules (Federal Register Vol. 86 No. 91 Thursday, May 13, 2021)

The proposed rules do not go far enough to correct this adverse situation as it relates to the perceived anti-trust activities imposed by processors that own card payment networks and merchant acquirer networks. Issuers have a right to require the PIN be used on Card Present Transactions to reduce the risk of Debit card fraud.

The Federal Reserve should expand the proposed rules to include the above reforms for Exempt institutions and ask the Department of Justice to investigate the tactics associated with the manipulation of Network Operating Rules of Card payment Networks (Switch Networks) and the connection with Merchant/Acquirer networks that are specifically designed to mitigate the benefits Durbin intended to help community financial institutions in preserving interchange income (include card present and card not present transactions).


Your institution

get a free EFT review for interchange income

Dan Fisher

With over 35 years in the financial industry, Dan M. Fisher has proven himself as a leader in the financial industry holding roles as the former director of the Federal Reserve Bank of Minneapolis and former Chairman of the ABA Payment Committee.

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