The Clearing House Association, L.L.C. (TCH) submitted an unsolicited comment letter to the Board of Governors of the Federal Reserve System (Board) advising the Board of partnerships between large fintech companies and small banks that appear to be structured to circumvent Regulation II and asking the Board to take actions to address Regulation II circumvention. TCH believes that certain fintech companies, including companies with well over $10 billion in assets, are selecting small financial institutions as card issuers and are structuring debit- and prepaid-card-issuing programs to avoid the interchange fee limitations provided under the Electronic Fund Transfer Act and Regulation II. TCH’s letter recommends that the Board revise official Board commentary to clarify that a card issuer does not “hold” underlying program funds unless it holds all of the funds, as well as adoption of an FAQ or official commentary that establishes that a small issuer that knowingly participates in a scheme designed to circumvent or evade the interchange limitation may be found liable for circumvention or evasion. Additionally, the letter suggests that the small issuer exception should not be available to an otherwise-qualifying financial institution that serves as the BIN sponsor issuer for a third party if the third party has the authority to direct the issuer to move funds into or out of the issuer’s cardholder account associated with the cards (other than to direct the issuer to settle transactions with a card network), unless the combined assets of the financial institution and third party are less than $10 billion.
To read the full comment letter click here.