Big tech companies are exploiting a loophole in the Durbin amendment and Reg. II that allows them to enjoy significantly higher interchange revenue than their asset size merits. Congress intended the small issuer exemption to apply to small banks, not to big tech companies that structure programs with a handful of small banks so that no interchange restrictions will apply. Small businesses are now paying more than twice as much to accept a big tech debit card than a debit card issued by a bank subject to interchange limitations. In addition, consumers that use big tech debit cards may lack FDIC protection because the tech company that partners to issue cards may hold a substantial portion of the underlying funds in accounts that do not receive such protection.
Big tech debit programs also lessen investment in communities by reducing the funds subject to the Community Reinvestment Act or diverting funds away from cardholders’ communities, and put thousands of small community banks and credit unions in direct competition with companies with assets well above the $10 billion threshold.
To address these concerns and foster an even regulatory playing field, The Clearing House Association, L.L.C. (TCH) wrote an unsolicited comment letter to the Board of Governors of the Federal Reserve System to ask the Fed to take various actions to close the loophole. In its letter, TCH recommends that the Fed revise its official commentary to clarify that a card issuer does not “hold” underlying program funds unless it holds all of the funds. Additionally, TCH recommends the Fed adopt FAQs 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.
To read the full comment letter click here.