et ready for more changes in the payments space, compliments of Uncle Sam. First up is the Federal Reserve, with new rules regarding consumer electronic payments. Next, as the mid-term Congressional elections near, it's a good bet Congress will weigh in on issues such as card interchange.

In the final days of 2005, the Fed announced changes to federal EFT rules that address the responsibilities of merchants doing automated clearing house (ACH) check conversions, and the extent to which Regulation E applies to payroll cards (bank-branded stored value cards that employers can load up and hand out to employees in lieu of traditional paychecks).

The rule change on check conversion, penned as an amendment to the Fed's Reg E, makes it clear that merchants and other businesses that accept checks from consumers and convert those payments to EFT payments (ACH check conversion transactions) must provide written notices to those consumers prior to completion of the transactions.

In the case of POS check conversion, the Fed ruled, these disclosure notices must be "posted in a prominent and conspicuous location," and copies must be provided as part of the check out process (e.g., on receipts).

The required notices should explain to consumers, among other things, that when a check is used to initiate an EFT (i.e., converted to an ACH transaction), funds may be withdrawn from their accounts that very day. Or, put another way, merchants need to remind customers it's not a good idea to play the float on the checks that they write.

Some merchants already post notices to this effect, but the Fed's rule change makes it clear that all merchants are required to post and distribute these disclosures; compliance is mandatory beginning January 2007.

Separately, the Fed also published an "interim" Reg E amendment that extends the regulation's consumer protections to payroll card accounts. This amendment, which doesn't take effect until July 2007, is subject to modification. The Fed has given banks and other interested parties two months to submit written comment before it considers a final rule change. But it's a good bet the final rule will mirror the interim regulatory amendment.

Some background

The Fed, amongst its many responsibilities as the nation's central bank, oversees implementation of the federal EFT Act, as well as the rule processes for several federal consumer credit laws (e.g., Truth-in-Lending and Equal Credit Opportunity Acts). It addresses the EFT Act through Reg E.

In addition to crafting formal regulations, the Fed also maintains ongoing commentaries that provide insights from its legal staff on how regulatory requirements might apply to real-life situations. In tandem with its announced amendments to Reg E, the Fed updated its Reg E commentary to clarify issues related to banks' responsibilities when customers dispute EFT transactions, and ATM operators' disclosure obligations with respect to ATM fees.

While the U.S. President appoints members to the Federal Reserve Board, the Fed actually is a creature of Congress. In other words, it gets its marching orders from the U.S. House and Senate.

When Congress passed the EFT Act in the 1970s, it put the Fed in charge of working out the details and ensuring compliance with the new law. The result was Reg E. When, in 1987, Congress passed the Expedited Funds Availability Act (EFAA), the Fed's staff crafted Reg CC, which spelled out limits on how long banks could hold off on making funds available on deposited checks.

Now it's beginning to look like Congress may enact legislation that addresses interchange fees for credit and debit card transactions. That could mean the Fed will be directed to take action, but as it stands now, Congress is only interested in fact finding.

Presently, the Fed has no jurisdiction over the fees banks charge merchants for accessing the inter-bank card system. This sets the Fed apart from other countries' central banks that have taken to regulating interchange fees.

A few years ago, for example, the Fed's counterpart in Australia, the Reserve Bank of Australia, made headlines when it decided it had the authority to regulate bankcards, and forced Visa and MasterCard to slash interchange. More recently, the Aussie central bank has taken on POS debit card interchange pricing (see "Australia Examines Debit Fees, Network Rules," The Green Sheet, Jan. 9, 2006, issue 06:01:01).

Congressional scrutiny

Interchange has been a contentious issue in the United States for more than a decade. But the issue has only recently captured the attention of lawmakers who are now debating interchange in the context of rising oil prices and price gouging accusations.

Energy legislation approved by the U.S. House and now awaiting consideration in the Senate, among other things would commission a Federal Trade Commission (FTC) study of price gouging at the gas pump, including an "analysis of the role and overall cost of credit card interchange rates on gasoline and diesel fuel retail prices."

The request was inserted in legislation taken up in the wake of Hurricane Katrina and the problems that ensued with domestic oil supplies. It was brought to the attention of Congress by the National Association of Convenience Stores (NACS), a Washington-area association that lobbies on behalf of convenience stores and service stations. NACS also is a party to current class-action litigation challenging Visa, MasterCard and several large banks on interchange pricing.

Congress, as a rule, doesn't meddle in things like bank pricing, unless, of course, there's a hue and cry from the public. Back in the early 1990s, with interest rates spiraling and bank credit card profits soaring, a debate occurred in Congress on legislation that addressed card fees, but no legislative mandates were issued.

That the current debate is being raised in the context of spiraling prices at the gas pump and allegations of price gouging by oil companies, however, and the fact that this is an election year, suggests that the pending request for an FTC study of credit card interchange might well be enacted.

It's only a preliminary step, of course, but the fact that the FTC might be called upon to look into credit card interchange suggests that the debate over card interchange won't be limited for much longer to the courts and convention panels.

To learn more about Reg E and Reg CC, visit www.greensheet.com/mlsportal/industryfaq.html

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com .