34.1 Deposit Classification, Reserve Ratios and Debit Interchange

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Federal Reserve Board Regulation D (12 CFR Part 204)

Regulation D implements Section 19 of the Federal Reserve Act, establishing reserve requirements that depository institutions must maintain on deposit liabilities to facilitate the implementation of monetary policy by the Federal Reserve System.

Statutory Deposit Classifications

Regulation D establishes three foundational categories of deposit liabilities, each governed by distinct legal characteristics:

1. Transaction Accounts (12 CFR § 204.2(e)): Deposit accounts from which the depositor or account holder is permitted to make unlimited transfers or withdrawals to third parties or to another account of the depositor. Transaction accounts include Demand Deposit Accounts (DDAs), Negotiable Order of Withdrawal (NOW) accounts, and Automatic Transfer Service (ATS) accounts.
2. Savings Deposits (12 CFR § 204.2(d)): Interest-bearing or non-interest-bearing accounts for which the bank reserves the right to require at least seven days’ written notice of an intended withdrawal, even though it ordinarily does not exercise the right, historically distinguished by limitations on convenient transfers.
3. Time Deposits (12 CFR § 204.2(c)): Accounts with a fixed maturity date or required notice period of at least seven calendar days from the date of deposit (e.g., Certificates of Deposit [CDs]). Under 12 CFR § 204.2(c)(1), time deposits are legally distinguished by mandatory early withdrawal penalties: if a depositor withdraws principal within six calendar days after deposit or prior withdrawal, the bank must impose an early withdrawal penalty equal to at least seven calendar days of simple interest.

The Historical 6-Transfer Rule and the 2020 Interim Final Rule

Historically, 12 CFR § 204.2(d)(2) strictly limited savings deposits to no more than six 'convenient' transfers or withdrawals per calendar month or statement cycle of at least four weeks:

• Counted Against the 6-Limit: Preauthorized ACH debits, automatic recurring transfers, online banking transfers, mobile transfers, telephone transfers, checks, and point-of-sale debit card transactions payable to third parties.
• Exempt from the Limit: Unlimited transfers or withdrawals initiated in person at a teller counter, by mail, or at an automated teller machine (ATM), as well as internal bank transfers made to repay loans at the same institution.
• Mandatory Monitoring: Depository institutions were legally required to monitor accounts and enforce the rule by reclassifying non-compliant accounts to transaction accounts or revoking transfer capabilities for customers who repeatedly exceeded six transfers.

The 2020 Interim Final Rule & Current Reserve Environment

In April 2020, the Federal Reserve Board issued an Interim Final Rule that fundamentally transformed the operational administration of Regulation D:

• Elimination of Mandatory 6-Transfer Enforcement: The Federal Reserve amended the definition of 'savings deposit' in 12 CFR § 204.2(d)(2) to delete the numeric six-transfer limitation, permitting depository institutions to allow depositors to make unlimited convenient transfers from savings accounts.
• Zero Percent Reserve Ratios: Effective March 26, 2020, the Federal Reserve reduced reserve requirement ratios across all net transaction account tranches to 0% (zero percent), effectively eliminating statutory reserve maintenance burdens.

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Federal Reserve Board Regulation II (Debit Card Interchange Fees, 12 CFR Part 235)

Regulation II implements Section 920 of the Electronic Fund Transfer Act (EFTA), commonly known as the Durbin Amendment (enacted under Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act). Regulation II restricts the interchange transaction fees that large debit card issuers may receive and prohibits payment card network routing exclusivity.

Institutional Scope and the $10 Billion Exemption

Regulation II divides debit card issuers into two distinct regulatory tiers based on institution size:

• Covered Issuers ($10 Billion or More): Any depository institution that, together with its affiliates, reported total consolidated assets of $10 billion or more as of the end of the calendar year preceding the date of the transaction. Covered issuers are subject to the statutory interchange fee cap.
• Exempt Small Issuers (Under $10 Billion): Depository institutions with consolidated assets under $10 billion are statutorily exempt from the interchange fee cap (the 'small issuer exemption'), permitting them to receive traditional, market-determined interchange revenue.

The Interchange Fee Cap Architecture (12 CFR § 235.3 & § 235.4)

For covered issuers, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is capped by a strict statutory three-part formula:

1. Base Component: 21 cents per transaction;
2. Ad Valorem Component: 5 basis points (0.05%) multiplied by the total transaction dollar value;
3. Fraud Prevention Adjustment: An optional adjustment of up to 1 cent per transaction, provided the covered issuer develops, implements, and certifies compliance with Federal Reserve standards for fraud-prevention policies reasonably designed to identify and prevent fraudulent transactions.

• Statutory Formula: Maximum Permissible Fee = 21 cents + (0.05% × Transaction Dollar Value) + 1 cent (optional fraud prevention adjustment).

• Calculation Example: On a $100 purchase using a debit card issued by a covered bank with qualified fraud prevention controls, the fee is calculated as follows: Base fee (21 cents) + Ad Valorem fee (0.05% × $100 = 5 cents) + Fraud adjustment (1 cent) = 27 cents total interchange fee ($0.27).

Network Exclusivity and Multi-Network Routing Rules (12 CFR § 235.7)

Unlike the interchange fee cap, Regulation II's network routing and anti-exclusivity rules apply universally to ALL debit card issuers, regardless of asset size:

• Minimum Two Unaffiliated Networks: An issuer and a payment card network are strictly prohibited from restricting the number of payment card networks on which an electronic debit transaction may be processed to fewer than two unaffiliated networks.
• Dual-Routing for In-Person and E-Commerce: The Federal Reserve's updated routing rules clarify that issuers must enable at least two unaffiliated payment card networks for both card-present (in-store POS) and card-not-present (online e-commerce, mobile app, and digital wallet) transactions.
• Anti-Steering Prohibitions: Issuers and payment card networks cannot inhibit or override the ability of merchants to direct the routing of electronic debit transactions over any unaffiliated network enabled on the card.

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Regulation GG: Unlawful Internet Gambling Enforcement Act (12 CFR Part 233 / 31 CFR Part 132)

Promulgated jointly by the Federal Reserve Board and the Department of the Treasury, Regulation GG implements the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA, 31 U.S.C. § 5361 et seq.). The regulation prevents gambling businesses from using the United States payment system to accept wagers or bets in connection with unlawful Internet gambling.