varies with the amount of the transaction, we believe that fraud losses are best incorporated through a component in the interchange fee standards. turning to the implementation approaches, numerous issuers, trade groups, networks and individuals objected to the fee limits embodied in the cap under both alternatives and the safe harbor. however, many of these commenters recognized the app l appealed and acknowledged a pure specific standard would be difficult to implement and enforce. although many issuers argued against both alternatives, a significant number preferred alternative two, the standalone over alternative one, the framework with the safe harbor in a cap due to the second alternative's ease of come ploins. however, many of these commenters suggested raising the cap value for expanded definition and to cover the costs of a larger percentage of covered issuers. merchants uniformly supported alternative 1 as being the most consistent with the statute. merchant commenters generally preferred a more issuer specific approach because issuers would receive interchange fees tied to actual respective costs, aulg though some of these commenters acknowledged that a cap or a safe harbor would make the interchange fee structure simpler for merchants to understand which could increase transparency. however, they advocated a lower safe harbor value arguing that a higher safe harbor would allow a large fraction of issuers to receive interchange fees above their actual allowable costs. similarly, merchants generally supported a lower cap to discourage issuers from incuring and compensated for excessively high costs. we believe that the best reading of the statute's reference to an issuer and a transaction is to interpret those terms to refer to a representative issuer and a representative transaction rather than a specific issuer and a specific transaction. a approach based on a more specific reading of those terms would be virtually impossible as an issuer costs for each specific transaction which may vary cannot be ascertained at or time the issuer received the interchange fee. therefore, with respect to the implementation approach, we recommend that the final rule adopt a modified version of the proposed rule, that is, apliblgible to all covered issuers. under the final rule, the maximum permissible interchange fee would be the sum of a base component. we recommend that the base component set at 21 cents, which corresponds to the 80th percentile issuers average transaction allowable costs as reported in the board survey of covered issuers. we further recommend that the component set at five basis points of the transaction value, ri flekting the median issuer's fraud losses as reported in the same sur vafr. each covered issuer permitted to receive an interchange fee that did not exceed the sum of two components without demonstrating the actual per transaction allowable costs. with respect to the statute's requirement that an interchange fee be reasonable and to portional to the cost of the issuer, we believe that the cap delineates a separation of a fee that's reasonable and not reasonable. moreover, because it's based on certain costs for affecting particular electronic debit transactions, the standard ensures that sfees are proportional to those costs as required by the statute. these interchange fee standards would be effective on october 1st, 2011. the final rule also contains provisions that prohibit sir couple vengs or avags of the standards. the statute authorizes the board to allow for adjustment to an interchange fee to account for an issuer's costs in preventing fraud from vided complying with standards established by the board related to fraud prevention activities. the proposed rule did not include a specific adjustment to the amount of interchange fees for an issuer's fraud prevention costs. instead, the proposal requested about comment of two broad approaches to designing standards. the first focused on general fraud prevention activities and costs. the second focused on recouping costs of new or substantial improved fraud prevention technologies. although commenters did not uniformly favor either proposal, they generally agreed that the board should not mandate use of specific technologies, merchant commenters favored a requirement that an issuer adopt technologies that would decrease fraud to be eligible for the adjustment. in contrast, issuers and payment card networks preferred a nonprescriptive approach to allow issuers the flexibility necessary to tailor their fraud prevention activities to address most effectively the risk faced by the issuer associated with changing fraud patterns. we believe that the dynamic nature of the debit card fraud environment requires standards that permit issuers to determine the best methods to mitigate fraud losses for the size and scope of their program and in response to frequent changes in fraud patterns. as a result, we recommend that the board issue an interim final rule with a request for comment that basis eligibility for the fraud prevention adjustment on general standards for an effective fraud prevention program rather than prescribing specific measures or technologies. the general standards require an issuer to establish policies and procedures, reasonably designed to maintain an effective fraud prevention program. as in the case of the interchange fee standards we considered a variety of approaches for implementing the fraud prevention adjustment. we recognized that both issuers and merchants make substantial investments in fraud prevention and the statute does not require the board to set an adjustment so that each issuer fully recovers the costs. as a result, we recommend that the fraud prevention adjustment be implemented through an addition through the cap applicable to all covered issuers. based on information about fraud prevention costs gathered through the board's survey of covered debit card issuers we recommend that the board permit a fraud prevention adjustment of no more than one cent per transaction which is based on the median issuer's fraud preconvenience costs as reported in the survey, less the cost of transaction monitoring included as an allowable cost in determining the interchange fee standard. when combined to the maximum interchange fee under the standard, a covered issuer eligible for the fraud prevention adjustment could receive an interchange fee up to approximately 24 cents for the average transaction. a suggested by virtually all commenter it is fraud prevention adjustment effective on october 1st, 2011. we may recommend that the board make revisions to the adjustment as appropriate at a later date after we consider the comments received. in addition to rules related to interchange fees the statute requires the board to prescribe rules related to the routing of transactions. first, the board must adopt rule that is prohibit issue herbs and payment card networks from restricting the number of networks on which a debit card transaction may be processed to fewer than two unaffiliated networks. second, the board must adopt rule that is prohibit issuers and networks from restricting the ability of merchants to route debit card transactions over any network that may process such transactions. these provisions apply to all issuers including small issuers and certain prepaid card programs that are exempt from the interchange fee restrictions. the proposed rule included two alternatives for implementing the prohibition on network exclusively arrangements. alternative "a" requires a debit card transaction routed over at least two unaffiliated networks irrespective of the authentication of the authentication methods on the card. alternative "b" would require two affiliated networks for each authentication available to the card holder. under either alternative, issuers would be prohibited from restricting merchant routi inin choice among the networks enabled on a card. issuers in payment card networks universally preferred alternative "a." it would impose less severe operational burdens and would not have as large a negative effect on the development of new authentication methods. merchants preferred alternative "b", which they believed would provide the broadest routing choice. such as many online transactions. merchants also believed this alternative would not require substantial operational changes for issuers and networks. we recommend the final rule adopt alternative "a." the recommended final rule requires two unaffiliated networks to be enabled on each debit card without regard to authentication method. under the final rule, an issuer could comply by having one signature network and one affiliated pin network, or alternatively two unaffiliated pin networks or two unaffiliated signature networks enabled on a card. we believe this approach is consistent the statute, which prohibits issuers of payment card networks from restricting the number of payment card networks on which a debit card transaction may be processed to fewer than two unaffiliated network. moreover, the statute does not require two payment card networks available to the merchant for each method of authentication. we further believe this approach would minimize the compliance burden on institutions, particularly small issuers, would present less authentication methods. the statute does not establish an effective date for the exclusivity and routing provisions. under the final rule t prohibition would be effective april 1st, 2012 with respect to issuers and october 1st, 2011 with respect to payment card networks. the final rule includes a delayed effective date for certain prepaid cards that may face technological or operational difficulties with complying by april 1st, 2012. the effective date on routing restrictions would be october 1st, 2011. the earlier effective date will enable merchants to take advantage of enhance erouting flexibility. my colleagues and i would be happy to answer any questions you have. >> thank you very much. thanks to the staff again for a tremendous amount of work on this very challenging rule. we've been talking about issuers and merchants and networks. the ultimate beneficiary, we hope, is the consumer. how do you think this rule will affect consumers? >> i'll answer that question. it's very hard to predict the effect that the rule will have on consumers because the effect is going to depend on the actions taken by various participants in the payment -- in the debit card system. on the one hand, card issuers are likely to implement changes in response to introduction interchange fee. although the staff thinks it's unlikely that issuers would actually impose fees on debit card transactions, per se, or engage in other activities that are designed to steer their customers away from using debit cards, we would expect that at least some cards issuers would change some terms facing their account customers, such as reducing or eliminating rewards associated with debit cards, perhaps imposing certain fees on deposit customers more generally or reducing benefits on deposit customers more generally. at the same time, it's likely to reach consumers in the form of lower prices. the extent to which the savings do get passed on will depend on the competitiveness of the markets in which the merchants operate. merchants who operate in highly competitive markets with low margins are likely to pass on substantially all the savings to their customers. merchants in less competitive markets may keep a larger portion for themselves. if they continue their current practice of not varying prices with payment method, any savings that do get passed on will be shared by all consumers, regardless if they pay with debit cards or other forms of payment. see the effect on any individual consumer will depend on their p behavior. do they use debit cards or not? on the competitiveness of the merchants with whom they do business, on any changes in merchant acceptance of various payment card methods and on the bank's reactions in terms of how they adjust any account terms. so it's hard to predict how any individual consumer will be affected and in aggregate, how all consumers will be affected. we can't say in advance how those are going to play out. >> thanks. >> one of the differences -- one of the most important differences between this rule and the preliminary rule is the expanded set of costs that you are allowing in calculating interchange fees. can you talk about how you decided which costs would be included? maybe what the legal reading is that supports that. >> let me fry to answer that one. we first focused on a statute that prohibits the board from considering. those were costs not specific to a particular debit transa. as mark alluded to in his presentation, that would include corporate overhead, audit, billing department, hr department, those kinds of costs. what the board is allowed to consider are the costs that are specific to particular debit card transactions. those would include the costs the board proposed to permit as allowable costs. the authorization clearance and settlement, which the statute in fact requires the board to consider. but then a range of other costs that are also specific to particular transactions. and we considered those, and we looked at the data we had on those. some are included in the final rule and some are not. for example, fixed costs of software, hardware, that goes towards affecting a particular transaction. those are included in the proposed fee standard. other costs such as rewards, customer inquiries, arguably they are particular to specific transactions, but for the reasons we laid out in the federal registry notice, those were not included in the interchange fee standard. >> okay. thank you. >> thank you, mr. chairman. mark noted in his presentation that the proposed interchange fees standard has to meet the statutory requirement that the interchange fee be reasonable and proportional to an issuer's kogs. i noted in looking through the public comments that a number of commenters indicated that in rankings for public utilitieuti the interpretation that would typically be given to the term reasonable would include some markup to allow for a fair rate of return. >> so getting back to the costs that the board is prohinted the from considering those would be costs not specific to a particular transaction. a rate of return overall on your debit card program is difficult to attribute to a particular transaction. i would also say many of the rate making cases use a term just in reasonable rates. we have a different term here. reasonable and proportional to cost. congress wanted us to rely on this. they could have used that term. they did not. we were interpreting it differently. >> thank you very much. >> one other question is i wonder if you talk a little bit about what impact you think this rule is likely to have on innovation in the payment system more broadly. i noted some commenters were concerned that this is a rule that could inhibit innovation. i wonder what your perspectives are. >> so we did receive a lot of comments to express concern about the potential effect of the rule on innovation. the commenters would note the effect and development of authentication methods. like new form factors, like mobile payments. or new fraud prevention technologies. there were commenters that expressed concern of inhibiting the development of new technologies. there were also commenters, however, who wanted the rule to be applied evenly across new as well as existing technologies in order to create a level playing field, so as not to advantage one type of technology over another. we also recognize the importance of establishing basic ground rules that create a level playing field across different types of technologies. so the final role does not generally exempt innovative technologies for the provisions of the rule. we think that this does establish the level playing field that some of the commenters were looking for. and also creates regulatory certainty for potential innovators going forward. at the same time we recognize that certain aspects of the rule could have an effect on innovation. that is going to impact the way in which they develop those technologies. but there are certain features of the recommended final rule that should have a mitigating effect on the negative effects of innovation. in the exclusivity portion of the rule, we are fot requiring multiple networks associated with each authentication method. this should help an innovator not have to open the technology to other parties. we are not using a technology specific standards. there will not be dictates about technologies are or are not acceptable. the market can develop the technologies that are most effective. ultimately there will be an effect on innovations as the innovators have to meet the restrictions associated with the rule. certain aspects of the rule should mitigate some of the effects. >> thank you. governor duke? >> thank you, mr. chairman. following up on the chairman's questions about impact on consumers. other countries have implemented restrictions on interchange fees. could you talk about the experience they've seen respective to account holder fees, savings passed on by retailers, changes in discounts for different methods of payment? >> sure. there are two types of scenarios one could look at when looking at other counteds. one would be places where there's a government intervention to lower interchange fees. the second would be countries with a payment card system with low ore zero interchange fees. it can be hard to draw conclusions about the affect of interchange fees on the outcome for consumers, banks and payment card networks. there are a lot of moving parts. there are a couple of general conclusions one can draw by looking at case studies in other countries. in response to change and interchange fees due to government intervention, there are often changes in account terms for card holders. for example, in australia when the reserve bank of australia lowered credit card interchange fees in their particular case, rewards for many cards went away. certain account fees were less attractive to the consumers. so a first lesson would be that there is generally some adjustment in terms of the account terms for card holders. but at the same time, the evidence doesn't suggest that having a high interchange fee is necessary for the debit card or payment card system to function effectively. in australia when they cut the credit card interchange fees, banks continued to offer the kr credit cards and consumers continued to use them. in canada where there is no interchange fee on pin debit transactions, pin debit remains an important part of the deposit relationship between banks and consumers. we will expect some adjustment in terms of the fees, but we wouldn't expect to see a cig capital contraction in the supply of or demand for debit card services based on evidence in other countries. in terms of the effect of the interchange fee regulation and other countries on prices, that can manifest itself in two ways. first is in terms of the merchant discounts that merchants receive or pay. i'm sorry. and i think there is evidence that many of the decreases in interchange fees are passed through in merchant prices. in merchant discounts. the evidence for consumer prices is much weaker. there are so many factors buffeting consumers prices that there's not been strong evidence documenting that any decreases in interchange fees and subsequent decreases in merchant discounts are passed through in terms of lower consumer prices at the point of sale. if you were trying to determine what the impact would be on the consumer here, are there any authorities you would need to collect data that you don't have today? >> well, we currently under the statute hav