The Federal Reserve’s interchange proposal takes an unnecessarily narrow approach to recovering costs that not only would be allowable under the Dodd-Frank Act, but also are a recognized and indisputable part of conducting a debit-card business, the Office of the Comptroller of the Currency said Friday in a comment letter.

“This [approach] has long-term safety and soundness consequences -- for banks of all sizes -- that are not compelled by the statute,” acting Comptroller of the Currency John Wash wrote. He emphasized that there is flexibility under the statute for the Fed to consider alternative approaches to enable issuers to recover identifiable costs of doing business.

Walsh noted, for example, that the agency has proposed excluding network switch fees as allowable costs, even though they should be allowable even under narrowest reading of the statute. “We … urge the [Fed] to reconsider and expand the types of transaction-specific costs that are clearly identifiable as part of conducting a debit-card business,” he said.

The Dodd-Frank requirement that the Fed establish standards for assessing debit interchange fees does not obligate the agency to set a specific rate for debit interchange fees, Walsh added. But the Fed’s proposal, which focuses on two fee options -- a safe harbor of 7 cents per transaction and a cap of 12 cents per transaction, or a simple cap of 12 cents per transaction -- does just that.

The rate caps will reduce interchange revenue by 70 percent “with obvious impacts on [institutions’] ability to recover their costs of operation and unpredictable collateral consequences for their customers,” Walsh said. “We … urge the [Fed] to reconsider its rate-cap-based approach in light of the flexibility it … has to pursue other choices.” Read the letter.