WASHINGTON—Debit card usage continued to grow in 2023, though at a slower pace than in prior years, according to a new Federal Reserve report that highlights rising fraud exposure, shifting cost burdens, and persistent disparities between large and small financial institutions.
Payment card networks processed more than 100 billion debit and prepaid transactions valued at $4.7 trillion, with growth moderating as post-pandemic spending patterns normalized.
Interchange fee revenue across all debit and general-use prepaid transactions totaled $34.1 billion in 2023, up modestly from 2021. For transactions subject to Regulation II, average interchange fees remained largely unchanged from prior years, while exempt transactions continued to generate materially higher fees. Network fees, however, increased to nearly $13 billion, with a growing share of those costs borne by acquirers and merchants rather than issuers—a long-running trend the Fed says has continued since the regulation took effect..
Fraud losses edged higher overall and continued to shift away from issuers toward merchants and consumers. Total fraud losses across covered issuers reached 17.6 basis points of transaction value in 2023, nearly double levels seen a decade earlier. Merchants absorbed about half of all fraud losses, while issuers’ share fell to just over 28%. Cardholders’ exposure rose sharply, accounting for more than one-fifth of fraud losses, driven largely by growth in card-not-present and prepaid transactions, the report shows..
Prepaid cards stood out as the highest-risk and highest-cost segment for financial institutions. Prepaid transactions experienced the highest fraud rates and the highest authorization, clearing, and settlement (ACS) costs, even as overall issuer costs continued to decline over time. The report also shows that fraud increasingly concentrates in remote transactions, reinforcing operational and compliance pressures tied to e-commerce and digital payments.
Issuer costs varied dramatically by institution size, underscoring scale advantages in debit card operations. High-volume issuers posted average per-transaction ACS costs of just a few cents, while low-volume issuers—often smaller banks and credit unions—faced costs dozens of times higher. The Fed found that while most covered issuers remained within Regulation II’s interchange fee caps, fewer institutions qualified for the fraud-prevention adjustment, potentially tightening margins for smaller issuers with rising fraud-control expenses.
Overall, the report underscores a debit payments ecosystem in which revenue growth is slowing, fraud risks remain elevated, and cost pressures are unevenly distributed. For financial institutions, particularly smaller issuers, the findings highlight ongoing challenges around fraud management, network pricing, and compliance under Regulation II as payment behavior continues to shift toward digital and card-not-present transactions.