WASHINGTON–The Federal Reserve Board has put out a request for comment on a proposal to lower the maximum interchange fee that a large debit card issuer can receive for a debit card transaction, with credit unions blasting the plan as a way for “greedy merchants to line their own pockets,” while retailers call it a “step in the right direction.”
The proposal would also establish a regular process for updating the maximum amount every other year going forward.
The Fed, which in 2011 first implemented its statutory requirement to set an interchange fee cap for debit card issuers with $10 billion or more in assets, has announced a proposal that would adjust the interchange fee cap to “reflect changes in issuer costs since the rule first took effect.”
For example, the Fed said, the cap on an average-sized $50 debit card transaction would decline from 24.5 cents under the current rule to 17.7 cents under the proposal.
The Specifics
Specifically, CUNA noted the proposal would:
- Reduce the base component of the interchange fee cap to 14.4 cents (down from the current 21 cents), reduce the ad valorem component to 4.0 basis points (down from the current 5.0 basis points), and increase the fraud-prevention adjustment to 1.3 cents (up from the current one cent).
- Update all three components of the interchange fee cap (base, ad valorem, and fraud prevention) every other year going forward by directly linking the components to data from the board’s biennial survey of large debit card issuers starting in 2025, without public comment.
- Adopt an approach for future adjustments to the interchange fee cap, which would occur every other year based on issuer cost data gathered by the Fed from large debit card issuers.
The comment period will close 90 days after the proposal is published in the Federal Register.
CUNA: Outdated Data Being Used
“While the current debit card system benefits merchants and consumers, it does not come close to covering the real costs debit issuers incur as it was intended to post-Durbin Amendment, and the Fed’s proposal would widen this gap even further,” CUNA President/CEO Jim Nussle said in a statement. “Even more concerning, the Fed’s proposal is based on data that doesn’t reflect the actual state of covered debit card issuers today and new regulatory requirements that are now in effect. Combine that with more than a decade’s worth of post-Durbin Amendment data that shows consumers now face higher prices and card issuers have less revenue to cover the expense of debit card processing.
“Meanwhile, merchants have not passed their savings from the Durbin Amendment onto consumers and big retailers continue to see increased profits,” Nussle continued. “It doesn’t add up. We can’t afford to make this mistake again, and especially not so the largest retailers get a larger slice of the profits.”
New Regs Not Reflected
The Fed also released its 2021 survey of covered debit card issuers.
“However, the data collected does not reflect new regulations applying the debit card routing requirements to card-not-present transactions that took effect this summer,” CUNA said in response.
The trade group noted that while financial institutions with less than $10 billion in assets are “exempt” from the debit interchange cap created by the Durbin Amendment, it along with the American Association of Credit Union Leagues (AACUL) released a study in July that found government-mandated interchange price caps “disproportionately harm local, community financial institutions.
NAFCU: ‘Greedy Merchants Will Line Own Pockets’
NAFCU is also objecting to the proposal.
"We firmly believe the Fed is misguided in its proposal to further reduce the interchange cap on debit transactions,” said NAFCU Senior Vice President of Government Affairs Greg Mesack. “Any reduction in interchange would undermine the financial stability of small credit unions, likely propelling a wave of consolidations within the financial sector. We vehemently disagree with the Board's assessment of the success of the small issuer exemption as well as its assessment of the proposed changes generally, which evaluates only a narrow subset of costs in order to evade more fulsome consideration of the total cost associated with operating card programs and addressing fraud.
“With today’s proposal, consumers, particularly those in underserved communities, would see reduced access to financial services and higher costs for basic services,” Mesack continued. “The Fed must reconsider this proposal and put consumers ahead of greedy merchants, who have proven they will use cost savings to line their own pockets."
Virginia League: Will Harm Low-Income Americans
“We will carefully examine the Federal Reserve Board’s proposal and submit comments,” said Virginia Credit Union League President/CEO Carrie Hunt. “We know the fraud costs our credit unions are facing continue to mount and we must have fairness in the system. The league remains engaged with policymakers on this issue because we understand the debit interchange fee cap had an impact on every financial institution, not just those issuers with $10 billion or more in assets.
“We know, too, that the price cap imposed on debit interchange fees is a failed policy that’s had a disastrous impact on the cost and availability of basic banking services, harming low- and moderate-income Americans.”
Merchants: Step in Right Direction
Taking the opposite view, the Merchants Payments Coalition’s General Counsel Doug Kantor said in a statement, “Banks have been charging more than five times their costs for debit card transactions and the Fed is finally saying that’s too much. This is a step in the right direction toward the real, competitive market that Congress wanted to see but still leaves the fees too high. Merchants and the consumers who ultimately pay these fees have been overcharged for far too long, so we need to get this right.”
The MPC statement said banks can charge any amount they want if they set the fees themselves, but no major banks have done so, choosing to be part of Visa and Mastercard’s “price-fixing mechanism instead. Smaller banks are exempt and can charge as much as they like.”
According to the MPC, which cited Nilson Report data, debit card swipe fees cost merchants and their customers $34.4 billion in 2022, up 5% from 2021, according to the Nilson Report.
NRF: ‘A Welcome Move, But…’
Meanwhile, the National Retail Federation said the Fed proposal is a welcome move but still leaves the fees significantly higher than banks’ cost to process the transactions.
“This is a significant reduction that will save money for retailers and their customers, and we welcome the progress that has been made,” NRF Chief Administrative Officer and General Counsel Stephanie Martz said. “Nonetheless, it still doesn’t get to the ‘reasonable’ level Congress sought and it isn’t proportional to banks’ falling costs. The Fed needs to meet that goal, and particularly needs to consider that a larger share of fraud costs has shifted from banks to merchants since the cap was established. Main Street merchants and American families have paid billions of dollars too much and want the Fed to do what Congress intended a dozen years ago.”
Suit Filed
The NRF noted it sued the Fed in U.S. District Court in 2011, saying the cap was set too high. A trial judge agreed but the ruling was overturned by the U.S. Circuit Court of Appeals for the District of Columbia, and the Supreme Court refused to hear NRF’s appeal. The Supreme Court agreed last month to take up a 2021 challenge to the cap brought by a North Dakota retailer and decide whether the statute of limitations has expired.
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