Small US Banks Decry Fed's Debit Swipe Fee Proposals

May 14, 2024
Small and mid-sized US banks have overwhelmingly urged caution on changes proposed by the Federal Reserve to the rules governing debit card interchange fees in the country.

Small and mid-sized US banks have overwhelmingly urged caution on changes proposed by the Federal Reserve to the rules governing debit card interchange fees in the country. 

As the extended comment period came to an end on May 12, a high proportion of the 1,855 comments received by the prudential regulator came from credit unions, trade organisations and community banks, urging the Fed’s Board of Governors (FRB) to abandon attempts to update Regulation II (Debit Card Interchange Fees and Routing). 

Thomas Minichiello, senior vice president of retain banking at Kish Bank, expressed “deep concern and opposition”, while Twana Billeaudeau from The Bank & Trust said the “proposed rule to regulate and regularly set fees and pricing on debit interchange absolutely must not proceed forward”. 

Regulation II is a provision of the Dodd-Frank Act, which was passed in 2010 to prevent a repeat of the 2008 global financial crisis. It requires the FRB to assess if interchange fees for debit card transactions are reasonable and proportional to costs incurred with the transaction.

The prospective changes would require this assessment to be updated every two years based on data from the Fed’s survey of large debit card issuers, and would lower the maximum interchange fee an issuer can receive per transaction.

In January, the Fed extended the comment period for its consultation and issued additional data to support its proposals. 

Critics suggest the proposals will greatly benefit larger banks while harming the country’s several thousand small and mid-sized banks. 

Brian Tate, president and CEO of the Innovative Payments Association, wrote: “Members have serious concerns that the modifications proposed by the board will negatively impact both consumers and industry by unnecessarily increasing costs and fees for the provision of debit card products.” He urged the Fed to withdraw the proposal.

Tate suggested the rule change would be detrimental for institutions of all sizes, not just those with assets of $10bn or more who would be under the purview of the rule if amendments went ahead. Tate also suggested the rules would be negative for consumers. 

Several of the comments referred to merchants’ desire to push the regulatory change through, with the American Bankers Association suggesting that petitions from merchants are “riddled with errors” and urging the FRB “not to be misled”. 

The Merchants Payments Coalition, a lobbyist representing the industry, welcomed a reduction in fees but challenged the format of the proposals. 

“It is not reasonable for the Board to set a single base component rate that massively overcompensates high-volume, low-cost issuers,” it wrote, suggesting that it is doing so to “accommodate high-cost, low-volume issuers whose debit operations are a tiny part of their overall business”. Instead it suggested several modifications to the proposals. 

The proposals did have some backing, one coming from the state representative of the 95th District of Illinois, Mike Coffey, whose family owns a pair of restaurants employing more than 60 people. He said that “businesses like mine believe the proposed rule to revise the debit card regulation cycle is of the utmost importance” and is “long overdue”. 

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