US Moves To Cut Debit Card Interchange Fee By 30 Percent

October 27, 2023
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The Federal Reserve has proposed to reduce the interchange fee on debit cards from 21 to 14.4 cents for the first time since the cap was introduced in 2011.

The Federal Reserve has proposed to reduce the interchange fee on debit cards from 21 to 14.4 cents for the first time since the cap was introduced in 2011.

On Wednesday (October 25), the Fed voted in favour of a proposal that would significantly reduce the maximum amount large card issuers can charge for processing a debit card transaction.

The interchange fee cap was introduced twelve years ago as part of the post-financial crisis Dodd-Frank Act, which tasked the central bank to set a cap on debit card interchange that is “reasonable” and “proportional” to the issuer's costs.

The currency cap allows issuers to charge up to 21 cents for a debit card transaction plus 0.05 percent of the transaction amount for fraud loss recovery and 1 cent for fraud prevention.

The cap does not apply to debit cards issued by small banks with less than $10bn in assets, nor to credit cards where interchange remains unregulated in the US.

In 2022, US merchants paid $34.4bn in interchange fees, according to the Nilson Report, which they often claim is their second-highest operating cost after labour.

More than a decade later, the Fed says its staff believes that the current interchange fee cap “may no longer be effective” for assessing whether the interchange fee is reasonable and proportional to the costs.

In a memo produced by the Fed staff, the regulator noted that banks’ transaction-processing costs have nearly halved, dropping from 7.7 cents in 2009 to 3.9 cents in 2021. Fraud losses have fallen too, while fraud prevention costs increased, the regulator found.

It proposes to reduce that cap to 14.4 cents, plus 0.04 percent for fraud loss recovery and 1.3 cents for fraud prevention.

In practice, it would mean that for an average-sized $50 debit card transaction merchant would pay 17.7 cents for the interchange, instead of 24.5 cents they must pay under the existing rules.

Additionally, the Fed also proposes to update the cap every other year when issuers are legally obliged to report debit card transactional data to the central bank.

This will ensure that the interchange fee cap “will be reasonable and proportional to the cost incurred by the issuer”, the Fed staff wrote in the memo.

These future updates to the interchange fee cap would be published on March 31 of odd-numbered years with the new amounts taking effect on July 1.

Mixed reactions

Banks have criticised the Fed's proposal, calling it “an unprecedented gift to big-box retailers”.

“We are deeply disappointed with the Federal Reserve’s proposed reduction in debit interchange fees, and strongly disagree with the flawed data and incomplete process that produced this result,” said Rob Nichols, President and CEO of the American Bankers Association (ABA).

The Clearing House (TCH) has also released a statement along with the Bank Policy Institute and the Consumer Bankers Association, arguing that even the existing cap harmed all parties involved, except for merchants.

According to the payment system operator, since 2011, consumers have experienced higher checking account fees and lower availability of free accounts and the cap had an impact on banks of all sizes, including those that fall outside the scope of the regulation.

Merchants did not pass on the savings to consumers in the form of lower prices, while bank investments in technology and fraud prevention have risen, the statement said.

Meanwhile, merchants, who would be the direct beneficiaries of the reduced cap, have welcomed the Fed proposal.

Stephanie Martz, general counsel of the National Retail Federation (NRF) called it “a significant reduction that will save money for retailers and their customers.”

Martz, however, added that she believes the proposed cap “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,” she stressed.

NRF was among those who have previously brought the Fed to court, saying the cap was set too high.

While NRF’s case was denied in court, last month, the Supreme Court agreed to take up another retailer’s lawsuit challenging the cap, as reported by Vixio.

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