Last week, the Federal Reserve Board voted in favor of a proposal to lower the maximum interchange fee that covered debit card issuers (with $10 billion or more in assets) can charge merchants to process a transaction. The Fed’s proposal would revise all three components of the “interchange fee cap” in Regulation II, which includes the base component, ad valorem component, and fraud prevention adjustment.
The Fed based its proposed revisions on the latest data that covered issuers reported regarding debit card transactions in 2021. The proposal would lower the base debit fee rate by approximately 30%, from 21.0 to 14.4 cents. The ad valorem component would decrease from 0.05% of the transaction amount to 0.04% of the transaction amount. The fraud prevention adjustment would increase from $0.01 to $0.013. For a $50 transaction, the revised interchange fee cap would yield a maximum interchange of 17.7 cents compared to 24.5 cents with the current rates.
The proposed revisions are intended to be “reasonable and proportional” to the cost incurred by the issuers related to debit card transactions. The Fed determined that transaction-processing costs have nearly halved, issuer fraud losses have fallen, and fraud-prevention costs have risen since the current interchange fee cap was developed in 2010 (based on 2009 issuer-reported debit transaction data).
Key industry stakeholders, including merchants, issuers, and the card networks, have mixed reactions to the Fed’s proposal. Representing the global convenience and fuel retailing industry, NACS General Counsel Doug Kantor said: “The proposed new rates are an acknowledgment that the rates that were initially set in 2011 are out of line with the costs of processing transactions, but they still don’t accurately reflect the market, and consumers deserve better.”
Issuers say the interchange fees help keep debit card transactions safe from fraud. However, changes could lead to less fraud prevention, decreased access to credit, and other negative consequences. “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,” said CUNA President/CEO Jim Nussle.
During the firm’s latest quarterly earnings, Visa CEO Ryan McInerney acknowledged ongoing uncertainty about several interchange-related issues and told analysts, “I think what’s notable about our business model is we’ve proven that we can be resilient and have a strong business in regulated interchange markets, unregulated interchange markets and in markets that have higher regulated interchange and lower regulated interchange…We feel good about our ability to compete.”
Federal Reserve Governor Michelle Bowman noted in her statement that lower debit interchange fees could have mixed effects on consumers. Merchants could potentially pass on savings to shoppers, but financial institutions could also increase fees related to debit cards or deposit accounts.
The proposal would also establish a regular process for updating the maximum amount every other year from now on. At this point, no final decisions have been made. The Fed is currently seeking public comment on the Federal Register Notice: Debit Card Interchange Fees and Routing and will review and analyze comments received.
