Feds Propose Reducing Debit Card Interchange Fee

On Wednesday afternoon, the Federal Reserve issued its proposed changes to the current debit card interchange cap, which would reduce the interchange fee cap and increase the fraud-prevention adjustment. News of the proposal from the Fed was not received well by the credit union industry. At the same time, merchant groups called it “a step in the right direction.”

According to an analysis of the Fed’s proposal by CUNA, the changes, if enacted, would result in the following:

• 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 valorum 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.

For months, officials with CUNA and NAFCU have been very vocal in their opposition to any significant changes to the current debit card interchange cap. On Wednesday, their opposition to the Fed’s move only grew louder.

“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. “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. 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.”

In a statement to CU Times, Virginia Credit Union League President/CEO Carrie Hunt said, “We will carefully examine the Federal Reserve Board’s proposal and submit comments. 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.”

In a statement, NAFCU SVP of Government Affairs Greg Mesack said, “We firmly believe the Fed is misguided in its proposal to further reduce the interchange cap on debit transactions. 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. 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.”

On the merchants side of the world, officials there stated the reduction of “swipe” fees is a welcome change, but doesn’t go far enough.

Merchant Payments Coalition Executive Committee Member and National Association of Convenience Stores 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.”

While financial institutions with less than $10 billion in assets are “exempt” from the debit interchange cap created by the Durbin Amendment, credit union leaders have provided studies showing that government-mandated interchange price caps disproportionately harm local, community financial institutions.