The Federal Reserve recently initiated a request for comment
on a proposal to reduce the maximum interchange fee receivable by large financial
institutions for debit card transactions. The proposal also aims to establish a
regular biennial process for updating the maximum fee amount in line with
changing issuer costs.
Interchange fees are set in accordance with the Electronic
Fund Transfer Act (EFTA) and its implementing regulation, commonly known as
Regulation II, which refers to Section 920 of the EFTA. Regulation II
establishes standards for assessing whether a debit card interchange fee
received by a debit card issuer for an electronic debit transaction is
reasonable and proportional to the costs incurred by the issuer with respect to
the transaction.
Since 2011, the Fed has been statutorily obligated to set
standards to evaluate the reasonableness and proportionality of interchange
fees for debit card issuers holding assets of $10 billion or more when
processing transactions.
“Both setting a single cap for all issuers and basing that
cap on data reported by a wide range of issuers is regressive in several ways,”
Fed Gov. Michelle Bowman said in a statement. “Larger issuers — those with the
highest transaction volumes, greater negotiating power, and the most
efficiencies that come from scale — will continue to have a significant
competitive advantage under this rule. Even the lower interchange fee may allow
them to continue profitably operating their debit card programs.
“By contrast, smaller issuers subject to the cap — those
with smaller transaction volumes, less negotiating power, and fewer
efficiencies in scale — may be at a significant competitive disadvantage.
Because retail banking is such a core function for many smaller issuers, this
pricing dynamic may not ultimately force smaller issuers to abandon their debit
card programs. But it is possible that banks will be forced to either pass
costs through to customers or operate their debit card programs as a loss
leader, which many banks do today,” Bowman added.
The proposed adjustment to the interchange fee cap seeks to
reflect changes in issuer costs since the initial implementation. For instance,
the cap for an average $50 debit card transaction would decrease from 24.5
cents to 17.7 cents under the proposal. Additionally, the proposal outlines a
method for future adjustments to the interchange fee cap, to be performed every
other year based on data pertaining to issuer costs collected by the Fed.
In response to the Fed’s proposal, the Consumer Bankers
Association, Bank Policy Institute and The Clearing House issued a statement
noting multiple issues with past updates to interchange rate policies under Regulation
II, as well as concerns they have about the new proposal.
“The last time the Federal Reserve placed a cap on debit
transaction costs, two things happened: the availability of free checking
accounts declined and merchants pocketed the difference in cost, defaulting on
their promise to the American consumer to lower costs at the counter,” the
trade groups said. “Attempting to revisit the failed policy in a world where
technology and fraud prevention costs are even higher will exacerbate these
problems and further harm consumers.”
The trade organizations asserted since the adoption of
Regulation II:
·
Merchants have not lowered prices, according to
a 2014 survey conducted by the Federal Reserve Bank of Richmond and Javelin
Strategy & Research;
·
Account holders have seen higher checking
account fees and fewer available free accounts;
·
Banks have had to increase investments in
technology and fraud prevention; and
·
Banks of all sizes have been affected, not just
the largest debit issuers.
In the Fed’s latest biennial report, the agency offers
insights into data collected from major debit card issuers regarding
interchange fees, issuer costs and fraud related to debit card transactions in
2021.
The comment period will remain open for 90 days after it is
published in the Federal Register.