The most significant overhaul of debit card interchange fees in more than a decade looms, where those fees may be cut by roughly 30%.
In the wake of a Federal Reserve Open Board meeting Wednesday (Oct. 25), nothing’s set in stone yet, and a commentary period’s underway.
Yet the immediate aftermath has been one where each side of the argument is crystalizing, press release by press release, statement by statement.
Board members on Wednesday heard recommendations that the changes to debit interchange caps should contain a number of moving parts. The changes would shave the “base component” of the interchange fee cap to 14.4 cents; that figure has been 21 cents. The proposed rule-making would also reduce the ad valorem component to 0.04%, a reduction from the current 0.05%. But there’s an increase, too: the fraud-prevention fees would rise to 1.3 cents, which would be a significant boost to the penny-per-transaction fee that has historically been place.
The net impact is that the fees would be lowered by about 28%. The Fed’s votes to move forward with the commentary process were overwhelmingly in support and included Fed Chair Jerome Powell and Vice Chair for Supervision Michael Barr. The lone dissent came from Fed Governor Michelle Bowman.
The proposed rule-making comes against a backdrop where, as Barr said in remarks during the meeting, that “debit cards accounted for over half of all non-cash payments.” He noted that the Fed has been tasked with examining whether the fees assessed on debit card transactions to merchant banks are “reasonable and proportional to the costs incurred by the issuer.”
The Fed notice of proposed rule-making has found that the costs incurred have declined through the past several years, even though interchange fee caps have remained steady.
Krzysztof Wozniak, who serves as section chief of the Payment System Studies Section, noted during the meeting that the proposed changes come in the wake of issuer-reported data for 2021. And that data, contained in this report, finds that the per-transaction component costs for covered issuers has declined by about 50% since 2009, also detailed here, yet the interchange cap has remained the same. Thus, the Board now proposes to review the interchange caps every two years.
There are 90 days in the commentary period before anything is finalized.
In the wake of the hearing, and in comments provided via email to PYMNTS, various stakeholders began to weigh in on Wednesday. In one example, the Merchants Payment Coalition said that the proposed reduction in fees does not go “far enough,” though they represent “a step in the right direction.”
There’s a bit of debate as to what happens with the fees that would be saved from the caps and other changes to the debit system. The MPC noted in its release that routing rules that let merchants choose their networks saved an estimated $9 billion a year, and cited studies showing about 70% of the savings has been shared with consumers.
Conversely, the Bank Policy Institute, Consumer Bankers Association and The Clearing House said Wednesday that in the wake of the caps being established more than a decade ago, merchants didn’t lower prices.
Data from the Fed and Javelin Strategy & Research revealed in 2014 that 75% of merchants reported that they did not change prices due to Regulation II, 23% reported that they increased prices and 2% reported that they decreased prices.
The higher costs tied to those fees mean that banks had less money on hand to offer products like free checking accounts, boosting fees on other products and limiting funds that could have been spent on fighting fraud. The end result is that the products that debit cards have been linked to, such as checking accounts, in fact become more expensive for end users.
Separately, in his paper, “The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis, economist David Evans, who is currently the global leader for digital economy and platform markets at Berkeley Research Group, found with his co-authors that consumers “lost more on the bank side than they gained on the merchant side,” to the tune of as much as $25 billion in discounted value dollars.