Though Congress passed a law capping debit card issuers’ per-transaction interchange income at essentially 24 cents—about half the average issuer take previously—many merchants remain convinced issuers still earn sizable profits from their debit card transactions.
A new 35-page report released by the Federal Reserve Board suggests that may be true, or altogether false, depending on the institution. For the most part, though, merchants are right.
As in previous years, the Fed noted in its report summary, covered issuers' costs to authorize, clear and settle (ACS) debit card transactions, excluding their fraud losses, varied greatly across the industry, with the median issuer in 2013 having an average ACS cost of 14.9 cents. However, the issuer at the 75th percentile had an average ACS cost of 42.2 cents.
Issuers with the highest debit card transaction volume generally had the lowest ACS costs per transaction as reflected in an overall average of 4.4 cents per transaction, down from 5 cents per transaction in 2011,” the Fed said. “Conversely, issuers with the smallest debit card programs generally had the highest ACS costs per transaction.”
In its report, the Fed notes summary information on transaction volume and value, interchange fee revenue, certain issuer costs, and fraud losses related to debit card transactions in 2013. The report is the third in a series to be published every two years as required by section 920 of the Electronic Fund Transfer Act (EFTA). Interchange represents the network-determined portion of the discount rate acquirers charge merchants for card transactions that goes to the issuer of a card presented for payment.
Under the Fed’s Regulation II (Debit Card Interchange Fees and Routing) rules mandated under the so-called Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, a covered debit card issuer may not receive an interchange fee that exceeds 21 cents plus 5 basis points multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, if eligible. A basis point is one-hundredth of a percentage point.
The interchange-fee standard became effective on Oct.1, 2011. Excluded from the rate cap are debit card issuers with consolidated assets of less than $10 billion, certain government-administered debit cards, and certain prepaid cards. They continue to earn about 44 cents on average per debit card transaction.
The Fed estimated debit card fraud losses to all parties (merchants, cardholders and issuers) at $1.57 billion in 2013, with an average loss of approximately 8 basis points as a share of transaction value, up slightly from 2011. The median covered issuer's average fraud loss as a share of transaction value was 5 basis points, up slightly from 4.7 basis points in 2011. The median covered issuer had average fraud-prevention and data-security costs of slightly more than 1.4 cents per transaction.
Among covered issuers, 64 percent in 2013 had average ACS costs, including issuer fraud losses, below 21 cents plus 5 basis points (or about 24 cents on an average $40 debit purchase). This proportion is slightly lower than the 66 percent that had average ACS costs below the maximum interchange fee in 2011, the Fed said. Covered issuers with average ACS costs below the cap in 2013 processed more than 99 percent of all reported covered transactions, the same proportion as in 2011.
Despite the differential in costs and revenue from debit card transactions, the Fed said it has no plans to propose revisions to the Regulation II interchange fee standard or the fraud-prevention adjustment. In March, a federal appeals court overturned a lower court’s ruling that would have forced the Fed to recalculate its debit-rate cap.
At 5 basis points, the median issuer fraud loss, which serves as the basis for the ad valorem portion of the interchange fee standard, was essentially unchanged from 2011. Moreover, when rounded to the nearest cent, the median fraud-prevention and data-security costs remained at 1 cent per transaction (the current fraud-prevention adjustment), according to the Fed report.