Debate Over Debit Interchange Caps Set to Heat Up as Commentary Deadline Is Pushed Out

The debate over debit card interchange fees — and the cap on those fees — looks set to rage for at least a few more months.

The Federal Reserve said in a statement Monday (Jan. 22) that it would delay the deadline for comments on the controversial proposal to lower maximum interchange fees on debit card transactions.

The deadline is being extended from Feb. 12 to May 12. And those additional three months give 12 weeks worth of weigh in from banks, from industry associations, from the public in general, to lodge their positions for, or against, the caps.

The Fed said in its announcement published in the Federal Register that “since the publication of the proposal [in November 2023], multiple commenters have requested that the Board extend the comment period, while one commenter has expressed opposition to any extension.”

The comments themselves, as detailed here, help form the basis of any final rule.

Complex Methodologies, Complex Debate

The Fed also noted that it published additional data detailing the new methodology for determining the “base component” of the cap. The details are complex, and in its overview of the mechanics of determining the cap, the Fed delves here into formulas, statistics, distributions and multipliers.

Beyond the math, what is clear is that the debate will gather momentum — and the pushed-out deadline is a nod to the complexity of the issue.

The general proposal, as it stands now, would adjust the interchange fee cap that applies to debit card issuers with at least $10 billion in assets. The transaction caps would be revisited every two years, adjusted depending on costs tied to the transactions themselves.

The proposed changes would lower the cap from the 21 cent and .05% of the transaction value level that’s in place. The newest iteration would take the cap down to around 14 cents and 0.04% of the transaction. If issuers also have mechanism in place to improve fraud prevention according to standards laid out by the Fed, there would be an adjustment equating to a bit more than a penny.

The American Bankers Association (ABA) had, along with other trade associations, looked to have the commentary deadline extended. “The data presented to support the Board’s proposal is complex, dated, and incomplete, requiring the private sector to invest significant time to digest and supplement it,” they said in a December letter urging the extension.

Merchants, as represented here by the National Retail Federation (NRF), have heralded the Fed’s move and have said that the bulk of past caps have been passed on to consumers. But the NRF also contends that the caps may not go far enough, given the decline in overall transaction costs. Elsewhere, studies, such as this 2015 paper from the Richmond Fed, found that the majority of merchants did not in fact change prices in the wake of the initial swath of interchange fee caps. Only a minority of merchants — about 1% — actually lowered prices.

The question remains, too, as to whether, and how, more stringent caps might impact banking innovation and efforts aimed at financial inclusion.

In a letter published earlier this month by the ABA and sent to bank CEOs, the association detailed that the caps would “fundamentally impair the sustainability of affordable deposit account products. If enacted, this Federal Reserve proposal to lower Durbin Amendment debit card interchange caps will subsidize the largest global retailers at the expense of bank account customers.” The ABA cites Bank On accounts as being particularly at risk.

The accounts, which are sponsored by the Cities for Financial Empowerment, are generally low cost accounts at credit unions and banks that are also tied to debit cards and foster financial inclusion. The accounts are largely funded by debit activity, as the ABA noted, and the roughly 30% decline in debit interchange fee, the association stated, will “imperil the economics” of the transactions.