Fed Expected to Propose Review of Debit Card Fee Cap

The Federal Reserve will meet Wednesday (Oct. 25) to tackle merchant debit card fees.

As a report by Reuters notes, analysts expect the central bank will propose an official review of these fees, charged to retailers by banks every time someone makes a debit card transaction.

And this review, bringing the specter of the first fee reduction in many years, could lead to a court battle, the report noted.

The Fed announced the meeting last week, and soon after, a Wall Street Journal report said the bank’s board was going to propose lowering those fees. (A spokesperson for the Federal Reserve has PYMNTS the board would not comment on the matter prior to the meeting.)

The prospect of a reduced fee cap has the support of merchants, represented by the National Retail Federation (NRF).

“Congress told banks a dozen years ago that debit card swipe fees should be ‘reasonable and proportional’ but they’ve never been either,” NRF Chief Administrative Officer and General Counsel Stephanie Martz said in a statement last week.

“It’s time to set the cap that Congress intended and recognize that banks’ costs to process transactions have dropped significantly.”

The NRF argues that banks’ average cost tied to the transactions had dropped to 3.9 cents as of 2019, while the fees paid by merchants are among their greatest operating costs.

Banks, meanwhile, say the fees are essential to offset costs at a time when debit card fraud is increasing.

The Reuters report quotes a research note by TD Cowen analyst Jaret Seiberg, who says the Fed “likely expects both the banks and the merchants to challenge any final … rule even if that final proposal simply ratifies the status quo.”

PYMNTS last week examined how this issue might impact FinTechs, which see interchange as a central revenue driver, “as they’ve been dependent on customers critical mass and transaction volumes — wrapping services around debit cards — to compete with more traditional brethren.”

And because the cap doesn’t apply to smaller banks — which often collaborate with FinTechs to issue cards — it seems like those revenue streams may be safe for the moment.

“And because the fees have not been capped in this space, the FinTechs have been able to charge higher fees to merchants,” PYMNTS wrote.

Meanwhile, the U.S. Supreme Court is due to hear a case that could decide the fate of debit interchange fees.

The lawsuit, brought by a North Dakota convenience store called Corner Post, challenges the 2011 cap set by the Federal Reserve, arguing that the regulation that set the fee violates the Dodd-Frank Act’s Durbin Amendment, which was designed to regulate debit card swipe fees.