US Fed sets up debit card fees battle between banks and retailers

The U.S. Federal Reserve is proposing to cut debit card fees that banks charge merchants for processing debit-card transactions by up to 30%, setting up a face off between the two industries over billions of dollars in revenue.

US Fed sets up debit card fees battle

Citing data that showed the costs of processing such transactions had fallen by roughly half in recent years, the Fed proposed cutting the current cap from 21 cents per transaction to 14.4 cents per transaction.

The proposal, which is now open to public feedback, marks the first time the Fed has adjusted the fee cap after it was set in 2011.

Banks charge retailers when processing debit-card transactions, and the Fed was ordered to limit those costs to a “reasonable and proportional” level as part of the 2010 Dodd-Frank financial reform law.

The fees generated $31.59 billion for lenders in 2021, according to Fed data.

Retailers and banks have sparred over the fees for years, with merchants complaining they are excessively high and pad bank profits, while financial firms argue retailers have failed to pass savings on to consumers via lower prices on products.

According to the The Bank Policy Institute, Consumer Bankers Association and The Clearing House, which issued a joint press release, “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 Truth is, Since Regulation II Became Effective in 2011:

• Merchants didn’t lower prices: According to a merchant survey conducted by the Federal Reserve Bank of Richmond and Javelin Strategy & Research in 2014, 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.
• Account holders have experienced higher checking account fees and lower availability of free accounts: Nearly 60% of regulated banks offered free checking account options prior to Regulation II’s effectiveness; that percentage dropped to less than 20% within the first few years after Regulation II became effective. Higher bank fees attributable to Regulation II priced some consumers out of the market and resulted in their use of more expensive banking replacements such as check-cashing and payday-lending facilities.
• Bank investments in technology and fraud prevention have risen: Interchange goes toward fraud prevention; insufficient updates to this calculation could hinder efforts to combat fraud. These sophisticated efforts by large issuers make the overall system safer by eradicating fraudulent activity that could harm other issuers and consumers. Evaluating the same cost metrics as the Board used to establish the Regulation II cap in 2011, regulated issuer costs have not declined.
• Banks of all sizes were affected: Although the Board’s 2011 rule was supposed to protect small community banks and credit unions from the impact of the interchange fee price controls, the Board’s current data shows that merchants and networks have forced small debit card issuers to accept interchange fees only slightly above the cap on single-message card networks, a trend that will likely get worse as a result of the Board’s 2022 dual-routing rule.

Retailers, who have pressed the Fed for a lower cap for years, praised the proposal, while vowing to try and push the limit even lower.

The proposal would also trim an added fee that banks can charge from 0.05% of the cost of the transaction to 0.04%.

However, the Fed proposed expanding a supplemental fee banks can charge to cover fraud-prevention services from 1 cent per transaction to 1.3 cents per transaction, citing a slight uptick in those costs.

In practice, the proposed changes would result in, on average, a 17.7 cent fee on a $50 transaction, down from a 24.5 cent fee currently, according to Fed officials.

The Fed also proposed automatically adjusting the cap every two years in response to fresh data.

Analysts said that it is likely the Fed could face a legal challenge from either industry as it considers a new cap.