Dive Brief:

• The Federal Reserve on Friday issued a report detailing data on debit card transactions, including fees imposed on merchants by bank card issuers and card networks when consumers swipe the cards to pay for a purchase.
• Interchange fees charged across all debit and prepaid card transactions rose 3.9%, on average per year between 2021 and 2023, climbing to $34.12 billion in 2023, according to the biennial report required by law.
• The Merchants Payments Coalition pointed to the report as evidence of the need for the Federal Reserve to follow through on a plan to lower the cap on debit card fees, saying the report shows fees charged by banks and networks are not “reasonable and proportional” to their costs, as required by federal law.

Dive Insight:

The Fed’s report is based on data from the biggest debit card issuers, such as JPMorgan Chase, and the card networks, such as Visa, the largest in the U.S. The report is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a law that is implemented by the Federal Reserve Board under its Regulation II. 

The Fed has released the report every two years since 2011 when the federal rules regarding debit card transactions went into effect. 

Under the law, the Fed is also required to set a cap on debit card interchange fees that are allowed to be charged by financial institutions with $10 billion or more in assets. It can adjust that cap, but hasn’t done so since it was first set in 2011. 

Setting the cap rate has been a point of contention for years, with merchants arguing the cap should be lowered, based partly on data from the report, and the banks opposing any reduction.

The Fed proposed lowering the cap by one third in October 2023, and adjusting other parameters related to fees. The proposal suggested the base debit fee rate be cut to 14.4 cents from 21 cents per transaction, while also reducing the amount card issuers can charge for fraud losses to .04% of the value of the debit transaction from .05%, per a memo from the Fed’s staff. 

On the flip side, the Fed also proposed increasing the amount issuers can charge for the cost of preventing fraud to 1.3 cents, from one cent.

The Fed hasn’t moved forward with the proposed changes, and hasn’t commented on when it will do so. The central bank was barraged with criticism last year after it proposed the changes, with card issuers arguing against the proposal and merchants saying it didn’t go far enough in reducing rates. 

The Reg II stipulation that banks’ debit card interchange fees be “reasonable and proportional” in relation to their costs derives from Dodd-Frank.

The new report will likely give both sides fodder for continuing the battle over whether the fees meet that requirement of the law. Indeed, the MPC contended in its release that banks “earn outsized returns on debit transactions, averaging nearly six times their costs, with about 24 cents in revenue on costs of just 4.1 cents.”

The Fed report also showed that merchants are shouldering an increasing percentage of the cost for debit card fraud relative to banks that issue the cards, the MPC said.

The Fed’s debit fee rules were dealt a blow in August by a federal court judge in North Dakota who is presiding over a case in which merchant groups sued the central bank over its debit fee parameters. U.S. District Judge Daniel Traynor ruled that the Fed exceeded its authority when it put the debit card regulations in place. 

The judge stayed the decision to give the Fed time to appeal the ruling “to prevent interchange transaction fees from becoming a completely unregulated market,” the court order said. The Fed said in October that it would appeal the decision. 

In the meantime, both camps have taken the delay as an opportunity to keep fighting over whether the Fed should move forward with its proposal. A Fed spokesperson declined to comment on when the central bank expects to take any action on the proposal. 

In a letter to the Fed last Thursday, the MPC urged the central bank to proceed with the proposal to lower the debit fee cap. The letter noted the banks keep pressing for the opposite. 

Meanwhile, growth in the debit card market may be slowing after a burst of use during the COVID-19 pandemic. 

The Fed report last week noted that the growth of U.S. debit card transaction volume and value ebbed in 2023, with card networks processing 100.7 billion debit and prepaid card transactions valued at $4.7 trillion. The volume and value both rose at an annual average of 4.6% per year from 2021 to 2023, which was slower than the 7.8% and 9.5%, respectively for volume and value, from 2009 to 2021.

A spokesperson for JPMorgan Chase declined to comment and referred questions to the Electronic Payments Coalition, which repressents banks, networks and other card industry firms. Spokespeople for that trade group and Visa didn’t immediately respond to requests for comment on the report or the pending Fed proposal issue.