The Federal Reserve Board at a meeting next week will reconsider whether a legal cap on debit card fees is set at the appropriate level under a 2010 law.
The Fed issued a notice Tuesday for an Oct. 25 meeting at which it will consider “proposed revisions to the Board’s debit interchange fee cap.”
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act required the Fed to set the cap and to produce a report related to the debit card industry every two years.
Currently, the cap is set at 21 cents plus 0.05% of the value of the debit transaction, in addition to a one-cent fraud-prevention adjustment. The fee cap applies to banks and financial institutions that issue debit cards and have $10 billion or more in deposits.
The Fed cap hasn’t changed since it was put in place in 2011 under Regulation II. Under the rule, it’s expected to be “reasonable and proportional to the costs incurred by the issuer with respect to the transaction.”
Data from the Fed show that average debit card interchange fees dropped substantially after the rule was put in place and have stayed essentially flat at between 21 and 22 cents since then. The Fed’s most recent industry report was released in 2021, with data covering 2019, and it hasn’t produced a report yet this year.
Retailers and other merchants have railed for years that such interchange fees on debit and credit card transactions are too high.
Advocates for lowering the fee, including the National Retail Federation, reacted quickly to the Fed’s agenda item. “It’s time to set the cap that Congress intended and recognize that banks’ costs to process transactions have dropped significantly,” NRF Chief Administrative Officer and General Counsel Stephanie Martz said in an Oct. 17 press release. “Doing so would reduce costs for retailers and give them more savings to share with their customers by holding down prices in a time of inflation.”
For its part, the Electronic Payments Coalition, which represents card issuers and their partners, stressed in an emailed statement that its members have made significant investments in improving the security of debit cards that has reduced the impact of fraud on cardholders.
Analysts who follow the card companies weighed in on the potential impact to major card issuers and the card networks, including the largest network, Visa, as well as Mastercard, American Express and Discover Financial Services.
“We aren't sure if the cost for processing debit card payments are declining,” said Baird Equity Research analysts in a note to their investment clients on Wednesday. “It's possible some tech costs have declined, but most costs have inflated in recent years (like labor). In addition, interchange fees haven't grown much relative to size of transaction.”
The Fed’s consideration next week is likely to attract heightened attention in light of the U.S. Supreme Court saying last month that it would hear a complaint from North Dakota merchants who argued the Fed’s debit cap is too high. The merchants’ petition for review isn’t with respect to the merits of the 2021 case, but rather an appellate court’s affirmation last year that the merchants brought the case past a statute-of-limitations date.
Also hanging in the balance is a bid by some members of Congress for a vote on a bill that seeks to inject more competition into the credit card market by requiring card issuers to make more networks available for processing transactions. That bill is also aimed at lowering card “swipe” fees. Sens. Roger Marshall and Dick Durbin have been leading the charge on that bipartisan legislative effort.
If the Fed were to propose a new debit rate cap it would likely seek public comment on the adjustment to that Regulation II rule before voting on a final change.
A Fed spokesperson declined to provide additional comment on the agenda item, such as what prompted the consideration of a revision.
The Fed debit cap rule doesn’t apply to reloadable prepaid cards and debit cards issued by government payment programs.