The Merchants Payments Coalition and the American Bankers Association revived their battle last week over whether the Federal Reserve should finalize a rule that would lower the amount card issuers can charge merchants when consumers swipe their debit cards.
The central bank proposed in October 2023 to reduce the base debit interchange fee card issuers can charge by about 30% to 14.4 cents from 21 cents, per a memo produced by the Fed’s staff. As part of those proposed changes to Regulation II, the amounts issuers can charge for fraud prevention and fraud losses would also adjust.
The Fed hasn’t changed the interchange fee cap since 2011 after the limit was made possible under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. For bankers, the proposed fee cap reduction would eat into revenue, while for merchants, it would mean reduced costs.
The regulatory revision has been pending since it was proposed in 2023, even though such proposals are typically instituted within about six months of a federal agency receiving public comments. In this case, public comments flowed in early last year through an extended May deadline, but the Fed hasn’t taken action.
As part of its proposal, the Fed also planned to lower the amount bank card issuers can charge for fraud losses, cutting that amount to .04% of the value of the debit transaction from .05%. Still, the Fed, led by Chair Jerome Powell, also planned to increase the amount issuers can charge for the cost of preventing fraud, raising that amount to 1.3 cents, from 1 cent. The rule only applies to bank card issuers that have $10 billion or more in deposits, exempting smaller institutions.
The Fed’s slow pace in implementing the rule changes may be related to the criticism that followed the proposal. That negative feedback came principally from the large banks that stand to lose millions of dollars if the debit fee cap is reduced.
“We are writing to reiterate our strong concerns with the proposed amendments to Regulation II,” the ABA wrote in its Dec. 12 letter to the Fed. “The proposed changes to the cap are based on 2021 survey data that is artificially skewed by negative externalities stemming from the COVID-19 pandemic, and the data does not consider subsequent routing restrictions imposed on card-not-present transactions.”
The ABA attached a 17-page analysis of comment letters on the proposal to its letter, contending that 80% of those missives oppose the change. The ABA cited potential negative impacts raised by the letters, including reduced “affordable banking services” for consumers, especially low-income and moderate-income customers.
Ultimately, the ABA encouraged the Fed to further review its proposal and consider withdrawing it.
In a Dec. 23 rebuttal letter, the Merchants Payments Coalition, which includes restaurant, retail and gas station members, pushed the Fed to finalize the proposed rule changes, calling them “long-overdue.” It also argued that the ABA letter, which landed after the comment deadline, doesn’t raise any new issues.
In its letter, the MPC said the ABA’s analysis ignores comments from consumer organizations that support the Fed’s proposal, and cast doubts on the threat of reduced affordable banking services. Instead, it suggests blocking the rule is a way to keep fees charged through the card networks high.
“The banking industry wants to extend, for as long as possible, the status quo in which covered debit card issuers are able to have Visa and Mastercard fix interchange rates on their behalf at lucrative levels that exceed the reasonable and proportional standard Congress established,” the MPC’s letter said.
A spokesperson for the Fed declined to comment on its timeline regarding the rule, or the latest letters.
