COMMENT CALL: The Federal Reserve Board is proposing to significantly lower the cap on debit card interchange fees allowed under its Regulation II.
Interchange fees are paid by merchants to debit card issuers each time a customer uses a debit card to make a purchase. The Fed has proposed to lower the maximum interchange fee that a large debit card issuer – one with more than $10 billion in assets – could receive for a debit card transaction. The proposal would also establish a regular process for updating the cap every two years.
What’s at stake
Under the Durbin Amendment to the Dodd-Frank Act, Congress required the Fed to determine whether debit card interchange fees are “reasonable and proportional to the cost incurred” by debit card issuers, considering issuers’ fraud prevention expenses. The Fed was also authorized to adjust the interchange fee “in an amount that is reasonably necessary.”
The current rule, adopted by the Fed in 2011, caps the interchange fee per transaction at 21 cents, plus a 5.0 basis point ad valorem component (multiplied by the value of the transaction), less a 1 cent fraud prevention adjustment.
According to the Fed, the interchange fee standards were first adopted using data reported by covered issuers in a voluntary 2010 survey using 2009 data. Since then, data that the Fed has collected indicates that certain costs incurred by covered issuers have declined dramatically, while the interchange fee cap has not changed. Therefore, current data suggests that the interchange fee “may no longer be effective for assessing whether … the amount of any interchange fee received by a debit card issuer is reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”
Relying on more recent data from covered issuers, the proposal would:
- Reduce the base component of the interchange fee cap to 14.4 cents (down from the current 21 cents);
- Reduce the ad valorem component to 4.0 basis points (down from the current 5.0 basis points); and
- Increase the fraud-prevention adjustment to 1.3 cents (up from the current one cent).
In addition, the interchange fee cap would be reassessed every other year by linking the cap to fresh data from the Fed’s survey of covered issuers. According to the proposal, these updates “would be published without inviting public comment and would be published by March 31 of odd-numbered years, with the new amounts taking effect on July 1 and remaining in effect for two years.”
Significantly, an existing Reg. II exemption to the interchange fee cap for small issuers, defined as debit card issuers with consolidated assets of less than $10 billion, would remain intact. However, CUNA and AACUL released a study last summer showing that government-mandated interchange price caps disproportionately harm local, community financial institutions. Among other things, the study found that these “exempt” institutions saw a 31% revenue decline, adjusted for inflation, in the decade after its implementation.
The Board recently announced that it has published data related to the interchange fee cap, to give the public additional information as they consider the proposal.
Make your voice heard
The League plans to submit a comment letter to the Fed, but we’d like your feedback. How do you feel about the proposed change? How, specifically, would it impact your credit union and your members? Please share your thoughts with Paul Guttormsson by May 6, so that our letter, which is due by May 12, accurately reflects your views. (The Fed recently announced that it has extended the comment period, which was to end on Feb. 12.)