The American Bankers Association (ABA) along with 50 state bankers associations, the DC Bankers Association and Puerto Rico Bankers Association sent a letter (the “ABA Letter”) to the Federal Reserve “in strong opposition to the Federal Reserve’s misguided proposal to reduce the regulated interchange cap under Regulation II, and to ask that the proposal be withdrawn pending a rigorous study of this proposal’s impacts and the cumulative impacts of the tsunami of newly finalized and pending regulations from the banking agencies.” The ABA Letter further states “[w]e remain gravely concerned that the Federal Reserve is moving forward – in response to intense pressure from the very largest retailers and an expansive misinterpretation of the statute – with an unnecessary and poorly considered rule that will have far reaching impacts.”
In October 2023, the Federal Reserve issued a proposal to lower the maximum interchange fee that a large debit card issuer can receive for a debit card transaction. Under the proposal, the base component would decrease from 21 cents to 14.4 cents, the ad valorem component would decrease from 5.0 basis points (multiplied by the value of the transaction) to 4.0 basis points (multiplied by the value of the transaction), and the fraud-prevention adjustment would increase from 1.0 cents to 1.3 cents for debit card transactions subject to the interchange fee cap. The due date for comments on this proposal, originally February 12, 2024, has been extended to May 12, 2024.
The ABA Letter informs the Federal Reserve that:
The Dodd-Frank Act does not require further modification of the existing regulation.
The proposal is based on a “flawed and incomplete 2021 data set, which reflects anomalous pandemic-related payment behavior” and does not factor in the changes made to debit routing in July 2023 (requires online/card not present debit card transactions to be enabled for processing on at least two unaffiliated payment card networks). The ABA Letter suggests the Federal Reserve could instead use the 2023 survey data that will be available in early May.
The biennial automatic adjustments of the cap are inappropriately excluded from notice and comment.
Smaller institutions are more impacted by a 30% reduction in debit interchange, which will likely lead to further consolidations. Interchange for smaller institutions that were exempt from the cap on debit card interchange fees decreased 35% from 2011-2022.
This proposal will increase the cost of checking accounts and other basic banking services.
While not a party to the ABA Letter, the Consumer Bankers Association (CBA) commissioned research on debit card interchange fee limits and the potential implications if the proposal to reduce debit interchange caps is finalized. The key findings from the white paper include:
- Data supports that free accounts became less common, minimum monthly balance rose, and “monthly maintenance fees increased in an amount equal to 42% of the overall reduction in interchange revenue” when bank interchange revenue dropped;
- Economists conclude that it is “virtually impossible” to prove or measure any merchant or consumer savings; and
- Consumers can expect to pay an extra $1.3 billion to $2 billion annually in bank account fees through higher monthly maintenance fees or increases to other service fees.
We previously released the Consumer Finance Monitor Podcast episode “Understanding the Federal Reserve Board Proposal to Lower Interchange Fee Cap for Debit Card Transactions” that discusses the impacts of the current debit interchange fee cap, the Federal Reserve Board’s rationale for its new proposal and related study, the proposal’s implications for each of the affected parties, and the potential impact of the U.S. Supreme Court’s pending decision on Chevron deference.
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