Thursday, October 26, 2023
The Fed said the proposal, which comes with a 90-day comment period, aims to reflect changes in issuer costs since the debit cap took effect in 2011. For example, interchange on a $50 debit card transaction would decline from 24.5 cents under the current cap to 17.7 cents, the Fed noted in a press release.
Organizations representing retailers gave showed tepid approval for the proposal, while those representing financial institutions blasted it.
"This is a significant reduction that will save money for retailers and their customers," said Stephanie Martz, CEO at the National Retail Federation. Nevertheless, Martz added, it's not enough. "[I][t still doesn't get to the 'reasonable' level Congress sought and it isn't proportional to banks' falling costs," she asserted.
Not so, countered Jim Nussle, president and CEO of the Credit Union National Association. "While the current debit card system benefits merchants and consumers, it does not come close to covering the real costs debit issuers incur as it was intended to post-Durbin Amendment, and the Fed's proposal would widen this gap even further," he said.
Federal Reserve Board Governor Michelle Bowman, in a statement of opposition released in tandem with the Fed's proposal, argued that consumers will not be well-served by the new debit cap.
"While the proposal suggests that it could result in benefits to consumers, I am concerned that the costs for consumers – through the form of increased costs for banking products and services – will be real, while the benefits to consumers – such as lower prices at merchants – may not be realized," she stated.
Debit card interchange has been controversial with card issuers and the card brands since 2010, when the concept was ushered in by the Durbin Amendment to the Dodd-Frank Act. That law required the Fed to cap debit interchange, to keep tabs on debit card costs and revenues, and to regularly publish its findings.
The Fed first set the debit cap, which applies only to debit card issuers with $10 billion or more in assets, at 21 cents and 0.05 percent (or 5 basis points) of the transaction amount, plus a penny to cover fraud prevention costs. Now the Fed wants to lower the cap to 14.4 cents plus 0.04 percent (or 4 basis points) and a fraud prevention adjustment of 1.3 cents. The Fed proposed the changes take effect on June 30, 2025. In a document explaining the latest proposal, the Fed said the cap set in 2011 was based on cost information related to 2009 debit card payments that were "voluntarily" reported by the largest debit card issuers. The new cap is based on 2021 debit card fees and fraud data, which the Fed published along with its new cap proposal.
In 2021, interchange fees collected on all debit card transactions (general and prepaid) totaled $31.59 billion, an increase of 19.1 percent over 2020, according to the Fed's data. "This growth in interchange fees is the largest observed since Regulation II came into effect," the Fed noted. Regulation II is the rule set that implements the Durbin Amendment.
The average per-transaction authorization, clearing and settlement costs, excluding issuer fraud losses, among FIs covered by Reg II were 3.9 cents in 2021, roughly half what it was in 2009, the Fed reported. 
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