Banks Urge Fed to Withdraw Rule Lowering Cap on Debit Interchange Fees

Beyond the Consumer Financial Protection Bureau (CFPB)’s new rule that would cap credit card late fees, banks are girding for the impact of the Federal Reserve’s updated Reg II proposal, which would cap debit interchange fees.

This past October, the Fed unveiled its proposal to lower the ceiling on what banks can charge for debit card transactions — also known as swipe fees. The cap would decrease from 21 cents to 14.4 cents. 

The commentary period is this Sunday (May 12). The commentary period had been extended from Feb. 12.

Ahead of the Sunday deadline, comments were submitted by a slew of banking groups, including the Bank Policy Institute, American Bankers Association, America’s Credit Unions, Consumer Bankers Association and a host of others. 

In a joint letter that was sent to the Fed, the trade groups have argued that the Fed’s actions would hurt the banks themselves as well as their end customers. 

In his own analysis, through the study “The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis,” economist David Evans wrote that banking customers “lost more on the bank side than they gained on the merchant side,” by as much as $25 billion in discounted value dollars, as a result of the interchange fee caps implemented by the 2010 Durbin Amendment. 

Harder to Invest in Innovation 

The trade groups that wrote to the Fed represent the majority of debit card issuers, they noted, and would wind up “driving up costs to consumers for basic deposit accounts (disproportionately harming low-income and underserved consumers) and degrading the ability of banks and credit unions” to invest in payments innovation. 

The proposal would restrict resources available to banks to cover the costs of facilitating debit card transactions, the May letter and the comments argue.

“Interchange revenue helps fund low- or no-cost deposit account programs like Bank On-certified accounts. After Regulation II was promulgated, the percentage of banks offering free checking accounts declined from 60% to less than 20%,” the banks contended.

Furthermore, “the proposal bases its reduction in the cap on the estimated costs of high-volume issuers, which comprise only one-third of total issuers. The highest-volume issuers generally have the lowest costs to run their debit programs safely and securely because of scale. The proposal disregards the costs borne by most banks and credit unions, which are higher given their smaller programs,” per the comments.

The comments went on to state that “debit cards have become a primary payment method for millions of American consumers,” while PYMNTS Intelligence data estimated that headed into 2024, that paycheck-to-paycheck consumers — at about 60% of all consumers — are more likely to use debit cards than credit cards for everyday transactions, as less than 20% of credit card holders in this group reported using a credit card for their last purchase.

Elsewhere, as detailed here, 44% of respondents had paid for their most recent retail purchase in stores via debit card, while 28% paid with a credit card. Visa’s latest earnings results showed that debit spending was up 9%, versus credit at 8%. 

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