The Federal Reserve today proposed to significantly lower the cap on debit card interchange fees earned by banks and institute a new review process by which the cap would be revised every two years. Under the notice of proposed rulemaking, the Fed would revise Regulation II to lower the cap from its current rate of 21 cents and .05% of the transaction, plus a one cent fraud adjustment, to 14.4 cents and .04% per transaction and a 1.3 cents fraud prevention adjustment, effective June 30, 2025. It also proposed to update the cap every other year going forward by linking it to data from the board’s biennial survey of large debit card issuers. The proposal would apply to debit card issuers with at least $10 billion in consolidated assets.
The proposal does “not invite public comment on the allowable costs that the board considered in establishing the interchange fee standards.” The American Bankers Association and other associations have stated repeatedly that the allowable costs considered by the Fed are too narrow.
The Fed board voted 6-1 to advance the proposed rulemaking, with Governor Michelle Bowman casting the dissenting vote. During the meeting, Fed staff said that transaction processing costs declined by nearly 50% from 2009 to 2021, and that issuer fraud losses also declined, while fraud prevention costs increased, over the same time period.
Bowman questioned whether the Fed artificially limited the types of information that it gathered for the survey used to set the new cap, with staff saying that data was limited to comply with statute. Before engaging in significant regulatory proposals, it is critical to reflect on the broader context and to understand the potential consequences of the revisions, she said. “While the proposal suggests that it could result in benefits to consumers, I’m 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.”
Nichols: Lowering fee cap may harm consumers
In a statement, ABA President and CEO Rob Nichols said the association strongly disagrees with the flawed data and incomplete process that led to the Fed proposal. The Fed’s plan “has the potential to make checking accounts, debit cards and a range of financial products more expensive for American consumers, while delivering an unprecedented gift to big-box retailers that have shown no inclination to pass any savings along to customers,” he said.
“Far from holding community banks harmless as the Fed claims, smaller institutions will be sharply impacted by this change, as revenue they use to pay for a range of financial products and services is reduced,” Nichols said. “Regulation II has also accelerated consolidation in the industry and more small banks are covered by these caps. If enacted, this government price cap would result in reduced fraud protection and reduced access to debit cards, which no one should want, including merchants.” Nichols added that ABA will join with other stakeholders to oppose the proposal.