A proposal to significantly lower the cap on debit card interchange fees earned by banks is unfair to many issuers and, in some ways, regressive in its effects, Federal Reserve Governor Michelle Bowman said Thursday. The Fed last month proposed to revise Regulation II to lower the cap from its current rate of 21 cents and .05% of the transaction, plus a one-cent fraud prevention adjustment, to 14.4 cents and .04% per transaction and a 1.3 cents fraud prevention adjustment, effective June 30, 2025. The proposal would apply to debit card issuers with at least $10 billion in consolidated assets, according to the Fed.
Bowman was the only Fed board member to vote against moving forward with the proposal. In a speech at a New York Bankers Association conference, Bowman reiterated her belief that lowering the cap would raise costs for consumers with no guarantee that merchants would lower their prices in return for lower fees. And she said that despite the proposal being targeted at financial institutions over $10 billion, she expects it to affect smaller community banks and credit unions. “Issuers of all sizes use the same payment rails, and smaller issuers will inevitably face some pricing pressure, at least indirectly, from the interchange fee cap,” she said.
“Retail banking is an essential, core function for many smaller issuers, so this pricing dynamic may not ultimately lead them to abandon their debit card programs,” Bowman said. “Under the proposed rule, a staggering one-third of bank issuers would not be able to recover even the partial costs that factor into the interchange fee cap. For banks that operate debit card programs at a loss, presumably those costs will need to be recovered elsewhere, such as through higher borrowing costs for bank customers or through other fees for services provided, which are also targeted by the banking agencies for elimination.”
Higher borrowing costs or fees could be particularly harmful for low-income customers who may not qualify for credit card products or other alternatives, as banks may be forced to discontinue their lowest-margin products, Bowman said. She also noted that the fee adjustment comes as banking agencies are moving forward with multiple regulatory proposals, including new capital requirements, revisions to Community Reinvestment Act implementation, and climate risk modeling. “The cumulative effects of recent proposed and final rules remain to be seen, but these significant regulatory changes could present ongoing risks to the health of certain institutions and the U.S. banking system,” she said.