A Federal Reserve proposal to significantly tighten the cap on debit card interchange compensation earned by banks has introduced sustainability concerns for smaller and medium-sized financial institutions that are trying to stay independent rather than merging, the members of the Fed’s Community Depository Institutions Advisory Council told the agency during their most recent meeting. Council members suggested that the Fed withdraw the proposal and re-introduce it once an appropriate cost-benefit analysis has been conducted.
The Fed in October proposed revising the Durbin Amendment caps in 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 $10 billion or more in consolidated assets. However, the community bankers who make up the CDIAC said the sizable revenue cuts that occur once that revenue threshold is crossed may encourage smaller institutions to reduce lending to stay below the limit. It also may lead to more mergers as banks consolidate rather than grow independently, so they are able to dilute the lost revenue as part of a larger banking organization, they added.
“Council members are interested in correcting the misperception that the Durbin Amendment ‘exempts’ community banks, including as it relates to the current price cap that the Federal Reserve proposes to amend,” according to minutes from the meeting. “CDIs rely on fee income (1) to support the cost of services, such as free checking, that are currently available at no extra charge and (2) to cover increases in operating expenses to implement fraud prevention and mitigation measures… If fees continue declining, at some point, CDIs will begin to curtail customer services.”
