Research: Fed proposal to lower debit interchange fees will cost consumers billions

If the Federal Reserve’s proposal to reduce the debit interchange fee cap is finalized, consumers will pay an extra $1.3 billion to $2 billion annually in higher bank account fees, and there will be no way to measure whether merchants passed on their savings to customers, according to a new white paper.

The research by Nick Bourke, former executive director of the consumer finance and housing program at The Pew Charitable Trusts, examined the potential economic effects of the Fed’s proposed Regulation II revisions. He reviewed research about the fee cap’s effects when it first took effect in 2011 pursuant to the Durbin Amendment, noting that it led to a $5.5 billion reduction in annual debit card interchange fee revenue for covered banks but no measurable reduction in pass-through savings to consumers through merchants lowering prices for goods and services.

Using that research as a basis, Bourke estimated that the Fed’s current proposal would further reduce interchange fee revenue for banks by $3 billion annually. Forty-two percent ($1.3 billion) of that loss would be offset through higher monthly maintenance fees for consumers, while other service fees would increase by $250 million to $700 million. Merchants will save on debit processing costs, but economists agree that it will not be possible to measure how much of that savings is passed to consumers, he added.

“When judging the effects of the Durbin Amendment and any future reductions in its debit card interchange cap, it must be concluded that bank interchange revenue drops and correspondingly, consumers experience measurably higher costs and more restrictive terms on their bank accounts; and even though the average cost of debit card processing falls for merchants, any corresponding reduction in the cost of consumer goods and services is debatable and ultimately not measurable,” Bourke said.