By Tom Rosenkoetter
ABA Viewpoint
The Federal Reserve’s proposal to lower debit card transaction interchange fees for the first time since 2011 is drawing cheers from the retail industry lobby — and jeers from a wide swath of the rest of the American public. That is the clear verdict commenters on the plan, known as Regulation II, delivered to the central bank before the feedback window closed May 12.
The numbers tell the story of the overwhelming opposition generated by the plan to lower the regulated cap on debit interchange from 21 cents to 14.4 cents. Of 202 comment letters released as of Memorial Day weekend, 160 of them — 79 percent — urged the central bank to back off the rule change. Less than a fifth, or 38, supported the proposal, while four of the letters defied categorization.
Those weighing in — from community banks and credit unions to public officials, civil rights activists, academics, economists and everyday Americans — found plenty to criticize.
They pointed to data showing the detrimental impact on financial inclusion efforts since the Fed first imposed a cap on debit card fees in 2011, as many financial institutions could no longer afford to offer rewards and no-fee checking accounts that appeal to lower-income customers and the unbanked. They noted that research shows retailers pocketed savings from the fee cap rather than passing them along to customers. And they raised alarm that further slashing the cap would halt momentum for low-cost Bank On-certified accounts, which — following a nationwide campaign championed by ABA — are now offered by hundreds of banks. These accounts rely heavily on interchange revenue to subsidize full-service transaction accounts with low or no fees.
Here are a few additional insights from the robust record of comments on the proposal:
- Eleven academics, five government officials, and 20 nonprofits weighed in, with 33 of those 36 opposing the rule change.
- In total, 61 opponents, or 38 percent, come from outside of the banking industry, representing a variety of fields in both the public and private sectors.
- Policy experts opposing the proposal span the ideological spectrum, from former Cato Institute and Heritage Foundation economist Daniel Mitchell to Progressive Policy Institute executive director Lindsay Lewis.
- At least 30 commenters mention harm to low-to-moderate-income communities, with 19 focusing on the threat that lowered interchange fee caps would pose to Bank On-certified account offerings.
The fate of Bank On is a major concern.
Advocates for low-income communities expressed concern about the proposal’s potential to harm Bank On adoption. “As well-intentioned as this proposal sounds, it would take direct aim at banking access for Black households by undermining and even defunding a critical and successful program that has opened doors for banking services for low-income Americans and communities of color,” Al Sharpton, president of the National Action Network, wrote in a April 30 letter to Federal Reserve Chairman Jerome Powell.
The fees that the Fed proposal would slash are “a relevant component” of Bank On’s sustainability, wrote Jonathan Mintz, president of the Cities for Financial Empowerment Fund, the nonprofit that created and maintains national standards for the program.
Lowering the fee cap would imperil Bank On’s model, wrote Sarah Dieleman Perry, VP for economic mobility at Neighborhood Allies, which administers the program in Pittsburgh and Allegheny County, Pennsylvania. She wrote the Fed’s proposal could “ultimately lead banks to scale back free or low-cost checking accounts that are of vital importance to low- and moderate-income individuals.”
Civil rights advocates say communities of color will suffer under the plan.
A number of civil rights activists told the Fed its plan would disproportionately harm communities of color. “The proposed cap would close doors that have only recently been opened and turn back the clock on equality and access in the U.S. banking system,” Al Sharpton wrote.
Meanwhile, Earl Fowlkes, president and CEO of the Center for Black Equity, and David Johns, CEO and executive director of the National Black Justice Coalition, also urged the Fed to stand down. “We are concerned that changes to Regulation II, as proposed by the Federal Reserve, would undermine the ability of the people we serve” to prosper, they wrote.
Garland Hunt, chairman of the Frederick Douglass Leadership Institute, noted that adjusted for inflation, the Fed’s proposed interchange fee cap would be lower than the 12-cent cap it rejected as too draconian when it first set the standard in 2011.
Small banks and credit unions say the regulation would damage community financial institutions and their customers.
The Fed proposal exempts institutions with less than $10 billion in assets, but lenders under that threshold say they would still feel the policy’s pinch as competitive pressure forces them to track the shift by larger banks. “Small and community banks have actually been affected indirectly,” wrote Kendall Rieman, president and CEO of $1.1 billion-asset Croghan Colonial Bank in Ohio. Citing Fed data, he noted that “[s]mall community banks experienced a drop of over 20% in interchange fees between 2011 and 2019,” leading to cuts in free checking accounts, debit card rewards and lending.
Credit union officials said their institutions and their members would suffer, too. “As a credit union we are a cooperative owned by our members,” wrote Sue Vandermeuse, SVP at Kohler Credit Union in Wisconsin. Interchange fees help “keep the cost of banking down. We use fees to keep interest rates low and provide affordable access to credit for our members.”
Several opponents say the rule would weaken lenders’ cybersecurity and fraud prevention efforts.
Financial institutions are facing rapidly rising costs to secure consumer data as cybersecurity breaches and fraud proliferate. Further reducing lender revenue by lowering debit fees would kneecap those efforts at a dangerous moment, bankers and cybersecurity experts alike noted. “Continuing investments to maintain cybersecurity and fraud deterrence should not be starved by capping transaction fees arbitrarily,” wrote Reynold Schweickhardt, a former senior technology policy officer for the U.S. House of Representatives and CIO and CTO for the Government Printing Office.
The proposal “will result in higher security risks to consumers and place additional unwarranted burden on card issuers.” wrote Bob Gerads, president and CEO of the Mid Minnesota Federal Credit Union.
Those risks are not borne by retailers, wrote Twana Billeaudeau, COO of the Bank and Trust in Texas. “Financial institutions make consumers whole after a card incident, not retailers. Contrary to what you might be being led to believe, financial institutions of all sizes will be impacted if this proposal succeeds.”
The retail industry, backed by Sen. Dick Durbin (D-Ill.), will not be satisfied until it eliminates all interchange revenue. Durbin and the National Retail Federation, in separate letters to the Fed, make strikingly similar arguments that appear aimed at zeroing out interchange revenue altogether. They both claim that due to declining average transaction costs, the reduced debit interchange cap the Fed is considering would nevertheless represent a greater multiple of banks’ average transaction cost than the original. And they both argue for an even lower cap than the one the Fed is considering — a push that many industry experts believe is an overreach.
As Don Apgar, director of merchant payments at Javelin Strategy and Research, said when quoted in a recent article in Payments Journal, the industry group’s position ignores the significant benefits their members derive from accepting debit cards, “such as guaranteed funds (compared to checks), faster transaction times at the point of sale, linking of cards to loyalty or rewards for customer marketing purposes, mobile checkout, omnichannel commerce, and reduced risk and cost of handling cash.”
Nevertheless, Apgar notes, the industry and its allies are signaling they want to zero out entirely the fees that secure the conveniences making debit cards more popular than ever. “The NRF won’t be happy until debit cards cost $0 for merchants to accept,” he said.
The Fed is not required to update its original fee cap, and in fact its poorly justified proposal is vulnerable to legal challenge.
Retailers pushing the central bank to lower the interchange fee cap frame the move as overdue. In fact, Americans for Tax Reform warned in its comment letter, that the Fed is overstepping its statutory authority by reducing the regulated rate without providing a “substantive cost-benefit analysis,” and by committing to automatically update the cap every two years, even though Congress never mandated that, without giving the public a chance to provide comment. These decisions could render the rule vulnerable to legal challenge, ATR wrote.
“The Proposal’s acknowledgment that it cannot determine the effects on consumers stands in contrast to the Fed’s obligation to ‘examine the relevant data and articulate a satisfactory explanation for its action,’” the group added.
The comment file makes a clear case for withdrawal for further study.
By a five-to-one margin, commenters from every slice of the political spectrum, representing different policy and community service disciplines, made a strong and multi-pronged case for the Fed to pull back its Reg II proposal for further study. These negative customer impacts, even if unintentional, must be addressed directly by the Fed as part of its legal obligations in any rulemaking process. But even if the legal bar were not so high, we would hope the Fed would understand based on this unambiguous public response that its proposal is just bad policy that would pad the profits of mega retailers at the expense of vulnerable consumers and the financial institutions trying to serve them.
Tom Rosenkoetter is executive director of ABA’s Card Policy Council.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.
