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Industry Groups React to Proposed Debit Swipe Fee Changes

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May 17, 2024

Cathy Sagle

Multiple retailer associations view potential revisions by the Federal Reserve as a first step, not a complete solution.


May 15, 2024

Multiple retail industry groups told the Federal Reserve that its proposed changes to debit card swipe fees are a welcome start, but not sufficient.

If adopted, the proposed revisions to Regulation II's Interchange Fee Cap would result in the base component cap decreasing to 14.4 cents, the ad valorem component would decrease to 4 basis points, and the fraud-prevention adjustment would increase to 1.3 cents per transaction.

The public comment period on the changes ended May 12 after being extended by three months.

The National Retail Federation (NRF) told the Federal Reserve that its proposed methodology change leaves the debit swipe fee cap too high.

"We are very appreciative that the board has undertaken to update the interchange rate so that it will no longer depend on data that is now 15 years old," said NRF Chief Administrative Officer and General Counsel Stephanie Martz said in a letter to the Federal Reserve's Board of Governors. "The economic factors that were considered by the board when it originally set the maximum allowable interchange rate for covered issuers in 2011 based on 2009 data have changed dramatically."

When set, the current cap was 2.7 times card-issuing banks' average cost of 7.7 cents for processing a payment and was meant to cover actual costs at 80% of institutions, according to the NRF, which stated that the current proposal works out to 3.7 times banks' average cost was determined by new methodology intended to ensure that actual costs are covered for 98.5% of banks.

Martz urged the Federal Reserve to keep the cap at 2.7 times banks' average cost, resulting in a limit of 10.5 cents per transaction, or to set tiered rates based on based on banks' debit card transaction volume.

The Merchants Payments Coalition (MPC) expressed similar sentiments, stating that the debit swipe fee reduction would still provide banks with huge profit margins that no competitive business in the nation could charge.

"It is not reasonable for the board to set a single base component rate that massively overcompensates high-volume, low-cost issuers," the MPC said in its letter to the Board of Governors. It added that the Federal Reserve is doing so to accommodate high-cost, low-volume issuers to have debit operations as a very small part of their business.

"The MPC believes that several modifications are needed to the proposed rule in order to make it fully consistent with the governing statute," the letter added.

According to the MPC, the proposed rate would lower the amount banks can charge by less than a third, despite the fact that their average cost of processing a transaction has fallen by nearly 50%. A 14.4 cent rate would give average profit margins of 270%, nine times the 30% average profit margins large banks make on their business overall, the organization stated.

The Retail Industry Leaders Association (RILA) expressed its support for the proposal, stating that leading retailers want to see it finalized as soon as possible, but also urged the Federal Reserve to consider adopting a tiered approach with at least two rates: one for the largest banks with the lowest processing costs, and one for all other smaller banks.

"The proposed reduction is a first step in the right direction. And a tiered approach would better align the debit interchange system with Congress's stated goals and the law," said Austen Jensen, RILA executive vice president, government affairs. "Adopting this new tiered approach would better balance the cost recovery regime between the largest banks with the lowest cost, while maintaining equitable treatment for smaller issuing banks in the debit market."

RILA asked the board to strengthen its current proposal to ensure that the largest banks are not circumventing the law and collecting excess profits.

A group of banks and credit unions submitted comments urging the Federal Reserve to fully rescind the proposed rule change entirely, arguing that it would harm consumers, banks and credit unions and would violate the law by prohibiting banks from recovering costs incurred by providing affordable, safe debit card programs and a reasonable return on that business.

The proposal would benefit large retailers like Walmart and Amazon at the expense of consumers and financial institutions of all sizes, according to a joint letter submitted by the Bank Policy Institute, American Bankers Association, America's Credit Unions, Consumer Bankers Association, Independent Community Bankers of America, Electronic Payments Coalition, Mid-Size Bank Coalition of America, National Bankers Association and The Clearing House Association.