Fed delays debit cap plan

Don't expect a speedy resolution to the Federal Reserve's controversial plan to lower allowable debit card interchange. The Fed disclosed last year that a new, lower debit interchange cap was on the schedule for 2025. In an announcement this week, however, the Fed said it would extend until May 12 the deadline for comments on its plan to slash permissible debit interchange by as much as 30 percent. Comments originally were due by Feb. 12.

Separately, the Fed published additional data which it says will help the public better analyze and comment on plans for a lower regulated cap.

Slash debit interchange by 30 percent

The Fed's original plan was to slash interchange beginning in mid-2025. Now that the Fed has extended the time frame for submitting comments on the proposal, it seems unlikely any new cap will take hold within a year of the deadline for comments. Controversial proposals like this often take a year or more to move through the Fed's approval apparatus. Once approved there is generally a waiting period of six months, or more, before a rule change takes hold.

Regulated debit interchange refers to interchange charged by debit card issuers with assets of $10 billion or more.

Today the cap for those issuers is 21 cents plus 0.05 percent (5 basis points) of the transaction amount, and a penny to cover the cost of fraud prevention, or about 24.5 cents for a $50 purchase. The Fed's new proposal, if adopted, would lower that cap to 14.4 cents plus 4 basis points and 1.3 cents to cover fraud prevention costs, which works out to 17.7 cents for a $50 transaction.

'Rough justice?'

The Fed was put in charge of regulating debit interchange under the Durbin Amendment to the 2010 Dodd-Frank Act. As written, the law applied only to the largest financial institutions—those with the most debit cards in circulation. And back then, $10 billion was a standard cutoff between the biggest and smaller financial institutions.

Almost from the get go, FIs balked, arguing that the cap amounted to government price controls. Despite strong opposition, the cap did take effect and has remained unchanged ever since.

No parties—neither issuers nor merchants—have gone on record approving of the notion of the Fed setting debit card interchange. Yet, as of January 24, 2024, the Fed had logged just 20 original letters and in excess of 1,600 form letters commenting on the proposal. (Some of the original letters, though, were from groups of trade associations.)

Fed data shows issuer costs going down

The Fed's latest move is drawing criticism from FIs (arguing it's too much of a haircut), merchants (who want the cap to be lower) and even from within its own ranks. Fed Governor Michelle Bowman, in a statement for the record, asserted the proposal "aims to achieve 'rough justice' by establishing a single cap that applies to all covered issuers."

But background information prepared by the Fed's staff suggests the cap isn't really so onerous. In a document issued in conjunction with the proposal, the Fed offered data suggesting that the base per-transaction cost for about 95 percent of covered issuers was 14.4 percent in 2009; by 2021 the per-transaction base cost for those banks had fallen to 12.1 cents.

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