Friday, February 9, 2024
The white paper, How proposed interchange fee caps will affect consumer costs, was published by Nick Bourke, former director of consumer finance at The Pew Charitable Trusts, with support from the Consumer Bankers Association.
It draws from prior research by the Fed and former Treasury Department economists on the Durbin Amendment to the Dodd-Frank Act, which ushered in debit card interchange caps more than decade ago. It considers market changes ushered in by the original cap and how changes might play out in the current market under the latest Fed proposal.
"The Federal Reserve Board's proposal would boost revenue for merchants at the expense of consumers," said CBA President and CEO Lindsey Johnson.
The Fed was instructed under the Durbin Amendment to cap debit card interchange. The initial cap, set in 2011, was 21 cents and 0.05 percent of the transaction, plus a penny to cover fraud prevention-detection costs. That works out to about 24.5 cents on a $50 transaction. Not all debit card issuers are subject to the rule, however; only those with assets of $10 billion, or more. All smaller issuers are exempt.
That capping resulted in covered issuers losing an estimated $5.5 billion in annual debit card interchange, according to Bourke's white paper. Economists have tried but have been unsuccessful in pegging the corresponding savings enjoyed by merchants or any measurable savings that were passed on to consumers.
Johnson accused the Fed of "doubling down" on what was bad policy in 2011 with even lower allowable interchange in 2024.
At issue is a proposal floated by the Fed in October 2023 that would lower the allowable debit cap to 14.4 cents plus 0.04 percent and 1.3 cents to cover fraud prevention. That works out to 17.7 cents for a $50 debit card payment.
In proposing to adjust the debit interchange cap for the first time in 13 years, the Fed said it plans to make adjustments more frequently going forward. Changes can be expected every two years, and will be based on the Fed's own analysis. No public comments will be solicited, the Fed said.
Both consumers and card issuers will be hard hit by the planned new rate cap, similar to the way things happened back in 2011, Bourke suggested. Following the initial capping in 2011, the reductions in interchange income led banks to adopt higher account fees, practically eliminate "free" accounts, and raise minimum account balances, Bourke noted.
Research also suggested that few merchants passed along to consumers any savings realized from lowered debit card interchange.
"If the current proposal to reduce the debit interchange fee cap is finalized, the research suggests that consumers will pay an extra $1.3 billion to $2 billion annually in higher bank account fees," Bourke wrote.
Under this scenario, interchange fee revenues would drop by $3 billion annually. That would be offset, in part, by $1.3 billion in higher monthly account maintenance fees, while other consumer account fees increase by between $250 million and $700 million, Bourke predicted.
"On the merchant side, debit processing costs drop on average," but savings are "debatable," since some merchants may shift to accepting other methods of payment, he added. "Any pass-through savings to consumers (i.e.: lower prices for goods or services) remain unmeasurable and cannot be estimated."
Bourke added that consumers at smaller, exempt banks "would also expect to pay higher costs as their banks follow larger competitors to raise prices in some markets, just as they did post-Durbin." 
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