Wednesday, May 22, 2024
Not surprisingly, card issuers complained in their comment letters that the Fed is setting the debit cap too low, while merchants want the Fed to leave it alone or lower the cap.
The Fed was tasked with setting interchange caps on regulated debit card payments under the Durbin Amendment to the 2010 Dodd-Frank Act. The cap applies to any card issued by a financial institution with assets in excess of $50 million.
Back in 2011, the Fed set the cap at 21 cents plus 5 basis points, and a fraud prevention adjustment of 1 cent. This year the Fed wants to lower the cap to 14.4 cents plus four basis points and 1.3 cents to cover fraud prevention costs. The $50 million cutoff would remain.
Most of the data the Fed used when it first set the cap was based on FI self-reporting. But going forward, the Fed said, it plans to make adjustments automatically every two years using its own data and an improved method.
"[T]he time is well overdue," for updating the cap, said Stephanie Martz, chief administrative officer at the National Retail Federation. But the new method the Fed uses for calculating the cap "significantly changes the methodology in a manner that is detrimental to retailers."
Martz wants the Fed to calculate interchange based on banks' average costs to process transactions, which she said would result in interchange of 10.5 cents per transaction. Martz also argued that the charge of 1 cent per transaction allocated to fraud loss recovery is no longer necessary, given the shift in fraud liability ushered in by EMV.
The Merchant's Payments Coalition agreed. "Merchants now bear far more fraud losses than banks and therefore should not also prepay," the MPC asserted, adding that the new proposal practically eliminates banks' financial incentives to fight fraud.
A group of banks and payment services providers, led by the American Bankers Association, urged the Fed not to be swayed by merchant complaints in setting interchange. Any action the Fed undertakes "should be based on robust data and changes in the market realities (i.e.: fraud and cyber threat environment, transaction types) and routing in multiple environments," the group asserted. "Since Regulation II [the rule set used to set the cap] was implemented more than a decade ago, there have been increases in fraud and operational costs that are not currently captured" using the Fed's methodology, the group wrote.
The ABA led group added that the merchant groups are way off base when it comes to costs. "The merchant petitions and presentations to the [Fed] demanding action on Regulation II are riddled with errors, misleading statements and false comparisons that appear designed to deceive," they wrote.
The Bank Policy Institute, which includes banking and payment processing members, sent a comment letter urging the Fed to ditch the planned rate hike on constitutional grounds.
"We are concerned that the proposal is legally defective, is unauthorized by the Durbin Amendment, creates serious constitutional issues, and is unsupported by reasoned decision making," BPI wrote.
The Constitution prohibits "confiscatory price controls, that is setting rates so low as to be inadequate to compensate current equity holders or the risks associated with their investments," BPI added. "Courts have repeatedly held that price control regulations that fail to allow a reasonable rate of return are unconstitutional." The revised cap would do just that, it insisted.
The Fed had planned to have the new cap in place by this summer. But given the stack of comment letters it must read, a summer start date seems unlikely. 
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