Sweeping changes to debit card interchange fees — and the ways debit transactions are facilitated — may come in 2025.
As a result, the economics of debit payments may also change, with ripple effects that impact issuing banks, merchants and consumers.
Front and center is what will happen with the Federal Reserve’s proposed rule to cap interchange fees, which are the charges levied on merchant’s banks by the banks that issue debit cards. The regulation would reduce the “base component” of the interchange fee cap to 14.4 cents from 21 cents.
The proposed rulemaking would also reduce the ad valorem component to 0.04%, a reduction from the current 0.05%.
Elsewhere, fraud prevention fees would rise to 1.3 cents, which would be a boost to the penny-per-transaction fee that has historically been in place.
A roughly 28% decline in those fees because of the new caps, updated from the 2011 Durbin Amendment, would reduce the revenue streams garnered by the issuing banks.
The Fed’s move comes as PYMNTS Intelligence found that debit cards are a key means through which budget-conscious consumers manage their spending. By using debit cards, they effectively spend the cash they have on hand, rather than embracing new credit card debt (and paying interest on that debt with rates in the high 20% range).
The PYMNTS Intelligence report “Debit Cards in Digital Wallets Gaining Ground Across Sectors” found that consumers paying with digital wallets used stored debit cards in 55% of grocery transactions, as well as 52% of retail transactions, 62% of restaurant transactions and 46% of travel transactions.
The Fed’s own data (noting that debit cards are roughly half of all non-cash transactions) on interchange fees, as relayed for 2021 and contained in its proposed rule, indicated that the fees totaled $31.6 billion, up 19% year over year.
The jousting over the Fed’s proposal — as banking groups square off with merchant industry trade associations — has ramped up as recently as this week. In the latest development, the Merchants Payments Coalition pushed for the Fed to quickly finalize the current proposal. A letter sent this week to the Fed’s chairman, Jerome H. Powell, followed a December missive from the American Bankers Association that recommended the Fed withdraw the proposal.
In the ABA’s letter to the Fed, the group pointed out that 78% of comments submitted during the commentary period were opposed to the rule.
“Commentors, including prominent civil rights activists, raised concerns about consumer harm [particularly lower- and middle-income consumers] that could result from the proposed rule,” the ABA wrote. “In particular, commentors focused on increased costs of banking services and failure of merchants to pass through savings to consumers.”
The MPC contended in its own letter: “Accepting deposits and maintaining accounts is a profit-making activity for banks, and they do not need interchange revenue for allowing consumers access to their deposits.”
As for the economic impact, in the study “The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis,” economist David Evans wrote that banking customers “lost more on the bank side than they gained on the merchant side,” by as much as $25 billion in discounted value dollars, as a result of the interchange fee cap initially set in place by the Durbin Amendment.
A separate 2017 study from the Fed said that “banks subject to the cap raised checking account prices by decreasing the availability of free accounts, raising monthly fees and increasing minimum balance requirements, with different adjustment across account types.”
For the moment at least, the impact of a law in Illinois focused on debit (and credit) card payments tied to taxes and gratuities would restrict interchange fees for some issuers. In a partial injunction that was handed down last week by a federal judge, the restriction of those fees would extend to Illinois chartered financial institutions and payments networks (including Visa and Mastercard) but would not apply to national banks. Additional briefings are due next month to be considered for hearings on the injunction in 2025.
Banking associations argued in their suit seeking injunctive relief that the law, as it exists at the state level, “usurps the federal government’s sole regulatory authority over multiple types of federally chartered financial institutions; and in turn, it runs afoul of multiple provisions of federal and state law designed to ensure that federal and state financial institutions operate on a level playing field and are not treated in a discriminatory manner” and would “upend the intricate and carefully calibrated global systems for debit and credit card purchases.”
In September, the Department of Justice lobbed a lawsuit against Visa, alleging that the payment network has monopolized the debit card market, offering volume discounts to larger issuers, which in turn moves those issuers to route transactions across the Visa network. The DOJ also said that despite the Durbin Amendment to Dodd-Frank’s provision that merchants be given the option to route debit transactions across any PIN debit network, alternative debit networks have been less embraced than they otherwise might be given Visa’s debit market share.
However, as Karen Webster wrote in an October column: “The lack of volume over alternatives could have something to do with the lack of confidence merchants have in transactions running over those networks. Maybe they aren’t confident that those transactions won’t be falsely declined or have the same level of fraud protection. … When consumers are presented with the option at the point of sale to pick Visa versus an unaffiliated debit network, they are (a) mostly wondering why they need to pick one and (b) most likely choose Visa since it seems safer. Maybe even less sketchy.”
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