In a significant move, the Federal Reserve unveiled a proposal on Wednesday to decrease the fees banks can impose on retailers for processing any debit card transaction, addressing long-standing complaints of exorbitant “swipe fees” hurting consumers.
These fees, formally known as interchange fees, are paid by a spectrum of businesses from supermarkets to online retailers, each time a customer uses a debit card for a purchase. Financial institutions issuing the cards collect revenue from these fees charged to the merchants. The Federal Reserve gained regulatory authority over these fees following the 2008 financial crisis.
Under the Dodd-Frank law’s Durbin amendment of 2010, the Fed was tasked with setting reasonable and proportionate caps on these fees for banks with over $10 billion in assets. In 2011, the cap was established at 21 cents, plus 0.05% of the transaction amount. The central bank now proposes to reduce this cap to 14.4 cents, plus 0.04% of the transaction amount, alongside an increase in the fraud-prevention adjustment from 1.0 cent to 1.3 cents.
Presently, the average debit card transaction stands at $50. If implemented, the proposed cap would amount to 17.7 cents for the same transaction, a notable reduction from the current 24.5 cents.
Fed Governor Michelle Bowman expressed dissent, emphasizing that consumers might not experience the anticipated savings, while banks could face heightened expenses. “While the proposal suggests that it could result in benefits to consumers, I am concerned that the costs for consumers—through the form of increased costs for banking products and services—will be real, while the benefits to consumers—such as lower prices at merchants— may not be realized,” Bowman stated.
This proposal represents the latest in a series of regulatory changes introduced by the Fed and other banking authorities, affecting various aspects of financial institutions’ operations. Some measures have faced resistance from banks, notably a proposal necessitating banks with assets exceeding $100 billion to maintain larger buffers for potential future losses.
Anticipating a potential legal challenge, nine prominent banking trade groups, including the American Bankers Association, cautioned Fed Chair Jay Powell against proposing fee reductions. The industry is poised to contest any final rule in court.
The proposed rule sets forth a 90-day comment period, with the final rule slated for publication in the Federal Register, becoming effective at least 60 days thereafter. Additionally, the Fed envisions a biennial review of the fee cap, collecting data by March 31 in odd-numbered years, with changes taking effect on July 1.
However, the trajectory of the cap’s adjustments in subsequent years remains uncertain, contingent on evolving costs. Merchants have persistently argued that the Fed’s established interchange rates exceed what is deemed “reasonable and proportional.” Although they previously lost a legal battle, the Supreme Court has agreed to reevaluate the matter.
Banks advocate for a revamp that incorporates fraud and operational costs not presently factored into the existing regime. They contend that the Fed’s latest public assessment, rooted in 2019 data, does not substantiate any pricing modifications.
Governor Bowman further emphasized that larger issuers with substantial transaction volumes would gain an edge over smaller counterparts. She voiced concern over potential risks to the financial health of certain banks and the broader U.S. banking system, citing both the proposed fee reduction and heightened capital requirements.
Source: Yahoo Finance
