When consumers pay at the point of sale with their card – or with any other of the myriad options now available – rarely do they think about the cost of that payment. The economics of such fees has burst out from the shadows again, triggered by the Federal Reserve Board’s proposal to cap debit card fees. For multinationals, this could potentially save them millions. For banks, they could be losing a substantial chunk of their revenue.
The recent proposal has triggered a decades-long battle between retailers and banks over interchange fees. For every transaction, the retailer’s bank (the acquirer, which enables them to accept payment cards) pays an interchange fee to the card issuer (the cardholder’s bank). That cost is then passed onto the merchant by the acquirer, hence why retailers feel aggrieved.
The Fed’s recent proposal is to reduce the cap on debit interchange fees by around 30%. The Fed explains that for an average US$50 debit transaction, the fee would decline from the current 24.5 cents to 17.7 cents. Smaller banks would be exempt, and the limits would only apply to issuers with US$10bn or more in assets.
Despite the proliferation of alternative payment options, interchange fees are still big business for issuing banks. According to Fed data, in 2021, interchange fees across all debit and general use prepaid card transactions totalled US$31.59bn, an increase of 19.1% since 2020.
The debate is often polarised, and there have been numerous lawsuits over interchange. On the merchant side, Austen Jensen, Executive Vice President of Government Affairs at the Retail Industry Leaders Association said, “Current debit transaction fees paid by merchants are outrageously disproportionate to the actual costs incurred by issuers.”
He referred to the laws that enable the Fed to intervene on interchange, a move that was brought about by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Fed implemented its powers – through Regulation II – to cap debit interchange fees back in 2011. Those rules state debit interchange must be “reasonable and proportional to the cost incurred by the issuer”.
Jensen argues the fees are not reasonable. “The data overwhelmingly proves that the current rate needs to be lowered… Merchants shouldn’t be forced to pay such absurd mark-ups to simply accept debit cards.”
Meanwhile, Stephanie Martz, Chief Administrative Officer and General Counsel at the National Retail Federation, argued the move would “reduce costs for retailers and give them more savings to share with their customers by holding down prices in a time of inflation.”
On the bank side of the fence is the argument that the fees are necessary to enable financial institutions to invest in the payments infrastructure that makes reliable and secure electronic payments possible.
Institutions with assets under US$10bn argue they will be affected by the cap – even though they are exempt – because they will be under pressure to follow suit and also reduce their fees. The Credit Union National Association and National Association of Federal Credit Unions wrote an open letter to the Fed, calling for it to reject the fee reduction. “As in the merchant groups’ litigation against the Federal Reserve on Regulation II, there is consistent cherry-picking of facts and omission of ‘inconvenient evidence’ that contradicts their advocacy efforts,” the groups wrote. “We urge the board not to be misled. Contrary to merchant talking points, Regulation II has caused significant real-world economic harm to our members and their customers — and its recent expansion by the board is compounding that harm.”
In this latest version of the retailer vs bank interchange spat, whatever the Fed ultimately decides, both sides will not be satisfied with the outcome.
