Much to the delight of merchants that accept debit cards for purchases and the dismay of banks that issue them, the Federal Reserve Board in late October proposed to cut regulated interchange for the first time since 2011.
There’s big money involved. Interchange is a fee set by card networks— Visa Inc. and Mastercard Inc. dominate the U.S. debit market, but there are 13 in all — charged to the merchant acquirer and paid to the issuer of a card used in a particular transaction. The acquirer—a bank or processor that provides card-acceptance services to merchants — typically passes the cost on to its merchant clients, and it’s a major source of expense. Interchange fees from debit and general-use prepaid cards totaled $31.59 billion in 2021, up 19.1% from 2020, spurred partly by the Covid-19 pandemic that powered an ecommerce boom from millions of newly shut-in consumers.
“Any merchants with regulated debit volume are going to see some benefit if the proposal is finalized in its current state,” Christian Johnson, senior global advocacy manager at CMSPI, an Atlanta-based consulting firm specializing in payment card cost issues, tells Digital Commerce 360.
The public comment period ends in February
The Fed reports payment card networks in the United States processed 92.11 billion debit and general-use prepaid card transactions valued at $4.26 trillion in 2021. Card-not-present transactions, now dominated by Internet purchases but also including phone and mail orders, totaled 29.54 billion to account for nearly a third — 32.1% — of debit volume. CNP debit transactions averaged $64.50 in 2021, well above the average $37.64 card-present debit sale, according to the Fed.
The changes will take effect sometime, possibly months, after a 90-day comment period ends on Feb. 12, 2024. The comment period started on Nov. 14 when the Fed published its official proposal in the Federal Register, the journal of the executive branch.
The so-called Durbin Amendment to 2010’s Dodd-Frank Act, the sweeping law Congress passed in the wake of the 2008 financial crisis, empowered the Fed to regulate interchange received by debit card issuers with more than $10 billion in assets. The ranks of what the Fed calls “covered issuers” include such familiar names as Bank of America, Wells Fargo, U.S. Bank, Chase, and Citi, and dozens of others. Transactions from covered issuers totaled 56.19 billion in 2021, some 61% of all debit purchases. (All of the Federal Reserve data cited in these two stories come from the Fed’s 2021 surveys of payment networks and 163 covered issuers, the most recent available.)
The Fed’s Regulation II, which implements the Durbin Amendment, currently sets a per-transaction interchange cap of 21 cents and 0.05% (five basis points) of the sale, plus another 1 cent for debit issuers that meet certain fraud-prevention standards. That cap, which hasn’t changed since Reg II took effect in late 2011, applies to both card-present and CNP transactions.
Now, the Fed is proposes lowering the interchange cap to 14.4 cents plus four basis points of the sale while increasing the fraud-prevention adjustment to 1.3 cents. On a $50 debit sale, the cap would decline from 24.5 cents to 17.7 cents, a 27.8% reduction.
Next: Will merchants actually benefit from the Fed’s proposed price reduction?
Jim Daly is a Digital Commerce 360 contributing editor covering B2B digital commerce technology and strategy.
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