Digital Transactions Authoritative, insightful and timely information for payments professionals
Merchant groups are calling for the Federal Reserve to revise regulations governing debit cards to ease what they see as a growing fraud burden and to lower the interchange fees they pay and debit issuers earn.
The call for action comes in the wake of the Federal Reserve’s biennial report on debit cards, released last week, which covers interchange revenues, issuer costs, and fraud losses.
The latest figures from the Fed show that, in 2023, merchants paid for 49.9% of debit card fraud, up from 46.9% in 2021. The share of debit fraud losses banks paid totaled 28.3%, down from 33.4% in 2021.
The Federal Reserve is required by the Durbin Amendment to publish its report every other year, The amendment was attached in 2010 to that year’s Dodd-Frank Wall Street Reform and Consumer Protection Act.
Prepaid debit transactions had the highest fraud losses as a share of transaction value, as well as the highest incidence of fraudulent transactions as a percentage of total transactions in 2023 (312.6 basis points and 1.12%, respectively), according to the Fed report.
Fraud levels were second highest for dual-message transactions (17.9 basis points and 0.12%, respectively) and were once again the lowest for single-message transactions (6.7 basis points and 0.03%, respectively), as they have been since 2011.
Overall, fraud losses to all parties as a share of the transaction value were 17.6 basis points, or $17.63 per $10,000 in transaction value, up from 7.8 basis points in 2011, when the amendment’s Regulation II, which caps debit card interchange fees and establishes network-routing and fraud-prevention rules for debit transactions, went into effect.
Merchants’ shouldering of an increasing portion of debit fraud losses is a year’s-long trend that needs to be reversed, says Doug Kantor, a Merchants Payment Coalition executive committee member and general counsel for the National Association of Convenience Stores.
“Visa and Mastercard have been pushing more of the fraud burden on merchants since (Regulation II) went into effect and that’s a problem,” Kantor says. “The Fed has not kept up with the facts on the ground [when it comes to regulating debit cards].”
One of the biggest flaws in the Fed’s regulation is that the central bank allow banks to receive or charge a fee for meeting fraud-prevention standards. Banks may “receive or charge up to 1 cent per transaction provided the issuer meets the fraud-prevention standards described in Regulation II,” according to the Fed’s Web site.
“This is a largely a self-policed rule that allows banks to receive fees even if they do nothing [when it comes to fraud prevention],” Kantor says. “We have told the Fed that banks should only receive the fee if they take steps to effectively prevent fraud. It shouldn’t take 15 years to revise the regulations [to reflect the reality of the marketplace].”
In response to the MPC’s argument that banks are not shouldering their fair share of debit fraud losses, the American Bankers Associations counters that consumers are satisfied with the job banks are doing in preventing debit fraud.
“Polls consistently show Americans credit the banking sector for doing more to stop fraud and scams than any other industry,” Sarah Grano, vice president of public relations for the American Bankers Association, says by email. “It’s time for all stakeholders to join this fight, including the nation’s retailers and merchants.”
A poll of 4,403 adults commissioned by the ABA in October revealed that 50% of respondents said they trust banks more than any other entity to protect them from fraud. Consumers favored banks by a more than a 6-to-1 margin over the next closest industries, health-care providers (8%) and non-bank fintech payment providers (8%), the study says.
The Fed report shows that banks earned about 24 cents in interchange per transaction in 2023, while their cost per transaction is 4.1 cents.
“Banks’ are earning profits far out of proportion to their costs,” Kantor argues. “Since the debit caps were set, banks’ debit costs have dropped 50%.”
The ABA counters the figures in the Fed’s report paint a picture of a healthy debit card market for all parties. “The Fed’s biennial report proves that the modern, debit card payment system is producing increased sales, better cash flow and increased customer reach every year for the nation’s retailers and merchants,” Grano says.
“Even as debit card transaction volume increased from $1.43 trillion in 2009 to $4.66 trillion in 2023, an average growth rate of 8.8% per year, the average interchange fees merchants and retailers pay for transactions covered by Reg II have remained unchanged since 2011,” Grano adds.
