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The Federal Reserve Board’s proposal Wednesday to make a 31% reduction in the main component of its debit card interchange ceiling for large issuers touches on a longstanding sore point among merchants and has already sparked a spirited debate in the payments industry.
Merchant groups, long riled by debit card acceptance costs, contend the Fed’s cut doesn’t go far enough, while the banking lobby deplores the proposal as arbitrary and likely to hurt banks and consumers.
The Fed’s action, which the payments industry has been expecting for some time, comes as the nation’s banking regulator seeks to reduce its mandated cap on debit interchange for the first time since the current regulation became effective 12 years ago as part of the Durbin Amendment to the Dodd-Frank Act. The Fed says as part of its proposal that it will review the new cap every other year.
According to information the Fed released Wednesday, the ceiling on the so-called base component would drop to 14.4 cents per transaction from 21 cents. The so-called ad valorem rate, meant to help cover issuers’ fraud losses, would dip slightly from 0.05% to 0.04%. But the penny per transaction for fraud-prevention costs would rise to 1.3 cents. The Fed’s Board of Governors approved the proposal by a 6-1 vote.
Merchant acquirers pay interchange to card issuers, and typically bundle the cost into the rate they charge merchants. The new limits, like the current ones, would apply to issuers with $10 billion or more in assets.
The reaction from the banking lobby to the Fed proposal has been quick and emphatically negative. In one example, the Independent Community Bankers of America argues the proposal would harm even exempt smaller institutions. “The [Fed’s] cap on debit card interchange puts smaller card issuers at a disadvantage due to their smaller transaction volumes and lower negotiating power relative to larger issuers, which could cut off access to low-cost and no-cost banking services in local communities—even those served by the community banks that are intended to be exempt from the proposal,” the group said in a statement.
Other associations representing bank interests were predictably negative. “This proposal has the potential to make checking accounts, debit cards, and a range of financial products more expensive for American consumers, while delivering an unprecedented gift to big-box retailers that have shown no inclination to pass any savings along to customers,” argued Rob Nichols in a statement released Wednesday by the American Bankers Association. Nichols is president and chief executive of the group.
Merchant groups generally welcomed the Fed’s action, as they have contended for years that debit-acceptance costs have been too high, even under the current Fed regulation. But some groups, such as the Food Industry Association, argued in a release Wednesday that the proposal doesn’t cut interchange enough. The proposal, the group said, “does little to ease the economic burden on merchants and further shifts fraud prevention costs onto retailers.”
Long-time industry experts, too, reacted to the Fed’s action with sharply opposed opinions, with some arguing the reduction in the base limit was long overdue. “The 21[-cent] rate was 4-5 cents too high, even though the banks were self-reporting all the authorization, clearing, and settlement costs they could,” argues Steve Mott, principal at payments-advisory BetterBuyDesign, in an email message to Digital Transactions News.
But other observers, while contending cost data could have spurred the Fed to make an even deeper cut in its interchange ceiling, argue mandated price caps distort market forces, ultimately causing consumer harm. “Even charitably administered price controls are harmful, causing systemic misallocation of resources. Interchange price caps reduce issuer innovation, fee-free banking, and a host of benefits, services, and rewards that consumers love,” says payments consultant Eric Grover, principal at Intrepid Ventures.
The marketplace, even if distorted by pricing caps, will be the ultimate judge of the matter. But first, the Fed has to implement either the current proposal or a new one modified by industry reaction.
