Federal Reserve proposes changes to debit card interchange cap

October 25, 2023

The Federal Reserve issued a proposal Wednesday to make significant changes to the current debit card interchange cap.

CUNA strongly opposes any changes—legislative or regulatory—to the current interchange system.

Specifically, the proposal would:

  • Reduce the base component of the interchange fee cap to 14.4 cents (down from the current 21 cents), reduce the ad valorem component to 4.0 basis points (down from the current 5.0 basis points), and increase the fraud-prevention adjustment to 1.3 cents (up from the current one cent).
  • Update all three components of the interchange fee cap (base, ad valorum, and fraud prevention) every other year going forward by directly linking the components to data from the Board’s biennial survey of large debit card issuers starting in 2025, without public comment. 

The Fed also released its 2021 survey of covered debit card issuers. However, the data collected does not reflect new regulations applying the debit card routing requirements to card-not-present transactions that took effect this summer.

“While the current debit card system benefits merchants and consumers, it does not come close to covering the real costs debit issuers incur as it was intended to post-Durbin Amendment, and the Fed’s proposal would widen this gap even further,” said CUNA President/CEO Jim Nussle. “Even more concerning, the Fed’s proposal is based on data that doesn’t reflect the actual state of covered debit card issuers today and new regulatory requirements that are now in effect. Combine that with more than a decade’s worth of post-Durbin Amendment data that shows consumers now face higher prices and card issuers have less revenue to cover the expense of debit card processing. Meanwhile, merchants have not passed their savings from the Durbin Amendment onto consumers and big retailers continue to see increased profits. It doesn’t add up.  We can’t afford to make this mistake again, and especially not so the largest retailers get a larger slice of the profits.”

Federal Reserve Governor Michelle Bowman shared similar concerns with the proposal during the meeting, noting interchange fees only cover part of many financial institution costs, and changes could lead to less fraud prevention, decreased access to credit, and more.

CUNA, NAFCU, the American Association of Credit Union Leagues (AACUL) and other financial trade associations wrote to the Fed last week calling on it to reject merchant requests for further changes to Regulation II governing debit card interchange fees.

While financial institutions with less than $10 billion in assets are “exempt” from the debit interchange cap created by the Durbin Amendment, CUNA and AACUL released a study in July showing that government-mandated interchange price caps disproportionately harm local, community financial institutions.  

It found—among other things—that these “exempt” institutions saw a 31% revenue decline, adjusted for inflation, in the decade after its implementation.

The proposal will be open for comment for 90 days following its publication in the Federal Register.