Federal Reserve Proposes Major Reduction in Debit Card Fees

The Federal Reserve has unveiled its plan to slash debit card fees, potentially bringing relief to both merchants and consumers, as highlighted in Finextra news. This move comes as part of a broader initiative to review and reform the fees charged by banks for debit card transactions. As per the latest announcement on October 26, 2023, the Fed is proposing a substantial reduction of nearly 30% in the debit interchange fees that banks can impose on merchants. What’s more, the central bank intends to revisit this cap every two years, ensuring ongoing fairness and transparency in the financial ecosystem.

For over a decade, merchants have been burdened with paying 21 cents plus 0.05% of the transaction cost for every debit card payment, in addition to a one-cent fraud prevention adjustment for issuers meeting specific standards. In 2021, the total interchange fees for all debit and general-use prepaid card transactions soared to $31.59 billion, marking a considerable 19.1% increase compared to 2020.

However, the Federal Reserve has pointed out that since 2011, the costs incurred by issuers have decreased significantly. As a result, they are proposing a reduction in the base component to 14.4 cents and the ad valorem component to 0.04% of the transaction cost, while simultaneously increasing the fraud prevention adjustment to 1.3 cents. This adjustment, if implemented, would result in an overall decrease of approximately 28% in debit interchange fees.

The Federal Reserve is also planning to keep a close eye on these fees, with a commitment to updating the cap every other year. This update will be directly tied to data gathered from the central bank’s biennial survey of large debit card issuers, ensuring that the fee structure remains reflective of the current financial landscape.

However, the proposal is not without its critics. The National Retail Federation has welcomed the significant reduction in fees but contends that it still falls short of matching the declining costs for issuers. According to a statement by the federation, the Fed originally considered a cap of up to 12 cents, given that the average cost per transaction was found to be 7.7 cents. However, it settled on the 21-cent cap after lobbying efforts by banks.

This development is poised to bring substantial changes to the debit card fee landscape, potentially benefiting both merchants and consumers alike. As the proposal enters a comment period, stakeholders and interested parties will have an opportunity to weigh in on the Federal Reserve’s plan, shaping the future of debit card fees in the United States.