Federal Reserve Proposes Reduction in Debit Card Fees

The Federal Reserve plans to reduce the debit interchange fees that banks charge merchants by nearly 30%, according to the proposal made. The plan also includes reviewing the cap every two years.

Current Interchange Fee Structure

Merchants have been paying banks a fee of 21 cents plus 0.05% of the transaction cost for each debit card payment for the past 12 years. There is an additional one cent fee for fraud prevention if issuers meet certain criteria. In 2021, these interchange fees across all debit and general-use prepaid card transactions amounted to $31.59 billion, marking an increase of 19.1% from 2020.

However, the Federal Reserve notes that since 2011, the costs that issuers have incurred have significantly declined.

Proposed Changes in Fee Structure

The proposal suggests reducing the base fee to 14.4 cents and the ad valorem to 0.04% of the transaction. However, there is a proposal to increase the fraud prevention adjustment to 1.3 cents. These changes, if implemented, would result in an overall decrease of approximately 28%.

The Federal Reserve also plans to adjust the cap every two years. This adjustment would be directly linked to data from the central bank’s biennial survey of large debit card issuers.

Reaction to the Proposal

The National Retail Federation has shown support for the significant reduction. However, they argue that the proposed changes do not align with the falling costs for issuers. The Federation highlighted that the Federal Reserve found the average cost per transaction was 7.7 cents and proposed a cap of up to 12 cents, but eventually settled on 21 cents after lobbying by banks.

The proposal is now open for a comment period.