In a significant development, the Federal Reserve announced on Wednesday its proposal to lower the fees that banks can levy on retailers for processing any debit card transaction. This move has been welcomed by merchants who have long decried these fees, often referred to as “swipe fees,” as excessive and detrimental to consumers.
The proposal has implications for major banks issuing credit cards, as well as industry giants Visa (V), Mastercard (MA), and American Express (AXP), all of which could experience a decline in revenue if these fees are indeed reduced.
Commonly known as interchange fees, these charges are paid by a range of businesses, including retailers, supermarkets, convenience stores, gas stations, and online merchants, when customers make purchases with debit cards. The revenue generated from these fees is collected by the banks issuing the cards.
Following the 2008 financial crisis, the Federal Reserve gained increased authority over these fees, a power strengthened by the Durbin amendment within the 2010 Dodd-Frank law. This amendment tasked the Fed with capping rates for banks with assets exceeding $10 billion at a cost deemed “reasonable and proportional.” In 2011, the regulatory body set the cap at 21 cents, plus 0.05% of the transaction amount.
While the central bank retains the authority to lower this cap in the event that payment processing costs decrease, it had not exercised this option until now. The newly proposed cap stands at 14.4 cents, along with 0.04% of the transaction amount. Additionally, the Fed proposes an increase in the fraud-prevention adjustment from 1.0 cent to 1.3 cents.
At present, the average debit card transaction amounts to $50. Under the proposed cap, this would result in a total fees of 17.7 cents for the average debit card transaction, a reduction from the current 24.5 cents.
However, Federal Reserve Governor Michelle Bowman voiced her objection to the proposal, expressing concern that while banks would face heightened costs, consumers may not realize the anticipated savings. She stated, “While the proposal suggests that it could result in benefits to consumers, I am concerned that the costs for consumers—through the form of increased costs for banking products and services—will be real, while the benefits to consumers—such as lower prices at merchants—may not be realized.”
This move is part of a series of new regulations introduced by the Federal Reserve and other banking regulators, affecting various aspects of financial institution operations. These encompass capital requirements for banks, climate risk assessments, and reevaluations of lending practices in low-income communities. Some of these measures have encountered resistance from banks, particularly the proposal necessitating banks with assets surpassing $100 billion to hold larger buffers for potential future losses.
In anticipation of potential legal challenges from the industry, the Fed has suggested a 90-day comment period for the proposed rule, with any final rule taking effect “at least 60 days” after publication in the Federal Register. The Fed envisions a biennial update of the fee cap, with data collection in odd-numbered years by March 31, followed by implementation on July 1.
While the final trajectory of the fee cap remains uncertain, it is contingent on fluctuations in costs. Merchants have long contended that the Fed’s interchange rates exceed what is “reasonable and proportional,” leading to legal disputes. The Supreme Court recently agreed to hear a case that could compel the Fed to reduce these fees.
Critics, including Bowman, underscore that larger issuers with high transaction volumes stand to gain an advantage over smaller counterparts. Concerns have also been raised regarding potential risks to certain banks and the broader U.S. banking system in light of the proposed reduction in interchange fees coupled with heightened capital requirements.
Source: Yahoo Finance
