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League Will Comment on Federal Reserve Board's Proposed Rule for Revision of Debit Interchange Fee Cap

10/25/2023

The Board of Governors of the Federal Reserve (FRB) today proposed a rule that would reduce the debit interchange fee cap contained in Regulation II.

In a sweeping move, the Board proposed a steep reduction of almost one-third in the core component of the interchange fees paid to institutions covered by the regulation and a separate reduction for a component that generates interchange income based on the purchase amount. The fraud prevention cost component of debit card interchange would rise from 1 cent per transaction to 1.3 cents per transaction.

Carrie at Federal Reserve Building - Oct. 25 2023PHOTO: League President/CEO Carrie Hunt was on hand today for the Federal Reserve Board's meeting.

“We will carefully examine the Federal Reserve Board’s proposal and submit comments. We know the fraud costs our credit unions are facing continue to mount and we must have fairness in the system,” said League President/CEO Carrie Hunt. “The League remains engaged with policymakers on this issue because we understand the debit interchange fee cap had an impact on every financial institution, not just those issuers with $10 billion or more in assets. We know, too, that the price cap imposed on debit interchange fees is a failed policy that’s had a disastrous impact on the cost and availability of basic banking services, harming low- and moderate-income Americans.”

Also of note: the proposed revisions would codify in Regulation II an approach for updating the three components of the interchange fee cap every other year going forward based on the latest data reported to the Board by covered issuers. These future updates to the interchange fee cap would be published without inviting public comment and would be published by March 31 of odd-numbered years, with the new amounts taking effect on July 1 and remaining in effect for two years.

Debit interchange fees paid to large card issuers ($10 billion or more in assets) are capped at 21 cents plus 0.05% of the transaction. Section 235.4 of Regulation II also allows a 1-cent adjustment if the issuer implements fraud-prevention standards.

The FRB proposal would lower the core component of the cap from 21 cents to a base of 14.4 cents. The “purchase amount” or ad valorem component of the cap would fall from 5 basis points to 4 basis points.

The table below summarizes the proposed changes.

Interchange Fee Component Current Proposed Change
Base component 21 cents 14.4 cents 31.4% decrease
Ad valorem component 5 bps 4 bps 20% decrease
Fraud prevention adjustment 1.0 cent 1.3 cents 30% increase


For perspective, the maximum permissible interchange fee for a $50 debit card transaction would be 17.7 cents under the proposal, down from 24.5 cents under the current rule.

There will be a 90-day comment period on the proposal, once published in the Federal Register.

Both debit and credit card fraud continue to tick up. Some $12 billion was lost to credit card fraud alone in 2021. Those losses are expected to reach $19 billion by 2031.

Interchange – so vital to credit unions’ success in detecting and fighting fraud -- is under attack on multiple fronts.

The U.S. Supreme Court will hear a lawsuit against the FRB that seeks to invalidate Regulation II’s standard for reasonable and proportional interchange fees on debit cards.

Financial institutions are also fighting legislation in Congress that would target interchange fees for credit cards. The Credit Card Competition Act also features an exemption for institutions with less than $100 billion in assets, but credit unions can count on the changes proposed in the CCCA proving just as detrimental as the debit card interchange fee cap by lessening interchange income and making it more difficult to fight fraud.



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