Fed Receives Overwhelming Response to Proposed Interchange Fee Changes

This past Sunday, comments were due in response to the Federal Reserve’s proposed changes to Regulation II of the Durbin Amendment. Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research recently covered the initial proposal.

A Quick Recap

In October 2023, the Federal Reserve Board voted in favor of a proposal to lower the maximum interchange fee that debit card issuers (with $10 billion or more in assets) can charge merchants to process card transactions. The current interchange cap per Reg II is set at 0.05% + $0.21, plus $0.01 for fraud prevention. The interchange rate would be lowered to 0.04% + $0.144, and fraud prevention would be raised to $0.013. Since the inception of the Durbin Amendment nearly a decade ago, no changes have been proposed until now. This proposed change is the first of its kind. After publishing the proposed changes, the Fed sought public comment on the Federal Register Notice: Debit Card Interchange Fees and Routing. The original deadline for public comment was set for February 12, 2024; however, given the complexity and importance of the issue, the Fed extended the public comment period to May 12, 2024. Merchants and issuers alike have been battling over interchange fees for decades, and a flood of comment letters was to be expected.

Considering Next Steps

The Federal Reserve Board received over 2,500 response letters regarding the proposed lowering of the current interchange cap—from both merchants who approve the change, and issuers who depend on the interchange for revenue. Large players have stepped up to make their stances clear. On the merchant side, the National Retail Federation questioned if the changes would still leave the cap too high. They encouraged the Fed to consider routinely updating the interchange cap in years to come. In the same vein, the Merchants Payments Coalition supported the rate reduction and proposed lower rates. On the issuer side, the Iowa Credit Union League feared there wasn’t enough of a distinction between smaller, financial institutions and their larger, national peers. Their comments warned of financial detriments to credit unions. Many financial institutions banded together to produce a joint-effort letter to the Fed displaying their disproval, including the American Bankers Association, Credit Union National Association, National Association of Federally-Insured Credit Unions, Bank Policy Institute, National Bankers Association, Consumer Bankers Association, Mid-Size Bank Coalition of America, Independent Community Bankers of America, and The Clearing House. Interestingly, a third-party group, the International Center for Law & Economics, suggested the Fed should drop the regulation altogether. They sighted free markets as the best mechanism to appropriately set fees. The Fed is to read each of the 2,500-plus responses and take them into consideration as they proceed with making a final decision on the proposed changes. The final decision has the potential to shake up the payments industry similarly to what was witnessed with the original Durbin Amendment.