Fed Proposes Sharp Cuts in Debit Card Transaction Fees

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter, Dec. 16, 2010.

The Federal Reserve Board released proposed standards for determining debit card interchange fees that, if adopted, would result in fees falling to over 70 percent below their 2009 average. The newly-revised fees are scheduled to take effect in July 2011.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Fed to set standards to determine whether debit card interchange fees are “reasonable and proportional” to the cost incurred by the issuer. The fees are established by payment card networks and are paid by merchants to card issuers for each transaction.

Fed Vice Chairman Janet Yellen noted that a recent Fed survey showed that nearly 38 billion debit card payments were made in the United States in 2009, with debit cards used in 35 percent of non-cash payment transactions. Interchange fees in 2009 totaled $16 billion.

Under the Fed proposal, interchange fees for issuers with assets over $10 billion would be capped at an initial rate of 12 cents per transaction. The Fed said it is also requesting comment on possible options for adjusting the interchange fees to reflect costs associated with fraud prevention.

“It’s very important that we do all we can to preserve the dynamism, competition and innovation in payments…and we should do all we can to minimize the administrative and regulatory burden implied by these rules,” Fed Chairman Ben Bernanke said.

The Fed proposals would also prohibit all issuers and networks from restricting the number of networks over which debit card transactions may be processed.

Fed staff said the impact on consumers from the proposed changes would be hard to predict. In light of the proposed reduction in fees, merchants could choose to pass savings through to consumers in markets operating with lower margins and intense price competition, they said.

The American Bankers Association, meanwhile, described the Fed’s “interference in marketplace pricing” as a “big concern for banks of all sizes.”

Public comments are due by Feb. 22, 2011.