The Board of Governors of the Federal Reserve (FRB) is holding an open meeting on October 25, 2023 to discuss proposed revisions to the Board’s debit interchange fee cap contained in Regulation II, which implemented the Durbin Amendment. For large issuers (with $10 billion or more in assets), Section 235.3(a) of Regulation II requires an issuer to charge interchange fees that are “reasonable and proportional to the cost incurred by the issuer with respect to the electronic debit transaction” and Section 235.3(b) of Regulation II caps such fees 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. Last October, the FRB expanded Regulation II to require online (card not present) debit card transactions to be enabled for processing on at least two unaffiliated payment card networks, effective July 1, 2023.
In a May 2021 report, “2019 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions,” the FRB reported that the average interchange fee for covered transactions processed over single-message networks was $0.24, and that for covered transactions processed over dual-message networks the average interchange fee was $0.22. The 2019 data shows that the average per-transaction authorization, clearing, and settlement cost (ACS costs), excluding issuer fraud losses, for covered issuers equaled $0.039 and the base interchange fee exceeded the average per transaction ACS costs, including issuer fraud losses, for 78.6% of covered issuers and 99.4% of covered transactions. Based on this report, we expect that the FRB will consider proposals to lower the interchange cap set forth in Section 235.3(b) of Regulation II to make the fees reasonable and proportional to the issuer ACS costs reported to the FRB since 2011 when the rule took effect.
In addition to the Biden Administration’s attacks on so-called “junk fees,” the pending debit card interchange lawsuit against the FRB could be the catalyst for the proposed revisions to Regulation II. In that case, the U.S. Supreme Court agreed to decide when a right of action first accrues for an Administrative Procedure Act challenge to a final rule issued by a federal agency—when the final rule is issued or when the rule first causes injury. The lawsuit against the FRB seeks to invalidate Regulation II’s standard for reasonable and proportional interchange fees on debit cards. The complaint alleges that issuers continue to profit from debit card fees at retailers’ and consumers’ expense notwithstanding the requirement that the fees be reasonable and proportional. The plaintiffs argue that the Durbin Amendment requires a case-by-case approach to whether an interchange fee is reasonable and proportional, not a single standard as the FRB adopted.
Additionally, legislation has been proposed with the goal of limiting interchange fees on credit cards. This summer, Senator Dick Durbin and Representative Lance Gooden introduced “The Credit Card Competition Act of 2023” to enhance competition and reduce interchange fees on credit cards by requiring certain credit card issuers with over $100 billion in assets to enable at least two credit card networks on their credit cards, and at least one of those networks must be a network other than Visa and Mastercard. The Act does not apply to networks that are the card issuer, such as cards issued by American Express and Discover. The bill has failed so far to gain any traction in Congress. We recently released an episode of our Consumer Finance Monitor Podcast in which we discussed the Act’s implications and political prospects.
We will attend the FRB’s October 25 meeting to provide a further update on proposed revisions to Regulation II.