The Federal Reserve Board’s proposal to cap debit interchange fees could increase consumer costs by up to $2 billion, according to a new white paper.
The paper, called How Proposed Interchange Fee Caps Will Affect Consumer Costs, was authored by Nick Bourke, former director of consumer finance at The Pew Charitable Trusts.
The paper shows that when bank interchange revenue is artificially capped, consumers experience higher costs and more restrictive terms on their checking accounts without any measurable savings passed on to them by merchants.
Bourke’s conclusions are drawn from prior research by the Federal Reserve Board and former Treasury Department economists about the 2010 Durbin Amendment’s impacts on consumers.
The Durbin Amendment, which went into effect in 2011, required debit card interchange fees from covered banks with assets above $10 billion to be “reasonable and proportional to the cost incurred by the issuer with respect to the transaction. In 2011, the Fed Board’s Regulation II established a debit interchange fee cap for covered banks set at 21 cents plus 0.05 percent of the transaction, plus an additional 1 cent fraud protection fee for qualified issuers.
On Oct. 25, 2023, the Federal Reserve Board issued a proposed rulemaking that would further lower the maximum amount of interchange revenue that covered debit card issuers can earn by more than 20 percent. The proposal would also allow the Board to revise the debit interchange fee cap periodically based on its ongoing review of issuer cost data.
Based on the research, the new proposal reduces interchange fee revenue for covered banks by $3 billion annually. About 42 percent ($1.3 billion) of this is would likely be offset by higher monthly maintenance fees for consumers, while other service fees could increase by $250 million to $700 million. In effect, the author said, consumers would find it harder to avoid fees, as “free” bank accounts with no maintenance fees become less common and the average minimum deposit required to qualify for fee waivers increases. This may disproportionately affect lower-income consumers, the paper said.
All in all, it said that if the Federal Reserve Board’s current proposal to further reduce debit interchange revenue is finalized, consumers would pay an extra $1.3 billion to $2 billion annually in higher bank account fees.
“The Federal Reserve Board’s proposal would boost revenue for merchants at the expense of consumers. This research, coupled with recent findings of the Government Accountability Office and other renowned academics of past changes to debit interchange, is compelling evidence that the original Durbin Amendment never delivered for consumers. By doubling down, the Federal Reserve’s proposed rule would only lead to higher costs for consumers and less access to banking services,” Lindsey Johnson, president and CEO of the Consumer Bankers Association, said.
CBA and Johnson urge policymakers to consider the findings in this white paper.