The takeaway …
Back on 25 October 2023, the Board of Governors of the Federal Reserve System voted to reduce the cap on the interchange fee, a fee received by debit card issuers. 12 CFR 235.2(j) defines the interchange fee as “any fee established, charged, or received by a payment card network and paid by a merchant or an acquirer for the purpose of compensating an issuer for its involvement in an electronic debit transaction.” The fee compensates debit card issuers for the cost of processing transactions and implementing fraud prevention methods.
12 CFR 235.3(a) requires that “The amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the electronic debit transaction.”
12 CFR 235.3(b) describes how the reasonableness and proportionality of the interchange transaction fee is to be determined. Specifically, “An issuer complies with the requirements of paragraph (a) of this section only if each interchange transaction fee received or charged by the issuer for an electronic debit transaction is no more than the sum of (1) 21 cents; and (2) 5 basis points multiplied by the value of the transaction.”
In regard to recovering the costs for protecting debit card users from fraud, 12 CFR 235.4(a) provides a debit card issuer with a fraud prevention adjustment of one cent per debit card transaction.
At issue for the Board during its meeting was whether the current interchange fee scheme was reasonable and proportional to debit card issuer costs. Given the decline in debit card processing costs, the Board appeared ready to readjust the interchange fee. The Board’s proposed rule reduces the base component from 21 cents to 14.4 cents while reducing the ad valorem component from five basis points per transaction value to four basis points per transaction value.
As for fraud prevention, those costs have increased although issuer fraud losses have seen a decrease. The Board proposed keeping the fraud adjustment at one cent per debit card transaction.
I sensed low energy on the part of the Board regarding the interchange fee. This review of the fee was dumped on them as part of the Durbin Amendment to the Dodd-Frank Act. Other than harkening back to my days being in charge of a one-man credit card department at a credit union, I share the Board’s lack of enthusiasm about the interchange fee. Energy on the issue might have been piqued if there was going to be some major negative impact on issuer revenues but that may not be the case.
Since the implementation of the Durbin Amendment, debit card transactions processing costs have fallen from 7.7 cents in 2009 to 3.9 cents in 2021. And according to Board data, the volume and value of debit card transactions have been on the increase over the 2009 to 2021 period.
| Calendar Year | Number of Debit Card Transactions (billions) | Value of Debit Card Transactions (billions) |
| 2009 | 37.58 | $1,429.12 |
| 2011 | 46.66 | $1,821.00 |
| 2013 | 53.74 | $2,070.00 |
| 2015 | 60.59 | $2,315.00 |
| 2017 | 68.48 | $2,617.64 |
| 2019 | 79.23 | $3,104.73 |
| 2021 | 92.11 | $4,260.60 |
The growth in the number of debit card transactions and the value of these transactions tells me that while debit card issuers may take a nominal hit in revenues from the interchange fee, the reduction in their transaction costs combined with increasing values in debit card transactions will make up for the loss.
The Board’s decision does not negatively impact the broad goal for the American political economy, the increase in taxable transactions activity. If changes in the cap reversed debit card transactions or lowered their value, I would recommend against the action.
Alton Drew
3 November 2023
The stats ….
30-Day Federal Funds Futures/Options: 94.635
Discount Window: 5.50%
Interest on Reserve Balances: 5.40%
Effective Federal Funds Rate: 5.33%
Federal Funds target range: 5.25% to 5.50%
EUR/USD=1.06507
GBP/USD=1.22324
AUD/USD=0.64442
USD/JPY=150.207594
Sources: x-rates.com. Board of Governors-Federal Reserve. CME Group.
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