In a significant development, the Federal Reserve has put forth a proposal to lower the fees that banks can impose on retailers for processing debit-card transactions, a development that has been welcomed by merchants who have long contended that these fees, commonly referred to as “swipe fees,” were excessively high and detrimental to consumers.
The consequences of this move could reverberate across the financial industry, particularly affecting major banks that issue credit cards and large credit card companies like Visa (NYSE:V), Mastercard (NYSE:MA), and American Express (NYSE:AXP). These financial entities stand to see a decline in their revenue streams if these swipe fees are indeed reduced.
These charges, also known as interchange fees, are typically paid by various retail establishments such as supermarkets, convenience stores, gas stations, and online retailers when customers use their debit cards for purchases. The revenue generated from these fees is collected by the banks that issue the debit cards.
It’s important to note that the Federal Reserve gained more authority over these fees following the 2008 financial crisis. A section of the 2010 Dodd-Frank law known as the Durbin Amendment granted the Fed the power to cap these rates for banks with assets of at least $10 billion at a “reasonable and proportional” cost. In 2011, the regulator set the cap at $0.21 plus 0.05% of the transaction amount.
The Fed has now proposed reducing this cap to $0.144 plus 0.04% of the transaction amount, along with an increase in the fraud-prevention adjustment from $0.01 to $0.013. In today’s landscape, the average debit card transaction amounts to $50, and under the new proposed cap, this would translate to $0.177 for the average $50 transaction, compared to the current $0.245 fee for the same transaction.
It’s important to note that not everyone within the Federal Reserve is in full agreement with this proposal. Fed governor Michelle Bowman has expressed concerns, stating that while the proposal suggests potential benefits for consumers, she is worried that the costs for consumers, in the form of increased expenses for banking products and services, might outweigh any savings enjoyed at the merchant level.
This proposal is just the latest in a series of new rules introduced by the Federal Reserve and other banking regulators that will significantly influence the operations of financial institutions. These rules encompass various aspects, including capital requirements for banks, climate risk assessments, and evaluations of how banks provide services to low-income communities.
Some of these regulations have faced opposition from banks, particularly the one requiring banks with assets exceeding $100 billion to hold greater financial reserves to cover potential losses. Banks argue that they already maintain adequate capital and that these new requirements could constrain lending and negatively impact the economy.
Furthermore, various bank trade groups have urged the Federal Reserve, the FDIC, and the OCC to reconsider the proposed rule on swipe fees, asserting that the initial proposal relies on data and analyses that have not been made accessible to the public. The Federal Reserve has extended the comment period in response to these concerns.
Banks are gearing up to challenge any final rule related to swipe fees, as indicated by a letter from nine major banking trade groups, including the American Bankers Association, which cautioned the Federal Reserve against cutting these rates.
The Federal Reserve envisions a periodic review of the fee cap every two years, where data would be collected in odd-numbered years by March 31 and subsequently implemented on July 1. However, it’s important to note that the cap’s future trajectory will hinge on changes in costs, with the aim of maintaining fees at levels that are reasonable and proportional to the issuer’s expenses.
Merchants have consistently argued that the Federal Reserve’s interchange rates were set higher than what is “reasonable and proportional.” Despite their legal challenges, a federal appeals court sided with the Fed. Merchants continue to maintain that the existing rates generate excessive revenue for card-issuing banks, well beyond what is mandated by the law. The Supreme Court has recently agreed to hear a case that could compel the Federal Reserve to lower these swipe fees.
The banks, on the other hand, argue that any changes should consider fraud and operational costs that are not presently accounted for in the current regime. They also assert that the Fed’s most recent public assessment is based on 2019 data and does not substantiate any adjustments in pricing.
In her objection to the new proposal, Fed governor Michelle Bowman expressed concerns about the competitive advantage larger issuers with high transaction volumes would have over smaller issuers. She also voiced apprehensions that reducing interchange fees, coupled with the proposed higher capital requirements, could pose risks to certain banks and the overall health of the U.S. banking system.
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