Federal Reserve’s Flawed Debit Card Proposal Harms Banks, Credit Unions and Consumers

​America’s banks and credit unions urged the Federal Reserve to rescind its proposal to update Regulation II (Reg II) in a comment letter submitted today. The joint letter was submitted by the Bank Policy Institute, American Bankers Association, America’s Credit Unions, Consumer Bankers Association, Independent Community Bankers of America, Electronic Payments Coalition, Mid-Size Bank Coalition of America, National Bankers Association and The Clearing House Association.
 
The associations argue the proposal would harm consumers, banks and credit unions and would violate the law by prohibiting banks from recovering the costs they incur in providing affordable, safe debit card programs and a reasonable return on that business. The proposal would benefit large retailers like Walmart and Amazon at the expense of consumers and financial institutions of all sizes.
 
“[T]he Associations urge the Board to withdraw its proposed rule. The proposed rule would further lower the existing deficient price cap on debit card interchange fees and thereby amplify the damage already done by Regulation II as promulgated in 2011, including by driving up costs to consumers for basic deposit accounts disproportionately harming low-income and underserved consumers) and degrading the ability of banks and credit unions (including smaller, exempt issuers) to serve their communities and to invest in payment system innovation.”
 
Retailers pay a small transaction cost, known as an interchange fee, to the card issuer (i.e., the buyer’s bank) and the acquirer (i.e., the seller’s bank) when a consumer uses their debit card to make a purchase. The Federal Reserve’s proposal would further reduce the legal limit on the interchange fee already in place under Regulation II, thus restricting the resources available to banks to cover the costs of facilitating debit card transactions, cover fraud losses and fund innovation in the payments system, including ways to reduce costs that support all consumers, such as free checking accounts.
 
Major problems with the proposal:

• Consumers, particularly low-income and minority consumers, would be harmed. Interchange revenue helps fund low- or no-cost deposit account programs like Bank On-certified accounts. After Regulation II was promulgated, the percentage of banks offering free checking accounts declined from 60 percent to less than 20 percent.
• Resources used to mitigate fraud would be restricted. Fraud losses more than doubled from 2011 to 2021 and fraud schemes are increasingly perpetrated by sophisticated criminal actors and organizations. Restricting interchange revenue undermines efforts to better secure the debit networks.
• Small banks and credit unions would bear the brunt. The proposal bases its reduction in the cap on the estimated costs of high-volume issuers, which comprise only one-third of total issuers. The highest-volume issuers generally have the lowest costs to run their debit programs safely and securely because of scale. The proposal disregards the costs borne by most banks and credit unions, which are higher given their smaller programs. Small banks and credit unions will shoulder higher costs, making them less competitive with their larger counterparts, and 34 percent of issuers will not recover their debit program costs.
• Large retailers would profit while continuing to gouge consumers. Banks and credit unions facilitated 92.1 billion debit card transactions valued at $4.3 trillion in 2021. Retailers significantly benefit from accepting card payments, including through gaining a higher transaction volume and avoiding the substantial costs of handling cash. These optional benefits aren’t cost-free and come at a cost that banks should not have to disproportionately bear. Moreover, it is a fact that merchants do not pass these savings onto consumers: 75 percent of retailers didn’t lower their prices when Regulation II was first implemented; 23 percent of retailers increased prices. There is no reason to think that further lowering the cap will yield a different result.
• The Federal Reserve would violate the Durbin Amendment and the Constitution. The proposal is not designed to allow issuers to recover their costs and a reasonable rate of return, contrary to the law. Furthermore, the Board does not even allow banks and credit unions the opportunity to recover certain costs that they are legally entitled to recover in connection with their debit programs, such as cardholder inquiry and non-sufficient funds handling costs.
• The Board would finalize a rule not grounded in fact. The Federal Reserve ignores over a decade of data, fails to undertake a substantive cost-benefit analysis and disregards research from its own economists examining the harm Reg II would cause consumers.

To access a copy of the letter, please click here.

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