Debit Card Surcharge News: Swipes Being Cut By Federal Reserve

The Wall Street Journal reported that “the Federal Reserve proposed lowering by about 30% the fees merchants pay to many banks when consumers shop with debit cards, setting off a fight with banks that oppose the changes.”

Reuters adds that the U.S. Federal Reserve is preparing to propose a significant reduction in the fees banks can charge merchants for processing debit card transactions by nearly a third. This move is anticipated to spark a heated dispute between the two sectors.

The Fed’s upcoming proposal, which is slated for a board vote later today, seeks to reduce the current cap from 21 cents to 14.4 cents per transaction. This decision corresponds to data collected since the cap was initially instituted in 2011, demonstrating that transaction processing costs have approximately halved.

Moreover, the proposal envisages a slight decrease in an additional fee that banks can impose, from 0.05% of the transaction cost to 0.04%. However, the Fed proposes to augment a supplemental fee charged by banks to cover fraud prevention services from 1 cent per transaction to 1.3 cents per transaction, referencing a marginal increase in these costs over the years.

Debit Card Surcharge News Details

On average, these proposed changes would result in a 17.7 cent fee on a $50 transaction, a decline from the current 24.5 cent fee. The Fed also proposes an automatic biennial adjustment of the cap in response to fresh data.

This prospective reduction in fees, which yielded $31.59 billion for lenders in 2021 based on Fed data, will trigger a fervent lobbying fight between the two industries and might potentially lead to a future courtroom challenge.

This proposal marks the first attempt by the Fed to modify the cap imposed in 2011. This cap on “swipe fees” was prescribed as part of the 2010 Dodd-Frank financial reform law, directing the Fed to establish a limit that is “reasonable and proportional” to the actual costs of processing transactions.

Austen Jensen, a lobbyist with the Retail Industry Leaders Association, conveyed that retailers have persistently argued that the existing cap is too high. He expressed confidence in a favorable outcome for the industry from this proposal.

“Today’s proposed rulemaking signals an end to these outrageous markups,” said Austen Jensen, executive vice president of the Retail Industry Leaders Association, which represents larger retailers.

Austen Jensen via Reuters

Share prices for credit card companies Visa and Mastercard declined last week as news of the Fed’s meeting to reconsider the cap emerged. However, nine major bank trade groups claimed in a letter to the Fed that retailers do not share the savings from the 2011 cap with consumers and questioned the credibility of claims that they would pass on future savings.

Analysts predict that the Fed could likely face a legal challenge from either industry if it implements the new caps, and “TD Cowen analyst Jaret Seiberg said in a research note the Fed ‘likely expects both the banks and the merchants to challenge any final…rule even if that final proposal simply ratifies the status quo.’”