Retailers Riled up About Regulated Debit Interchange as Authorization Costs Decline

A prominent merchant group says that in the face of declining authorization, clearing, and settlement costs, it is time for the Federal Reserve to lower its regulated debit card interchange rate.

The Retail Industry Leaders Association issued its call after the Fed last month released its latest bi-annual study of the debit card market, as required by the Durbin Amendment to 2010’s Dodd-Frank Act. The new study, for the year 2017, says average per-transaction authorization, clearing, and settlement costs for regulated debit card issuers, excluding their fraud losses, fell to 3.6 cents in 2017—a cumulative decline of 54% since the Fed began collecting such data in 2009.

The regulated rate, which applies to debit cards issued by financial institutions with $10 billion or more in assets, is 21 cents plus 0.05% of the transaction amount. Issuers that take certain fraud-prevention steps also are eligible for another 1 cent in interchange. The Fed, which is tasked by Dodd-Frank with implementing the Durbin Amendment, hasn’t changed the regulated rate since it took effect in October 2011.

“The Federal Reserve’s data confirms that it is long past time for the Federal Reserve to lower the base interchange rate of 21 cents to reflect the current reality in today’s payment ecosystem,” Austen Jensen, senior vice president of government affairs at Arlington, Va.-based RILA, said in a statement.

RILA noted that Dodd-Frank requires the regulated interchange rate to be “reasonable and proportional” to the issuer’s transaction cost. The statement claims the “580% markup” big banks receive in interchange is “neither ‘reasonable’ nor ‘proportionate’ to the cost of the transaction.”

A Fed spokesperson declined comment when asked by Digital Transactions News if the central bank has any plans to change the regulated rate.

RILA also said big banks aren’t abiding by the Durbin Amendment’s requirements for transaction-routing competition in e-commerce purchases. The amendment says merchants must have at least two choices of unaffiliated networks in a debit transaction.

A RILA spokesperson could not be reached Tuesday morning for further comment. RILA represents 200 retailers, product manufacturers, and service providers with more than $1.5 trillion in annual sales.