The ABA’s Letter to the Fed Is the Latest Salvo in the Battle Over Debit Card Interchange

The American Bankers Association on Thursday issued a long and detailed letter it has sent to the Federal Reserve Board to argue its case against a Fed proposal that would reduce a longstanding cap on the interchange banks can earn on debit card transactions. The ABA’s action follows an analysis indicating nearly 80% of the more than 400 comments regarding the proposal oppose it.

Comments on the Fed’s proposed action, which would cut by nearly one-third the maximum interchange fee banks can charge on debit card transactions,  were due May 12 after the Fed extended its original Feb. 12 deadline. The Fed has not acted on the proposal in the months since its deadline. The proposal emerged in October 2023 as part of an effort by the Fed to update the 13-year-old measure.

Passions regarding the matter, however, have not cooled in the intervening months as merchants contend both debit and credit card interchange is too costly, while banking groups argue against any reduction. As with credit cards, financial institutions earn interchange income on debit card transactions.

In the analysis it sent to the Fed, the ABA argues the Fed’s proposal will in particular harm black households by leaving more members of that community unbanked as financial institutions look to compensate for lost debit income. Community banks, as well, will have to look to new or higher fees for checking accounts, the paper argues, Fraud-prevention measures will also suffer as institutions look to compensate for reduced income, the ABA paper says.

But merchants have long argued the Durbin cap is too high, and would remain so even with the proposed reduction. In a comment letter it sent to the Fed in May, the Merchants Payments Coalition, which lobbies on behalf of retailers on payments policy, contended the proposal would cut banks’ allowable interchange by “less than a third even though banks’ average cost of processing a transaction has fallen by nearly 50%–from 7.7 cents just before the current rate was set to 3.9 cents as of 2021.”

Indeed, merchant groups say interchange costs on both debit and credit cards are too high and fail to reflect a market rate. In the latest effort to put a lid on credit card acceptance costs, U.S. Senators Richard Durbin of Illinois and Roger Marshall of Kansas have backed a bill that seeks to control credit card interchange by requiring more competition among card networks.

Durbin is best known in the payments industry as the backer of the Durbin Amendment, which codified limits on debit card acceptance costs for merchants by limiting interchange for financial institutions with more than $10 billion in assets. The bill, which also set up the Fed as the rulemaker for debit interchange, was passed in 2010 as part of the Dodd-Frank financial-reform legislation.