In a draft final rule that is expected to be approved by the Fed board this afternoon, the agency's staff said the cap should be set at 21 cents to account for issuer costs to complete a transaction, but proposed a separate rule that would allow banks to charge an additional 1 cent per transaction if they met certain standards established by the central bank.
In addition, the Fed said it would allow banks to charge a 5 basis point "ad valorem" charge to account for fraud costs.
For example, for a $38 debit transaction, a bank can charge 21 cents plus 1 cent for fraud prevention, if qualified. Additionally, under the rule, they could charge 5 basis points of the amount of the transaction, in this case 1.9 cents. The total debit interchange fee in this scenario would be 24 cents.
In the end, the Fed appeared willing to allow more flexibility than expected, with most estimates suggesting the central bank would set a hard cap of 20 cents.
Although banks would prefer to avoid any interchange fee limit, the final rule is a partial victory for them. Banks had been arguing since December that the proposed 12-cent cap was too low and did not adequately take into account the costs involved. In its final rule, the Fed clearly agreed.
Banks also received extra time to comply with the rule, which under Dodd-Frank was supposed to go into effect on July 21. Instead, banks will have to comply with the new limits on Oct. 1.
The central bank has been under pressure by banks, credit unions and others to elevate its cap under a provision introduced by Sen. Richard Durbin in the Dodd-Frank Act. The agency received more than 11,000 comments prompting the Fed to ask for more time by Congress to evaluate all of the letters before crafting a final rule ahead of the July 21 effective date.
The 9 cent lift is a significant improvement, but still falls short of the industry's average of 44 cents per transaction.
The Fed decided to raise the fee cap largely because it included other costs than were covered in its initial proposal. In the rule, the Fed said the 21-cent base cap accounts for: network connectivity costs, costs of hardware, software and labor, and transaction monitoring costs. It also addressed another industry point by allowing banks to charge 5 basis points to account for fraud losses.
