Fed Raises Cap On Debit Fees

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WASHINGTON – The Federal Reserve this afternoon approved a more liberal cap on debit fees than what was proposed in December, but the cap will still cost credit unions and banks billions of dollars in annual revenues.

The Fed’s Board of Governors approved a cap of 21 cents per transaction, up from the 7 cents to 12 cents proposed in December, and agreed to allow issuers to add 0.5% of fraud-related costs, which could bring the cap up to as much as 26 cents.

The Fed also agreed to push back the effective date of the rule until Oct. 1.

Even with the higher cap the credit union lobby expressed disatisfaction with the rule. “While we appreciate the Federal Reserve’s upward adjustment of the interchange fee cap and the inclusion of additional costs (with an interim rule on fraud), it still falls far short of covering all the interchange costs for credit unions,” said Fred Becker, president of NAFCU.  “Unfortunately, this means consumers will ultimately pay a higher price for basic financial services because of the limitations this final rule creates.”

The proposed cap, which amounts to an average of 23.9 cents on a $38 debit purchase, represents far less than the 44 cents credit unions and banks currently earn per debit transaction and will reduce their annual $20 billion in revenue substantially. The Fed estimates the cap will cut debit revenues to banks and credit unions by 40%.

The Fed said it ended up hiking the cap by agreeing to include additional costs that card issuers incur in transacting debit that were not included in the December proposal, including network processing fees; fixed electronic debit transaction processing costs; fraud prevention costs associated with authorization; and the allowance for fraud losses.

The final rule also includes several measures aimed at enforcing the exemption for small issuers, those credit unions and banks under $10 billion in assets.

One will require that the Fed publish annual lists of institutions that fall above and below the small issuer exemption in order to assist payment card networks in determining which of the issuers participating in their networks are subject to the rule’s cap. The Fed will also survey payment card networks annually and publish a list of the average interchange transaction fee each network provides to its covered issuers and to its exempt issuers.

The list should help issuers, including small issuers, to more readily compare the interchange revenue they would receive from each network. This reporting will also allow exempt issuers, Congress, and others to monitor the effect of the statute and final rules to determine if they are having the desired policy result.

Fed staffers who wrote the rule were ambivalent on whether they believe the savings will be passed on by merchants to consumers.

The debit fee cap was mandated under the terms of last year’s Wall Street reform bill, the Dodd-Frank Act which required that an issuers debit fees be “reasonable and proportionable” to its costs.


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