NRF calls on US Fed to lower debit card swipe fees

“We are very appreciative that the board has undertaken to update the interchange rate so that it will no longer depend on data that is now 15 years old,” said NRF chief administrative officer and general counsel Stephanie Martz said Sunday in a letter to the Fed’s Board of Governors. “The economic factors that were considered by the Board when it originally set the maximum allowable interchange rate for covered issuers in 2011 based on 2009 data have changed dramatically.”

Martz highlighted that while an update is long overdue, the new method of calculating the cap changes the methodology in a way that is detrimental to merchants and consumers. She emphasised that the proposed changes are insufficient to accommodate future developments in the rapidly evolving payments industry.

The existing cap of 21 cents per transaction was established in 2011 following complaints from merchants about high debit card swipe fees. Congress responded with the Durbin Amendment, a 2010 law directing the Fed to ensure that the fees were ‘reasonable’ and ‘proportional’ to banks’ costs. The cap applies to cards from banks with at least $10 billion in assets and has halved typical debit swipe fees, saving retailers an estimated $9 billion annually. Studies show that retailers have shared at least 70 per cent of these savings with customers. Despite this, debit and credit card swipe fees reached a record $172.05 billion in 2023, increasing prices paid by consumers by over $1,100 annually per family. Debit card swipe fees accounted for $36.3 billion of the total, NRF said in a press release.

When the cap was set, it was 2.7 times the average cost of 7.7 cents for banks to process a payment, intended to cover actual costs at 80 per cent of institutions. The Fed's current proposal would lower the cap to 14.4 cents, based on research showing that banks' average costs fell to 3.9 cents in 2021. However, this new cap would be 3.7 times banks’ average costs and was designed using a new methodology to cover actual costs for 98.5 per cent of banks.

Martz criticised this approach, arguing that it guarantees higher profit margins for the largest issuers. She suggested the Fed retain the cap at 2.7 times banks' average cost, resulting in a limit of 10.5 cents per transaction. Alternatively, she proposed tiered rates based on banks' debit card transaction volumes.

Currently, banks can charge an additional 1 cent for fraud prevention and 0.05 per cent of the transaction amount to cover fraud costs. Under the Fed’s proposal, the fraud cost amount would drop to 0.04 per cent, but the fraud prevention amount would increase to 1.3 cents. Martz argued that the 1 cent for fraud prevention is no longer justified due to the shift of fraud costs to merchants after the adoption of EMV chip cards in 2015, and should be eliminated rather than increased. She also called for the fraud cost percentage to be based on banks' net costs after considering the fraud borne by merchants, which would incentivise all participants to reduce fraud.

The Fed's proposal includes automatic updates to the cap every two years based on updated calculations of banks' costs. However, Martz insisted that banks should substantiate these numbers, currently self-reported in a biannual survey, with independent audits to ensure accuracy. Without verification, she warned, faulty figures could lead to billions of dollars in excess interchange fees paid by merchants.

Fibre2Fashion News Desk (DP)