Washington, D.C. — Several of America's banks and credit unions have urged the Federal Reserve to rescind its proposal to update Regulation II (Reg II). The plea was made in a comment letter submitted by the Bank Policy Institute, American Bankers Association, America’s Credit Unions, Consumer Bankers Association, Independent Community Bankers of America, Electronic Payments Coalition, Mid-Size Bank Coalition of America, National Bankers Association and The Clearing House Association.
The associations argue that the proposal would harm consumers, banks and credit unions. They believe it would violate the law by prohibiting banks from recovering the costs they incur in providing affordable, safe debit card programs and a reasonable return on that business. They suggest that the proposal would benefit large retailers like Walmart and Amazon at the expense of consumers and financial institutions of all sizes.
The joint letter states: “[T]he Associations urge the Board to withdraw its proposed rule. The proposed rule would further lower the existing deficient price cap on debit card interchange fees and thereby amplify the damage already done by Regulation II as promulgated in 2011, including by driving up costs to consumers for basic deposit accounts disproportionately harming low-income and underserved consumers) and degrading the ability of banks and credit unions (including smaller, exempt issuers) to serve their communities and to invest in payment system innovation.”
Retailers pay a small transaction cost known as an interchange fee when a consumer uses their debit card to make a purchase. This fee is paid to both the card issuer (the buyer’s bank) and the acquirer (the seller’s bank). The Federal Reserve’s proposal aims to further reduce this legal limit on interchange fees which are already in place under Regulation II. This move could restrict resources available to banks for covering costs related to facilitating debit card transactions, covering fraud losses and funding innovation in payments systems.
Consumers could be negatively impacted by this change. Interchange revenue helps fund low- or no-cost deposit account programs like Bank On-certified accounts. After Regulation II was promulgated, the percentage of banks offering free checking accounts declined from 60 percent to less than 20 percent.
The proposal could also restrict resources used to mitigate fraud. Fraud losses more than doubled from 2011 to 2021 and fraud schemes are increasingly perpetrated by sophisticated criminal actors and organizations. Restricting interchange revenue undermines efforts to better secure the debit networks.
Small banks and credit unions would bear the brunt of these changes. The proposal bases its reduction in the cap on the estimated costs of high-volume issuers, which comprise only one-third of total issuers. Small banks and credit unions will shoulder higher costs, making them less competitive with their larger counterparts, and 34 percent of issuers will not recover their debit program costs.
Large retailers would profit while continuing to gouge consumers. Banks and credit unions facilitated 92.1 billion debit card transactions valued at $4.3 trillion in 2021. Retailers significantly benefit from accepting card payments, including through gaining a higher transaction volume and avoiding the substantial costs of handling cash.
The Federal Reserve would violate the Durbin Amendment and the Constitution according to these associations. They argue that the proposal is not designed to allow issuers to recover their costs and a reasonable rate of return, contrary to the law.
The Board would finalize a rule not grounded in fact as per these associations' view. They believe that the Federal Reserve ignores over a decade of data, fails to undertake a substantive cost-benefit analysis and disregards research from its own economists examining the harm Reg II would cause consumers.