05.10.24

Durbin Urges The Federal Reserve To Hold Banks and Card Networks Accountable & Charge Reasonable Interchange Fees

WASHINGTON – Following the November notice of proposed rulemaking (NPRM) on Debit Card Interchange Fees and Routing published by the Board of Governors of the Federal Reserve System (Board), U.S. Senate Majority Whip Dick Durbin (D-IL), author of the “Durbin Amendment,” sent a letter to Federal Reserve Chair Jerome Powell, urging the Board to ensure that the biggest banks and card networks fulfill their obligations to charge reasonable and proportional interchange fees—and protect consumers, who pay these hidden fees in the form of higher retail prices, and merchants, who face an inability to negotiate fees with the dominant card networks.

Durbin wrote, “I support the Board’s proposal to reduce the cap on debit card interchange fees and codify a regular process for updating this cap on a biennial basis based on the latest available data reported by large debit card issuers.  This is an important and long overdue step in maintaining the proper regulation of debit card interchange fees.  However, I believe there is more that can be done to ensure the biggest banks and card networks fulfill their obligations to charge reasonable and proportional interchange fees—and protect consumers, who pay these hidden fees in the form of higher retail prices, and merchants, who face a “take or leave it” proposition from the dominant card networks.”

The Durbin Amendment directs the Board to place “reasonable and proportional” constraints on the interchange fees that card networks like Visa and Mastercard set on behalf of their issuing banks.  In 2011, the Board adopted Regulation II to implement a base component of 21 cents for debit interchange fees.  However, this was almost three times the average base per transaction cost of 7.7 cents for large debit card issuers at the time, and since the original regulation, the transaction-processing costs have dropped by nearly half to 3.9 cents.  Although the Federal Reserve’s proposed regulation would decrease the base component for debit interchange fees to 14.4 cents, in the letter, Durbin urges that the Federal Reserve to further lower the base component so that large banks do not collect sizable profits on the backs of consumers and merchants. 

The letter continued, “As the Board noted in its current proposal, that previous average of 7.7 cents fell to 3.9 cents in 2021.  Mitigating this discrepancy is vital to upholding the statutory text and legislative intent of the Durbin Amendment, and I appreciate the Board’s acknowledgement of this.  However, the proposed interchange fee base component of 14.4 cents hardly closes this gap.  Rather, it maintains a status quo that allows large banks and issuers to collect windfall profits from debit interchange at the expense of merchants and consumers.  I urge the Board to further lower the proposed base component of 14.4 cents to a number that accurately reflects the significant decline in average base per-transaction costs incurred by banks and issuers.”

The NPRM calls for an increase in the current issuer fraud prevention adjustment from 1.0 cent to 1.3 cents per transaction for all covered issuers.  In the letter, Durbin argues that rather than implementing an across-the-board increase, the Board should exercise a high degree of discernment in determining which issuers qualify for the increased adjustment.  Only by limiting the adjustment to issuing banks that demonstrate successful fraud prevention does the adjustment provide the incentive to actively reduce fraud. 

In the letter, Durbin states that despite the Durbin Amendment’s requirement that all issuers or payment card networks report their aggregate data with regard to costs incurred, as well as interchange transaction fees charged or received, in connection with the authorization, clearance, or settlement of electronic debit transactions, on at least a biennial basis, 12 years since Regulation II was finalized, the maximum debit interchange fee has not once been revised in accordance with this regularly reported data. 

“The NPRM’s proposed implementation of a regular biennial update of the interchange fee cap is long overdue, and should prove effective with proper execution.  As the Board notes in its NPRM, ‘this approach would create predictability for the debit card industry regarding how and when updates to the interchange fee cap would occur.’  However, the effectiveness of the provision is dependent upon the Board’s ability to ensure the submission of accurate data by covered issuers,” Durbin continued.

Durbin concluded, “Big banks and card networks have long been in fierce opposition to the Durbin Amendment, so it is no surprise that, when faced with regulation, they have actively sought out ways to manipulate the system to maximize their interchange fee revenue.  It is imperative that the Board be highly attentive to this when implementing this new mechanism.”

In Congress, Durbin has made it a priority to protect consumers.  Durbin’s Credit Card Competition Act is bipartisan legislation that would enhance competition and choice in the credit card network market, which is currently dominated by the Visa-Mastercard duopoly.  It is estimated that businesses paid more than $100 billion in swipe fees on Visa- and Mastercard-branded cards in 2023 alone.

Building off of debit card competition reforms enacted by Congress in 2010, the Credit Card Competition Act would direct the Federal Reserve to ensure that the largest credit card-issuing banks offer a choice of at least two networks, one of which must be a network other than Visa and Mastercard, over which an electronic credit transaction may be processed. 

Visa and Mastercard wield enormous market power in credit cards; according to the Federal Reserve, they account for nearly 576 million cards, or about 83 percent of general-purpose credit cards.  Visa’s and Mastercard’s market power and network structure have enabled them to impose fees on U.S. merchants that are among the world’s highest, charging more than $100 billion in U.S. merchant credit card fees in 2023. These fees include interchange fees which Visa and Mastercard require merchants to pay to issuing banks, as well as network fees that Visa and Mastercard require merchants to pay directly to them.  Consumers ultimately pay for all of these fees in the price of the goods and services they buy. 

Full text of the letter can be found here. 

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