The Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed in June 2010, aimed to provide oversight and new regulations to protect consumers from predatory financial practices. Among its many provisions, the so-called Durbin Amendment authorizes the Federal Reserve to regulate the fees that debit card issuers may charge retailers at the point of sale.
Plastic is king in American society, and debit cards play a significant role in today’s economy. The use of debit cards has grown more than any other form of electronic payment over the past decade, increasing to $37.6 billion in 2009. Interchange fees from debit card purchases totaled over $16.2 billion.
On October 1, 2011, the final rule implementing the Durbin Amendment became effective. Since then, the interchange fees that issuers can charge are capped at 21 cents per swipe, however, issuers with assets under $10 million are exempt from this cap. Recent data show that fees for exempt institutions have stayed around 43 cents, about the same as they were back in 2009 before the law was enacted. This exemption expired April 1, and all institutions, regardless of size, will now be subject to the cap. In the meantime, fees at institutions that are covered by the regulations, dropped from 43 cents in 2009 to 24 cents in the fourth quarter of 2011, a 43% drop.
As stated under the law, issuers may only charge fees that are “reasonable and proportional to the cost incurred by the issuer,” which the Federal Reserve determined in its rulemaking is no more than 21 cents, plus 1 cent for fraud-prevention services. From the start, the financial industry has complained that the cap is too low. Yet, the Federal Reserve defended the cap last month saying it “acted within its discretion.” Nevertheless, the National Association of Federal Credit Unions (NAFCU) and eight other groups, which have opposed the Durbin Amendment from the beginning, recently filed an amicus brief arguing this point.
While the banking industry may be correct that the fees are too low and should be raised, the bottom line is that consumers need protection. Thus, if the Federal Reserve ultimately raises the interchange fee cap, it should only do so to the extent that such an increase will be reasonable and proportional to actual costs, and even then the costs to consumers must be considered.
This blog post was coauthored by Alison Terkel.