JPMorgan Chase may begin capping debit card purchases at $100 or even $50. Chase stopped issuing new debit reward cards in November of last year and recently announced that it will end the reward program for existing customers as well. Chase is also testing monthly fees on debit cards and checking accounts in select states. These are just some of the ways that banks and credit card issuers are responding to proposed regulations on interchange fees.
The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act gave the Federal Reserve the authority to regulate the amount of interchange or swipe fees (i.e., the fees that a card issuer can charge retailers for transactions involving their cards) to ensure that they are “reasonable and proportional” to card issuers’ costs. About $16 billion in interchange or “swipe” fees were collected in 2009; averaging around 44 cents per transaction. However, a report issued by the Federal Reserve (Fed) found that the median total processing cost for debit and prepaid card transactions is 11.9 cents per transaction.
Using its new authority, the Fed has proposed rules that would cap interchange fees at 12 cents, starting in July. Since such caps could cost card issuers billions, they are examining potential sources of new revenue. For instance, a cap on interchange fees could cost Chase over $1 billion a year. In addition to getting rid of rewards programs, banks are considering “unbundling,” (i.e., dividing debit card services into components and charging for each of them separately). Some banks are also considering limiting the amount of debit card transactions.
At the same time, banks are also challenging the proposed regulations. TCF filed a lawsuit against the Fed claiming that the proposed regulations are unconstitutional because (1) they apply only to 1% of U.S. banks with assets of $10 billion or more and (2) they constitute an unlawful taking by the government of TCF’s property (i.e., debit card income). Although the U.S. Justice Department sought to dismiss the lawsuit the judge denied this motion.
In Congress, legislators are also concerned and have taken action to delay the proposed rules. Senator Jon Tester (D-MT) introduced the Debit Interchange Fee Act of 2011 (S. 575) and Representative Shelley Capito (R-WV) introduced the Consumer Payment System Protection Act (H.R. 1081). Sen. Tester’s bill would place a two-year delay on the implementation of any regulations and require a study examining the debit interchange payment system, including the costs and benefits of electronic debit card transactions and alternative forms of payment, the structure of the current debit interchange system, and the impact of the proposed rule reducing debit card interchange fees. Rep. Capito’s bill calls for a one-year implementation delay and a study of the various categories of all costs and investments associated with debit card transactions and the impact of any proposed rules. On the other hand, the Oregon State Legislature introduced a Senate joint memorial (SJM 18) urging Congress to proceed with interchange fee limits.
While consumer groups agree that swipe fees should be regulated, they are somewhat divided on how to achieve these objectives. Consumer advocates such as U.S. PIRG, Public Citizen and the Hispanic Institute support the new rule while the Consumer Federation of America has expressed concerns and has asked the Fed to increase the proposed rate cap.
For more information on interchange fees including other countries’ experience with similar debates, see the American Antitrust Institute (AAI)'s March 2010 report, “Electronic Payment Systems and Interchange Fees: Breaking the Log Jam on Solutions to Market Power” by Albert A. Foer.
For more information on the proposed regulations and the potential impact on consumers, see the resource page of the Sargent Shriver National Center on Poverty Law’s recent webinar, The Next Frontier in Public Benefits: Electronic Benefit Cards.
This blog post was coauthored by Ji Won Kim.