Open Board meeting on proposed revisions to the Board’s debit interchange fee cap October 25, 2023 | Summary and Q&A

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October 27, 2023
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Federal Reserve
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Open Board meeting on proposed revisions to the Board’s debit interchange fee cap October 25, 2023

TL;DR

The Federal Reserve considers a proposal to update the debit card interchange fee cap based on changes in costs incurred by debit card issuers.

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Key Insights

  • 🇺🇸 Debit cards have become the most popular method of payment, accounting for over half of all non-cash payments in the United States.
  • 👲 The current interchange fee cap has not kept up with changes in debit card-related costs, necessitating the proposed revisions.
  • 🤱 The proposed revisions aim to balance cost recovery for issuers while ensuring that interchange fees remain reasonable for consumers and Merchants.

Transcript

great welcome everyone um and good afternoon I I want to welcome our guests both here at the Federal Reserve and also online today we will consider a proposal to revise the board's rule that implements the dodf Frank act requirements to cap debit cards interchange fees consistent with the statute and the board's current Rule The Proposal would appl... Read More

Questions & Answers

Q: What is the purpose of capping debit card interchange fees?

The caps on interchange fees ensure that the amount issuers receive for each debit card transaction is reasonable and proportional to the costs incurred, as mandated by the Dodd-Frank Act.

Q: How have debit card-related costs changed since the current interchange fee cap was established?

Based on data reported by covered issuers, transaction processing costs have declined by nearly 50% from 7.7 cents in 2009 to 3.9 cents in 2021. Median fraud losses have decreased from five basis points to four basis points, while fraud prevention costs have increased from approximately 1 cent to 1.3 cents.

Q: What are the potential unintended consequences of the proposed revisions?

The proposal suggests that lower interchange fees could result in Merchants passing on reduced fees to consumers in the form of lower prices or improved service quality. However, it is difficult to predict the exact impact, and unintended consequences could include Banks passing on higher costs to consumers or discontinuing certain products or services.

Q: How will the proposed revisions affect Community Banks and small depository institutions?

The proposed revisions do not directly apply to depository institutions with less than $1 billion in consolidated assets. However, smaller issuers may still face competitive pressure, and the proposal seeks feedback on the potential effects on smaller depository institutions.

Summary & Key Takeaways

  • The Federal Reserve is revising the board's rule on capping debit card interchange fees for issuers with at least $101 billion in consolidated assets.

  • The proposal aims to update the interchange fee cap to reflect changes in debit card-related costs and establish a transparent process for future updates.

  • Debit cards have become the most popular method of payment, and the proposed revisions ensure that interchange fees remain reasonable and proportional to costs.

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