Federal Reserve’s Flawed Debit Card Proposal Harms Banks, Credit Unions and Consumers

America’s banks and credit unions urged the Federal Reserve to rescind its proposal to update Regulation II (Reg II) in a comment letter submitted today. The joint letter was submitted by the American Bankers Association, Bank Policy Institute, 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 the proposal would harm consumers, banks and credit unions and 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. The proposal would benefit large retailers like Walmart and Amazon at the expense of consumers and financial institutions of all sizes.

“[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, to the card issuer (i.e., the buyer’s bank) and the acquirer (i.e., the seller’s bank) when a consumer uses their debit card to make a purchase. The Federal Reserve’s proposal would further reduce the legal limit on the interchange fee already in place under Regulation II, thus restricting the resources available to banks to cover the costs of facilitating debit card transactions, cover fraud losses and fund innovation in the payments system, including ways to reduce costs that support all consumers, such as free checking accounts.

Major problems with the proposal:

• Consumers, particularly low-income and minority consumers, would be harmed. 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.
• Resources used to mitigate fraud would be restricted. 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. The proposal bases its reduction in the cap on the estimated costs of high-volume issuers, which comprise only one-third of total issuers. The highest-volume issuers generally have the lowest costs to run their debit programs safely and securely because of scale. The proposal disregards the costs borne by most banks and credit unions, which are higher given their smaller programs. 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. These optional benefits aren’t cost-free and come at a cost that banks should not have to disproportionately bear. Moreover, it is a fact that merchants do not pass these savings onto consumers: 75 percent of retailers didn’t lower their prices when Regulation II was first implemented; 23 percent of retailers increased prices. There is no reason to think that further lowering the cap will yield a different result.
• The Federal Reserve would violate the Durbin Amendment and the Constitution. The proposal is not designed to allow issuers to recover their costs and a reasonable rate of return, contrary to the law. Furthermore, the Board does not even allow banks and credit unions the opportunity to recover certain costs that they are legally entitled to recover in connection with their debit programs, such as cardholder inquiry and non-sufficient funds handling costs. 
• The Board would finalize a rule not grounded in fact. 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.

To access a copy of the letter, please click here.

Additional Resource:

• Myth vs. Fact: Debit Card Interchange

Media Contacts:

• Sarah Grano, American Bankers Association ([email protected])
• Austin Anton, Bank Policy Institute ([email protected])
• Molly Safreed, America’s Credit Unions ([email protected])
• Weston Loyd, Consumer Bankers Association ([email protected])
• Nick Simpson, Electronic Payments Coalition ([email protected])
• Nicole Swann, ICBA ([email protected])
• Brent Tjarks, Mid-Size Bank Coalition of America ([email protected])
• Molly Moran, National Bankers Association ([email protected])
• Gregory MacSweeney, The Clearing House Association ([email protected])

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About the American Bankers Association

The American Bankers Association is the voice of the nation’s $23.7 trillion banking industry, which is composed of small, regional and large banks that together employ approximately 2.1 million people, safeguard $18.8 trillion in deposits and extend $12.5 trillion in loans.

About America’s Credit Unions

America’s Credit Unions is the unified voice for not-for-profit credit unions and their more than 140 million members nationwide. America’s Credit Unions provides strong advocacy, resources and services to protect, empower and advance credit unions and the people and communities they serve. For more information about America’s Credit Unions, visit AmericasCreditUnions.org.

About Bank Policy Institute

The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud and other information security issues.

About the Consumer Bankers Association

The Consumer Bankers Association represents America’s leading retail banks. We promote policies to create a stronger industry and economy. Established in 1919, CBA’s corporate member institutions account for 1.7 million jobs in America, extend roughly $4 trillion in consumer loans and provide $275 billion in small business loans annually. Follow us on X @consumerbankers.

About the Electronic Payments Coalition

We are the credit unions, community banks, payment card networks, and institutions that support the backbone of our economic system: electronic payments.

About ICBA

The Independent Community Bankers of America® has one mission: to create and promote an environment where community banks flourish. We power the potential of the nation’s community banks through effective advocacy, education, and innovation.

As local and trusted sources of credit, America’s community banks leverage their relationship-based business model and innovative offerings to channel deposits into the neighborhoods they serve, creating jobs, fostering economic prosperity, and fueling their customers’ financial goals and dreams. For more information, visit ICBA’s website at icba.org.

About the Mid-Size Bank Coalition of America

Across the country mid-size banks are providing financial solutions to entrepreneurs, professionals, their businesses and their families. Mid-size banks fuel their growth and build stronger connections to the communities in which they operate. The MBCA is proud to be their voice and their self-help network.”

About the National Bankers Association

Founded in 1927, the National Bankers Association is the voice for the nation's Minority Depository Institutions (MDIs). No other trade association focuses solely on the priorities, federal advocacy, and representation of minority-owned and -operated banks. Members include Black, Hispanic, Asian, Pacific Islander, Native American, and women-owned and -operated banks. MDIs are located across 32 states and territories. For more information, visit nationalbankers.org.

About The Clearing House Association

The Clearing House Association, L.L.C., the country’s oldest banking trade association, is a nonpartisan organization that provides informed advocacy and thought leadership on critical payments-related issues. Its sister company, The Clearing House Payments Company L.L.C. owns and operates core payments system infrastructure in the United States, clearing and settling more than $2 trillion each day. See The Clearing House’s website at www.theclearinghouse.org.