It appears that Thanksgiving has arrived early this year. On October 25th, the Fed proposed to carve the regulated interchange fee cap of 0.05% + $0.22 (including $0.01 allowed for fraud) by 28%.
The regulated interchange fee cap was established in 2010 as part of the Durbin Amendment. The Durbin Amendment is an extension within the 2010 Dodd Frank Act that grants the Fed the power to set debit and pre-paid interchange caps for banks and other financial institutions with $10BN or more in assets.
Interchange fees are paid by merchants when consumers purchase items or services every single time a card is used for payment.
The recently proposed regulated interchange cap changes are:
- Reducing the interchange per item from $0.21 to $0.144
- Reducing the interchange variable fee 0.05% to 0.04%
- Increasing the fraud protection from $0.01 to $0.013
The net impact of these changes is estimated to lower a merchant’s interchange costs by 28% for regulated volume. Generally, regulated issuers comprise 60% – 65% of a merchant’s total debit volume. However, it is important to note that the regulated percentage of the total debit sales varies by merchant as there are many factors that determine the issuer mix. These factors include ticket size, type of business, merchant/customer location, and customer’s preferred payment method. The potential interchange savings for a merchant is promising and can be meaningful as illustrated in the example below.
Average Ticket: $50.00
Regulated %: 60%
Unregulated %: 40%
The Durbin Amendment
The intent of the Durbin Amendment was to lower merchant interchange costs and spur economic growth by passing some of the interchange savings to the consumer through reduced pricing. Unfortunately, data from the Fed and Javelin Strategy and Research revealed in 2014, 3 years after the Durbin Amendment went into effect (October 2011), that majority of merchants did not reduce prices. In fact, the study uncovered that 75% of merchants reported that they did not modify prices post Durbin, 23% reported that they increased pricing, and 2% reported that they decreased pricing. Not only did prices not decrease, but according to the Fed the average cost per transaction for issuers (authorization, clearing, and settlement – excluding fraud losses) decreased in half by 2021 to $0.039 compared to 2009.
As stated in the 2010 Durbin Amendment, Congress required the Fed to review the debit card regulated interchange fee cap every two years to ensure that it is “reasonable” and “proportional” to bank costs. Unfortunately, twelve years later and the Fed has not reviewed the cap even though the average cost per transaction for banks has been cut in half.
The Potential After-Effects
The countdown is on as we have entered the 90-day commentary period before anything is finalized. During this period various stakeholders have the opportunity to voice their stance regarding the proposed cap reduction. The general consensus from merchant payment groups is that the reductions are not deep enough. In one example the Merchant Payment Coalition said that the proposed cuts in interchange does not go “far enough,” though they represent “a step in the right direction.”
The banks feel differently and state that reducing the regulated interchange cap will negatively impact consumers by limiting the amount of money issuers have available to offer products like free checking accounts subsequently resulting in increased fees on other products.
The Estimated Timeline if the Proposal is Passed
After the 90-day commentary period, which is set to expire January 25, 2024, the proposal will have to go through the judicial process (if approved) which could take 6 months or longer.
Further, additional time will be needed for all stakeholders to update their billing systems to reflect the reduced cap.
In summary, the proposed cap reduction is a giant step in the right direction. Should it be passed, it will probably be Q3 or Q4 of 2024 before merchants will benefit from the cap savings.
Stay tuned as the story unravels there will be more updates from Optimized Payments.
