In a significant development, the Federal Reserve Board has voted in favour of a proposal that could substantially reduce the cap on interchange fees that debit card issuers can impose on merchants for processing transactions. This proposal, if adopted, would bring about a 30% reduction in the base debit fee rate, lowering it from 21 cents to 14.4 cents. Additionally, the proposal seeks to modify the allowances for fraud costs and losses, altering the amounts that card issuers can charge under the rules of Regulation II, established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
The proposal reflects a comprehensive reassessment of the debit card transaction landscape, acknowledging that the costs incurred by covered issuers have evolved significantly over time. The Board’s decision is rooted in the evolving dynamics of transaction-processing costs, which have nearly halved since the cap was initially set in 2011.
Under the current system, the debit card interchange fees are capped at 21 cents, plus an additional 0.05% of the transaction’s value, along with a one-cent adjustment aimed at fraud prevention. This fee cap is applicable to banks and financial institutions that issue debit cards and maintain deposits of $10 billion or more.
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The proposed changes also include a provision to codify modifications to the rule, ensuring that fee updates occur every other year based on the mandatory review of industry data, which is already in place. The goal is to keep the cap in line with the evolving dynamics of the financial and payment processing landscape, which have witnessed substantial changes since the initial cap was set over a decade ago.
The Federal Reserve intends to maintain a two-year cycle for reviewing and updating the interchange fee cap. These updates will be conducted without public comment and are set to be published by March 31 of odd-numbered years, taking effect on July 1 and remaining in place for two years. This measure is aimed at maintaining the fee cap’s responsiveness to market changes and cost fluctuations.
Looking ahead, the Federal Reserve’s proposal, which was voted on recently, will undergo a period of public scrutiny and feedback. Once published in the Federal Register, there will be a 90-day window for public comments and suggestions. Following this comment period, if the rule is ultimately adopted, it will come into effect 60 days after the final rule is published in the Federal Register.
In conclusion, the Federal Reserve‘s decision to revisit and potentially lower the debit card interchange fee cap represents a pivotal development in the financial and payment processing landscape. The proposal recognizes the evolving nature of transaction costs and aims to align the fee cap more closely with contemporary market conditions. As this proposal moves through the regulatory process, industry stakeholders and consumers will be closely monitoring its implications for their financial transactions and costs.