October 25, 2023
WASHINGON – A long-awaited reduction in the “swipe” fees large banks are allowed to charge merchants to process debit card transactions proposed today by the Federal Reserve is welcome but doesn’t go far enough, the Merchants Payments Coalition said.
“Banks have been charging more than five times their costs for debit card transactions and the Fed is finally saying that’s too much,” MPC Executive Committee member and National Association of Convenience Stores General Counsel Doug Kantor said. “This is a step in the right direction toward the real, competitive market that Congress wanted to see but still leaves the fees too high. Merchants and the consumers who ultimately pay these fees have been overcharged for far too long, so we need to get this right.”
Under regulations established in 2011, banks that have at least $10 billion in assets and follow rates set centrally by Visa and Mastercard are allowed to charge up to 21 cents per debit card transaction plus 1 cent for fraud prevention and 0.05 percent of the transaction amount for fraud loss recovery. Banks can charge any amount they want if they set the fees themselves, but no major banks have done so, choosing to be part of Visa and Mastercard’s price-fixing mechanism instead. Smaller banks are exempt and can charge as much as they like.
The Fed today released a proposal to lower the basic amount allowed to 14.4 cents per transaction while increasing the amount for fraud prevention to 1.3 cents and lowering the amount for fraud loss recovery to 0.04 percent. Going forward, the rate would be updated every other year by “directly linking” the amount allowed to data on banks’ costs. The proposed regulation will be open for public comment for 90 days and must be approved by the Board of Governors before becoming final.
In 2010, Congress passed legislation directing the Fed to adopt regulations requiring that debit card swipe fees – which then averaged about 45 cents per transaction – be “reasonable” and also “proportional” to banks’ costs. The Fed found that banks’ average cost to process debit transactions was 7.7 cents but set the maximum at 21 cents under heavy lobbying by banks.
The 21-cent rate has remained in effect even though surveys conducted by the Fed every two years have shown that banks’ costs have fallen steadily since then and were at an average 3.9 cents as of 2019. A new report released by the Fed today said the average remained at 3.9 cents as of 2021.
Based on the 2019 average cost, merchants last year asked the Fed to make the fees actually reasonable and proportional to the cost of the average transaction. Merchants also asked that the extra 1 cent and 0.05 percent for fraud be eliminated, saying those fees have given banks a “windfall” since a larger share of liability for fraud shifted to merchants following the widespread adoption of EMV chip cards beginning in 2015. Merchants now pay for the majority of fraud while banks only pay for 36 percent.
The swipe fee regulation and a provision of the 2010 law letting merchants choose which networks process debit transactions have saved an estimated $9 billion a year and studies show about 70% of the savings has been shared with consumers, largely by holding down price increases. Nonetheless, the savings could have been higher had the Fed set a lower rate or adjusted rates to follow banks’ falling costs.
Debit card swipe fees cost merchants and their customers $34.4 billion in 2022, up 5 percent from 2021, according to the Nilson Report. When all types and brands of cards are included, credit and debit card swipe fees totaled $160.7 billion in 2022 and had more than doubled over the previous decade. The fees are most merchants’ highest operating cost after labor, driving up consumer prices and amounting to over $1,000 a year for the average family.
The Merchants Payments Coalition represents retailers, supermarkets, convenience stores, gasoline stations, online merchants and others fighting for a more competitive and transparent card system that is fair to consumers and merchants. Follow MPC on Twitter, Facebook or LinkedIn for the latest on swipe fees.