Merchants Tell Fed Debit Card Swipe Fees Should Be Competitive

Contact: J. Craig Shearman
(202) 257-3678

WASHINGTON, May 13, 2024 – The Merchants Payments Coalition told the Federal Reserve this weekend that a proposed reduction in high “swipe” fees large banks charge merchants to process debit card transactions is welcome but still provides banks with huge profit margins that no competitive business in the nation could charge.

“It is not reasonable for the Board to set a single base component rate that massively overcompensates high-volume, low-cost issuers,” MPC said in a letter to the Fed’s Board of Governors, noting that the Fed is doing so to “accommodate high-cost, low-volume issuers whose debit operations are a tiny part of their overall business.”

“The MPC believes that several modifications are needed to the proposed rule in order to make it fully consistent with the governing statute,” MPC said.

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. A Fed proposal released last fall would lower the base amount to 14.4 cents and the amount for fraud loss to 0.04 percent but would increase the amount for fraud prevention to 1.3 cents.

MPC’s letter said the proposal doesn’t go far enough because it would lower the amount banks can charge by less than a third even though banks’ average cost of processing a transaction has fallen by nearly 50 percent – from 7.7 cents just before the current rate was set to 3.9 cents as of 2021.

The 14.4-cent rate would give banks average profit margins of 270 percent. That is nine times the 30 percent average profit margins large banks make on their businesses overall, which is the highest profit margin of any industry in the United States.

The Fed’s attempt to fully cover costs for smaller banks that have almost no significant debit business and are therefore very inefficient with costs “is particularly problematic” because a single uniform rate would give large banks that handle the vast majority of debit transactions “huge net profit margins,” MPC said. MPC recommended that the Fed set separate rates for larger and smaller banks or one rate for all banks and a higher rate for those that can show their costs are higher.

MPC said the Fed’s proposal to update allowable swipe fee rates every two years based on banks’ future costs is an important step forward but makes it “critically important” to first establish the proper methodology. Locking in 270% profit margins would not be reasonable and would serve as a drag on U.S. economic activity.

MPC said the percentage charged for fraud loss recovery should be eliminated. The level was set when banks bore 61 percent of fraud losses, but the number has dropped to 33 percent since the adoption of EMV chip cards, which shifted a large share of fraud costs to merchants. Merchants now bear far more fraud losses than banks and therefore should not also prepay for the banks’ much smaller losses, MPC said, adding that the Fed’s proposal nearly eliminates banks’ financial incentives to fight fraud.

MPC also said it would be “clearly unreasonable” to increase the 1 cent for fraud prevention because banks “have not demonstrated that they have taken effective fraud prevention steps.” The current regulations require banks to have fraud prevention policies and self-certify that they follow the policies, but no data is collected to determine whether the policies are effective. No bank has ever conceded not doing enough to prevent fraud even though the fraud losses have doubled since 2011. Banks should be required to show the policies are effective in order to collect the fee, MPC said.

The current 21-cent rate was established by the Fed in 2011 after Congress passed legislation in 2010 requiring that debit card swipe fees – which averaged about 45 cents per transaction – be “reasonable” and also “proportional” to banks’ costs. Merchants have saved an estimated $9 billion a year and studies show about 70 percent of the savings has been shared directly with consumers, largely by holding down inflationary price increases. The other 30 percent has largely gone to increase jobs and employee compensation, and merchant profit margins did not rise following the reduction in debit swipe fees. But the same rate has remained in place even though surveys conducted by the Fed every two years have shown that banks’ costs have fallen steadily.

Even with the savings, debit card swipe fees cost merchants and their customers $36.3 billion in 2023, according to the Nilson Report. Credit and debit card swipe fees together totaled a record $172.05 billion in 2023 and have more than doubled over the past decade. The fees are most merchants’ highest operating cost after labor, driving up consumer prices by over $1,100 a year for the average family.

About MPC
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.