Federal Reserve Proposes Lower Cap on Debit Card Swipe Fees

The Federal Reserve released a proposal to lower the cap on debit card transaction fees, known as swipe fees. The National Retail Federation (NRF) responded to the proposal, saying it is a welcome move but leaves the fees higher than banks’ costs to process transactions.

“This is a significant reduction that will save money for retailers and their customers, and we welcome the progress that has been made,” says NRF chief administrative officer and general counsel Stephanie Martz. “Nonetheless, it still doesn’t get to the ‘reasonable’ level Congress sought and it isn’t proportional to banks’ falling costs. The Fed needs to meet that goal, and particularly needs to consider that a larger share of fraud costs has shifted from banks to merchants since the cap was established. Main Street merchants and American families have paid billions of dollars too much and want the Fed to do what Congress intended a dozen years ago.”

The Fed’s proposal would cap the amount of money large banks are allowed to charge retailers to process debit card transactions to 14.4 cents, plus an additional 1.3 cents for fraud prevention and 0.04% of the transaction amount for fraud costs. Martz says the proposal is an important victory for merchants ​​harmed by the Fed’s failure to update the debit fee cap since it was established; the numbers would automatically update every two years going forward.

For 90 days, the proposal will be subject to public comment before it is voted upon by the board before becoming final. The Fed was required to review the cap every two years but has kept it the same even though banks’ average cost has steadily fallen, dropping to 3.9 cents as of 2019.

The current cap on transactions, which has been in effect since 2011, is 21 cents plus one cent for fraud prevention plus 0.05% of the transaction amount to cover fraud costs and was introduced under the Durbin Amendment. The amendment also directed the Fed to adopt regulations requiring debit card swipe fees be “reasonable” and “proportional” to banks’ costs.

Debit and credit card swipe fees have doubled over the past decade and totaled $160.7 billion in 2022, according to the Nilson Report. The fees are among most merchants’ highest operating costs and drive up prices paid by consumers by more than $1,000 a year for the average family. Debit card swipe fees account for $34.4 billion of the total.

In an effort to continue improving credit card competition and reduce swipe fees, Senate Bill 1838, commonly referred to as the Credit Card Competition Act of 2023 (CCCA) was reintroduced to the Senate in June but has made no headway into becoming law.

The bipartisan bill was read twice in July before being referred to the Committee on Banking, Housing and Urban Affairs, which main sponsor Sen. Dick Durbin (D-IL) does not serve on. The CCCA aims to reduce credit card interchange fees, or swipe fees, and create a more competitive environment for merchants accepting credit cards as payments. 

Reigning in Soaring Credit Card Profits

Along with swipe fees doubling, the Merchants Payments Coalition (MPC) recently released a statement regarding increasing credit card profits serving as further evidence the credit card market is broken and not competitive. 

“Visa and Mastercard’s profit margins are more than 20 times what merchants make, and their megaprofits are still rising,” says MPC executive committee member and National Association of Convenience Stores general counsel Doug Kantor. “Businesses in competitive markets just don’t make those profit margins. With no competition or fairness, this is a broken market that only Congress can fix. It’s time to pass the Credit Card Competition Act so credit card companies will have to compete the same as small businesses.”

Both Visa and Mastercard, who control 80% of the credit card market, reported positive net incomes over the past year with Visa’s fourth-quarter net income rising 19% and Mastercard’s third quarter net income rising 28%. JPMorgan, the largest credit card issuer in the United States reported its third-quarter net income rose 35%. 

Through a survey of nearly 1,000 adults conducted by Pierpont Consulting & Analytics LLC, MPC found that 65% of voters support swipe fee reform.

“These numbers show that bringing competition to out-of-control swipe fees is a priority for consumers, not just merchants,” says MPC executive committee member and National Association of Convenience Stores General Counsel Doug Kantor. “Consumers are increasingly aware that swipe fees drive up the prices of everything they buy and are going nowhere but up. They want Congress to stand up against global credit card networks and Wall Street banks and put American families first. Regardless of political affiliation or age, consumers want lawmakers to pass the Credit Card Competition Act.”