Hold onto Your Wallets- Debit Interchange under Scrutiny

We at BIG have been advising credit unions for some time not to become overly reliant on revenue from interchange fees. The Credit Card Competition Act, currently winding its way through Congress, is a prime example of the persistent threat. But now there’s an even more clear and present danger.

Last week the Federal Reserve formally proposed its first adjustment to debit interchange rates since the Durbin Amendment upended the industry in 2011. The short version: fees earned by card issuers face an immediate cut of roughly 30 percent. As usual, however, the full story is more nuanced.

Current debit rates are capped at 21 cents per transaction, plus 0.05% of the transaction value. The Fed’s proposal reduces these figures to 14 cents and 0.04% (there’s also a small upward adjustment to the 1 cent fraud fee applied to “applicable transactions”). The Fed’s proposal is based on internal research which indicates the cost of processing debit transactions has gradually declined.

Technically, the debit cap applies only to financial institutions with over $10 billion in assets- a mere 21 credit unions met this threshold as of year-end 2022. That does NOT mean the other 5,100+ CUs can rest easy, however. The Fed’s own data shows that over time, interchange at small FIs gradually regresses toward the cap as well. It’s one of several bizarre gaps in the Fed’s logic- banks and credit unions of all sizes compete in the same marketplace- why would anyone expect the free market to support different pricing structures?

Additionally, in a public dissent to the proposal Federal Reserve Board Governor Michelle Bowman pointed out that the Fed analyzes cost data on an aggregate basis- which by definition is heavily skewed toward the nation’s largest banks. Bowman expressed concern that FIs closer to the $10 billion threshold might not be able to cover their debit costs at the proposed lower rates. If that’s a concern for $10 billion institutions, just imagine the impact on the vast majority of credit unions with assets of $2 billion and under.

This is a rare issue (there should be many more, IMO) in which community banks and credit unions set aside their differences and speak with one voice. Trade associations for both strenuously oppose the move, despite the Fed’s implication that it shouldn’t impact their members.

At this point the Fed’s proposal is open for public comment- this window should remain open until late January. It’s important to note that the Fed significantly revised its initial 2011 debit cap (it was first proposed at 12 cents) following a deluge of comments. We may see a similar compromise, but only if credit unions and other interested parties take a stand. Regardless of the final number, it’s safe to assume debit interchange will be on the downturn by late 2024.

Don’t expect to wait another dozen years for the next reduction, either- the Fed’s proposal also includes a mechanism to apply future adjustments in odd-numbered years- without an opportunity for public comment.