Banks Warn Free Accounts at Risk in Fed’s Debit Swipe Fee Plan

Efforts to bring more low- to moderate-income people into the banking system are at risk under the Federal Reserve’s plan to reduce caps on debit card interchange fees, banks and a prominent civil rights advocate say.

The Fed is proposing to cut the fees—charged to merchants for processing debit card transactions on networks run by Visa Inc. and MasterCard Inc.—by nearly 30%. Banks and other card issuers retain most of those fees even though the card networks set the rates. A Bloomberg Intelligence analysis says the proposal would cut nearly $3.7 billion of banks’ annual $13 billion swipe fee income.

The central bank’s plan would update rules under the Dodd-Frank Act’s Durbin amendment, named for Sen. Dick Durbin (D-Ill.), a fierce opponent of interchange fees who is pushing legislation (S. 1838) targeting credit card swipe fees. Retailers say the debit and credit fees cost them more than $170 billion last year, and argue the Fed’s caps benefit consumers.

But banks issuing debit cards—led by Wells Fargo & Co., Bank of America Corp., and JPMorgan Chase & Co.—and card networks say merchants haven’t passed on the savings. The banks also raised several concerns about the Fed’s rule-writing process that could be the basis for litigation over the proposal, should it become final.

The comment period on the proposal closed May 12.

Banks and credit unions use money generated through the swipe fees to, in part, fund low- and no-cost bank accounts and other financial products that have helped reduce the number of unbanked and underbanked American households. Putting new restrictions on how much banks and credit unions can charge would significantly reduce those product offerings, they say—a point echoed by civil rights leader Rev. Al Sharpton, among others.

“Specifically, the proposal will likely result in bank account products and services that are more expensive and less attractive to LMI consumers, driving more of them out of the regulated banking industry,” a group of nine bank and credit union trade groups said in a letter to the Fed, referring to low-to-moderate income consumers.

The American Bankers Association, the Electronic Payments Coalition, the Clearing House Association, the Bank Policy Institute, the Independent Community Bankers of America, the National Bankers Association, the Consumer Bankers Association, the Mid-Size Bank Coalition of America, and America’s Credit Unions all signed on to the letter.

Swipe Fee Caps

Debit card interchange fees for banks with $10 billion or more in assets would be capped at 14.4 cents per transaction plus 0.04% of the transaction amount under the Fed’s proposal, which its board backed in a 6-1 vote in October. The current limit is 21 cents per transaction plus 0.05% under rules adopted in 2011.

The Fed began reviewing debit card interchange fees after retailers filed a petition for lower caps in 2022.

Now, retailer industry groups are urging the Fed to go even further than proposed to slash the fees.

The Fed’s existing cap and the proposed changes allow banks to recover most of the costs of processing debit card transactions, even though there’s no requirement to do so, retailers said in their comment letters. All the Fed needs to do is ensure the fee caps are reasonable, they said.

“Reducing the fees that are deducted from debit transactions provides cost savings to merchants that ultimately accrue to the benefit of consumers, because merchants operate in an intensely competitive market environment with tight profit margins,” the Merchant Payments Coalition said in a comment letter.

One way to ensure a more reasonable fee structure would be to establish a tiered regulation, where the biggest banks that use their ability to process the most transactions to lower their costs would have to comply with a higher rate than smaller banks face, according to the Retail Industry Leaders Association.

“Such an approach would more effectively limit the excess profits extracted by the largest issuers, while maintaining equitable treatment for smaller issuers,” RILA’s letter said.

Lower-Income Customers

While the Fed’s 2011 cap on debit interchange fees may have benefited retailers, in particular big box stores like Target Corp. or Walmart Inc., there’s no evidence those savings were passed on to consumers, banks and credit unions say.

Instead, higher costs at banks led to a 15.5% reduction in free checking at banks and credit unions subject to the debit interchange fee caps, the joint financial services industry comment letter said.

Banks didn’t have to choose to scale back those product offerings under the Fed’s rule, Sterling J. Johnson, the just opportunity director at the Partnership for Southern Equity, an Atlanta-based advocacy group, said in his letter.

“The policy led to the development of new practices in the banking industry that expanded on their extraction from families and consumers in ways the original interchange fee legislation sought to prevent,” Johnson wrote, adding that the Fed and other regulators should focus on cutting down a wider range of bank fees.

Still, one prominent civil rights activist agreed with the financial services industry’s concerns that lower debit card interchange fees could mean fewer products and services for lower-income people, particularly people of color.

“As well-intentioned as this proposal sounds, it would take direct aim at banking access for Black households by undermining and even defunding a critical and successful program that has opened doors to banking services for low-income Americans and communities of color,” Sharpton, the president and founder of the National Action Network, a civil rights group, said in a comment letter to the Fed.