Credit Cards by Nick Youngson is licensed under CC BY-SA 3.0

On April 25, 2024, American Banker’s commentary page, BankThink, published an op-ed written by ATR’s director of financial policy, Bryan Bashur. The piece discusses why the Federal Reserve’s proposed rule to amend the debit card interchange fee cap will harm the debit card market in the future. 

The article starts by explaining that the proposed rule plans “to adjust debit card interchange fees biennially without future input from stakeholders.”

The rule is proposing to lower the cap on debit card interchange fees:

In its current form, the proposal would lower the cap for interchange fees paid to a debit card holder’s bank or credit union. The Fed is also arbitrarily proposing to evaluate and “update” the debit interchange fee cap every other year. This fundamentally flawed government-mandated price control is distortionary and will increase costs on other banking products for consumers. It gives the Fed nearly total control of the debit card market. It also augurs continual Fed control over credit cards if the Credit Card Competition Act is enacted.

By manipulating the interchange fee cap, the Fed is distorting the banking sector:

The Fed is dictating how banks and credit unions can earn revenue to fund their operations. The proposal arbitrarily and impractically excludes consideration of costs such as rewards programs, “card production and delivery costs, marketing costs and research and development costs.” In 2022, the Government Accountability Office highlighted several studies that found the enactment of the Durbin Amendment and its implementation via Regulation II increased the cost of checking accounts. There was a significant reduction in the number of free checking accounts after Reg. II was implemented. In fact, the GAO pointed out that “before the implementation of Regulation II, about half of non-interest checking accounts offered by covered banks were free, compared with less than one-third after implementation.”

The article talks about how lowering interchange fees will not result in a decrease in retail prices for consumers:

The proposed rule claims that merchants that see a reduction in interchange fees, “may pass on some or all these savings to consumers in the form of lower prices, foregone future price increases, or improved products or services.” This has not been observed in practice. According to one academic study, “[o]utput prices tend to respond faster to input increases than to decreases” in the producer and consumer goods market. The title of the study says it all: “Prices Rise Faster Than They Fall.”

Additionally, in 2014, the Federal Reserve Bank of Richmond published a study showing that after the Durbin Amendment was enacted, about 22% of retailers raised prices on consumers while only 1% lowered prices.

The piece also points out that the proposed rule could impact small community banks and credit unions. This was observed after the Durbin Amendment passed as a part of the Dodd-Frank Act:

Although banks and credit unions with less than $10 billion in consolidated assets are ostensibly exempt from the debit interchange fee cap, this has not been observed in practice. According to a 2014 survey conducted by scholars at the Mercatus Center, nearly half of small banks reported being affected by the Durbin Amendment with “reported decreases in revenue ranging from seven to thirty percent.” 

The piece concludes by stating that the Federal Reserve should study the effects the rule could have on low-and moderate-income communities, banks, credit unions, merchants, and consumers before moving forward. A comprehensive quantitative impact study would go a long way to better understanding the effects of this rule on the broader U.S. economy. Rep. Blaine Luetkemeyer (R-Mo.) has introduced legislation to do just that. 

You can read the full op-ed here.