Conservative Coalition Asks Fed to Withdraw Debit Card Rule

Today, Americans for Tax Reform along with a coalition of conservative organizations submitted a comment letter to the Federal Reserve (Fed) in response to a proposal that lowers the cap on debit card interchange fees. An interchange fee is a percentage of a debit card transaction that is transferred to a consumer’s bank or credit union. These fees are used to pay for privacy protection and rewards points.

The organizations that signed the letter include Americans for Tax Reform, Americans for Prosperity, American Commitment, The American Consumer Institute, Center for Freedom and Prosperity, Competitive Enterprise Institute, Consumer Action for a Strong Economy, The Heartland Institute, Heartland Impact, R Street Institute, Small Business & Entrepreneurship Council, 60 Plus Association, and The American Association of Senior Citizens.

The organizations asked the Fed to withdraw the rule on the grounds that it is arbitrary and capricious. You can read the full letter here.

The letter starts by describing how the Fed plans to change the cap on debit card interchange fees:

The Proposal, as outlined, seeks to biennially adjust the debit card interchange fee framework for banks and credit unions with consolidated assets of at least $10 billion. The initial adjustment to the debit card interchange fee cap would be a decrease in the base component from 21 cents to 14.4 cents and a reduction of the ad valorem component from 5 basis points to 4 basis points, alongside a marginal increase in the fraud-prevention adjustment from 1 cent to 1.3 cents.

The proposal fails to offer a substantive cost-benefit analysis:

The Proposal neither offers a substantive cost-benefit analysis nor justifies a need to update the debit card interchange fee cap on a biennial basis. The Fed acknowledges that it “cannot determine at this time whether the potential benefits of the proposal to consumers exceed the possible costs imposed on consumers and financial institution.” This alone should be grounds for withdrawing the Proposal.

The letter also points out how the proposed rule contravenes the Administrative Procedure Act:

The interchange fee adjustments also raise concerns under the Administrative Procedure Act (APA), which protects against arbitrary and capricious agency actions. Congress authorized the biennial debit card surveys but not biennial updates to the interchange fee cap without stakeholder feedback. These automatic updates lack a clear congressional mandate required for such a substantial shift in policy, thus rendering the action vulnerable to challenge as exceeding the Fed’s statutory authority. The Proposal’s acknowledgement that it cannot determine the effects on consumers stands in contrast to the Fed’s obligation to “examine the relevant data and articulate a satisfactory explanation for its action, including a ‘rational connection between the facts found and the choice made.’” The analysis is incomplete and calls into question the veracity of the claims made in favor of the Proposal’s provisions.

The biennial updates to the interchange fee cap without a notice and comment procedure was not expressly authorized by Congress. The Fed claims it has the authority to skip the notice and comment process under the “good cause exemption.” However, “courts should give no deference to an agency’s assertion of good cause.” In fact, the courts should be the sole entities to make that determination and ensure the exemption is “not abused.”

The proposed rule also fails to consider all the potential expenses that interchange fees cover:

The Proposal arbitrarily excludes consideration of certain expenses that are related to the revenue generated from interchange fees. Banks and credit unions have expenses such as rewards programs, “card production and delivery costs, marketing costs, and research and development costs,” which are funded by interchange fee revenue. A surprise reduction in fee revenue from automatic biennial updates could devastate these services. The Fed is dictating how banks and credit unions can earn revenue to fund their operations. This fundamentally flawed government-mandated price control is distortionary and increases costs on other banking products for consumers. According to an article posted by the American Bar Association, “[m]arket distortions inevitably result from price regulation, and this proposed rule, which would amend Regulation II, is no exception.”

The rule does not consider all the costs that come from changing the debit card interchange fee cap—especially the effects it will have on small community banks and credit unions:

The Fed is required to “demonstrate that the consumer protections of the proposed regulations outweigh the compliance costs imposed upon consumers and financial institutions.” However, the proposal fails to account for these considerations and appears to fall short of meeting the APA’s requirement for reasoned decision-making grounded in a holistic evaluation of relevant factors. 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. 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 Proposal dismisses the notion that small community banks or credit unions would ever be affected by the amendments to the debit card interchange fee cap. However, this is not a consensus viewpoint. One member of the Board of Governors stated that community banks may be negatively affected by the Proposal because they “use the same payment rails, and smaller issuers inevitably face some degree of pricing pressure, at least indirectly, from the interchange fee cap.”

Another article points out that “many community banks that offer credit cards do so through an agent relationship with an issuing bank. For many that is TCM Bank, operated by the Independent Community Bankers of America.” Small community banks “will continue to face ongoing fee pressure in operating debit card programs” if the Proposal is finalized.

The letter concludes by stating that:

The Fed must reevaluate the Proposal thoroughly, considering the impact of market dynamics and the statutory framework governing debit card transactions. Conducting and analyzing a quantitative impact study, especially for consumers and low-and moderate-income communities, prior to finalizing the Proposal would be a positive step in the right direction. Therefore, ATR and the undersigned organizations urge the Fed to withdraw its rule in the interests of fostering a regulatory environment that promotes innovation, competition, and security in the payments ecosystem—a goal that is consistent with the broader public interest and benefits consumers.