The National Retail Federation said a Federal Reserve (the Fed) proposal released on Wednesday, October 25th, to lower the cap on debit card “swipe” fees is a welcome move but still leaves the fees significantly higher than banks’ cost to process the transactions.
The Fed issued a proposal that would cap the amount large banks are allowed to charge retailers to process debit card purchases at 14.4 cents per transaction plus 1.3 cents for fraud prevention and 0.04% of the transaction amount for fraud costs.
In a significant 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 from now on, stated the NRF.
“This is a significant reduction that will save money for retailers and their customers, and we welcome the progress that has been made,” NRF Chief Administrative Officer and General Counsel Stephanie Martz said.
“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 proposal will be subject to public comments for 90 days and must be approved by the board before becoming final.
Efforts to Lower the Cap on Debit Card Swipe Fees
The proposal compares with a cap of 21 cents – plus 1 cent for fraud prevention and 0.05% of the transaction amount to cover fraud costs – in effect since 2011.
The cap was established under the Durbin Amendment, a 2010 law that directed the Fed to adopt regulations requiring that debit card swipe fees be “reasonable” and “proportional” to banks’ costs. The Fed found the average price was 7.7 cents per transaction and proposed a cap of up to 12 cents but settled on 21 cents after lobbying by banks.
The cap applies only to bank cards with at least $10 billion in assets.
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.
Merchant groups called on the Fed last year to reduce the cap to 9.7 cents, basing the figure on the 2019 cost and keeping about the same proportion as the difference between the 2011 cap and average cost.
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According to a petition filed with the Fed, banks’ average cost has “decreased substantially year after year,” reflecting a variety of factors, including bank consolidation and growth, and the 21-cent cap now significantly exceeds the cost of even the highest-cost card issuers.
Merchants also asked that the extra fees for fraud be eliminated because of the shift of fraud costs to merchants after EMV chip cards were rolled out nationwide in 2015.
The Fed released a new report on October 25 saying that banks’ average cost remained at 3.9 cents as of 2021.
The 2011 cap cut typical debit swipe fees in half and saved retailers an estimated $9 billion a year, with studies showing retailers have shared at least 70% of the savings with customers.
However, the National Retail Federation has long argued that the savings could have been much more significant if the cap had been set lower or periodically adjusted as intended by Congress.
NRF sued the Fed in U.S. District Court in 2011, saying the cap was set too high. A trial judge agreed, but the ruling was overturned by the U.S. Circuit Court of Appeals for the District of Columbia, and the Supreme Court refused to hear NRF’s appeal.
The Supreme Court agreed last month to take up a 2021 challenge to the cap brought by a North Dakota retailer and decide whether the statute of limitations has expired.
According to the Nilson Report, debit and credit card swipe fees have doubled over the past decade and totaled $160.7 billion in 2022. 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.