Proposal aims to lower max interchange fee large debit card issuers may receive for transactions, set up regular process for updates

The maximum interchange fee that a large debit card issuer can receive for a debit card transaction would be lowered under a proposal issued by the Federal Reserve Board Wednesday.

The proposal would also establish a regular process for updating the maximum amount every other year going forward, according to the agency.

The Fed said its proposal would adjust the interchange fee cap to reflect changes in issuer costs since it adopted a final rule on debit interchange in 2011. The rule was adopted in the wake of legislation (known as the Durbin Amendment, in recognition of its chief sponsor, Sen. Richard J. Durbin, D-Ill.) passed in 2010.

The Fed said that under its proposal issued Wednesday, the cap on an average-sized $50 debit card transaction would decline from 24.5 cents under the current rule to 17.7 cents under the proposal.

In addition, the agency said, its proposal would adopt an approach for future adjustments to the interchange fee cap, which would occur every other year based on issuer cost data gathered by the Federal Reserve from large debit card issuers.

According to the staff memo issued in conjunction with the proposal, the revisions would update all three components of the interchange fee cap based on the latest data reported to the Fed by covered issuers regarding debit card transactions performed in 2021.

Under the proposal, the base component would decrease from 21.0 to 14.4 cents, the ad valorem component would decrease from 5.0 basis points (multiplied by the value of the transaction) to 4.0 basis points (multiplied by the value of the transaction), and the fraud-prevention adjustment would increase from 1.0 cents to 1.3 cents.

The memo notes that the proposed base component was determined using a new methodology that is informed by the cumulative data that have been reported to the Fed every other year since the original rulemaking. This methodology, the memo states, targets full cost recovery over time for a significant majority of transactions across covered issuers through a formula that relates the base component to a key metric of covered issuer costs. By contrast, the proposed ad valorem component and proposed fraud-prevention adjustment were determined using generally the same methodologies used in the original rulemaking.

In addition to updating the interchange fee cap for the first time since the original rulemaking, the memo states, the proposed revisions would codify in regulation an approach for updating the three components of the interchange fee cap every other year going forward based on the latest data reported to the Fed Board by covered issuers.

“By directly linking the interchange fee cap to data from the Board’s biennial survey of covered issuers, this approach should ensure going forward that, to the extent practicable, any interchange fee subject to the cap will be reasonable and proportional to the cost incurred by the issuer with respect to the transaction, as required by the Durbin Amendment,” the memo states. “These future updates to the interchange fee cap would be published without inviting public comment and would be published by March 31 of odd-numbered years, with the new amounts taking effect on July 1 and remaining in effect for two years.”

While the Fed Board approved the proposal for a 90-day comment period, it was not issued without dissent: Gov. Michelle Bowman said she could not support the rule as proposed.

Federal Reserve Board requests comment on a proposal to lower the maximum interchange fee that a large debit card issuer can receive for a debit card transaction