The Fed plans to slash debit card swipe fees by a third
The Fed has finalized a recent proposal to slash debit card swipe fees by one third—a move that could help merchants and cash-strapped consumers save money.
The previous base fee cap was 21 cents per transaction. That is set to change to 14.4 cents. The new rules are now in an open comment period for 90 days before taking effect.
“The proposal would also establish a regular process for updating the maximum amount every other year going forward,” the Fed said in an Oct. 25 press release.
The maximum allowable fee under the new proposal would be 17.7 cents for a $50 transaction, down from the current cap of 24.5 cents.
It may be a little confusing, but the Fed’s debit card swipe fee schedule has a base fee component and an adjustment for issuers that meet certain fraud-prevention standards. Small banks and other issuers of debit cards are exempt from caps.
The new changes come as the Fed notes that costs for card issuers have significantly declined in recent years. That will be good for merchants, but it will likely benefit consumers, too.
Merchants vs. banks: Industries spar over debit card fees
Retailers and debit card issuers have battled over fees for years. If passed, a lower fee cap will take pressure off millions of small businesses as well as their customers.
According to the National Retail Federation: “Applied to millions of transactions each day, swipe fees are most retailers’ highest operating cost after labor, driving up consumer prices by more than $1,000 a year for the average household and hurting retail sales because consumers buy less when prices go up.”
Data from Intuit shows that 55% of 27 million small businesses only accept cash payments because of swipe fees on debit and credit cards. This takes a bite out of retailers' sales because some customers without cash on hand are left high and dry.
According to a lawyer for the National Association of Convenience Stores: “The proposed new rates are an acknowledgment that the rates that were initially set in 2011 are out of line with the costs of processing transactions. But they still don’t accurately reflect the market, and consumers deserve better.”
U.S. courts have weighed in on swipe fee cases
So why is the Fed handling this instead of the Federal Trade Commission or the Consumer Financial Protection Bureau?
The Fed board is required by law to set standards for fees that large debit card issuers charge merchants. It’s the central bank’s job to decide if these fees are reasonable and justified by the issuer’s costs to process debit card transactions.
In response to an act of Congress, the Fed began setting caps on debit card swipe fees in 2011. But merchants and banks have fought for years in courts.
In 2015, for example, the Supreme Court declined to hear a case brought by merchants against the card industry. In 2018, the high court sided with American Express against the Justice Department, which brought a lawsuit against Amex under U.S. antitrust law.
The Supreme Court and circuit courts have generally sided with the card industry, but the Fed stepping in to lower debit card swipe fee caps could settle the matter for now.