MCUL Submits Comments to Federal Reserve Board on Proposed Debit Interchange Fee Rule
On Friday, MCUL submitted comments to the Board of Governors of the Federal Reserve System opposing their proposed rule on Debit Card Interchange Fees and Routing. This proposed rule would make significant revisions to Regulation II’s interchange fee cap. Specifically, the proposed revisions would update all three components of the interchange fee cap based on the latest data reported to the Board by covered issuers regarding debit card transactions performed in 2021. Under the proposal:
- The base component would be 14.4 cents (down from 21.0 cents)
- The ad valorem component would be 4.0 basis points (down from 5.0 basis points)
- The fraud-prevention adjustment would be 1.3 cents (up from 1.0 cents)
Additionally, the proposal would codify in Reg II 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 Board by covered issuers, without opportunity for public comment.
In our opposition, we strongly urged for the withdrawal of the proposed rule, citing decades of research showing the adverse effects of the Durbin Amendment and the current regulation and detailing how additional price controls would impact credit unions who are technically exempt from the proposed rule. Although the proposal maintains the established threshold of $10B in assets for an institution to be covered, we discuss how smaller institutions have faired under the current regulation and how a further reduction in interchange fees will effect the operations that are funded by these revenue streams. In particular, we detail how:
- The proposal will negatively impact small, exempt issuers. The Board’s own data shows that, under the current regulation, exempt issuers experienced over a 19% revenue loss on debit card interchange transactions processed on single-message networks, highlighting how a majority of technically exempt credit unions are not insulated from the regulation’s reach and how additional fee reductions will result in additional revenue losses.
- The proposal fails to adequately consider the costs of fraud. The Board’s methodology for assessing fraud losses and calculating fee components did not consider the costs at smaller institutions who are not able to rely on economies of scale, as well as how additional revenue constraints at technically exempt institutions will impact fraud recovery and mitigation efforts.
- The proposal will negatively impact consumers. Studies on the impact of the Durbin amendment show that the reduced interchange revenue resulted in fewer free checking accounts, further resulting in hundreds of thousands of households exiting the banking system. Further, while it was promised under the Durbin amendment that retailers would pass interchange savings onto consumers, studies show that not only was that not the case, but that some retailers even increased their prices. The fee reductions under the proposed rule are anticipated to have similar results.
Given these, we joined the industry-wide call to immediately withdraw the proposed rule.
Read the full comments here.
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