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Fed’s Proposal Means Debit-Card Fee Cuts Might Be on the Table

Elinor Rozenvasser Updated: October 26, 2023 • 3 min read
young adult paying for something at the store with a debit card

Key Points:

  • The Federal Reserve is considering a 30% reduction in fees merchants pay to banks for debit card transactions.

  • Merchants argue that high swipe fees drive up costs for consumers, while banks question whether lower fees will lead to reduced prices for consumers.

  • The Fed's proposal, if implemented, could have mixed results for consumers.

The Federal Reserve has recently proposed a significant reduction in the fees that merchants pay to banks when customers use debit cards for purchases. This move has triggered a heated debate, with banks expressing opposition to the proposed changes. Currently, large card issuers like JPMorgan Chase and Bank of America charge merchants 21 cents plus 0.05% of the transaction amount. The proposed adjustment would bring this down, with the possibility of further reductions in the future.

Let's dive into the Fed's proposal on cutting debit-card fees, and what this might mean for the average consumer.

For an average transaction of $50, the offered changes would result in a roughly 28% decrease in swipe fees.

Why Lowering Debit-Card Fees Matters

These fees, known as interchange fees, affect a wide range of businesses, from national retailers to local auto shops. They are collected by banks and financial institutions that issue debit cards.

Merchants argue that these fees lead to increased costs for consumers, as businesses often include them in the prices of their products or services. However, banks contend that reducing these fees may not necessarily lead to lower prices for consumers.

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The Fed's Rationale: Decreasing Costs for Debit-Card Issuers

According to the Federal Reserve, their data shows a decline in costs for debit-card issuers in recent years. This forms the basis for their decision to propose a reduction in fees. For an average transaction of $50, the offered changes would result in a roughly 28% decrease in swipe fees.

The Fed will now gather public input, which is expected to involve lobbying efforts from both card issuers and merchants, before a final vote by the central bank's governors is made.

Different Views within the Fed

Fed governor Michelle Bowman dissented, citing concerns about the cumulative impact of regulatory changes. She believes these, including lower debit fees and higher capital requirements, could risk certain financial institutions and the broader U.S. banking system.

The 2010 Dodd-Frank law, specifically the Durbin amendment, empowered the Fed to set caps for larger banks and financial institutions. This framework allowed merchants to advocate for lower debit interchange fees. The Supreme Court has agreed to hear a case initiated by a North Dakota truck stop and convenience store, challenging the existing cap as too high.

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Impacts on the Payments Sector

The Fed's fee cap has had significant implications for the payments industry. Major networks like Visa and Mastercard saw their ability to set debit interchange fees curtailed. As a result, banks have increasingly encouraged customers to use credit cards, offering enticing rewards and benefits. Interchange fees for credit cards tend to be much higher and more lucrative for banks.

The Bottom Line

In these uncertain times, it is crucial for consumers to find online banking services that prioritize low fees and flexibility. With the potential reduction in debit-card swipe fees, there may be opportunities for savings. These savings can benefit both merchants and consumers.

It's still important to keep an eye on potential adjustments in fees tied to debit cards by banks. Seeking out financial institutions that offer cost-effective and adaptable online banking services should be a top priority for shoppers.

Elinor Rozenvasser is a content writer and editor with a knack for finance. She holds a Bachelor's in Communications and Business from Reichman University, and has been swimming alongside finance specialists for over a decade. She's not your typical financial writer, though. She's more likely to use witty puns and sarcasm than jargon and technical terms. But don't let that fool you. She's still a whiz when it comes to explaining complex financial concepts in a way that anyone can understand. If there's any writer who can make finance fun and engaging, Elinor is your girl. She's sure to leave you laughing (and learning) long after you've finished reading her work.