Could Debit Interchange Be in For Serious Reductions?
Two years after the Durbin Amendment became law, the consequences of this historic legislation are still unfolding. In the coming months, new developments in Durbin implementation could lead to historically low debit swipe fees for merchants. Last July, U.S District Judge Richard Leon ruled on a Durbin-related lawsuit that pitted a consortium of retailers against the Federal Reserve.
Siding with the plaintiffs, Judge Leon ruled that the Fed had failed to implement the Durbin Amendment in good faith. Since 2011, the Fed has enforced a debit fee cap of approximately 24 cents per transaction. Judge Leon has not specified what new cap the Fed should implement. However, the judge’s ruling did favorably mention “Alternative 1,” an interchange cap proposal that the Fed considered and dropped in 2010. In the past few weeks, much of the public reaction to the new ruling has focused on Alternative 1, which caps debit swipe fees at 7 to 12 cents.
Interestingly, the Fed’s new debit fee cap could end up far lower than 7 cents per transaction. A widely overlooked report from the Federal Reserve sheds light on how per-transaction costs for debit card issuers have dropped 34% since 2009.
Released in March, the Fed report was overshadowed by the body’s decision to maintain the status quo in debit fee limits. Judging from the data in the March report, the Fed’s new debit fee cap could solidify well below 7 cents. Some experts predict that the new cap will hover around 5 cents per transaction. Merchant services analyst Eric Grover suggests that even a 2 cent cap is not beyond the realm of possibility.
Since debit cards have achieved deep saturation throughout society, changes to interchange fee rules create dramatic effects in multiple industries. For many companies, a 12-cent debit fee cap would provide much-needed breathing room during this time of slow economic growth.
On the other hand, government-mandated changes in merchant services can have unintended consequences. Defying all expectations, the original implementation of the Durbin Amendment led to higher costs for many small businesses. A similar dynamic could complicate court-ordered debit fee reform. Debit cards are so critical for modern commerce that society must find the right balance when regulating debit card issuers. Future developments will demonstrate if Judge Leon’s ruling will promote a healthier, more sustainable economy.