Quick Readout: Federal Reserve Board Issues Proposal to Reduce Debit Card Interchange Fee Cap

On October 25, 2023, the Federal Reserve Board (“Board”) issued a proposed rule that would reduce the debit card interchange fee cap in Regulation II (12 C.F.R. pt. 235). The Board promulgates Regulation II pursuant to its authority under the so-called Durbin Amendment to the Dodd-Frank Act (15 U.S.C. § 1693o-2). The Durbin Amendment requires the Board to establish standards for assessing whether the amount of any interchange transaction fee is reasonable and proportional to the cost incurred by the issuer with respect to the transaction.

Currently, under Regulation II, the interchange fee charged on a debit card transaction that does not qualify for an exemption can be no more than the sum of:

• 21 cents (the “base component”);
• 5 basis points multiplied by the value of the transaction (the “ad valorem component”); and
• For a debit card issuer that meets certain fraud-prevention standards, a “fraud-prevention adjustment” of 1 cent per transaction.

The proposed rule would update all three components of the interchange fee cap based on the 2021 data reported to the Board by non-exempt debit card issuers. Under the proposed rule:

• The base component would decrease to 14.4 cents from 21.0 cents;
• The ad valorem component would decrease to 4 basis points (multiplied by the value of the transaction) from 5 basis points (multiplied by the value of the transaction); and
• The fraud-prevention adjustment would increase to 1.3 cents from 1.0 cents.

Under the proposed rule, as a benchmark, the Board staff indicated that the maximum permissible interchange fee for a $50 debit card transaction would decrease to 17.7 cents from 24.5 cents.

The proposed rule would not amend the exemptions to the interchange fee caps, including the exemption for interchange fees charged or received by debit card issuers with less than $10 billion in total assets (i.e., the “small issuer exemption”). The proposal would amend some of the official staff commentary related to the small issuer exemption, as well as other aspects of Regulation II.

The Board also proposes to codify 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. The Board proposes to not seek public comment on such future updates.

What’s Next?

Comments on the proposed rule will be due 90 days after its publication in the Federal Register, which is anticipated in the near future.