WASHINGTON – The Merchants Payments Coalition on Tuesday called for the Federal Reserve to revise debit card swipe fee rules to reflect lower bank costs. The swipe fee regulations were adopted a decade ago, and a new Fed report shows that banks’ average cost of processing the transactions has since fallen by half.
“The Fed was required to regularly review these fees and was expected to adjust them if the cost of processing transactions went down,” MPC counsel Doug Kantor said. “Banks’ costs have constantly fallen but merchants are still paying as much as they were a decade ago. It’s time for the Fed to finally make good on what was expected. This is particularly important as the use of debit cards continues to increase.”
MPC, a trade group that represents retailers and online merchants, also welcomed the Fed’s announcement that it plans to clarify that debit card routing requirements apply to all transactions regardless of whether they take place online, in-store or in another form.
“Debit card routing goes hand-in-hand with the fees that are charged,” Kantor said. “Routing is key to competition, which is essential to any free market. Online shopping has grown tremendously since routing choice was made law, especially during the pandemic. For routing competition to be meaningful, it must apply no matter where a purchase is made.”
The debit reform law passed by Congress in 2010 directed the Fed to adopt regulations requiring that the swipe fees banks charge merchants to process debit card transactions be “reasonable” and also “proportional” to banks’ costs, according to MPC. The regulations, which took effect in 2011 and apply only to banks with $10 billion or more in assets, allow fees up to 21 cents per transaction plus an extra 1 cent for fraud prevention and 0.05 percent of the transaction amount for fraud loss recovery. Banks can charge more if they set the fees themselves, rather than having Visa and Mastercard set the fees centrally, but no major banks have done so.
A Fed survey found banks’ average cost of processing debit transactions was about 8 cents as of 2009. The cost has steadily fallen in new surveys conducted every two years since then and stood at 3.9 cents as of 2019, according to the latest survey, which was released on Friday. That means the 21-cent figure has doubled from about 2.6 times banks’ cost to 5.4 times the cost. Additionally, the Fed survey shows merchants are shouldering a greater portion of fraud, further evidence that the fraud adjustments are outdated and should be removed completely.
“The original level was far out of proportion to banks’ cost to start with and has become even more out of line as the average cost has gone down,” Kantor said. “This clearly does not meet the law’s requirement that these fees be ‘proportional’ to cost.”
The Fed said it “will continue to review” debit fees and “in light of the most recent data … may propose revisions in the future” but did not make any immediate commitment to lower the fees.
The amount charged to process debit transactions has become more important with growth in debit card use. The survey found the dollar value of debit transactions has grown by an average of 8.1% per year since 2009. Debit swipe fees totaled $24.3 billion in 2019, up from $16.2 billion in 2009. Credit and debit processing fees are most merchants’ second-highest cost after labor. MPC said those fees drive up prices paid by the average household by hundreds of dollars a year.
The Fed on Friday also proposed new regulations clarifying another provision in the law guaranteeing merchants the right to choose where to route debit transactions. The provision required banks to enable debit cards to be processed over at least two unaffiliated networks – typically either Visa or Mastercard plus one of the dozen competing debit networks such as Pulse, Star or Shazam.
The requirement has brought competition to debit processing for in-store transactions. However, some of the largest banks currently only enable cards to allow merchants to use an alternative debit network if a PIN is entered. That removes merchants’ choice online, where a PIN cannot be entered, leaving them with access only to Visa and Mastercard and not competitors. Debit networks have the ability to process transactions without a PIN, but “PINless” capability has been enabled on fewer than half of debit cards.
The Fed said its new regulations will clarify that debit cards must be usable with at least two networks online as well as in-store and said the issue has become “increasingly pronounced because of the continued growth in online transactions, particularly in the COVID-19 environment.”
With the PIN issue limiting routing options, the Fed survey found networks operated by Visa and Mastercard accounted for two-thirds of debit transaction processing in 2019. In addition, online debit volume was growing at 17.9 percent a year, more than four times the in-store growth rate of 4.2 percent. Average online debit purchases were also nearly twice as large as those in stores, at $61.36 compared with $32.65.
Late last month, the North Dakota Retail Association and the North Dakota Petroleum Markets Association sued the Fed over its debit fee regulations, saying the level was set too high in 2011 and seeking to have it reduced to reflect bank’s falling costs.