R.I. Bankers Association, other banking groups object to proposal to reduce cap on debit card ‘swipe fees’

PROVIDENCE – The Rhode Island Bankers Association joined 51 other U.S. bankers associations and the American Bankers Association in signing a letter to the Federal Reserve on Feb. 14 expressing strong opposition to the Fed’s proposal to reduce a cap on the debit card processing fees that banks can charge merchants.

The groups urged the Fed to withdraw the proposal to revise its Regulation II rule governing debit card interchange fees pending a study of its potential impact, as well as the effects of newly finalized and pending regulations, from the banking agencies.

The proposal would lower the fees that merchants pay to banks when customers use debit cards – so-called swipe fees – and would be the most significant update to the cap since the Federal Reserve put its first restrictions on debit card issuers in 2011. Multiple news reports said the move would reduce the cap from 21 cents per transaction to 14.4 cents.

The proposal would also reduce an added fee that banks can charge from 0.05% of the cost of the transaction to 0.04% but would allow for banks to increase a charge to cover fraud-prevention costs from 1 cent per transaction to 1.3 cents.

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It would also allow the Fed to revise the fee cap periodically.

The associations emphasized the potential unintended consequences the proposal might have on community financial institutions. The groups pointed to data that shows a 35% drop in per-transaction debit interchange for so-called “exempt” financial institutions.

“Not only will this proposal constrain – on an ongoing and potentially ever-reducing basis – the revenue used to facilitate payments, secure these systems, and account for fraud, but importantly it will also deplete revenue that banks rely on to provide low- and no-cost basic banking services consistent with their values and mission as community leaders,” the associations said in the letter.

“Customers who struggle to meet minimum balance requirements or pay monthly maintenance fees on their deposit accounts are likely to feel the squeeze from this rulemaking as the direct cut in interchange revenue is offset, at least in part, by raising those requirements,” the letter said.

The groups said the industry has taken strides to reduce the number of unbanked households, in part by encouraging banks to offer free or low-cost Bank On-certified accounts, which are structured to address common barriers to bank access.

But the letter also said that “interchange revenue plays an outsized role in making Bank On-certified accounts sustainable.”

Bank On-certified accounts feature low or no fees, no overdraft charges, online bill pay and other basic attributes.

“We believe the changes proposed in Reg II will jeopardize this progress and urge the Federal Reserve to collect and analyze relevant data as a precondition to proposing changes to its formula,” the associations said.

The Cities for Financial Empowerment Fund – the nonprofit organization that created and maintains Bank On standards – recently recognized interchange revenue as a component of bank account sustainability in its own letter to the Fed.

The associations concluded by urging the Fed to withdraw the proposal.

“Ultimately, we believe the only way forward that is consistent with the Federal Reserve’s statutory obligations and prudent regulatory conduct is to withdraw the rule to allow for the data and the courts to catch up and to address the proposals’ other deep-seated flaws, including its contribution to the cumulative impact of regulation on customers and the community banking model,” the associations said.