Retailers Say Change in Methodology Leaves Fed’s Proposed New Debit Card ‘Swipe’ Fee Cap Too High

"The largest issuers in the country are further guaranteed a higher profit margin."

NRF CAO and General Counsel Stephanie Martz

WASHINGTON – The National Retail Federation told the Federal Reserve this weekend that the Fed’s plan to lower a 13-year-old cap on debit card “swipe” fees is welcome but a proposed change in methodology would leave the cap too high.

“We are very appreciative that the board has undertaken to update the interchange rate so that it will no longer depend on data that is now 15 years old,” NRF Chief Administrative Officer and General Counsel Stephanie Martz said Sunday in a letter to the Fed’s Board of Governors. “The economic factors that were considered by the Board when it originally set the maximum allowable interchange rate for covered issuers in 2011 based on 2009 data have changed dramatically.”

“The time is well overdue” for an update but the new method of calculating the cap “significantly changes the methodology in a manner that is detrimental to merchants and, ultimately, to consumers,” Martz said. In addition, it “is insufficient” to accommodate “future developments that are inevitable in the rapidly changing payments industry.”

The current cap of 21 cents per transaction was established in 2011 after merchants complained that debit card swipe fees were far too high and Congress responded with the Durbin Amendment, a 2010 law directing the Fed to require that the fees be “reasonable” and “proportional” to banks’ costs.
The cap applies only to cards from banks with at least $10 billion in assets.

The cap cut typical debit swipe fees in half and has saved retailers an estimated
$9 billion a year, with studies showing retailers have shared at least 70% of the savings with customers. Nonetheless, debit and credit card swipe fees hit a record $172.05 billion in 2023, driving up prices paid by consumers by more than $1,100 a year for the average family. Debit card swipe fees accounted for $36.3 billion of last year’s total.

When set, the current cap was 2.7 times card-issuing banks’ average cost of 7.7 cents for processing a payment and was meant to cover actual costs at 80% of institutions.

The proposal under consideration would
lower the cap to 14.4 cents to reflect Fed research showing banks’ average cost had fallen to 3.9 cents as of 2021. But that works out to 3.7 times banks’ average cost and was determined by new methodology intended to ensure that actual costs are covered for 98.5% of banks.

Rather than reducing banks’ profits on debit card swipe fees, “the largest issuers in the country are further guaranteed a higher profit margin,” Martz said. “If the existing methodology reflects a ‘reasonable and proportional’ interchange fee as the Board has advocated for years, the new methodology does not.”

Martz said the Fed should keep the cap at 2.7 times banks’ average cost, which would result in a limit of 10.5 cents per transaction. Alternatively, the Fed could set tiered rates based on banks’ debit card transaction volume.

In addition to the basic limit of 21 cents per transaction, the current cap allows banks to charge an additional 1 cent for fraud prevention and 0.05% of the transaction amount to cover fraud costs. Under the Fed’s proposal, the fraud cost amount would drop to 0.04% but the amount for fraud prevention would rise to 1.3 cents.

Martz said the 1 cent for fraud prevention is no longer justified given the shift of fraud costs to merchants after EMV chip cards were adopted in 2015 and should be eliminated rather than increased. The percentage for fraud cost should be based on banks’ net costs after considering the amount of fraud borne by merchants, a method that “is fair and proportional, and it incentivizes all participants in the ecosystem to reduce fraud,” she said.

The Fed’s proposal would automatically update the cap every two years based on updated calculations of banks’ costs. But Martz said banks should be required to substantiate the numbers, which are currently self-reported to the Fed in a survey conducted every two-years, and that they should be audited by an independent party to ensure accuracy. If not verified, “the figures, if faulty for whatever reason, could result in billions of dollars or more of excess interchange paid by merchants,” she said.

As the leading authority and voice for the retail industry, NRF has fought for fair credit and debit card swipe fees for more than 20 years.

About NRF
The National Retail Federation passionately advocates for the people, brands, policies and ideas that help retail succeed. From its headquarters in Washington, D.C., NRF empowers the industry that powers the economy. Retail is the nation’s largest private-sector employer, contributing $5.3 trillion to annual GDP and supporting more than one in four U.S. jobs — 55 million working Americans. For over a century, NRF has been a voice for every retailer and every retail job, educating, inspiring and communicating the powerful impact retail has on local communities and global economies.