Fed Proposes Slashing ‘Swipe Fees’ in Move Expected to Fuel Battle Between Banks, Retailers

This illustration picture shows debit and credit cards arranged on a desk in Arlington, Va. on April 6, 2020. (Olivier Douliery/AFP via Getty Images)

The Federal Reserve unveiled a proposal to reduce “swipe fees” banks can charge merchants for processing debit card transactions, making it the largest reform of interchange fees in a decade.

Following a Federal Reserve Open Board meeting on Oct. 25, the U.S. central bank announced that it would recommend reducing debit interchange fees by close to a third, from 21 cents to 14.4 cents.

Fed data show that the fees created $31.59 billion for lenders in 2021. Officials cited additional figures confirming that the costs of processing transactions had declined by about half in recent years.

“The maximum permissible interchange fee for a $50 debit card transaction would be 17.7 cents under the proposal, down from 24.5 cents under the current rule,” the institution said in a memo.

The new proposed rule adjustments would also trim the ad valorem (transaction value instead of fixed fees per transaction) from 0.05 percent to 0.04 percent. The fraud-prevention adjustment would rise from 1.0 cents to 1.3 cents.

The central bank plans to assess future revisions to the interchange fee cap on a biannual basis. The last time the Fed assessed these fees was in 2011.

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Debit cards continue to be the most popular form of non-cash payments in today’s marketplace, says Fed Gov. Michelle Bowman.

“When we are considering proposed changes to the fees that support this important form of payment, we must take into account the broader context: the wide range of business models and sizes for issuers subject to the interchange fee cap; the effect of the rule on bank capital and earnings; the potential benefits and costs to consumers; the cumulative effect of regulatory changes and rules; and other unintended consequences,” Ms. Bowman said in a statement.

Banks Versus Retailers

In an Oct. 20 letter to the Fed Board of Governors, a coalition of nine major bank trade organizations, including the Independent Community Bankers of America (ICBA), urged policymakers to refrain from approving debit card interchange fee changes. They contend that altering the charge would not assist consumers because retailers do not pass savings onto customers.

“Any promises or representations they make now should be viewed with robust skepticism,” the groups wrote. “We urge you to ’stop, look, and listen' so that a baseline of timely, accurate, and comprehensive data about the effect of existing regulations can be developed and analyzed before further action is taken on new rules related to debit card routing and/or interchange.”

The Federal Reserve will finish the comment period 90 days after the proposal is published in the Federal Register. There is a growing expectation that both banks and retailers will challenge any final rule.

Retail industry experts assert this is good news for retailers since swipe fees are some of the most significant costs merchants endure. As a result, retail juggernauts like Walmart, Kohl’s, Macy’s, and Target will likely experience the most benefits because they serve a high volume of debit card users.

Shares in Visa and Mastercard slumped during the Oct. 26 trading session, falling around 2 percent and 5 percent, respectively.

Retail stocks were mixed toward the end of the trading week. Walmart shares dropped about 0.5 percent, while Target shares rose roughly 0.5 percent.

A September 2023 survey by the Merchants Payments Coalition (MPC) shows that nearly two-thirds of likely U.S. voters support “out-of-control swipe fees.”

“These numbers show that bringing competition to out-of-control swipe fees is a priority for consumers, not just merchants,” said Doug Kantor, the MPC Executive Committee member and National Association of Convenience Stores General Counsel, in a statement. “Consumers are increasingly aware that swipe fees drive up the prices of everything they buy and are going nowhere but up.”

Fed Introduces More Reforms

U.S. regulators have had a busy week of introducing reforms to longstanding regulations.

On Oct. 24, the central bank and the Federal Deposit Insurance Corporation (FDIC) voted to approve a new rule to fight bank lending discrimination, following a five-year initiative to transform the 1977 Community Reinvestment Act (CRA). The reform would mandate financial institutions to bolster their lending to low- and moderate-income communities, including for mortgages and small business loans.

Fed Chair Jerome Powell endorsed the modernization of the CRA because it adapts to “changes in the banking industry, such as mobile and online banking; providing greater clarity and consistency in the application of the CRA regulations; and tailoring to bank size and type.”

Fed Vice Chair for Supervision Michael S. Barr called it a “critical step.”

“The final rule takes a critical step forward in modernizing the CRA regulations to help ensure that banks meet the needs of all the communities they serve, consistent with safety and soundness,” Mr. Barr said in a statement. “As I have said before, fair lending is safe and sound lending, and the CRA regulations we promulgate today will help make the financial system safer and fairer.”

The Fed Board voted 6 to 1, and the FDIC voted 3 to 2. The new framework is scheduled to come into effect in January 2026.