Continued Discussion on the Debit Regulated Rate

Continued Discussion on the Debit Regulated Rate
Josh Pynn Senior Manager, Payments Content Merchant Advisory Group
Jul 10, 2024

Recap of the Regulated Rate Proposal

 With the comment period coming to a close, there is a flurry of activity in Washington surrounding the Federal Reserve’s (Fed) proposal to reduce the regulated debit card fee cap. Introduced in November of 2023, this was the first proposed change to the regulated rate since it was introduced in 2011. 

The proposal centered on two key aspects: a reduction in the regulated rate and establishing an automatic method of adjusting the rate regularly going forward. Firstly, the rate would be reduced from $0.21 + 0.05% to $0.144 + 0.04%. These figures will also include the base rate and a fraud adjustment, which increased from $0.01 to $0.013. Going forward, the rate would be adjusted automatically every 2 years, to be set at 3.7x the weighted average authorization, clearing, and settlement (ACS) costs of covered issuers. 

The MAG’s Comments on the Proposal

The MAG submitted comments in favor of the proposal but also touched on three aspects of the original rule and the proposed rulemaking that needed addressing. Firstly, the MAG explained how the Durbin Amendment was effective at both creating competition and reducing costs of transacting debit cards, but the 13 years without action on the original capped rate had been very costly for both merchants and consumers. 

Regarding the proposal, the MAG brought attention to two perceived flaws that hindered the proposal’s effectiveness at addressing the capped fees’ “reasonable and proportional” status. Most importantly, the 3.7x multiplier created an incentive for issuing banks to not optimize the efficiency of debit transactions, as profit would be baked into the rate at any level. As opposed to the current rate, where improvements in cost efficiency led to greater profits, applying a 3.7x multiplier to reported costs would give banks greater profit if they instead increased their underlying ACS costs. 

The second aspect discussed in the MAG’s comment letter surrounded the two fraud adjustments present in the rate, both the .04% compensation for fraud losses and the $0.013 fraud mitigation adjustment. The MAG proposes that there should be no reimbursement for fraud losses included in the capped debit rate, as there have been no overall reductions of fraud, and issuers have succeeded in shifting liability for fraud back to merchants and consumers through network rules. Because merchants are currently liable for most of the fraud that occurs despite issuers being most appropriately positioned to reduce it, merchants should not continue to pay fees as a part of interchange in the cap.

The Conversation Begins in Congress

After the proposal was released in October of last year, bills in both the House and Senate have been introduced with the goal of delaying the proposed ruling. In March, Representative Luetkemeyer (MO-3) introduced the Secure Payments Act of 2024. The bill would require the Federal Reserve to perform a “thorough economic analysis” of the proposed changes to Regulation II, including the potential impacts on low- and middle-income consumers, before finalizing the rule. On June 18, Senator Ted Budd introduced an identical bill in the Senate. Both bills are supported by the American Bankers Association as well as additional local and national bank trade organizations.

In Summary

Now that the comment period has closed, the Federal Reserve will review all comments before making any edits to and finalizing the proposed rule, pending passage of the Secure Payments Act of 2024. The MAG will continue to engage merchants on any updates. If you are interested in staying up to date, please contact Josh Pynn or Beth Provenzano to join our Advocacy and Communications Committee. If you would like to read the MAG’s full comments on the proposal, you can find them on the MAG Learning Center.

The Merchant Advisory Group

Driving positive change and innovation in the payments industry that serves the merchants interest through collaboration, education, and advocacy.