Regulation of Debit Interchange Fees
Changes from September 14, 2016 to November 1, 2016
This page shows textual changes in the document between the two versions indicated in the dates above. Textual matter removed in the later version is indicated with red strikethrough and textual matter added in the later version is indicated with blue.
Regulation of Debit Interchange Fees
Contents
Summary
Although theThe United States has seen continued growth of noncash or electronic payments, debit card transactions outpaced credit card transactions and other forms of payments in 2009electronic card payments (and a simultaneous decrease in check payments). From 2009 through 2012, debit card transactions have outpaced other payment forms. When a consumer uses a debit card in a transaction, the merchant pays a "swipe" fee, which is also known as the interchange fee. The interchange fee is paid to the card-issuing bank (i.e., the consumer's bank that issued the debit card), and the fee covers the bank's costs to facilitate the transaction. Section 1075 of the Dodd Frank Act (15 U.S.C. 920 as compensation for facilitating the transaction. Section 1075 of the Consumer Financial Protection Act of 2010 (or Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203), also known as the Durbin Amendment, authorizes the Federal Reserve Board to prescribe regulations to ensure that the amount of any interchange transaction fee received by a debit card issuer is reasonable and proportional to the cost incurred by the issuer.
The Federal Reserve may consider the authorization, clearance, and settlement costs of each transaction when it sets the interchange fee. The Durbin Amendment allows the interchange fee to be adjusted for costs incurred by debit card issuers to prevent fraud, but the Federal Reserve is prohibited from considering other costs associated with the transaction. Debit card issuers with less than $10 billion in assets would be exemptare exempt by statute from the regulation, which means that smaller financial institutions may receive a larger interchange fee than larger issuers. The legislation also prohibits network providers (e.g., Visa and MasterCard) and debit card issuers from imposing restrictions that would override a merchant's choice of the network provider through which to route transactions.
On June 29, 2011, the Federal Reserve issued a final rule to implementimplementing the Durbin Amendment by Regulation II, which includes a cap of 21 cents plus 0.05% of the transaction (and an additional 1 cent to account for fraud protection costs) , which includes a cap on the interchange fee for large issuers. The rule went into effect on October 1, 2011. Merchants that currently pay fees above the regulated interchange fee would likely benefit from the Durbin Amendment; large debit card issuers that wouldexpected to benefit from the Durbin Amendment by having to pay a lower swipe fee. Large debit card issuers expected to lose revenue under the regulated cap would be opposed. Many small debit card issuers that arewere exempt from the rule, however, are had also opposed to the Durbin Amendment given concerns that a about the feasibility of a sustainable two-tiered interchange pricing system may not be sustainable over time. On September 9, 2016, legislation was introduced in the 114th Congress, H.R. 5983, the Financial CHOICE Act of 2016, which . Since implementation of the rule, merchants have seen a limited and unequal impact on the amount they pay in swipe fees. Likewise, the impact of Regulation II has been uneven for covered institutions. Institutions not covered by the Regulation II have reportedly observed minimal change in revenues generated by debit transactions.
H.R. 5983, the Financial CHOICE Act of 2016, would repeal the Durbin Amendment. Specifically, Section 335 of the Financial CHOICE Act would repeal Section 1075 of the Consumer Financial Protection Act of 2010. On September 13, 2016, H.R. 5983 was ordered to be reported by the House Financial Services Committee.
This report begins with a description of the debit payments process and network pricing. Possible effects of the Durbin Amendment on the banking system are then discussed in light of comments by Federal Reserve Board Chairman Ben Bernanke. Given that banks have increasingly relied upon non-interest or fee income during the past two decades, the decline in overall bank operating income may be material; smaller banks may be disproportionately affected because a large share of their fee income is generated through checking and savings deposits-related services. Technological developments by network providers, however, could reduce the revenues generated from this line of business for large and small banks even in the absence of the Durbin Amendment.
Introduction
The United States has seen continued growth of noncash or electronic payments even though debit card transactions outpaced credit card transactions and other forms of payments in 2009.1 When a consumer uses a debit card in a transaction, the merchant pays a "swipe" fee, also known as the interchange fee. The interchange fee is paid to the consumer's bank that issued the debit card, and the fee covers the bank's costs to facilitate the transaction. Section 1075 of the Dodd-Frank Act (15 U.S.C. 920),2
Introduction
The United States has seen continued growth of electronic card payments (and a simultaneous decrease in check payments). From 2009 through 2012, debit card transactions have outpaced other payment forms.1 When a consumer uses a debit card in a transaction, the merchant pays a "swipe" fee, also known as the interchange fee. The interchange fee is paid to the consumer's bank that issued the debit card, covering the bank's costs to facilitate the transaction. Prior to 2010, the policy debate about interchange fees was motivated by concerns that the interchange fees received by banks were not being set by competitive market forces. A competitive market arguably would drive down swipe fees, which would benefit merchants and ultimately consumers. Alternatively, debit card issuers and networks had argued that a percentage of the interchange fees were being rebated to consumers in the form of consumer reward programs that were also beneficial to merchants.2
Section 1075 of the Consumer Financial Protection Act of 2010 (Title X of P.L. 111-203, the Dodd-Frank Wall Street Reform and Consumer Protection Act), known as the Durbin Amendment, authorizes the Federal Reserve Board to mandate regulations to ensure that any interchange transaction fee received by a debit card issuer is reasonable and proportional to the cost incurred by the issuer.
The The Durbin Amendment allows the Federal Reserve mayto consider the authorization, clearance, and settlement costs of each transaction when it setssetting the interchange fee. The Durbin Amendment allows the interchange fee to be adjusted for costs incurred by debit- card issuers to prevent fraud, but the Federal Reserve is prohibited from considering other costs associated with the transaction. Debit. By statute, debit card issuers with less than $10 billion in assets would beare exempt from the regulation, which means that smaller financial institutions may receive a larger interchange fee than larger issuers.3 The legislationDurbin Amendment also prohibits network providers (Visa, MasterCard, etc.) and debit card issuers from imposing restrictions that would override a merchant's choice of the network provider through which to route transactions.
On June 29, 2011, the Federal Reserve issued a final rule to implementimplementing the Durbin Amendment by Regulation II, which includes a cap on the interchange fee for large issuers. The final rule went into effect on October 1, 2011.4
H.R. 5983, the Financial CHOICE Act of 2016, rule went into effect on October 1, 2011.4 Merchants that currently pay fees above the regulated interchange fee would likely benefit from the Durbin Amendment.5 Large debit card issuers that would lose revenue under the regulated cap are opposed. Many small debit card issuers that are exempt from the rule, however, are also opposed to the Durbin Amendment because of concerns that a two-tiered interchange pricing system may not be sustainable over time.
On September 9, 2016, legislation was introduced in the 114th Congress, H.R. 5983, the Financial CHOICE Act of 2016, which would repeal the Durbin Amendment. Specifically, Section 335 of the Financial CHOICE Act would repeal Section 1075 of the Consumer Financial Protection Act of 2010. On September 13, 2016, H.R. 5983 was ordered to be reported by the House Financial Services Committee.
This report begins with a description of the debit payments process and network pricing. It then discusses the possible effects of the Durbin Amendment on the banking system in light of comments by Federal Reserve Board Chairman Ben Bernanke.6 Given that banks have increasingly relied upon non-interest or fee income during the past two decades, the decline in overall bank operating income may be material; smaller banks may be disproportionately affected because a large share of their fee income is generated by providing services related to checking and savings deposits.7 Technological developments by network providers, however, could reduce the revenues generated from this line of business for both large and small banks even in absence of the Durbin Amendment.8
How Network Pricing Works
for the four-party system and the three-party system. It summarizes the requirements of Regulation II, which implements the Durbin Amendment. The report concludes with a discussion of some implications of Regulation II for merchants, consumers, and banks as well as with some recent observations.
How Network Pricing Works
This section outlines the four-party and three-party network systems prior to implementation of the Durbin Amendment. The three-party system is explained for illustrative purposes, but implementation of the Durbin Amendment only applies to the four-party network where an interchange fee exists.
The Four-Party SystemNetwork providers, such as MasterCard and Visa, facilitate the interactions of four parties under a business model referred to as a "four-party system," consisting of the cardholder, the merchant, the acquirer, and the issuer. (See Figure 1 below, which illustrates the payment distribution.5) When a debit card is used in a transaction, the merchant pays a fee that is collected by the merchant's bank (the acquirer). For example, a debit cardholder makes a $100 purchase, the merchant retains $98.57 and pays $1.43 (merchant discount fee) to process the transaction. The $1.43 is distributed among the acquirer, the cardholder's bank (the issuer) that issuesissued the debit card, and the network provider that links the acquirer and issuer. ThePrior to the Durbin Amendment, the network provider retainsmight retain 10 cents, the acquirer keepsmight receive 30 cents, and the issuer iscould be paid $1.03.96 The $1.03 paid to the issuer is known as the interchange reimbursement or "swipe" fee. This fee may cover some or all of the costs to process the debit card transaction (authorization, clearing, and settlement); fraud prevention and investigation; and other fees, such as customer service, billing and collections, compliance, network connectivity fees, and network servicing fees.
|
Source: The Congressional Research Service (CRS). |
Network providers enter into contractual arrangements with issuers and acquirers rather than deal directly with merchants and customers. Network providers set the interchange fees to encourage issuers' greater issuance of payment cards by issuers, which in turn generates more transactions over their networks. Issuers may choose to rebate some of their interchange fee profits to cardholders in the form of reward points, which may entice greater debit card use. Consequently, some financial institutions may have greater ability to negotiate interchange fees with the network providers, especially if they have a large number of customers who frequently use debit cards. Nevertheless, network providers ultimately set interchange fees paid to issuers.
In addition to setting the interchange fees, network providers have association rules that merchants must follow. For example, no surcharge rules forbid merchants to levy surcharges when cardholders use debit cards, which prevents merchants from passing any of the merchant discount fees directly to cardholders. The honor-all-cards rules require merchants to take any cards that bear the network association's brand name, which means merchants cannot turn away credit or signature debit cards that may have higher merchant discount fees if the association's name appears on the card. Moreover, merchants are prohibited from offering discounts for the use of particular types of cards, which is known as the non-differentiation rule. Merchants are also required to accept these cards at all of their outlets, which is referred to as the all-outlets rule. Source: CRS. American Express links directly to the merchant and the customer, meaning that there is no explicit interchange fee paid to a customer's bank. This feature limits regulators' ability to enforce the interchange fee restrictions on firms that operate under a three-party system business model.8 The Federal Reserve acknowledged that, for purposes of the final rule, three-party systems are not payment card networks. Hence, the Durbin Amendment does not apply to the three-party model.Hence, associationAssociation rules prevent merchants from passing on to customers the costs to use cards and thereby, which arguably would discourage card use. The ability of merchants to pass such costs on indirectly to customers, therefore, wouldhowever, may vary from product to product.7
The Three-Party System
There is no explicit interchange fee in the three-party system. For example, American Express model is a three-party system that consists of the cardholder, the merchant, and the network provider, which serves as both the acquirer and issuer; the three-party system is illustrated in Figure 2 below. American Express enters directly into contractual arrangements with merchants and customers; in this arrangement, American Express is the network provider, acquirer, and the issuer.
Figure 2. Illustrative Example of Three-Party Network
vary from product to product.10
Implementation of the Durbin Amendment
After conducting a survey to obtain transaction cost information,11 the Federal Reserve issued a rule that caps the interchange fee received by large issuers (with $10 billion or more in assets) to 21 cents plus 0.05% of the transaction. The Federal Reserve also allowsallowed for a 1 cent adjustment if the issuer implements fraud-prevention standards that satisfy the requirements set out in an interim final rule.12 The final rule would also require every issuer regardless of size to link with at least two unaffiliated network providers, and thus it would allow merchants to choose the network provider with the lowest fees to process their debit card transactions.13 Mandatory compliance dates for network providers and issuers are October 1, 2011, and April 1, 2012, respectively.
Decline in Interchange Fee Revenue for Issuers
The final rule does not regulate the interchange fee that a network provider may charge; it only restricts the amount of interchange fee revenue that large-issuing banks may receive. This could theoretically result in a two-tiered interchange fee system in which small banks would receive higher interchange fee revenue from network providers.14 The sustainability of a two-tiered interchange pricing system, however, is questionable.15 The ability to charge different prices for the same service usually occurs when the supplier of the service can segment its customers into different categories. In this situation, however, the suppliers of the service (issuers) would be segmented into groups rather than the customers (merchants). Although some network providers have agreed to implement a two-tiered interchange pricing system,16 they may still find that competition for transactions over their networks would be difficult to sustain over time, especially in light of the next regulatory component of the Durbin Amendment.
The final rule would also give merchants greater ability to route transactions to network providers. Because merchants would have more choice over the processing of debit transactions, the increased competition may lead to a disappearance of the two-tiered interchange system over time and result in lower interchange revenue for smaller issuers.17 If smaller issuers (e.g., community banks and credit unions) represent only 20% of debit transaction volume, then network providers, who would be in competition for the routing of merchant transactions, may be more inclined to respond to merchant pressures for lower interchange fees rather than to pressures by smaller issuers for higher fees.18 Consequently, interchange profits for small issuers might still decline over time, and losses could be material if their processing costs are higher relative to those of large issuers.19
The Three-Party System
The American Express model is a three-party system that consists of the cardholder, the merchant, and the network provider, who serves as both the acquirer and issuer; the three-party system is illustrated in Figure 2 below. American Express enters directly into contractual arrangements with merchants and customers; in this arrangement, American Express is the network provider, the acquirer, and the issuer.
|
Source: CRS. |
After the Reserve Bank of Australia eliminated no-surcharge rules and lowered the interchange fees collected in the four-party system, MasterCard Worldwide reports that three of the four largest payment card issuers in Australia restructured themselves to resemble a three-party system.20 Some firms in the United States, therefore, might also consider restructuring their business models to bypass the impending regulation. For example, given that American Express links directly to the merchant and the customer, there is no explicit interchange fee paid to a customer's bank. This feature limits regulators' ability to enforce the interchange fee restrictions on firms that operate under a three-party system business model.21 Given that the fees charged by the merchants' bank are not restricted by the Dodd-Frank Act, the Federal Reserve acknowledges that there are "practical difficulties in limiting the amount of a merchant discount charged in a three-party network." The Federal Reserve, therefore, requested comments on the appropriate way to treat three-party networks and apply the routing provisions under a three-party system.22
Even in the absence of the interchange fee caps, technological innovations in the electronic funds transfer network industry arguably may eventually result in an industry restructuring such that issuers in a four-party system would experience declines in interchange revenue. For example, technology now exists that would allow consumers to submit payments directly to other consumers or small businesses by using the recipient's email.23 A new payment service that would allow people to use a payment card to send money directly to another personal payment card has been announced, which would bypass the need for banks to process numerous financial transactions.24 Such developments might allow network providers that currently use a four-party system to restructure themselves to link directly to merchants and customers, and therefore routing through a merchant bank and a customer bank would not be necessary to complete the transaction. Hence, interchange fee revenues for four-party issuers may already be vulnerable to innovation and technological change.
Author Contact Information
Acknowledgments
The author wishes to acknowledge the contributions of Margot Crandall-Hollick, Ronda Mason, and Jamie Hutchinson to this report.
Footnotes
| 1. | Regulation II does not regulate the merchant discount fee charged to the merchant by the network provider; it only limits the amount of the merchant discount fee that can be remitted in the form of interchange fee revenue to covered institutions. Consequently, a two-tiered interchange fee system exists, meaning that institutions exempted from Regulation II may receive (from network providers) revenues consistent with interchange fees set above the cap.12 Some network providers did agree to implement a two-tiered interchange pricing system.13 The final rule also gives merchants the ability to route transactions to multiple network providers. Every issuer regardless of size is required to link with at least two unaffiliated network providers, thereby allowing merchants to choose the network provider with the lowest fees to process their debit card transactions.14 Mandatory compliance dates for network providers and issuers were October 1, 2011, and April 1, 2012, respectively. Economists have questioned the sustainability of a two-tiered interchange pricing system over time.15 The ability to charge different prices for the same service usually occurs when the supplier of a service can separate its customers into different market segments. By contrast, Regulation II separates the suppliers (issuers) of the same service into separate groups rather than the customers (merchants). Because merchants now have more choice over the processing of debit transactions, network providers may be more responsive to merchant pressures to lower merchant discount fees instead of pressures by smaller issuers to remit higher interchange fees.16 Consequently, the increased competition for merchant business could undermine the two-tiered interchange system over time, resulting in lower debit interchange revenues for exempt issuers.17 Furthermore, if interchange revenues for smaller issuers were to decline over time, the losses could be material, especially if their processing costs are higher relative to those of large issuers.18 Hence, declining profit margins from this line of business could possibly result in greater financial distress particularly for depository institutions that are increasingly sensitive to noninterest or fee income.19 Since implementation of Regulation II, however, these institutions reportedly have not observed significant reductions in their interchange revenues.20 Numerous pricing arrangements among thousands of exempt institutions under $10 billion and data limitations increase the difficulty to monitor whether this trend is emerging. Merchants that were paying fees above the regulated interchange fee had expected to benefit from the rule.21 Evidence from a 2015 study, however, suggests that the regulation has had a limited and unequal impact in terms of reducing merchants' costs.22 Because algorithms consisting of multiple factors were used to set individual merchant discount fees prior to implementation of the final rule, the magnitude of influence associated with the interchange fee cap is less likely to be uniform across the vast array of merchant discount fees. Furthermore, even if consumer prices have declined, whether they did as a result of merchants rebating any lower merchant discount fee savings back to their customers is likely to be indeterminate. Merchant pricing strategies are generally designed to cover production costs, achieve marketing objectives, and increase profitability.23 Hence, the correlation strengths among changes in interchange fees, merchant discount fees, and consumer prices are difficult to isolate and observe.24 Debit card issuers covered by Regulation II had expected to lose interchange fee income under the regulated cap, but the evidence has been uneven particularly for those institutions that process large volumes of debit card operations. Some covered institutions initially experienced declines in debit interchange revenues shortly after rule implementation, but they have since seen some gradual increase over time, which is consistent with the reported growth of debit card transactions since 2009. By contrast, some covered institutions saw an initial increase in interchange revenues but have since seen some gradual decline over time.25 Many banks covered by the Durbin Amendment eliminated their debit card rewards programs after Regulation II's implementation; however, this response eliminates one mode for attracting (checking account) deposits to fund loans.26 Offering checking accounts with direct deposit, automated bill paying, and debit card services help depository institutions attract customers that are likely to use additional financial products, including loans. When customers use a variety of financial products and services, depository institutions may cross-subsidize their costs and financial risks more effectively. Hence, some financial institutions entered into partnerships with merchants sponsoring customer reward programs to help facilitate the attraction of deposits.27 Customers receive rewards for shopping with a particular merchant and paying for their purchases using electronic payment cards (i.e., credit, debit, or prepayment card) associated with participating banks.28 Over the long run, other factors aside from the allocation of swipe fee revenues would be expected to influence the structure of the payments system. For example, technological developments over time may allow consumers to submit payments directly to other consumers or small businesses via alternative payment systems.29 Greater competition from nonbank institutions may result in fewer financial transactions being processed by U.S. banking institutions.30 Hence, interchange fee revenues generated for issuers belonging to four-party network systems are constantly susceptible to future financial market innovations. Author Contact Information Acknowledgments The author wishes to acknowledge the contributions of Margot Crandall-Hollick, Sean Hoskins, Ronda Mason, and Jamie Hutchinson to this report. |
|||||||||||||||||||||
| 2. |
|
|||||||||||||||||||||
| 3. |
The legislation does not regulate the interchange fees associated with reloadable prepayment cards or debit cards provided pursuant to a federal, state, or local government | |||||||||||||||||||||
| 4. |
See http://www.federalreserve.gov/newsevents/press/bcreg/20110629a.htm and http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110629b1.pdf. |
|||||||||||||||||||||
| 5. |
| |||||||||||||||||||||
| 6. | ||||||||||||||||||||||
| 7. |
Robert DeYoung and Tara Rice, "How Do Banks Make Money? The Fallacies of Fee Income," Economic Perspectives, Fourth Quarter 2004 at http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2004/ep_4qtr2004_part3_DeYoung_Rice.pdf. |
|||||||||||||||||||||
| 8. |
In addition, small banks (or banks with less than $10 billion in assets) have seen declines in both numbers and asset share; thus, a substantial market transformation or consolidation of these institutions is expected to occur. See http://www.americanbanker.com/bankthink/operating-revenue-community-banks-1038365-1.html. |
|||||||||||||||||||||
| 4.
|
|
See Board of Governors of the Federal Reserve System, "Federal Reserve Issues a Final Rule Establishing Standards for Debit Card Interchange Fees and Prohibiting Network Exclusivity Arrangements and Routing Restrictions," press release, June 19, 2011, at http://www.federalreserve.gov/newsevents/press/bcreg/20110629a.htm. 5.
|
|
The pricing examples used in this report are similar to those used in a report by Tim Mead, Renee Courtois Haltom, and Margaretta Blackwell, The Role of Interchange Fees on Debit and Credit Card Transactions in the Payments System, The Federal Reserve Bank of Richmond, Economic Brief no. 11-05, May 2011. |
A debit card transaction has a lower interchange fee relative to a credit card transaction. Credit card authorizations essentially become loans made by issuers that carry default risk. This translates into higher interchange fees for these transactions. |
|||||||||||||||||
|
Merchants may be able to pass more of the interchange fee costs to customers on products with fewer substitutes, which may face less competition in the marketplace, but not on highly competitive products. |
||||||||||||||||||||||
|
|
See Letter from Robert Willig, American Express General Counsel's Office, to Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, February 22, 2011, at http://www.federalreserve.gov/SECRS/2011/March/20110303/R-1404/R-1404_022211_67230_584162046602_1.pdf. 9.
|
See Board of Governors of the Federal Reserve System, "Federal Reserve Issues a Final Rule Establishing Standards for Debit Card Interchange Fees and Prohibiting Network Exclusivity Arrangements and Routing Restrictions," press release, June 29, 2011, at http://www.federalreserve.gov/newsevents/press/bcreg/20110629a.htm |
See http://www.federalreserve.gov/newsevents/press/bcreg/20101216a.htm and http://edocket.access.gpo.gov/2010/pdf/2010-32061.pdf. The Federal Reserve reported an average interchange fee of 44 cents per transaction and a median total processing cost of 11.9 cents per transaction for all debit transactions in the proposed rule. On December 16, 2010, the Federal Reserve proposed a cap of 12 cents per transaction, which only considered authorization, clearing, and settlement costs. Fraud prevention expense had not been incorporated in the proposed rule. |
|||||||||||||||||||
| 12. |
| |||||||||||||||||||||
| 13. |
The effective date for the network exclusivity prohibition is April 1, 2012. Issuers of certain health-related prepaid cards have a delayed effective date of April 1, 2013, or later in certain circumstances. |
|||||||||||||||||||||
| 10.
|
|
See Board of Governors of the Federal Reserve System, "Federal Reserve Requests Comment on a Proposed Rule to Establish Debit Card Interchange Fee Standards and Prohibit Network Exclusivity Arrangements and Routing Restrictions," press release, December 16, 2010, at http://www.federalreserve.gov/newsevents/press/bcreg/20101216a.htm; and Federal Reserve System, "Debit Card Interchange Fees and Routing, Proposed Rule," 75 Federal Register 248, December 28, 2010, at http://edocket.access.gpo.gov/2010/pdf/2010-32061.pdf. The Federal Reserve reported an average interchange fee of 44 cents per transaction and a median total processing cost of 11.9 cents per transaction for all debit transactions in the proposed rule. On December 16, 2010, the Federal Reserve proposed a cap of 12 cents per transaction, which only considered authorization, clearing, and settlement costs. Fraud prevention expense had not been incorporated in the proposed rule. 11.
|
|
Whether the Federal Reserve had the authority to consider costs that were not explicitly mentioned in the statute was challenged in the courts. For a legal discussion, see CRS Legal Sidebar, CRS Legal Sidebar WSLG1166, Supreme Court Will Not Hear Challenge to Fed's Debit Card Swipe Fee Rule, by [author name scrubbed]. |
The Government Accountability Office (GAO) evaluated various options for reducing interchange fees that were similar to those taken by other countries, but a two-tiered pricing structure that varies by issuer size was not considered. See Testimony of Alicia Puente Cackley, GAO's director of Financial Markets and Community Investment, before U.S. Congress, Senate Committee on Appropriations, Subcommittee on Financial Servicers and General Government, 111th Cong., 2nd sess., June 16, 2010, at http://www.gao.gov/products/GAO-10-821T; and GAO, Credit Cards: Rising Interchange Fees Have Increased Costs for Merchants But Options for Reducing Fees Pose Challenges 13.
|
|
According to Electronic Banking Options, which is a merchant account industry blog, Visa, Star, Pulse, Shazam, and CU-4, which process an estimated 80% of PIN debit-card transactions, have all committed to a two-tier interchange system. See "A Two-Tiered Interchange System?," Electronic Banking Options, March 4, 2011. 14.
|
The effective date for the network exclusivity prohibition was April 1, 2012. Issuers of certain health-related prepaid cards had a delayed effective date of April 1, 2013, or later in certain circumstances. |
||||||||||||||
| 15. |
See Testimony of Governor Sarah Bloom Raskin before U.S. Congress, House Committee on Financial Services, Subcommittee on Financial Institutions and Consumer Credit, Interchange Fees, 112th Cong., 1st sess., February 17, 2011, at http://www.federalreserve.gov/newsevents/testimony/raskin20110217a.htm. |
|||||||||||||||||||||
| 16. |
According to |
|||||||||||||||||||||
| 17. |
Interchange fees in other countries fell after the elimination of rules, which were imposed by four-party network providers, were found to be anti-competitive and in violation of anti-trust laws in those countries. See James M. Lyon, "The Interchange Fee Debate: Issues and Economics |
|||||||||||||||||||||
| 18 |
According to the American Bankers Association, large issuers process approximately 80% of debit card transactions. See http://www.federalreserve.gov/newsevents/files/ABA_comment_letter_20101213.pdf, page 2. |
|||||||||||||||||||||
|
The Federal Reserve survey of debit card issuers only included the issuers that would be affected by the legislation. (See http://www.federalreserve.gov/newsevents/files/merchant_acquirer_survey_20100920.pdf.) Given the larger volume of transactions, the cost per transaction for larger issuers might be lower than that of small issuers. The interchange fee cap set by the Federal Reserve, therefore, reflects the median processing cost of only large as opposed to all U.S. debit card issuers. | ||||||||||||||||||||||
| 20. |
See http://www.rba.gov.au/payments-system/reforms/review-card-reforms/pdf/review-0708-conclusions.pdf and http://www.rba.gov.au/media-releases/2008/mr-08-28.html. In MasterCard Worldwide's assessment, the Australian payments system has become more expensive for payment cardholders, and there is little evidence of retail price reductions by merchants (See http://www.masterintelligence.com/upload/169/113/MC53-Interchange-FNL-S.pdf). |
|||||||||||||||||||||
| 21. |
See comments made by American Express at http://www.federalreserve.gov/SECRS/2011/March/20110303/R-1404/R-1404_022211_67230_584162046602_1.pdf. |
|||||||||||||||||||||
| 22. |
See the Federal Reserve Board's proposed rule on interchange fees on page 81727 at http://edocket.access.gpo.gov/2010/pdf/2010-32061.pdf. |
|||||||||||||||||||||
| 19.
|
|
Robert DeYoung and Tara Rice, "How Do Banks Make Money? The Fallacies of Fee Income," Economic Perspectives, Fourth Quarter 2004, at http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2004/ep_4qtr2004_part3_DeYoung_Rice.pdf; and Phil Mattingly, "Bernanke Says Debit 'Swipe' Rules May Cause Bank Failures," Bloomberg, May 12, 2011, at http://www.bloomberg.com/news/2011-05-12/bernanke-says-lawmakers-should-be-concerned-about-swipe-rules.html. 20.
|
|
See Lee Wetherington, Debit 2.0: Surprisingly Good News? ... For Exempt Issuers, Strategically Speaking, August 24, 2015, at http://discover.jackhenry.com/strategicallyspeaking/debit-2.0-surprisingly-good-news-...-for-exempt-issuers. 21.
|
|
See National Retail Foundation website at http://www.nrf.com/. Smaller retailers may potentially benefit from the Durbin Amendment more than large retailers may benefit. Because of the large volume of transactions, some large merchants may be able to negotiate interchange fees below the proposed regulatory cap discussed below. Consequently, some merchants could see their interchange fees increase, up to the rate cap. 22.
|
|
See Renee Halton and Zhu Wang, Did the Durbin Amendment Reduce Merchant Costs? Evidence from Survey Results, Federal Reserve Bank of Richmond, Economic Brief no. 15-12, December 2015; and Fumiko Hayashi, "The New Debit Card Regulations: Effects on Merchants, Consumers, and Payment System Efficiency," Federal Reserve Bank of Kansas City Economic Review, First Quarter 2013. 23.
|
|
See Marty Schmidt, Pricing, Price/Demand Curve, Pricing Strategy, Pricing Model Explained, Solution Matrix Ltd, Building the Business Case Analysis, 2004-2016, at https://www.business-case-analysis.com/pricing.html. 24.
|
|
Economists have found that predicting output (consumer) price movements after changes in input prices is difficult because firms include supply (costs) and additional demand factors when setting prices. The correlation strength between input and output prices varies with time and the pricing strategies germane to individual market demand conditions along the production chain. For example, see Todd E. Clark, "Do Producer Prices Lead Consumer Prices?" Federal Reserve Bank of Kansas City Economic Review, Third Quarter 1995, pp. 25-39. Hence, the interchange fee is only one factor considered by network providers when setting individual merchant discount fees; the merchant discount fee is only one factor considered by merchants when setting prices for consumer goods and services. A change in one factor may or may not offset the importance of other factors when firms set prices, and the various importance of a factor relative to other factors may change over time. 25.
|
|
See Maria Tor and Venkatesh Iyer, Banks Most Reliant on Interchange Fees, SNL Financial, April 18, 2016. 26.
|
|
See Tony Mecia, "Banks Cutting, Canceling Debit Card Rewards Programs," CreditCards.com, April 5, 2011, at http://www.creditcards.com/credit-card-news/debit-card-rewards-program-cutback-tips-1277.php. 27.
|
|
See Molly Plozay, Trends and Opportunities in Financial Institution Loyalty, First Data Corporation, Beyond the Transaction, 2012, at http://www.firstdata.com/downloads/thought-leadership/FI_Loyalty_WP.pdf. 28.
|
|
Advocates favoring the Durbin Amendment argued that capping interchange fees would translate into lower costs to merchants that could be passed on to consumers. The extent to which consumers see any greater benefit when merchants rather than banks have more control over customer rewards programs is ambiguous. The benefits to patrons depend more upon the generosity of the loyalty programs they use more frequently. 29.
|
See FIS Solutions, "NYCE and CashEdge Join Forces to Bring Real Time Person-to-Person Payments to Financial Institutions," press release, February 3, 2011, at https://www.fisglobal.com/About-Us/Media-Room/News-Releases/2011/NYCE-and-CashEdge-Join-Forces-to-Bring-RealTime-PersontoPerson-Payments-to-Financial-Institutions | |
|
See Telis Demos, "PayPal Strikes Partnership with Visa," Wall Street Journal, July 21, 2016, at http://www.wsj.com/articles/paypal-strikes-partnership-with-visa-1469135090 |