Regulation of Debit Interchange Fees

Darryl E. Getter
Specialist in Financial Economics

Although the United States has seen continued growth of noncash or electronic payments, debit card transactions outpaced credit card transactions and other forms of payments in 2009. 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 (the consumer’s bank that issued the debit card), and the fee covers the bank’s costs to facilitate the transaction. Section 920 of the Dodd Frank Act, 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 exempt 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 implement the Durbin Amendment, which includes a cap on the interchange fee for large issuers. The rule is scheduled to go 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 would lose revenue under the regulated cap would be opposed. Many small debit card issuers that are exempt from the rule, however, are also opposed to the Durbin Amendment given concerns that a twotiered interchange pricing system may not be sustainable over time. Legislation proposed in the 112th Congress, S. 575, the Debit Interchange Fee Study Act of 2011 (Senator Jon Tester), and H.R. 1081, the Consumers Payment System Protection Act (Representative Shelley Moore Capito), would delay implementation of the Durbin Amendment and require a study of the impact of this legislation on small issuers. On June 8, 2011, S.Amdt. 392 (Senator Jon Tester) to S. 782 was considered, but not agreed to, in the Senate by a 54-45 vote. This amendment would also have delayed implementation of the Durbin Amendment and required a study.

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.


Date of Report: July 12, 2011
Number of Pages: 10
Order Number: R41913
Price: $29.95

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