The Federal Reserve is gearing up to introduce a proposal to reduce the fees merchants must pay to banks when customers make purchases using debit cards. The fees have remained unchanged for a decade.
For each transaction, merchants must pay major card issuers a fee of 21 cents, coupled with an additional 0.05% of the total transaction value, a standard instituted by the Federal Reserve in 2011.
However, a shift is on the horizon as the central bank has announced its plans to convene a meeting to deliberate on a proposal to revise this fee cap, the Wall Street Journal reports.
Under the 2010 Dodd-Frank law, the Durbin amendment empowered the Fed to establish caps for financial institutions boasting assets exceeding $10 billion. In 2022 alone, banks that fell under this cap raked in $16.6 billion from these fees, per the Nilson Report.
For years, merchants have been vocal about their desire for the Federal Reserve to implement reductions in debit interchange fees. The banks have defended these fees, citing their role in safeguarding debit card transactions from potential fraud.
Introducing the Durbin fee cap had far-reaching effects on the payments sector. It diminished the influence of networks like Visa Inc (NYSE: V) and Mastercard Inc (NYSE: MA) in setting interchange fees and prompted banks to shift their focus towards promoting credit cards.
This shift got a boost from the allure of the higher interchange fees associated with credit cards, which are unregulated like their debit counterparts.
Furthermore, the cap gave rise to a dual-tiered system among issuers. Smaller banks and other issuers, exempt from the fee cap, have been enjoying debit-interchange fees exceeding 1.5% of the transaction amount.
This exemption has attracted fintechs, leading to collaborations with smaller banks to unveil attractive debit-card rewards programs for customers.
Price Actions: V shares traded lower by 1.31% at $238.05 premarket on the last check Wednesday. MA shares traded lower by 0.69% at $399.01.