Interchange Fees

Interchange Fees

Interchange is the fee retailers pay to access the credit and debit card payment system, usually a penny or two on each dollar for the ability to accept electronic payments. In return, retailers are provided safe and guaranteed payments and bear no risk associated with fraud, failure to pay or data breaches. Banks with $10 billion in assets or less are exempt. For a list, click here.

As part of the Dodd Frank Act, the Federal Reserve was required to impose debit-card interchange price controls.

The Federal Reserve Board adopted its anticipated final debit-card interchange price cap rule, setting a 21-cent cap for debit-card transactions. This is nine cents higher than the proposed rule, but still a reduction of more than half the current average interchange rate of 44 cents per transaction. The Fed issued the improved rule after considering more than 11,000 comments, many of which were from bankers, the GBA and our fellow trade groups and even consumer groups opposing the original 12-cent cap. These comments clearly made a difference in shaping the Fed's improved final rule. Here are the basics from the 378 page final rule:

The cap on debit interchange is 21 cents but there is an additional opportunity to charge an additional one cent if the bank meets certain security standards being set by the Fed.
The biggest surprise was the ability to allow an additional "ad valorem" charge of 5 basis points on the entire amount of a transaction to account for fraud losses throughout the payment system. The Fed had been telegraphing that it didn't interpret Dodd-Frank as giving the authority to consider fraud loss costs. This is one of the few "positives" for the industry in an otherwise negative rule.
Another "positive" is moving the effective date from July 21 to Oct. 1 to give the industry time to get systems in place.
The rule applies to banks with $10 billion in assets or more. With regard to the community bank exemption, the Fed will publish annual statistics about banks that are and are not exempted, and provide more transparency about debit-card pricing to help ensure the exemption is at least recognized. How the market reacts to that will depend on factors beyond what any rule can address, though.
The Fed also adopted requirements that issuers include two unaffiliated networks for routing debit transactions -- one signature-based, one PIN-based. The deadline for implementing this is April 1, 2012.

So, based on the new rule, a bank could receive 27 cents from the interchange component on a $100 purchase: the 21-cent base fee, plus five cents for fraud losses and an extra one cent for fraud-prevention measures. We still have grave concerns about how this government price fixing process will affect the free market system and the fact that the new cap still represents a reduction of almost 45 percent in debit card interchange revenue to the industry. "This is a multibillion dollar windfall for the merchants who are under no obligation to pass those savings on to consumers or use that money to hire new workers," said Joe Brannen, GBA President and CEO. “While it’s disappointing we couldn’t get the votes in Congress to defeat or study this ill-conceived measure, the Fed obviously listened to bankers, consumers and others, once again confirming the importance of all the stakeholders staying engaged in the process.” In discussion about the rule, Federal Reserve Governors expressed concern about the long-term effects of the rule on consumers and banks. As the lone vote against the measure, Fed Gov. Betsy Duke said she believes the rule will hurt consumers by eliminating free checking accounts and forcing hikes in other bank fees. She also was troubled by the Fed's lack of authority to ensure the intended exemptions for smaller institutions are met, and troubled by the lack of a requirement for payment networks to implement a two-tiered pricing system. Fed Gov. Sarah Bloom Raskin, who voted for the measure, worries that the rule could hurt smaller institutions. And Fed Chairman Ben Bernanke said the rule is "the best available solution that implements the will of Congress and also makes good economic decisions." He had testified before Congress saying he felt the loss in income could cause some small banks to fail. Here are links to the Final Rule, the Interim Rule related to fraud prevention, and the Fed's staff memo.

About 80% of Georgia banks responding to a recent GBA survey said interchange income is an important part of their non-interest income stream, and 85% had not received complaints about interchange fees from their business or retail banking customers.

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GBA's professional staff represents the membership at the both the state and federal levels. Contact any of them with questions about issues:

Joe Brannen
President & CEO

Elizabeth Chandler
SVP, Government Relations

David Oliver
SVP, Communications & Marketing