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|Lona Fowdur is a Senior Economist with EI. She specializes in Applied Industrial Organization, and has analyzed issues involving antitrust and regulation in a wide variety of industries.|
Judge Richard J. Leon of the U.S. District Court for the District of Columbia recently ruled that the Federal Reserve Board (FRB) overstepped its statutory authority by setting too high a cap for debit card interchange fees. These fees are payments from merchants to merchant-acquiring banks that are transmitted to card networks and that the networks then remit to the bank that issues the card. The Durbin Amendment to the Dodd-Frank Act requires the FRB to set a ceiling on such fees. The FRB argued that certain transaction-specific costs ought to be included when setting the cap because debit card transactions could not occur without generating such costs. Plaintiffs, including trade associations and merchant groups, argued that the Amendment did not allow the FRB to include these costs, and the judge agreed.
Interchange fees have traditionally been set by card networks, like Visa and MasterCard that vie for the business of card issuers and merchants. Higher interchange fees increase banks’ incentives to issue the network’s card, and banks may respond by offering their customers incentives, such as lower fees, to carry and use the card. Higher fees, however, also deter merchants from accepting the network’s card, which makes the card less valuable to potential users and lowers the volume of transactions on the network. Lower interchange fees have the opposite effect; banks have less incentive to issue the network’s card, but more merchants accept the card.
As the use of debit cards has grown, so has the volume of interchange fees. Merchant groups complained to Congress that collusion between the networks was resulting in excessive interchange fees. These complaints led to the passage of the Durbin Amendment.
It is unclear what effect, if any, lower interchange fees will have on consumers. Ultimately, customers pay the costs of using debit cards either through retail prices or through debit account fees. Whether lowering the interchange-fee cap benefits consumers depends on the degree to which merchants pass through their cost savings to consumers in the form of lower prices and the extent to which banks increase their fees on debit accounts to compensate for their loss of revenue.