Fed Must Withdraw Amendments to Regulation II, Says ABA-led Alliance

American Bankers Association (ABA) and 52 state bankers associations have expressed strong opposition to the Federal Reserve’s proposed amendments to Regulation II’s debit interchange cap.

Regulation II establishes standards for assessing whether an interchange fee received by a large debit card issuer for processing a transaction is reasonable and proportional to certain issuer costs.

The requirement was first implemented in 2011 with an interchange fee cap for debit issuers with $10 billion or more in assets, but in a competitive market the cap also reduces the fees for exempt smaller institutions including community banks.

The associations cited data that reveals per transaction debit interchange for exempt financial institutions decreased by 35% between 2011 to 2022.

The new proposal would reduce the interchange fee cap, by lowering the multipliers in the original formula. The Federal Reserve said the adjustment reflects changes in issuer costs since the rule took effect.

In a joint letter to the Federal Reserve, the associations have urged regulators to withdraw the proposal due to the unintended consequences it would have on community financial institutions.

According to the groups, the proposal will constrain the revenue banks use to facilitate payments, secure electronic debit transaction systems and account for fraud.

Most importantly, it will also deplete the revenue that banks rely on to provide low- and no-cost basic banking services, which will affect customers who already struggle to meet minimum balance requirements.

In the letter, the alliance said: “This proposal will also have a direct impact on customers, undermining well-organized and highly effective financial inclusion efforts, and increasing the cost of checking and other basic banking services. These impacts are predictable and avoidable.”