Facts Matter: Further Restrictions on Debit Interchange Fees Will Harm Consumers Most

Last year, the Federal Reserve Board unveiled a proposed rule to further reduce debit interchange fees, one of the many significant new regulations that will affect the nation’s leading banks and the millions of consumers they serve. As regulators, the media, and other policy influentials increasingly weigh in on the merits of the proposal, it has become evident that the debate fails to reflect the reality that any future reductions in the debit card interchange cap will lead to higher costs for consumers. In response, CBA outlines key insights from independent research to set the record straight.

Key Findings  

• Multiple independent studies show government intervention in debit card interchange fees increases costs for consumer checking account products, with low-to-moderate income consumers impacted the most. 

• Small banks and their customers are not immune from these impacts, regardless of whether they are exempt or not.  

• Research also clearly has found that merchants made no discernable change in the prices they offered consumers as a result—nullifying the intended purpose of the original interchange amendment.  

There seems to be confusion about what further debit interchange regulation would mean for consumers. 

A recent Wall Street Journal article examined how the industry is contending with an onslaught of new regulations coming out of Washington, D.C., that will have a significant impact on a wide array of products and services banks offer today, including proposals seeking to place additional caps on debit interchange fees.  

Unfortunately, the article misses the facts by conveying a flawed assumption that further limits on debit interchange fees will not have significant impact on consumers, stating:  

“In 2010, after the post-financial crisis overhaul of bank regulations, lenders warned that they would levy fees on debit cards because of a cap on some card charges—but few ended up doing so because consumers threatened to move their business.” 

Yet, as multiple Federal Reserve research papers and independent studies examining how prior caps on debit interchange (the “Durbin Amendment”) affected prices and access to consumer checking account products have found, the assertion above is simply inaccurate. In fact, the ability of banks to adjust other checking account prices to cover interchange losses was key to arguments in support of the Durbin Amendment in 2011--a fact repeated by Federal Reserve Researchers in 2022 (p.20)  

Separately, Jerome Powell, Chairman of the Federal Reserve, expressed a similar lack of familiarity with research demonstrating the consumer harm caused by debit interchange regulation during recent testimony in front of the House Financial Services Committee. When pressed by Rep. Ann Wagner (R-Mo.) about prior Federal Reserve research showing how this rule would negatively impact consumers, Powell stated, “I'm not entirely sure what research you're referring to. I'll be happy to follow up with you on that.” 

In a similar exchange, Rep. Nikema Williams (D-Ga.) pressed Powell on concerns regarding the harmful impacts Reg. II will have on low- or no-cost BankOn accounts, the Chairman made clear they “wouldn’t want to do anything to weigh on” access to the financial system for marginalized communities. 

Given the knowledge gap regarding how price caps hurt consumers, CBA has taken the time to reiterate what the literature says on the topic to educate policymakers and the media and protect consumers.  

Federal Reserve Board research has long established a clear connection between interchange caps, increased checking account prices, and worse consumer outcomes. 

Let’s be frank—the research is clear on what happens and does not happen when government policies cap debit interchange prices. Consumers lose, retailers win, and prices stay the same, or increase. 

Initial research from the Federal Reserve in 2017 examining the effects of the original Durbin amendment found consumers’ access to free checking accounts declined due to the reduction of debit interchange. 

• “...covered banks were 35.2 percent less likely after the regulation to offer noninterest checking accounts that did not involve a monthly fee (that is, “free accounts”).” (p. 5)  
• “on average, covered banks raised monthly fees on noninterest and interest checking accounts by $1.34 (or 20 percent) and $2.02 (or 17 percent), respectively.” (p.5) 
• “the average minimum balance to avoid a monthly fee increased by over $400 (or 50 percent) for noninterest checking accounts, and by nearly $1,700 (or 55 percent) for interest checking accounts.” (p.5) 
• “Our results further show that, depending on their competitive exposure to covered banks, exempt banks also raised their prices…” (pp.5-6) 

Further research by Vladimir Mukharlyamov and Natasha Sarin (former Biden Administration Deputy Assistant Secretary for Economic Policy and Counselor to Treasury Secretary Janet Yellen) shows that the negative impacts of this policy were borne most by low- to moderate-income consumers.  

• “We estimate that the share of free checking accounts fell from 61 percent to 28 percent as a result of Durbin.” (p.3) 
• “Average checking account fees rose from $3.07 per month to $5.92 per month.” (p.3) 
• “monthly maintenance fees, which averaged $3.07 for banks above the Durbin threshold increased by nearly 100 percent because of Durbin’s passage” (p.15)   
• “Monthly minimums to avoid these fees rose by 21 percent, and monthly fees on interest-bearing checking accounts also rose by nearly 14 percent. These higher fees are disproportionately borne by low-income consumers whose account balances do not meet the monthly minimum required for fee waiver” (p.3) 
• “In addition to a decrease in the availability of free checking and an increase in monthly fees, we also observe a 21% increase in the minimum account balance that must be maintained before banks will waive monthly fees.” (p.15) 

A prior 2019 paper by the authors put it plainly stating, “Our analysis suggests that consumers are not helped by this interchange regulation.” 

Additional, Research by Federal Reserve Bank of Richmond in 2014 focused on determining whether the Durbin amendment achieved its purpose in lower the prices merchants offered consumers. It’s survey of over 400 merchants across 26 sectors of the economy found, “The majority of respondents (75 percent) reported no price change due to the regulation. For those who had a price change, 11 times more (23 percent over 2 percent) reported price hikes than cuts.” 

To understand how the most recent proposal would impact consumers, CBA commissioned research conducted by Nick Bourke, former Director of Consumer Finance at The Pew Charitable Trusts, to estimate the effects based on these prior findings. His analysis estimates that the current proposal would cause consumers to pay $1.3 billion to $2 billion more annually in higher bank account fees driven by less prevalent “free” checking products and higher minimum balance requirements.  

The Bottom Line 

“Those who cannot remember the past are condemned to repeat it.” 

 – George Santayana 

With the knowledge of how price caps will affect consumers laid out, policymakers must choose how to proceed—either by repeating history or learning from it. Research clearly shows the harm from government price caps on debit interchange fees. Further restrictions will only increase the strain on low- to moderate-income consumers. 

To prevent consumers from becoming “debanked” through government price fixing that picks winners and losers – leaving low- to moderate-income families behind – the Board should withdraw its proposal.  

CBA Advocacy  

• To read CBA’s fact sheet on how the proposed debit interchange rule would harm consumers, click HERE. 
• To read CBA’s initial response to the Federal Reserve Board’s Regulation II proposal, click HERE 
• To read a Joint Trades letter to the Federal Reserve Board regarding changes to Regulation II, click HERE.