Federal Reserve Debit Card Regulations Report

December 12, 2024

The Honorable Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551

Re: Debit Card Interchange Fees and Routing (Docket No. R–1818)

Dear Chair Powell:

We are writing to reiterate our strong concerns with the proposed amendments to Regulation II (Reg II). As you are aware, Reg II currently sets a cap on debit card interchange fees to a base component of 21 cents, an ad valorem component of 5 basis points multiplied by the value of the transaction, and a fraud prevention adjustment of 1 cent. The proposed rule arbitrarily lowers the cap on debit card interchange fees to a base component of 14.4 cents, an ad valorem component of 4 basis points multiplied by the value of the transaction, and a fraud prevention adjustment of 1.3 cents. The proposed changes to the cap are based on 2021 survey data that is artificially skewed by negative externalities stemming from the COVID-19 pandemic, and the data does not consider subsequent routing restrictions imposed on card-not-present transactions.

It is our belief, and the belief of over 300 commenters, that the proposed amendments to Reg II are fundamentally flawed and should not be finalized. Attached to this cover letter is a report showing that nearly 80 percent of the comment letters submitted to the Board oppose the implementation of the proposed amendments to Reg II. Comments in opposition to the rule cited myriad issues, including:

Ill-conceived methodology that fails to (i) account for allowable costs, and (ii) maximize cost recovery for covered institutions.
Consumer harm—particularly for low- and moderate-income consumers—in the form of reduced access to affordable banking services.
Failure to assess the impact that recent changes to the routing rules will have on fraud costs, which have increased for our members.
Failure to account for the combined impact of proposed amendment and other recently promulgated bank regulations, which will, in aggregate, impair access to basic banking services by impacting a bank’s ability to recuperate costs.
Failure to account for the proposed amendment’s impact on community financial institutions, despite an asset-based exemption that has proven ineffective.

Significantly, commenters reinforced that the proposed amendments to Reg II threaten the economic viability of offering Bank On accounts for low- and moderate-income households.The goal of the Bank On program is to provide banking services to the unbanked.

According to new data from the Federal Reserve Bank of St. Louis, the program is currently working as intended. Bank On accounts have been opened in nearly 90 percent of U.S. zip codes, and there has been a 16 percent increase in the number of monthly debit card transactions processed per Bank On account. Further, the most recent data from the FDIC shows that only 4.2 percent of U.S. households are unbanked—an historic low—and the FDIC credits the growth of the availability and use of these Bank On accounts with bringing this number down. Finally, in October, subsequent to the closing of the comment period, the US Treasury issued it’s National Strategy for Financial Inclusion, which endorsed private sector programs like Bank On and noting that that “[g]overnment, nonprofit, and private sector actors should continue to collaborate on the Bank On initiative.”

ABA believes the proposed amendments will reduce the availability and affordability of BankOn accounts for low- and moderate-income Americans, and the comment file demonstrates that our view is shared by civil rights leaders who are working to close the unbanked gap, amongst others.

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