Factchecking Banks’ Dubious Claims on Interchange Fees
This post has been updated.
The banking industry has been busy fighting to defeat or delay a proposal that would cap the interchange fees they collect from merchants when customers pay with debit cards. As we’ve noted, they’ve lobbied extensively, and some banks have warned that they’ll end free checking, end some debit rewards, or place limits on the size of debit card purchases.
Yesterday, the industry took a different tack, suggesting there's no need to cap the fees because rates aren't going up to begin with: The claim comes from a one-page paper [PDF] by the industry's trade group, the American Bankers Association.
“Merchant fee rates are not going up,” the paper said. “The entire increase in total fees paid is due to growing sales volumes combined with customers and merchants choosing to increase their use and acceptance of debit cards as a means of payment.”
In other words, debit interchange revenue is going up, they say, but only because people are buying more and using debit cards more often. That doesn’t square with what the Federal Reserve has said—or with what one expert told us.
According to the Fed, it’s true, transaction volumes have been increasing, but debit interchange rates have also been rising. “Interchange fee issues have multiplied over the years proportionate to growth in the volume of credit card and debit card transactions, as well as increases in interchange fee rates,” according to the Fed publication, Central Banker.
In Congressional testimony last month, Fed Governor Sarah Bloom Raskin also undercut the banks' claims: “In recent years, increases in debit card interchange fee rates, together with the significant growth in the volume of debit card transactions, have led to a substantial rise in the total value of interchange fees paid by merchants.”
The Fed has proposed capping debit interchange fees at 12 cents per transaction for banks with more than $10 billion in assets. The plan has riled the banking industry—including the community banks and credit unions exempt from the cap—which has continued to push for the rule to be delayed.
Georgetown University associate law professor Adam Levitin called the ABA's document "incredibly dishonest." He told me that some of the data cited isn’t just for debit interchange fees, but for debit and credit interchange fees combined, obscuring the trends for each.
“Both credit and debit interchange fees are rising," Levitin said, "but because there is a rapidly growing number of debit transactions and debit has lower interchange than credit, the blended rate is staying fairly static." (That’s also what Reuters blogger Felix Salmon suspected was happening last year when he flagged a similar discrepancy.) Levitin has written a post that looks more closely at the ABA's charts.
To get the ABA's take on the discrepancy, I asked for clarification on the paper—particularly regarding some of the data and language used. It’s not clear, for instance, why the ABA sometimes refers to debit interchange rates, interchange rates (which could be debit and credit combined) as well as “merchant fee rates” (which could mean debit and credit interchange fees, plus network fees to the card companies).
ABA spokesman Peter Garuccio responded to say that he's working on getting answers to my other questions, but could confirm that the chart displaying a slight downward trend in interchange fee rates uses data for both debit and credit cards. I'll update when he gets back to me in more detail.
Update: After this post was published, Peter Garuccio of the American Bankers Association sent along a more detailed response, saying, "The impetus for our piece was the counteract the false notion that debit interchange fees have risen dramatically." He also attached some data from Visa, which we've looked at in more detail in a new post.