33 Pages Posted: 24 Dec 2014
Date Written: October 1, 2013
This study examines one section of the Dodd-Frank “Wall Street Reform and Consumer Act” directing the Federal Reserve Board to develop new regulations for the “interchange fees” charged by banks that issue debit cards for debit card transactions. On June 29, 2011, the Board issued its final rule, “Regulation II: Debit Card Interchange Fees and Routing,” which became effective on October 1, 2011. The standards set out in Regulation II cap debit card interchange fees at $0.21 per transaction, plus 5 basis points (0.05 percent) of the transaction’s value, plus a $0.01 charge per transaction for debit card issuers that meet certain fraud prevention standards. These standards apply only to transactions with debit cards issued by financial institutions with assets of $10 billion or more, covering about two-thirds of all debit transactions. Our analysis found that the new cap on debit interchange fees reduced the fee on the debit transactions covered by the regulation from an average of $0.51 per transaction (with large variations) to $0.24 (with less variation). This overall reduction saved consumers and merchants an estimated $8.5 billion in 2012; we further estimate that $5.87 billion of those 2012 savings were passed along to consumers in lower prices, while merchants retained $2.64 billion. Moreover, we also estimate that the $8.5 billion in cost savings was sufficient to support 37,501 new jobs.
However, the $0.21 fixed fee per transaction under Regulation II raised interchange fees on transactions of $15 or less; and on the average small transaction of $7.50, the fee as a share of the transaction exceeds the profit margins on such transactions for six industries that depend on small purchases (including supermarkets, groceries, convenience stores, gas stations and pharmacies). If Regulation II had not raised interchange fees on small debit transactions, consumers and merchants would have saved an additional $690 million in 2012, which could have supported 3,044 more jobs. The new standards do not affect credit card transactions. Our analysis found that if credit card interchange fees on the two dominant, four-party payment networks, Visa and MasterCard, were capped at the maximum $0.24 per-transaction rate set by Regulation II for covered debit transactions, consumers and merchants would have saved an additional $22.4 billion in 2012. Consumers would have captured $15.4 billion of those benefits, and their additional spending could support 56,733 jobs; while merchants could be expected to retain roughly $6.9 billion of those cost savings, and their additional spending and investments could support another 41,918 jobs.
Keywords: interchange, Dodd-Frank, regulation, consumer welfare
JEL Classification: D12, E24, K23, L51, L81
Suggested Citation: Suggested Citation
Shapiro, Robert J., The Costs and Benefits of Half a Loaf: The Economic Effects of Recent Regulation of Debit Card Interchange Fees (October 1, 2013). Available at SSRN: https://ssrn.com/abstract=2541728 or http://dx.doi.org/10.2139/ssrn.2541728