The Politics Surrounding Debit Card Payments

posted by Dan Kramer on Tuesday, October 22, 2024 in SHAZAM Blog

The debate over interchange income has been a long-running battle between retailers and financial institutions over the fees merchants pay to card issuers when cardholders use their debit cards to make purchases. Groups representing either side are constantly lobbing lawmakers to further their agenda. Here’s a look at the bills at the state and federal level relating to interchange.  

Lawmakers Vying to Stop Proposed Cuts to Debit Interchange

Last year, the Federal Reserve Board proposed to significantly reduce the existing cap on debit interchange fees earned by financial institutions. If enacted, the proposal would lower the base component interchange by roughly 30% from 21 to 14.4 cents. It also reduces the ad valorem component from 5 to 4 basis points while increasing the fraud-prevention adjustment from 1 to 1.3 cents for debit card issuers with more than $10 billion in assets. It also would establish a biannual review process in which the cap would be revised every two years. 

Lawmakers in the U.S. House and Senate have introduced a bill which would stop finalization of the Federal Reserve’s proposed debit interchange proposal. The Secure Payments Act of 2024 would require the Federal Reserve to pause its Regulation II Debit Card Interchange Fee proposal until it completes a study assessing the proposal’s impact on consumers’ access to low-cost or free checking accounts, fraud prevention, and merchants’ costs of accepting debit cards. The bill is currently in their respective house and senate committees. 

State Lawmakers Targeting Interchange Collected on State Taxes 

Illinois became the first state in the nation to prohibit interchange fees on the taxes and tips portion of any sale in the state. The Illinois Interchange Fee Prohibition Act passed this summer as part of a larger budget bill. It’s set to go into effect July 1, 2025.  

The Illinois Bankers Association, the Illinois Credit Union League and their national affiliated associations have filed a lawsuit claiming the law is invalid because it conflicts with several federal laws. This lawsuit has drawn interest from multiple national organizations with vested interests in this case. Multiple amicus briefs from organizations, government agencies and politicians have been filed in support of and against the law. An amicus brief, or friend-of-the-court brief, is a legal document filed by an individual or organization that is not a party to a case but has an interest in the outcome.  

The Office of the Comptroller of the Currency submitted an amicus brief in support of the lawsuit stating that, “interchange fees play a vital role in enabling banks to protect against fraud, cover the costs of transaction processing, and provide other valuable consumer services.” They claim the IFPA is, “an ill-conceived, highly unusual, and largely unworkable state law that threatens to fragment and disrupt this efficient and effective system.” 

U.S. Senate Majority Whip Dick Durbin (D-IL) also filed an amicus brief. The author of Regulation II, also known as the Durbin Amendment, is against the lawsuit and supports the IFPA. In it, the senator states, “the IFPA is both consistent with the Durbin Amendment and consistent with sound policy that will help protect merchants and consumers from excessive and anti-competitive fees.” 

The briefs are being filed in advance of an Oct. 30 preliminary hearing to determine whether the plaintiff’s request for an injunction against the law will be granted by the court. 

Other groups representing Illinois financial institutions, such as Community Bankers of Illinois and the Electronic Payments Coalition, say they will fight to overturn the Illinois Interchange Fee Prohibition Act. While groups representing merchants, such as the Illinois Retail Merchant Association, cite their own commissioned survey stating 86% of respondents agree it is unfair for banks and credit card networks to charge businesses swipe fees on the sales tax they collect for the state of Illinois and local government. 

Also this summer, lawmakers in Pennsylvania introduced a bill to prohibit financial institutions from charging interchange fees on the state sales tax portion of a debit or credit card payment. However, the bill remains stalled in the House Rules Committee. Since 2006, state lawmakers in 31 states and Washington, D.C. have introduced similar bills to limit interchange collection. 

The Power of Advocacy

The upcoming election is your chance to talk with your representatives. Lawmakers spend a large portion of their time meeting with their constituents throughout the year. This ramps up as Election Day draws near as they work to earn your vote. Meeting with your elected officials is one way you can help ensure they are aware of the issues that affect you. By sharing your expertise, you can help politicians understand the issues at hand. And who knows, you may find that getting involved on behalf of your financial institution and your community surprisingly rewarding. 

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