ABA and 52 State Bankers Associations Urge Fed to Withdraw Misguided Proposal to Further Reduce Debit Interchange

In a new letter to the Federal Reserve today, the American Bankers Association and 52 state bankers associations expressed strong opposition to the Federal Reserve’s misguided proposal to reduce the regulated debit interchange cap under Regulation II. The groups urged the Fed to withdraw the proposal pending a rigorous study of its potential impact as well as the cumulative impacts of the tsunami of newly finalized and pending regulations from the banking agencies.

In the letter, the associations emphasized the unintended consequences the proposal would have on community financial institutions. The groups pointed to data that shows a 35% drop in per transaction debit interchange for so-called “exempt” financial institutions.

“Not only will this proposal constrain – on an ongoing and potentially ever-reducing basis – the revenue used to facilitate payments, secure these systems, and account for fraud, but importantly it will also deplete revenue that banks rely on to provide low- and no-cost basic banking services consistent with their values and mission as community leaders,” the associations said. “Customers who struggle to meet minimum balance requirements or pay monthly maintenance fees on their deposit accounts are likely to feel the squeeze from this rulemaking as the direct cut in interchange revenue is offset, at least in part, by raising those requirements.”

The groups noted the industry’s significant strides in reducing the number of unbanked households, in part by encouraging banks to offer free or low-cost Bank On-certified accounts, which are structured to address common barriers to bank access. But they also pointed out that “interchange revenue plays an outsized role in making Bank On-certified accounts sustainable.”

“We believe the changes proposed in Reg II will jeopardize this progress and urge the Federal Reserve to collect and analyze relevant data as a precondition to proposing changes to its formula,” the associations said.

The CFE Fund—the nonprofit organization that created and maintains Bank On standards—recently recognized interchange revenue as a component of bank account sustainability in its own letter to the Fed.

The associations concluded by urging the Fed to withdraw the proposal.

“Ultimately, we believe the only way forward that is consistent with the Federal Reserve’s statutory obligations and prudent regulatory conduct is to withdraw the rule to allow for the data and the courts to catch up and to address the proposals’ other deep-seated flaws, including its contribution to the cumulative impact of regulation on customers and the community banking model,” the associations said.

Read the full letter: https://www.aba.com/advocacy/policy-analysis/joint-letter-re-nprm-on-regulation-ii-docket-no-r1818