A recent report released by the Federal Reserve revealed Visa and Mastercard’s shift of more of the burden of debit card fraud onto the merchants, easing the responsibility for banks. 

Updated figures show merchants paid for 49.9% of debit card fraud in 2023, up from 46.9% in 2021. During the same period, the amount paid by banks dropped from 33.4% to 28.3%. The report also revealed that banks subject to government regulation continue to earn outsized returns on debit transactions, averaging nearly six times their costs.

“The latest report shows the consequences of the Federal Reserve failing to keep up with its job as a regulator,” says Doug Kantor, executive committee member of the Merchant Payments Coalition and general counsel for the National Association of Convenience Stores. “Rather than updating its regulations, the Fed has allowed Visa and Mastercard to punish merchants with increasing fraud losses, while banks extract huge profits far out of proportion to their costs. It has been nearly 15 years since the Fed wrote its regulations, and this report underscores the long-overdue need for an update to ensure that fees are reasonable and that there are incentives to reduce fraud.”

The Fed is required by law to limit centrally price-fixed debit interchange fees to an amount that is “reasonable and proportional” to the cost of the transaction to the bank that issues the debit card to the consumer. While retail profit margins in the United States are typically 3% or less and bank profit margins are around 30%, the Fed report shows bank profit margins on regulated debit interchange fees of around 500%. The law allows banks that are willing to set their own fees in a competitive market to charge any amounts they see fit, but no banks have taken action so far.

Merchant groups sent a letter to the Fed urging it to finalize new regulations to reduce price-fixed debit interchange fees and correct parts of its regulations on components of those fees. Here is a statement from the letter:

“We know that the current Regulation II rate is no longer compliant with the statutory standard; as the Board pointed out in November 2023, “allowable costs incurred by covered issuers have fallen significantly since the original Regulation II rulemaking” and “the Board believes it is necessary to revise the interchange fee standards to reflect the decline since 2009” in issuer costs. But the financial industry wants to delay this necessary reform for as many months as possible because these fees are lucrative for them. Each day of delay means another day of excessively high fees that accrue to large banks but are borne by Main Street merchants and their customers.”