Frequently Asked Questions

What is interchange?

Interchange is part of the cost that merchants pay when they accept debit and credit cards. The current free market interchange rate for debit cards averages about 1.4% per transaction – so, when a customer makes a purchase for $10 on his or her debit card, the merchant who accepts the card pays about 14 cents in interchange.

What costs does interchange cover?

Interchange revenue covers a wide variety of costs for banks and credit unions that issue cards, including customer service, protection of customer data, and card production costs, among many others. For example, when a merchant accepts a debit card, they are guaranteed payment regardless of whether or not the transaction is fraudulent. The risk of fraud is accepted entirely by the bank or credit union that issued the card. In 2009, banks and credit unions experienced approximately $1.4 billion in fraud losses alone – a cost that is not covered by the Fed’s draft rule.

What does the Fed draft rule on interchange propose for the new rate?

The Fed rule provides two possible scenarios for the government to fix the price of interchange. The first scenario offers a range for interchange, from a “safe harbor” of 7 cents to a cap of 12 cents (with the issuer submitting variable costs to the Fed for approval). The second scenario simply sets a cap of 12 cents per transaction.

How much would the Fed’s proposed debit interchange rate cut the current free market rate?

The Fed’s proposed rate for debit interchange represents a 70 to 90 percent cut from the current free market rate. According to an estimate from CardHub, this will translate into a $14 billion windfall in additional profits for retailers, with $12 billion of that windfall going to the largest 2 percent of big-box stores.¹

What provision does the Durbin amendment or the Fed rule make for retailer savings to be passed on to consumers?

Neither the Durbin amendment nor the Fed rule makes any mention of merchants passing even one penny of their savings to customers. In fact, merchants themselves have suggested that instead of lowering prices for their customers, they may instead provide other “benefits” such as “free gift wrapping.”

How will the Fed draft rule affect community banks and credit unions?

Community banks and credit unions could face serious challenges as a result of the rule. Simply put, the so-called “carve out” for these institutions would not work. There is little evidence that a bifurcated system could actually work in practice. Even if it does succeed, the cards from smaller institutions would then be significantly more expensive, and merchants would be able to discriminate against those cards – ultimately forcing smaller issuers out of the market and further consolidating debit to only the largest institutions.