The Community Depository Institutions Advisory Council is calling on the Federal Reserve to withdraw its proposed revamp of interchange fees, according to minutes of the council’s Nov. 16 meeting.
The proposal, which the Fed introduced in October, would tighten the limit on debit card interchange compensation that banks earn. The revamp would lower Durbin Amendment caps in Regulation II to 14.4 cents and .04 percent of a transaction, plus a 1.3 cents fraud-prevention adjustment. The change from the current rate — 21 cents and .05 percent of the transaction, plus a one-cent fraud-prevention adjustment — would be effective June 30, 2025.
The CDIAC, which provides community bank-focused input to the Federal Reserve Board, said the plan raises sustainability issues for community and regional banks hoping to stay independent. Members called on the Fed to only reintroduce the proposal after conducting a sufficient cost-benefit analysis.
The proposal would only apply to debit card issuers with at least $10 billion in consolidated assets. According to the Advisory Council, the associated revenue reductions that those banks face could encourage smaller banks to reduce their lending to stay under the limit.
The change could also reportedly cause more mergers as banks consolidate instead of growing independently to dilute the lost revenue as part of a larger bank.
According to the Advisory Committee, the reduction in fee income harms the funding mechanism banks utilize to offer free checking and cover increases in operating expenses, which community depository institutions use to implement fraud prevention and mitigation measures.
“Even for those CDIs not subject to Regulation II, competitive pressures from larger banks mean that fee limitations affect CDIs,” the minutes stated. “If fees continue declining, at some point, CDIs will begin to curtail customer services.”
According to the Advisory Committee, the routing provisions also impact the fraud protection and liability frameworks of all CDIs. “Council members noted the opaque nature of these practices, and generally believe that the Regulation II proposal is picking winners — merchants — and losers — banks — with no evidence of customer benefit,” according to the minutes.
Those concerns came amid broader CDIAC pushback against regulations issued in the past 10-15 years. “Regulatory efforts are simply helping to speed up the trend toward greater industry consolidation, contradicting the current administration’s interest in promoting competition in the banking industry and having a viable CDI business model,” the minutes stated.