Is the Fed’s new debit card interchange rate a good deal for banks?

Yesterday, the Federal Reserve published a new proposed debit card interchange rate of at least 21 cents (would be 24 cents on an average $38 transaction), with this rate to come into effect from October.  Is this a good for banks? This depends on where the banks are starting from? They now enjoy an average debit card transaction fee of 44 cents, so this is a significant decline.  On the other hand, the Fed had previously proposed cutting the fee to 12 cents, so this new proposed fee structure is nearly double that.

Eeven with the latest rate proposal, banks will lose significant interchange income.  Some banks have already reacted by ending free checking and debit rewards.  We believe that there could be a re-emergence of debit rewards programs, albeit with different structures and pricing.  So what we may see are:

  • Debit rewards programs that carry program fees, but with waivers for “high-value” customers
  • Inclusion of debit spend in relationship rewards programs
  • Continued focus on developing new rewards programs that are at least partially funded by merchants