A New Proposal from the Federal Reserve Threatens Access to Banking Services

Debit cards are one of the most popular, important, and accessible financial tools. They allow people to carry less cash, and banks use the funds from debit card interchange fees to provide fraud protection, consumer education, and services like free checking accounts.

But a new proposal from the Federal Reserve would lower the cap on debit card interchange fees and hurt banks, card issuers, and consumers.

The Federal Reserve already capped interchange fees in 2011, and it led to the end of debit card rewards, higher minimum account balances, and reduced free account offerings. The largest retailers like Walmart and Target profited from the extra cash and didn’t pass the savings to consumers. Now, the big box retailers are at it again. This time, the ramifications could be much worse. Here’s why:

Families & Small Businesses Would Lose Out: When the Federal Reserve first introduced its price cap in 2011, account fees increased, and free checking accounts were restricted, leading to an increase in the unbanked population. If the Fed proceeds with its proposal, it will only make matters worse. Not only could this cost consumers up to $2 billion annually in higher bank account fees, but it could also hurt efforts meant to address those who are unbanked or underbanked. These effects will likely be felt most acutely in communities of color, which have historically struggled to access banking services.

Millions of Bank On Accounts Would Be Threatened: The national Bank On initiative, led by the Cities for Financial Empowerment Fund, partners with financial institutions, community organizations, government leaders, and banking regulators to create pathways for un- and underbanked individuals to enter or reenter the financial mainstream with safe and appropriate accounts. To date, more than 17.4 million Bank On certified accounts have been opened by consumers across the county, according to 2022 data from the Bank on National Data (BOND) Hub. Of those, over 8 million accounts were open and active in December 2022 across 87% of all U.S. ZIP codes. Since these accounts have minimal fees, they are largely funded by debit card interchange fees.

Credit Unions and Community Banks Would Suffer: Many of these institutions offer their own debit and checking services and operate on smaller margins than larger banks. If interchange fee revenue is cut further, it would prevent small financial institutions from being able to offer competitive products in the communities they serve best. Smaller institutions operate in the same payment ecosystem as large ones, so they will feel indirect, downward pressure even if the final rule is limited to large banks.