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Economic Analysis of the Effects of the Federal Reserve Board’s Proposed Debit Card Interchange Fee Regulations on Consumers and Small Businesses

This paper examines the impact of the reductions in interchange fees proposed by the the Federal Reserve Board on consumers and small businesses. It finds that consumers and small business would face higher retail banking fees and lose valuable services as banks rationally seek to make up as much as they can for the debit interchange revenues they will lose under the Board’s proposal. The number of unbanked consumers would increase as lower-income households reduce the use of higher-priced accounts. Small businesses would lose money in the first 24 months the proposed rules are in effect because of the offsetting increase in bank fees. Most of these small businesses do not accept debit cards and therefore would not have any offsetting benefits from lower interchange fees. Large retailers would receive a windfall.
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Tower Bridge Advisors: Debit Card Interchange Fees and Routing

This statement argues that the proposal to reduce the debit card interchange rate change usurps the market’s price setting mechanism. While the intent would seem to be to benefit both consumers and retailers by lowering the cost of business, price fixing virtually always leads to unintended consequences and likely will do so again in this case. Retailers, who will profit from the reduction in related debit card fees may choose to hold onto the gains as added profit or use the savings to lower product prices. They will probably do a combination of both. The net financial result is that consumers would save a little bit from retailers who pass through savings but will see increased banking fees necessary to offset to forced reduction in debit fees. Functionally, the action will force banks to move customers away from debit cards contrary to the strong trend in recent years of increased debit card use.
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