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Fed Reports Debit Transaction Costs Decrease for Issuers, but Fraud Rises

flag_of_the_united_states_federal_reserveThe Federal Reserve Board of Governors isn’t rushing to reduce its caps on debit interchange after its latest report on debit transactions found that issuers’ debit card processing costs went down in 2015. In the biennial report released Nov. 30, the Fed also found that fraud losses increased dramatically industry-wide.

Typical of previous years, issuers’ costs of authorizing, clearing and settling (ACS) debit card transactions, excluding issuer fraud losses, varied by issuer in 2015, according to the Fed. Issuers with the highest debit card transaction volume generally had the lowest ACS costs per transaction. Industry-wide, the overall average ACS cost per transaction was 4.2 cents per transaction in 2015, a decrease from 4.6 cents per transaction in 2013. The Fed’s report includes surveys of all 14 payment networks that process debit card transactions, and 129 issuers.

Overall, payments networks processed 60.6 billion debit and general-use prepaid card transactions valued at $2.31 trillion in the U.S. last year, compared with 53.7 billion transactions valued at $2.07 trillion in 2013. Total transaction volume grew 6.8 percent from 2014 to 2015, similar to the average annual growth over the previous three years, according to the report.

The volume of prepaid card transactions grew 7.9 percent from 2014 to 2015, faster than the average annual growth rate of 5.3 percent over the previous two years. Prepaid card transactions made up 6.1 percent of all transactions in 2015, for a total value of $127 billion. In 2013, prepaid card transactions comprised 5.9 percent of all transactions for a value of $105 billion, according to the report.

Interchange fees across all debit cards in 2015 totaled $18.41 billion, compared with $16.33 billion two years ago. The average interchange fee per covered transaction was 23 cents in 2015 “and has not changed materially since Regulation II took effect Oct. 1, 2011,” the report noted. The average network fee per transaction was $0.102 in 2015, marking negligible change from 2013. Network fees totaled $6.16 billion in 2015. Acquirers paid 58 percent of these fees and issuers paid the remainder. In 2013, network fees totaled $5.48 billion. Acquirers paid 57 percent of the fees and issuers paid the rest.

The board’s Regulation II (debit card interchange fees and routing) provides that debit card issuers subject to the interchange fee standard may not receive an interchange fee that exceeds 21 cents plus 5 basis points multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, if eligible. The interchange fee standard does not apply to debit card issuers with consolidated assets of less than $10 billion, certain government-administered debit cards and certain prepaid cards. When the Fed released its report two years ago, it said it “does not plan to propose revisions to the Regulation II interchange fee standard or the fraud-prevention adjustment based on these survey data.” This year, the Fed didn’t address changes to interchange.

Industry-wide debit card fraud losses totaled approximately $2.41 billion in 2015, a 44 percent increase compared with 2013’s estimate. “The estimated increase in total fraud losses is driven by two factors: a 28 percent increase in average fraud losses as a share of transaction value and a 12 percent increase in the value of total transactions from 2013 to 2015,” according to the report.

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