US banks are concerned about their ability to sufficiently fund debit card fraud prevention if the Federal Reserve's interchange fee rule is finalized.
The Fed's proposed rule is set to limit interchange revenue — the fee income banks receive when customers use their debit cards — for institutions with more than $10 billion in assets by more than 30%. The Dodd-Frank Act's so-called Durbin amendment put caps on interchange fees for banks with more than $10 billion in assets, and the Fed is updating the limits in part to account for decreases in transaction processing costs and issuer fraud losses.
However, fraud prevention costs have been on the rise. A chunk of the interchange fee income banks generate funds investment in processes and technology to detect and prevent debit card fraud, which is an escalating concern for the industry. Debit card fraud at depository institutions has spiked over the last two years with 72,156 suspicious activity reports (SARs) in 2023, up from 48,540 in 2021, according to US Treasury Department Financial Crimes Enforcement Network data. So far through April, there have been 27,013 debit card SARs related to depository institutions.
In comment letters to the agency, which were due May 12, US banks and trade groups said the income hit would inhibit their ability to invest in fraud prevention.
"This may discourage covered issuers from investing in sophisticated fraud detection and prevention tools, posing risks to consumers, smaller financial institutions, and the payments and banking systems generally," Salt Lake City-based Zions Bancorp. NA Chairman Harris Simmons wrote.
The Michigan Bankers Association echoed the same sentiment in its May 8 letter about the debit card interchange fee proposal.
"It will discourage further investment in fraud detection and prevention and harm the overall health of the U.S. payments system," the association wrote.
Banks specifically are worried that the Fed's data for drafting this rule does not adequately factor in fraud costs, even though the Fed proposed an increase to the fee cap for the fraud prevention component. Lake Oswego, Ore.-based Umpqua Bank CEO Clint Stein wrote in a May 3 letter that the calculations that support the rulemaking do not reflect the costs to issuers and exclude the expense to monitor transactions for fraud.
"The Board should ensure that such inconsistencies are remediated prior to issuing any rule that would further lower interchange rate caps and harm consumers," Stein said.
Tulsa, Okla.-based BOK Financial Corp. also criticized the Fed's data used for the proposal.
"While this proposal recognizes the shift in fraud activity up to 2021, it does not accurately reflect current economic conditions," Consumer Banking Services Executive Kelley Weil wrote in a letter Feb. 1. "Over the last two years, fraud losses have risen across the industry."
Four representatives of Pennsylvania-based Kish Bank wrote separate letters, three of which mentioned fraud costs as a factor that banks have to contend with.
"Our investment in fraud prevention has been one of our fastest growing expenditures in recent years," Kish Bank Executive Chairman William Hayes and CFO and Treasurer Mark Cvrkel each wrote in separate comment letters.
Kish Retail Banking Director Thomas Minichiello added, "A lower interchange fee cap will lead to a reduction in revenue for financial institutions, especially smaller community banks like Kish, who are shouldering the burden and expense of card fraud, not the retailers."
Wheeling, W.Va.-based WesBanco Inc. also expressed concern about fraud investment when commenting on the Fed's proposal.
"With less revenue available, smaller issuers and large issuers alike, exempt or non-exempt, will be forced to reconsider the continuance or future implementation of investments in technology such as fraud monitoring and prevention," WesBanco Chief Compliance Officer Aaron Rykowski wrote in a letter.
Even a bank that said it would not be covered by the proposal — Groton, Conn.-based Chelsea Groton Bank — reported its worries about impacts of the rule and described, in a letter May 8, the need to invest in preventing fraud, including fraud using artificial intelligence. The bank said larger institutions' investments help smaller ones, and they likely pay for investments with interchange revenue.
The Office of the Comptroller of the Currency is becoming more concerned about the effect of rising fraud on banks as well as on community banks' ability to fight it. While fraud is on the rise, big banks are better positioned with resources than community banks, acting Comptroller of the Currency Michael Hsu said in a speech April 4.
