Debit Card Interchange Fees Charged to Small Merchants After Regulation II

During the 2000s, both debit card transactions and interchange fees charged to merchants increased sharply in the United States, in part due to routing limitations and exclusivity agreements between card networks and issuers. To address growing fees and limited routing options, the Board of Governors of the Federal Reserve System implemented Regulation II in 2011. Regulation II capped debit card interchange fees received by large issuers (but not smaller “exempt” issuers), prohibited network exclusivity arrangements, and prohibited limitations on merchants’ routing choices. In this article, Fumiko Hayashi examines whether the prohibitions on exclusivity arrangements and routing limitations helped reduce exempt interchange fees charged to small merchants for in-person debit card transactions. She finds that while some networks reduced these fees for certain merchant categories, other networks either increased or did not change their fees. Moreover, the size of the interchange fee increases was generally much greater than the size of the reduction. Her results suggest that exempt interchange fees did not decrease broadly for small merchants after Regulation II.