2019 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions May 2021 B OARD OF G OVERNORS OF THE F EDERAL R ESERVE S YSTEM 2019 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions May 2021 B OARD OF G OVERNORS OF THE F EDERAL R ESERVE S YSTEM This and other Federal Reserve Board reports and publications are available online at https://www.federalreserve.gov/publications/default.htm. To order copies of Federal Reserve Board publications offered in print, see the Board’s Publication Order Form (https://www.federalreserve.gov/files/orderform.pdf) or contact: Printing and Fulfillment Mail Stop K1-120 Board of Governors of the Federal Reserve System Washington, DC 20551 (ph) 202-452-3245 (fax) 202-728-5886 (email) [email protected] iii Contents Preface ......................................................................................................................................... 1 Highlights ................................................................................................................................... 3 Card Use .................................................................................................................................... 3 Interchange Fees, Network Fees, and Incentives .......................................................................... 3 Fraud ......................................................................................................................................... 4 Issuer Costs ............................................................................................................................... 4 Data Collections ....................................................................................................................... 5 Background ................................................................................................................................ 5 Payment Card Network Survey .................................................................................................... 6 Debit Card Issuer Survey ............................................................................................................. 6 Detailed Discussion ................................................................................................................. 9 Card Use .................................................................................................................................... 9 Interchange Fees, Network Fees, and Incentives ........................................................................ 11 Fraud ....................................................................................................................................... 16 Issuer Costs ............................................................................................................................. 20 Appendix: Tables .................................................................................................................... 25 1 Preface An efficient, effective, and safe U.S. and global pay- The Electronic Fund Transfer Act requires the Fed- ment and settlement system is vital to the U.S. eral Reserve Board to biennially publish data on economy, and the Federal Reserve plays an impor- costs incurred, and interchange fees charged or tant role in helping maintain that system’s integrity. received, by debit card issuers and payment card net- The U.S. dollar payment and settlement system is works. The Board conducted the first Payment Card composed of payment instruments and methods, sys- Network and Debit Card Issuer surveys in 2010, col- tems, and institutions that have changed over time. lecting data for calendar year 2009. The information The Federal Reserve provides currency and operates from the first data collection assisted the Board in some elements of this system. developing Regulation II and was included in a report published in June 2011.1 In 2010, the Dodd-Frank Act provided the Board additional authority to regulate and supervise certain payment, clearing, and settlement systems and activi- 1 Board of Governors of the Federal Reserve System, 2009 Inter- ties that have been designated as systemically impor- change Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions tant, as well as prescribe rules related to debit card (Washington: Board of Governors, March 2011), https://www interchange fees. .federalreserve.gov/paymentsystems/files/debitfees_costs.pdf. 3 Highlights Card Use • Issuers subject to Regulation II’s interchange fee standard (covered issuers) experienced similar vol- • In 2019, payment card networks in the United ume growth to issuers not subject to the inter- States processed 79.2 billion debit and general-use change fee standard (exempt issuers), with growth prepaid card transactions valued at $3.1 trillion. rates in 2019 of 6.9 and 7.2 percent, respectively. Dual-message networks, which traditionally pro- cessed mainly signature-authenticated transac- • The growth in the volume of prepaid card transac- tions, accounted for 65.4 and 66.7 percent of the tions in 2019 was 12.0 percent, a decrease relative total by volume and value, respectively. Single- to the average annual growth rate of 16.3 percent message networks, which traditionally processed observed from 2009 to 2018. By contrast, the PIN-authenticated transactions, accounted for growth in the volume of non-prepaid debit card the rest. transactions in 2019 was much lower, at 6.4 per- cent, a small decline relative to the average annual • Total transaction volume grew 7.0 percent in 2019, growth rate of 7.4 percent from 2009 to 2018. largely in line with the 7.8 percent average annual growth rate from 2009 to 2018. Similarly, total transaction value grew 7.6 percent in 2019, largely Interchange Fees, Network Fees, and in line with the 8.1 percent average annual growth Incentives rate observed from 2009 to 2018. • In 2019, interchange fees across all debit and • In 2019, dual-message networks experienced faster general-use prepaid card transactions totaled volume growth than single-message networks, at $24.31 billion, an increase of 7.4 percent since 2018. 7.6 and 6.0 percent, respectively. While single- message network volume grew faster from 2015 to • The average level of interchange fees did not 2017, from 2017 to 2019 dual-message network change materially for covered transactions after volume growth once again surpassed that of Regulation II took effect in the fourth quarter of single-message networks, as it did from 2011. In 2019, the average interchange fee for cov- 2009 to 2014. ered transactions processed over single-message networks was $0.24, and that for covered transac- • While card-not-present (CNP) transaction volume tions processed over dual-message networks was only 22.8 percent of total debit card volume in was $0.22. 2019, it grew much faster in 2019 than the volume of card-present (CP) transactions. In particular, • The average interchange fee for exempt transac- the CNP volume growth rate of 17.9 percent was tions processed over dual-message networks gradu- more than four times the CP volume growth rate of ally increased after Regulation II took effect, from 4.2 percent over the same period. This large differ- $0.51 in the fourth quarter of 2011 to $0.54 in ence in volume growth rates between CNP and CP 2019. By contrast, the average interchange fee for transactions was already present in 2009 and per- exempt transactions processed over single-message sisted throughout every data collection. networks gradually fell after Regulation II took effect, from $0.31 in the fourth quarter of 2011 to • Similar to previous years, in 2019, the average $0.25 in 2019. transaction value of CNP transactions was nearly double that of CP transactions, at $61.36 and • Network fees totaled $8.26 billion in 2019. Acquir- $32.65, respectively. ers paid 64.4 percent of these fees; issuers paid the 4 2019 Interchange Fee Revenue rest. After Regulation II took effect, the share paid steady increase in fraud losses from 7.8 basis by acquirers increased slightly while the share paid points in 2011. by issuers correspondingly decreased. • In 2019, merchants absorbed 56.3 percent of losses • The average network fee per transaction was $0.10 from fraudulent transactions reported by covered in 2019, almost unchanged from 2018. Addition- issuers, up from 52.8 percent in 2017, while issuers ally, the average network fee per transaction as absorbed 35.4 percent, down from 42.5 percent in a percentage of average transaction value, 0.3 per- 2017. Cardholders absorbed the remainder. cent in 2019, did not change materially after Regu- • lation II took effect. From 2011 to 2019, the percentage of losses from fraudulent transactions reported by covered issuers • Payments and incentives (P&I) offered by net- absorbed by merchants steadily increased from works totaled $2.45 billion in 2019, a growth of 38.3 to 56.3 percent, while the percentage of losses 23.7 percent since 2018. While this growth rate in absorbed by issuers steadily decreased from 59.8 to P&I was substantially higher than the 7.4 percent 35.4 percent. At the same time, the percentage of average annual growth rate observed from 2009 to losses from fraudulent transactions reported by 2018, it was in line with the 23.0 percent growth covered issuers absorbed by cardholders increased observed