Fed's Waller: SCOTUS rulings should delay interchange rule

Bloomberg News

A top official with the Federal Reserve Board of Governors wants a better understanding of recent Supreme Court decisions before the central bank changes its cap on debit interchange fees.

Speaking on stage at The Clearing House annual conference on Tuesday, Fed Gov. Christopher Waller said he would like a better understanding of the high court's rulings in Loper Bright Enterprises v. Raimondo and Corner Post Inc., v. Federal Reserve Board before the Fed moves forward on its update to Regulation II. 

"The legal uncertainty around things now, with Chevron, Corner Post, all the legal cases, for me … I'd like a little more clarity on how the courts are going to be interpreting things, like how we interpret Reg II, before we put up a big new proposal or new stage," Waller said. "I'd like to see how fast that will happen."

Loper Bright overturned the legal precedent known as Chevron deference, in which courts were instructed to defer to agency on matters of interpreting unclear statutes. Corner Post has already extended the period during which regulatory rules can be challenged and could have more direct implications for Regulation II. The cases were two of several decided during the Supreme Court's most recent session that are expected to change how regulations are crafted and contested. 

Corner Post is a North Dakota truck stop challenging Reg II, the Fed's implementation of the so-called Durbin Amendment to the Dodd-Frank Act of 2010, which called for the Fed to establish a cap on debit interchange fees and collect data about activity in the space. 

In Oct. 2023, the Fed proposed an update to regulation that would adjust the various components of the cap. The base charge would fall from 21 cents to 14.4 cents and the ad valorem or percentage-based multiplier component would drop from 5 basis points to 4 basis points. The fraud prevention component would increase slightly. 

The agency said the changes would reflect the lower overall costs faced by debit card issuers in recent years. Banks and interchange operators say the Fed's policy is based on inaccurate information. They have also noted that the reduction of swipe fee income would hinder their ability to offer no-fee accounts to low-income individuals. Supporters of the proposal say banks could offset the lost revenue by scaling back rewards programs. 

During the event, Waller said the Fed is still considering data collected regarding the potential impacts of the proposed changes. Specifically, he said, the agency is trying to understand the correlation between card-not-present transactions and fraud costs.

"Everything we heard was that this had an impact on fraud costs that was different than card present [transactions]," Waller said. "So we're trying to tease some of that out."

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Waller began the event by delivering a speech on faster payments. During those remarks, he outlined his views on the Fed's role as a payments system operator. 

Waller, who chairs the Federal Reserve Board's payments committee, said the Fed should only engage in the space when there are clear market gaps. He said that ideal was core to the Fed's creation in 1913, after lack of central clearing contributed to a string of bank panics in the late 19th and early 20th centuries. He said that principle is still at play with the Fed's instant payments network, FedNow, which was launched last summer.

Waller praised the RTP network — the private instant settlement system owned and operated by TCH and its large bank members — but noted that bringing the 8,000-plus banks and credit unions throughout the country into the real-time payments space is a task only the government can accomplish.

"The role we're playing with FedNow is to help with that coordination problem using our existing connections to those thousands of institutions," Waller said. "And that approach is consistent with my overall view of the appropriate role of government — to narrowly address problems like those of coordination that can't always be efficiently solved by the private sector alone."

During the event, Waller reiterated his position on central bank digital currency, that it is a solution seeking a problem. He also endorsed elements of the crypto industry, less for the digital assets it creates, but more for the underlying infrastructure it has created.

"I find it very interesting how stuff from the crypto world could potentially be brought over — blockchain, tokenization, smart contracts. Forget the object that's being traded," he said. "I don't care if you're trading Dogecoin, Bitcoin — I'm more interested in the technology and how that technology can be transferred over to traditional type financing, banking, to make it efficient, easier, faster."

And while it is important for the Fed to be open to new technology, Waller said the institution also has an obligation to pay attention to older systems, namely those that are functionally obsolete. He pointed to the Fed's decision to wind down its cross-border payments system, FedGlobal ACH, due to dwindling usage.

Waller said the history of that program also teaches a valuable lesson about how trends in the payment space do not always play out as expected.

"We created Global ACH 20-something years ago because of this need for better global payments. We put a lot of money into it, we built it and nobody used it. Well, we finally shut it down," Waller said. "We're not going to run this thing for decades and nobody's using it. So that is what I mean: at the end of the day, we can't just build systems and, if nobody uses them, just keep paying for them and running them. At some point you've got to cut the cord and call it a day."