Why are huge debit card issuers still paying Visa to route payments?

• Key insight: Given new government rules on payment processing, giants like Bank of America, Chase and Wells Fargo would benefit immensely from acquiring proprietary debit card networks.
• Supporting data: In 2024, BofA, Chase and Wells Fargo combined had $1.425 trillion in debit purchase volume, on which they earned 49 basis points of interchange fees.
• Forward look: It’s time for banking heavyweights to stop playing a rigged game and buy debit networks.

Bank of America, Chase and Wells Fargo have roughly a third of the U.S. debit market, almost entirely branded with Visa. The debit economics of these retail banking colossi — and, by extension, their fundamental customer relationships — are threatened from multiple competitive, regulatory and legal vectors. Since 2011, the Durbin Amendment’s debit-interchange price controls have put large banks at a distinct structural disadvantage against exempt debit and credit cards, which enjoy higher, market-driven interchange fees.

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Competition is increasing. Capital One’s acquisition of Discover freed it from the straitjacket of price controls and merchant-dictated routing. The Federal Reserve has held that when a debit network doesn’t route a transaction to an independent issuer, it isn’t subject to the Durbin Amendment. By converting its Mastercard and NYCE debit portfolio to Discover, Capital One captures richer market interchange fees. With this massive edge, it will win debit card and retail banking share away from larger competitors by offering consumers superior value fueled by market interchange fees. Unlike community banks, which are also exempt from the price controls, Capital One has the scale, resources and marketing savoir faire to fully capitalize on this advantage.

On the regulatory front, the already paltry debit interchange cap to which banks with greater than $10 billion in assets are subject is on the precipice of a severe reduction.

If nothing else, a delayed but inevitable update of the cap by the Fed will reduce it. By law, the Fed is charged with capping debit interchange fees so they are “reasonable and proportional” to issuers’ incremental processing and fraud-prevention costs. By the Fed’s own charitable tallying, issuers’ processing costs have plummeted roughly 50% since the original 2011 cap was established (based on 2009 data). Relying on 2021 metrics, the Fed proposed a 28% reduction (on a typical $50 transaction) in November 2023. Caught between a firestorm of protests from banks decrying the proposed cut and merchants demanding more, the Fed has hesitated. It can’t delay indefinitely.

An even more devastating threat to the debit interchange revenue of leading banks looms in the courts. Supreme Court bound litigation questions whether the Fed faithfully implemented the statute. (Spoiler: It did not.)

Conflicting circuit court decisions are bringing this to a head. In Corner Post v. The Board of Governors of the Federal Reserve System in the 8th Circuit, Judge Traynor ruled that the Fed included recovery of impermissible costs in its standard and that applying a single, uniform cap for all issuers regardless of individual costs was illegal. Conversely, in the 6th Circuit, Judge Tatenhove held in the Linney’s Pizza case that such rulemaking was within the Fed’s prerogative. With the Supreme Court having euthanized the Chevron deference doctrine in 2024, Traynor’s logic, anchored in the statute’s text, is likely to prevail. If it does, the debit interchange economics for giants like BofA, Chase and Wells Fargo, whose variable debit-processing costs per transaction are less than a cent, will be destroyed.

Capital One’s escape from this pernicious regime of price controls and routing mandates raises the question: Why haven’t larger retail-banking behemoths taken the same path? In 2024, Chase’s, Wells Fargo’s and BofA’s debit purchase volumes were 7.1, 7 and 6.8 times, respectively, greater than Capital One’s, making their opportunity proportionately that much greater.

On top of reduced debit interchange revenue, highly profitable credit cards, which account for a majority of general purpose card spend, are becoming less attractive. Surcharging is surging. If the proposed settlement of merchants’ long-standing class action antitrust suit against Mastercard and Visa over credit interchange fees and acceptance rules is approved, it will meaningfully loosen surcharging restrictions. Merchants would be free to surcharge Mastercard and Visa credit cards without surcharging Amex and Discover. If a merchant surcharges Amex, Amex requires they surcharge all other card products as well, including debit. Visa and Mastercard ban surcharging debit. The settlement, consequently, will open a surcharging floodgate.

Increased surcharging will annoy cardholders. While it won’t cause Americans to abandon credit cards, some payment volume will shift to debit, making it all the more urgent that large banks have compelling debit products supported by market interchange fees.

The strategic imperative is clear: These banking titans should buy their own debit networks.

Consider the dormant potential of national debit networks like Star, Accel and NYCE. Today, they operate as secondary utility pipes owned by core processors. But if Chase acquired Star, the calculus would change overnight. By purchasing a network, investing in its acceptance infrastructure and converting their mammoth Visa-branded debit portfolios to their newly proprietary rails, banks would capture market issuer interchange economics and network acquirer processing and licensing fees. Additionally, they would avoid network issuer processing and licensing fees currently paid principally to Visa. Transactions routed over their network would keep the entire economic pie in-house, a large piece of which would fund rewards and benefits.

Furthermore, a bank-owned network could leverage its massive scale to negotiate directly with merchants, as well as design and execute sales-generating promotions on their behalf.

In 2024, BofA, Chase and Wells Fargo combined had $1.425 trillion in debit purchase volume, on which they earned 49 basis points of interchange fees. The Fed’s proposed adjustment would reduce that to 35 basis points, costing them $2 billion. The faithful implementation of the law, as required by the Corner Post ruling, would reduce that further to roughly two basis points, costing them $4.7 billion. Market interchange for branded and unbranded debit, however, is richer, at 141 and 67 basis points, respectively. A Chase-branded debit network would gradually ratchet its interchange rates up from 67 basis points to roughly 140 or more, earning $20 billion — $13 billion above the current cap.

America’s financial giants have passively accepted Durbin’s mandated revenue destruction. It’s time for banking heavyweights to stop playing a rigged game and buy debit networks. If one colossus acquired a debit network and upped its game and value for consumers, the others would have to follow.

Moreover, if they converted their Visa-branded debit cards to their own networks, that would end any plausibility that the DOJ’s debit antitrust suit against Visa might have had.

Markets work. Economic activity, innovation and value inevitably migrate from more to less regulated domains. If BofA, Chase and Wells Fargo each bought a debit network and converted its cardholders to their new rails, it would drive a stake through the heart of the Durbin Amendment, invigorate debit and retail-banking competition and create more value for consumers.