Merchants Are Bearing the Burden of Debit Card Fraud

The costs of debit card fraud have increasingly tilted toward merchants, with retailers now bearing nearly half of the overall burden rather than banks or payment networks.

That shift is documented in biennial data from the Federal Reserve, which publishes its debit card fraud report every other year as a snapshot of transaction costs across the debit ecosystem.

Under the Dodd-Frank Act, the Fed is required to limit price-fixed debit interchange fees to levels that are “reasonable and proportional” to the cost of each transaction, including anticipated fraud losses. As a result, the report serves not only as a measure of fraud trends but also as a benchmark for how those costs are allocated among merchants, banks, and other participants.

The data shows that merchants were responsible for 49.9% of debit card fraud costs in 2023, up from 46.9% in 2021. Over a longer time horizon, the shift away from banks is even starker. Banks’ share of debit fraud losses fell from 59.8% in 2011 to 28.3% in 2023.

A Growing Concern

At the same time, overall debit card fraud has risen over the past decade.

In 2023, fraud losses across all parties amounted to $17.63 per $10,000 in transaction value, up from $7.80 in 2011. A separate 2024 study from Federal Reserve Financial Services found that nearly three-quarters of financial institutions said debit card fraud was their most common type of fraud and one that resulted in the greatest losses.

The nature of debit card fraud has also evolved. After the introduction of chip-based EMV cards, fraud shifted away from in-person transactions toward card-not-present, or remote, fraud, changing both how losses occur and who ultimately absorbs them.

Despite these trends, merchants continue to pay interchange fees intended to cover banks’ expected fraud losses. Since Dodd-Frank took effect, merchants have paid banks roughly 0.05% of debit transaction value in interchange fees for that purpose.

The Fed’s report also highlights that banks subject to debit interchange regulation continue to earn strong returns on debit transactions, garnering about 24 cents in revenue on costs of roughly 4.1 cents.

Merchants Take Action

As the burden has moved toward retailers, they are fighting back. The day before the Fed’s report was released, the Merchant Payments Coalition sent a letter urging the Fed to finalize new regulations that would reduce fixed debit interchange fees.

Chargeback fees—incurred when payments are reversed following customer disputes—were at the center of a recent settlement in which Visa and Mastercard agreed to pay merchants $199.5 million to settle a class-action lawsuit. Retailers alleged that Visa and Mastercard violated antitrust laws by coordinating to make merchants responsible for chargeback costs unless they updated their point-of-sale systems to include chip readers.