The debate around “debanking” — the practice of financial institutions denying or withdrawing banking services from certain individuals — has surged to the forefront of policy discussions in the US, but has been bubbling under in other European markets.
Interchange fees reform risks debanking
While the conversation is often dominated by political narratives, the economic underpinnings of the issue are far more urgent.
According to recent data, over 5.6 million households in the US remain unbanked, with minority communities disproportionately affected.
Now, a new regulatory proposal from the Federal Reserve — aimed at reducing debit card interchange fees — threatens to unintentionally deepen this divide.
While Open Banking, fintech innovation and regulatory reforms have expanded access to financial services, basic banking remains unaffordable for many.
Debit cards are the primary payment method for those living paycheque to paycheque, who typically do not maintain high account balances.
For banks, interchange fees on debit transactions help subsidise the cost of offering low-balance accounts.
A cap on these fees may, paradoxically, disincentivise banks from offering these services at all.
Interchange vs. Overdraft: The Hidden Trade-Off
The Federal Reserve’s plan to lower debit card swipe fees is ostensibly designed to reduce costs for merchants and, by extension, consumers.
However, the unintended consequence could be a renewed reliance on overdraft fees to recoup lost revenue — a practice that has been heavily criticised for its impact on financially vulnerable customers.
The logic is straightforward: if banks can no longer rely on interchange income from low-margin accounts, they may either stop offering them or revert to punitive fee structures.
Some of the very banks that previously relied on overdraft charges have made progress by voluntarily reforming their fee models or adopting no-overdraft “Bank On” accounts.
Yet, the Fed’s swipe fee proposal risks undermining these gains.
Uneven Regulation and Perverse Incentives
The regulation also contains structural inconsistencies.
Under the Durbin Amendment, small banks and credit unions are exempt from interchange caps, allowing them to charge higher swipe fees.
Many of these institutions still rely heavily on overdraft fees — in some cases, as their primary source of profit.
Granting them a dual advantage — higher swipe fees and freedom to impose overdraft charges — distorts the competitive landscape and harms consumers.
The loophole has already spurred a wave of fintech–small bank partnerships, where fintechs provide the front-end digital interface while partner banks benefit from unrestricted interchange revenue.
While fintech firms deserve credit for promoting fee-free accounts and expanding financial inclusion, they also raise concerns about regulatory oversight and consumer protection.
The collapse of fintech platform Synapse, for example, highlighted risks in funds custody and the limits of deposit insurance in such arrangements.
The Path Forward
Rather than reducing swipe fees across the board, a more targeted approach could better support financial inclusion.
The Fed could exempt “Bank On” style accounts — those with no overdraft fees — from lower interchange rates, creating a direct incentive for larger banks to offer safer, affordable products.
This approach would align economic incentives with social outcomes.
It would not only reduce reliance on punitive overdraft fees but also encourage financial institutions to continue serving low-income consumers — many of whom are on the margins of the banking system.
At a time when economic pressures are mounting and millions remain financially excluded, regulatory missteps risk compounding the problem.
A reform intended to lower costs must not come at the expense of access. The Fed now faces a critical choice — and it should prioritise policies that promote inclusion, not accelerate exclusion.
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