Posted on Monday, July 4, 2011
WASHINGTON — Fees paid by retailers to banks for debit card purchases, a $20 billion annual expense that has been the subject of a furious political battle over the last year, will be cut in half after the Federal Reserve voted Wednesday to cap the charges.
The cap was mandated last year in the Dodd-Frank financial regulation law, but the Fed action was far less draconian than bankers had feared. The new cap of 21 to 24 cents a transaction, down from an average of 44 cents before the law passed, is roughly double the 12 cents tentatively proposed by the Fed last December.
Consumers are unlikely to see any immediate change at the register because they do not pay the fees directly. But merchants have complained that as the cost of debit fees — a charge for processing payments — has risen in recent years, they have had to add it to the prices they charge. The new lower fees may eventually be reflected in lower retail prices for consumers or, most likely, in a slight slowing of price increases. But banks said the caps would not pay for the cost of operating their electronic debit card networks, and they have warned that their customers can expect higher fees for other banking services as a result.
In approving the lower fees, the Fed’s Board of Governors said there was no way of knowing what the effect of the new rules would be, although they will be watching the results closely.
“I think this is the best available solution that implements the will of Congress and makes good economic decisions,” Ben S. Bernanke, the Fed chairman, said in voting to approve the rule. The board voted 4 to 1 in favor, with Elizabeth A. Duke dissenting.
Ms. Duke said her primary concern was about an exemption built into the law that gives smaller banks with less than $10 billion in assets a pass on the fee cap. These smaller institutions could charge retailers a higher transaction fee for debit card purchases.
Ms. Duke and other governors questioned whether and how that exemption would work. The board agreed to monitor the charges, known as interchange fees, to see how the revenues of small banks were affected, and whether merchants appeared to be rejecting cards that they knew would require them to pay a higher processing fee.
The new fee schedule includes three parts: a maximum interchange fee of 21 cents; a 1 cent addition that is allowed if the bank issuing the debit card develops a fraud-prevention program; and a variable charge of 5 basis points, or five one-hundredths of a percentage point, of the value of the transaction to recover a portion of fraud losses.
For the average debit card transaction of about $38, that variable fee would be roughly 2 cents, which would produce an upper limit, on average, of 24 cents a transaction.
The new rules will go into effect on Oct. 1. The Fed will accept comments on the proposal to allow a 1-cent addition for fraud-prevention efforts.
Since the Dodd-Frank law passed last year, lobbyists for consumers and retailers have been butting heads with bankers over the fee-setting process. At one point this month, banks pushed hard for a Senate measure aimed at delaying the fee caps, which was defeated in a floor vote.
Banking trade groups, retailers and consumer advocacy organizations all expressed some dismay at the Fed’s announcement — the bankers because they stand to lose fees and the retailer and consumer groups because the final charges rose sharply from the Fed’s initial proposal.
“While Congress spoke clearly that fee-fat banks can no longer sneak billions of dollars in stealth charges from debit card users, it appears that the Federal Reserve buckled under the weight of the banking lobby,” Bartlett Naylor, a financial policy advocate for Public Citizen, said in a statement.
Mallory Duncan, chairman of the Merchants Payments Coalition, a retailers’ group, called the new rule “unacceptable to Main Street merchants” and said the Fed “very clearly did not follow through on the intent of the law.”
Some banking groups also adopted a glass-half-full position. Frank Keating, president of the American Bankers Association, said the Federal Reserve took “a significant step in reducing the harm that could have resulted from the proposed rule.”
“The final rule still represents a 45 percent loss in revenue that banks use to provide low-cost accounts to our customers, fight fraud and maintain our efficient U.S. payments system,” Mr. Keating said. “Consumers will see higher fees for basic banking services, and banks — particularly community banks — will still feel the revenue pressures that this rule will cause.”
Merchant trade groups said retailers paid $20.5 billion in fees last year to accept debit cards, including processing fees.
By EDWARD WYATT, THE NEW YORK TIMES