In a blow to the banking industry, U.S. Federal Reserve officials Thursday agreed to advance a proposal that would prevent banks from charging merchants “swipe fees” from debit cards that are higher than 12 cents per transaction.
“It’s going to be painful,” said Consumer Bankers Association President Richard Hunt. “If adopted, this will result in a significant reduction in revenue and efficiencies and have major negative implications for consumers.”
Debit-card issuing banks charge merchants swipe fees, also known as interchange fees, every time a consumer swipes a debit card to make a purchase. New interchange fee regulations are a critical issue for banks, which are also facing other congressionally mandated restrictions on credit card and overdraft fees. Congress required the Fed to limit debit-card interchange fees as part of the financial regulations lawmakers approved over the summer.
Fed officials stressed that the proposal is not final and that they are interested in gathering feedback on the plan. The proposed rule will be open to public comment until Feb. 22.
“This is a very complex area,” said Federal Reserve Chairman Ben Bernanke during the highly-anticipated afternoon board meeting to consider the proposal to limit swipe fees.
“We need to be particularly open-minded” to public comments, said Fed Gov. Daniel Tarullo. “We should be more than usually open to a variety of comments on how to implement the final rule.”
The American Bankers Association criticized the Fed’s action, arguing that it would do nothing but eat into bank revenue and discourage innovation. The restrictions on interchange fees are expected to cut into debit-card profits at companies such as Bank of America Corp. , Capital One Financial Corp., Citigroup Inc. and J.P. Morgan Chase & Co. Depending on what is in the Fed’s proposal, Visa Inc. and Mastercard Inc. could be affected as well.
Banks have argued that the government shouldn’t be in the business of setting rates and have protested new regulation of interchange fees.
“At this point, the proposal seems little more than direct government interference in the card payments system on behalf of large retailers and at the expense of everyday consumers,” said the association in a statement.
Meanwhile, merchants have been fighting for years to have regulators rein in the fees. They welcomed the Fed’s action as a good step forward.
“Any reduction in debit card swipe fees at all, large or small, is a benefit for consumers because retailers are highly competitive and will share that savings with their customers — but the law requires a major reduction,” said National Retail Federation Senior Vice President and General Counsel Mallory Duncan.
The Fed’s proposed rule includes two competing proposals for regulating interchange fees, both of which involve the 12-cents-per-transaction cap.
Under one plan, card-issuing banks could use a formula to determine the maximum swipe fee it may receive, based on certain costs incurred by the bank to process debit transactions. The Fed would set a “safe harbor” standard at 7 cents per transaction. But then, any costs in excess of that could be recovered up to the 12-cents-per-transaction cap.
“Setting a cap ensures that no issuer is able to receive an interchange fee at an unreasonably high level,” said a Fed staff memo on the issue.
The alternative plan doesn’t involve a safe harbor — just the 12-cent cap.
An interchange fee of more than 12 cents per transaction wouldn’t be reasonable, the staff wrote.
Under the proposal, the Fed Board would re-evaluate the cap every two years based on banks’ costs.
