Fed proposes lower store fees on debit purchases

By Ylan Q. Mui
Washington Post Staff Writer
Thursday, December 16, 2010; 8:47 PM

The Federal Reserve proposed on Thursday lowering the fees that merchants must pay when shoppers use debit cards, a move that could reduce retail prices but result in higher banking fees for consumers.

Under the recommended new rules, the so-called interchange fee, or "swipe fee," on debit cards would be capped at 12 cents - about 70 percent lower than the average fee of 44 cents per transaction last year, according to the Fed. The total amount banks received from debit card interchange fees was $16.2 billion.

The move was applauded by retail industry groups and small businesses, which have long complained that the fees were excessive and they have little power to negotiate them down. Retailers have also said the cost of the fees is second only to labor and is growing faster than health care expenses. On Thursday, they said the new rules would allow them to deliver significant savings to shoppers.

"This is not only good for businesses, but most importantly it's good for consumers," said Hank Armour, chief executive of National Association of Convenience Stores. "There is an abundant amount of evidence cost savings will be passed through."

Interchange rates are set by card processors such as Visa and MasterCard and paid to banks as an incentive to use their networks. In a statement, the American Bankers Association, a trade group, said the proposal would have a "dramatic impact" on the industry at a time when bank revenue has also been curtailed by strict new regulations on credit card interest rates and overdraft fees. The swipe fee ruling would reduce banks' ability to offer basic low-cost services, make loans and fight fraud, he said.

"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," ABA Chief Executive Edward L. Yingling said.

Banks have begun seeking ways to recoup their losses from the wave of new regulations passed by Congress. Tower Group analyst Brian Riley said they would probably consider instituting charges for accounts that carry low balances or are used infrequently.

He noted there is no mandate from the Fed or Congress that retailers lower prices to reflect the reduced interchange rate - and the worst case-scenario for consumers is if banks raise their fees and merchants don't cut prices. "There's no tie-in from the beginning . . . to ensure that consumers see this as a price benefit," Riley said. "It just gets lost in the revenue model of the retailers."

Sen. Richard Durbin (D-Ill.), who sponsored the legislation that required the Fed to address the issue, said he will be monitoring any new bank fees closely.

"I worry that the banks and credit card companies, faced with change and reform, will do the same thing they've always done: Create a new product, create a new fee, find a new loophole," he said.

The Fed is gathering comments for several options for determining interchange fees. The first allows issuers to set the rate at a "safe harbor" of 7 cents or less. Issuers could also choose to determine their own average cost of authorizing, clearing and settling debit transactions, with a cap of 12 cents. The final option allows any interchange rate of 12 cents or less.

One key issue the Fed did not address in detail was fraud. Card processors and banks have argued that the cost of preventing and investigating fraud should be included in the interchange fees. The Fed said that it is still considering the issue and would develop a separate proposal to address it. It is also considering ways to increase competition among the methods for processing card transactions.

The law applies only to debit cards - not credit cards - and exempts government benefit cards and prepaid cards from the new regulations. It also would not apply to banks with assets less than $10 billion, but community banks still oppose the rule, saying they will probably have to comply with lower interchange rates or risk not being accepted by merchants.

"It is naïve to think that a reduction in debit interchange of the scale proposed today to large issuers will not be felt with equal pain by those purportedly 'carved out' from the provision," Karen Thomas, senior executive vice president of government relations for the Independent Community Bankers of America, said in a statement.

The Fed is accepting comments on the proposed rules through Feb. 22. A final ruling is expected by April.

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