Fed to Weigh Debit-Card ‘Swipe’ Fee at Dec. 16 Meeting

Federal Reserve Said to Consider Interchange-Fee Cap
The regulation may cut into profits for debit-card issuers, and reduce costs for retailers such as Wal-Mart Stores Inc. Photographer: Matthew Staver/Bloomberg

The Federal Reserve Board will meet Dec. 16 to weigh a proposed cap of debit-card transaction fees that could cut card-issuer profits and benefit retailers, the Fed announced today.

The Fed is writing rules for debit-card transaction fees under a provision of Dodd-Frank, the financial-regulation overhaul enacted in July. The so-called Durbin amendment requires that interchange fees -- what a merchant pays to the bank that issues a customer’s debit card -- be “reasonable and proportional to the cost incurred by the issuer.”

The regulation, which doesn’t cover credit-card fees, may cut into profits for debit-card issuers like Bank of America Corp., and reduce costs for retailers such as Wal-Mart Stores Inc. and Target Corp.

In September, Bank of America recorded a $10.4 billion goodwill charge -- a reduction in the intangible value of the business -- because of the interchange rule. The bank, based in Charlotte, North Carolina, has said the caps could reduce annual revenue by $2.3 billion.

Dodd-Frank requires the Fed, which writes regulations on electronic payments, to complete the rule by April 21. The vote will open a public comment period, after which the Fed board will meet to vote on the final rule.

‘Negative Consequences’

The law gives the Fed the authority to set interchange fees based on the level of fraud and other reasons. It also authorizes the Fed to consider unspecified facts that could give the central bank leeway in setting the fees, said Adam Frisch, a Morgan Stanley analyst who covers Visa and MasterCard.

“The question is not how much interchange fees will go up, the question is how far it will go down for debit,” Frisch said in a telephone interview.

U.S. Senator Thomas R. Carper, a Delaware Democrat who opposed the Durbin amendment in Congress, sent a letter to Fed Chairman Ben S. Bernanke today urging him to “use the discretion granted you to minimize negative consequences.”

Two lawmakers who voted for the provision, Senators David Vitter and Mike Crapo, both Republicans, signed Carper’s letter.

“Senator Carper will consider what, if any, additional steps are necessary after the Fed issues their rule on this matter,” Emily Spain, a spokeswoman for the lawmaker, said in an e-mail.

Susan Wheeler, a spokeswoman for Crapo, and Joel DiGrado, a spokesman for Vitter, didn’t return e-mails seeking comment.

$19.7 Billion

Visa Inc. and MasterCard Inc. set interchange, or “swipe” fees and pass that money along to banks that issue cards. Interchange is the largest part of the fees U.S. merchants pay to accept plastic from Visa and MasterCard. Debit fees totaled $19.7 billion and averaged 1.63 percent of each sale last year, according to the Nilson Report, an industry newsletter.

Retailers say interchange fees are out of proportion to the cost of providing the service. Banks say the legislation allows retailers to avoid a valid cost of doing business, without benefiting consumers.

The amendment was named for Senator Richard Durbin, an Illinois Democrat, who sponsored the provision. The Fed won’t consider debit-card network fees, which are excluded under the Dodd-Frank Act.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE