‘Swipe’ Fee Cap May Force Fees, Job Cuts, Bankers Say

'Swipe' Fee Cap May Force Fees, Job Cuts, Bankers Say
The Fed proposed capping debit interchange fees charged to merchants at 12 cents for each transaction. Photographer: Aaron M. Sprecher/Bloomberg

U.S. community banks may eliminate free products, fire workers and shelve expansion plans if the Federal Reserve imposes proposed debit-card “swipe” fee caps, according to a survey conducted by a trade group.

The caps, required by the Dodd-Frank Act, are “deeply flawed,” and an exemption for firms with less than $10 billion in assets won’t shield smaller banks from its negative effects, Independent Community Bankers of America President Camden Fine said in a statement.

To back up its case, the group released results of a survey today highlighting steps it says bankers would have to take in response to the new rule. Of the bankers surveyed, 93 percent said they would be required to charge customers for services that are currently free. Another 50 percent said they would charge customers a fee each time they use a debit card.

The Fed proposed capping debit interchange fees charged to merchants at 12 cents for each transaction, replacing a formula that averages about 1 percent of the purchase price. The cap rule must be completed by April 21 and in effect by July 21 to comply the regulatory-overhaul law. Credit-card interchange fees, which average about 2 percent, remain untouched.

Unified Opposition

The ICBA, which represents nearly 5,000 community lenders, joins large banks, electronic-payment networks and credit unions in seeking changes to the rules proposed by the Fed in December.

“It’s our sincere hope that this is the catalyst that allows Congress to take the steps necessary to stop this rule,” Jason Kratovil, the ICBA’s vice president of congressional relations, said of the survey results.

The Washington-based industry group is among the top contributors to members of Congress, spending more than $4.5 million in 2010 as lawmakers debated Dodd-Frank financial legislation, according to the Center for Responsive Politics.

Some of Wall Street’s top executives have gone directly to Fed Chairman Ben S. Bernanke, urging him to withdraw the central bank’s proposal to cap swipe fees.

The Federal Advisory Council, a group of 12 bankers who consult and advise the Fed, told Bernanke and his fellow governors that the proposal “misinterprets and misapplies” the Dodd-Frank provision requiring the rule.

‘Extremely Damaging’

“If enacted as proposed, the results would be extremely damaging to consumers, the U.S. payment systems and financial institutions of all sizes,” the council, which includes Bank of New York Mellon Corp. Chief Executive Officer Robert Kelly and State Street Corp. CEO Joseph “Jay” Hooley, told governors at a Feb. 4 meeting, according to a summary posted on the Fed’s website today.

Fee limits proposed by the central bank may reduce annual revenue for U.S. banks by more than $12 billion. Visa Inc. and MasterCard Inc., which set the fees and pass the money to card-issuing banks, tumbled more than 10 percent after the proposed rules were made public on Dec. 16, amid investor concern that the caps will damage their business model.

“Regardless of the size, from the largest bank to the smallest corner institution, debit-card customers will pay more, have less convenience or watch their cards disappear altogether,” said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents payment networks and card issuers.

MasterCard, based in Purchase, New York, rose 0.6 percent to $254.96 at 4 p.m. in New York Stock Exchange composite trading. San Francisco-based Visa gained 1.1 percent to $75.74.

Bank of America

Some of the largest banks have already begun shelving free services in anticipation of the interchange rule.

Bank of America Corp., the biggest debit-card issuer, said it will begin charging retail customers checking-account fees unless they maintain minimum balances, make regular deposits, use credit cards or take advantage of online services.

Even with the exemption for lenders with assets under $10 billion, groups representing smaller banks say members could lose revenue if networks offer separate fee levels that prompt merchants to favor debit cards issued by bigger companies.

Senator Richard Durbin, the Illinois Democrat who crafted the provision and the exemption for smaller lenders, has criticized Washington trade groups such as the ICBA and the Credit Union National Association for trying to scare members.

Time and Money

“These associations have expended so much time and money lobbying against reform over the past year that unfortunately I do not expect them to ever reconsider their position,” Durbin wrote in a Jan. 18 letter to the Illinois Bankers Association, Illinois Credit Union League and the Community Bankers Association of Illinois.

Durbin, the second-ranked Democrat in the Senate, has said he will work to stop any legislative effort to change the provisions. In a letter to the American Bankers Association dated today, Durbin said he would “vigorously oppose efforts to block the implementation of this needed reform.”

“Congress has now recognized that interchange reform is necessary and has passed a reform law that should be given time to work,” Durbin wrote to the Washington-based trade group.

House lawmakers will get their first update on its effects this week when the House Financial Services Committee holds a Feb. 17 subcommittee hearing on the issue. Sarah Bloom Raskin, a Federal Reserve governor, will testify.

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