Federal Reserve Approves 21-Cent Cap for Debit Swipe Fees

The Federal Reserve Board set a 21-cent cap on debit-card transaction fees, a less-severe limit on banks and payment networks than it previously proposed. Financial stocks surged.

The rule approved 4-1 by the Fed governors today almost doubles the 12-cent ceiling that the central bank first suggested in December. The no vote was cast by Elizabeth Duke, who said the measure was likely to harm small banks and raise the costs for checking account holders. Other governors, who voiced similar concerns, said the central bank had to weigh in after Congress required it to address the fees.

“This is the best available solution,” said Chairman Ben S. Bernanke, who called the process “one of our most challenging rulemakings.”

While the order was a relief to the financial industry, the 21-cent cap also will reduce costs for retailers, who currently pay banks an average 44 cents per transaction.

Still, the Retail Industry Leaders Association, a trade group that helped lead the successful effort to get Congress to pass the fee reduction, said the Fed had caved in to big banks and the payment networks by raising the cap from 12 cents.

“The Federal Reserve today has badly damaged its credibility,” Sandy Kennedy, the group’s president, said in a statement.

Banking groups also said they were at least somewhat dissatisfied.

‘Real Concern’

Frank Keating, president of the American Bankers Association, which represents banks of all sizes, said the Fed “has taken a significant step in reducing the harm that could have resulted from the proposed rule.”

Nevertheless, Keating said, the rule will slice 45 percent of the banks’ swipe-fee revenue, which he said the industry uses to provide low-cost accounts, fight fraud and maintain the U.S. payments system.

“This remains a real concern to banks everywhere and the consumers and communities they serve,” he said. “Consumers will still feel the impact of this direct transfer of costs from big-box retailers to everyday Americans.”

The Independent Community Bankers of America trade group said in a statement that the Fed rule “is still government price-fixing” at a level below the current market rate.

Network Rules

“There is no doubt that consumers will feel the effects of this harmful rule,” the association said.

The rule also requires card-issuing banks to give merchants the choice of using at least two unaffiliated payment networks when they process debit transactions. That could create more competition for MasterCard Inc. and Visa Inc., the world’s largest payment networks, which have been able to negotiate exclusive deals to handle the processing.

Investors displayed relief that the Fed didn’t choose a plan that could be more of a threat to the business model of MasterCard and Visa, and their shares rose sharply.

The fee cap, originally scheduled for July 21 under the Dodd-Frank Act, will now go into effect on Oct. 1; the network exclusivity provision on April 1, 2012.

MasterCard, in a statement, called the Fed’s move progress, but said it didn’t take into account all the costs associated with debit transactions.

The rule “still represents a government price control,” said Chris McWilton, president of U.S. markets for the company. “Setting price caps will create distortions in the market and harm consumers.”

Visa Outlook

Erica Harvill, a Visa spokeswoman, said executives of the San Francisco-based company will discuss the new rules and provide an update of their financial outlook on a conference call scheduled for July 6.

On fees, the Fed will allow banks to tack on five basis points of each transaction to pay for fraud costs. For the average payment of $38, that would add almost 2 cents to the 21-cent cap.

The Fed also said that banks following certain fraud prevention standards can add an additional 1 cent per transaction fee. That provision was passed on a conditional basis so the Fed can solicit public comments.

Debit fees, known as interchange, are set by Visa and MasterCard and passed on to the banks that issue the cards. Merchants say the payments can be their highest expense after labor.

Lobbying Effort

The banks, which collect about $16 billion a year from debit swipe-fees, has fought to retain the revenue and mounted a massive lobbying effort to get the Fed’s rule postponed or killed. The Senate on June 8 narrowly rejected a six-month delay.

To make up for some of their lost revenue, banks are moving to eliminate perks associated with debit cards, including rewards programs and free checking accounts.

Banks with less than $10 billion in assets are exempt from the rule, as are reloadable prepaid cards.

Consumers have embraced debit cards, which deduct money directly from a checking account. There were 38 billion debit transactions in 2009, the Fed has said, making it the most popular form of non-cash payment.

Visa and MasterCard both surged more than 10 percent after the Fed moved to lift the cap. Visa advanced $11.29, or 15 percent, to $86.57 at 4 p.m. in New York Stock Exchange composite trading, the most since March 2008. MasterCard climbed 11 percent to $309.70, the biggest gain since February 2009.

Three-Party Networks

The shares of both Visa and Purchase, New York-based MasterCard had fallen more than 10 percent on Dec. 16 amid investor concern the limits would damage their business.

So-called “three-party” payment networks including New York-based American Express Co. and Discover Financial Services also climbed as the Fed excluded the firms from the rule because they use a different business model. Unlike Visa and MasterCard, which process payments and rely on banks including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. to issue their cards, three-party networks perform both functions.

AmEx, the biggest credit-card issuer by consumer purchases, climbed $1.28, or 2.6 percent, to $50.92, the most since March. Riverwoods, Illinois-based Discover, this year’s top performer in the 82-company S&P 500 Financials Index, rose 1.8 percent to $26.61, the highest since July 2007.

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