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Fed’s 21-Cent Swipe-Fee Cap Leaves Banks, Merchants Unsatisfied

The Federal Reserve Board’s decision to cap debit-card swipe fees at 21 cents trims the amount of revenue banks would have lost under an earlier proposal, while roughly halving what retailers pay the banks each year.

Still, the action yesterday left both industries grumbling.

The Fed, which is required under the Dodd-Frank financial overhaul to address the fees, proposed in December capping them at 12 cents, compared with the average 44 cents retailers pay each time a customer swipes a card.

The 21-cent cap, approved 4-1 by the Fed governors, could slice about half of the $16 billion in annual revenue reaped by card issuers including Bank of America Corp. and JPMorgan Chase & Co.

“It looks like they split the baby in half, and whenever you do that you make nobody happy,” said Robert Litan, a senior adviser for the Global Economics Group, who conducted research on the issue sponsored by the banking industry.

Banks and payment networks, who had warned that their losses from the original proposal could weaken an already shaky financial system, yesterday complained that the 21 cents still wouldn’t cover the costs of providing debit cards.

“This is better than the 12 cents anticipated, but still poses significant challenges to our business,” said Betty Riess, a Bank of America spokeswoman.

Merchants, who saw part of their expected windfall dry up, said that the Fed caved in to fear-mongering.

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

Durbin Comment

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

Debit payments, 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.

Senator Richard Durbin, the Illinois Democrat who pushed for the caps last year as part of the Dodd-Frank financial regulation law, said the new rules “will give small businesses some relief from the unreasonably high fees that the Visa and MasterCard duopoly fix on behalf of the nation’s biggest banks, and consumers will finally begin to benefit from the increased competition, discounts, and lower prices that reform will bring.”

He added that he was “disappointed” that the Fed “yielded to the big banks” in setting the higher fee cap.

Dissenting Vote

Fed Governor Elizabeth Duke, the dissenting vote yesterday, argued that the cap 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.

Chairman Ben S. Bernanke called the process “one of our most challenging rulemakings.” He added: “This is the best available solution.”

Merchants said they disagreed.

“Let’s just say the Fed took a swing at reform and they whiffed,” said David French, senior vice president for government relations at the National Retail Federation.

French said his group is studying the decision to see if the Fed “stepped outside the law” in any way.

“There is certainly a legal option that could be pursued,” he said. “I don’t know that we’re going to go there, but I wouldn’t rule it out.”


Banking groups, while relieved that that initial 12-cent cap was changed, also criticized the Fed.

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

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

While many of its members would fall into the small-bank exemption, the trade group has questioned whether the exclusion is workable.

The rule, originally scheduled to take effect July 21 under Dodd-Frank, will now be put in place on Oct. 1. It will also allow banks to tack on five basis points, or 0.05 percent, 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 it sets can charge an additional 1 cent per transaction fee. That provision was passed on a conditional basis so the Fed can solicit public comments.

Shares Rise

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 yesterday.

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.

“Setting price caps will create distortions in the market and harm consumers,” said Chris McWilton, president of U.S. markets for the company.

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.

After Durbin’s provision became law and the Fed proposed its 12-cent cap in December, the banks mounted a lobbying effort to get the final rule postponed or killed. The Senate on June 8 narrowly rejected a six-month delay, paving the way for the Fed’s action yesterday.

Perks Eliminated

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.

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 yesterday 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.

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 model.

The Fed’s final rule would cost banks at least $8 billion annually, according to data compiled by Bloomberg Government. That is a savings of about $4 billion over the original proposal.

The final rule would cost Bank of America $1.29 billion, JPMorgan $959.2 million, Wells Fargo, $769.2 million and Citigroup, $573.2 million, Bloomberg Government estimated.

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