Jennifer Cavallaro’s day job is owner of a restaurant in Bristol, R.I. Over the past year she has moonlighted as an amateur lobbyist. She’s one of a small army of business owners who helped beat Wall Street in a fight to reduce the fees banks charge retailers for accepting debit cards, a development that promised to deliver big savings for her Beehive Café—until the Federal Reserve stepped in.
In December, the Federal Reserve Board, asked by Congress to determine an appropriate fee, proposed limiting payments to 12¢ per transaction. That sparked an outcry from banks, which said the move would mean an end to such perks as free checking and rewards programs. Then on June 29, after being flooded with more than 11,000 comments on the plan and meeting with scores of companies and interest groups, the Fed issued its final ruling: a cap of 21¢ per transaction, effective Oct. 1. Although still lower than the average 44¢ retailers now pay, the decision will preserve billions of dollars in revenue for banks. “I hate to sound like a conspiracy theorist, but what happened in between?” Cavallaro says. “This was definitely a surprise.”
If the central bank had expected to end the debate by effectively splitting the difference, it was mistaken. “Call it the least worst way to do the wrong thing,” says Scott Talbott, a lobbyist for the Financial Services Roundtable, an association of large financial companies. “Let’s just say the Fed took a swing at reform, and they whiffed,” says David French, the top lobbyist for the National Retail Federation. The group is studying whether the central bank adhered to Congress’s instructions to determine standards that are “reasonable and proportional” to banks’ costs in handling debit-card transactions. “There is certainly a legal option that could be pursued,” French says.
Debit cards, which deduct funds directly from a customer’s checking account, have surpassed checks and credit cards as the leading method of noncash payment by consumers. Debit transactions surged from 25 billion in 2006 to 38 billion in 2009, when they netted banks some $16 billion in transaction fees, the Fed reports. Merchants say card-charge costs can be their highest expense after labor, and they complain that they have little ability to negotiate fee reductions with Visa and MasterCard, which collect the money for the banks. Consumers pay at least some of the charges in the form of higher prices, though it’s impossible to say how much retailers pass on.
With the economy in turmoil and Congress considering the Dodd-Frank bill to overhaul financial regulation, merchants sensed an opportunity to rein in debit-card fees. Trade groups representing big retailers such as Wal-Mart Stores, Target, and Home Depot led the charge in pushing for the fee cap, with small business owners such as Cavallaro providing support by visiting lawmakers. The two sides deployed more than 500 lobbyists and spent some $30 million on the squabble, according to people briefed on the expenditures.
Banks, weakened from public anger over the $700 billion bailout after the 2008 financial crisis, lost the first round when Senator Dick Durbin (D-Ill.) inserted the fee limit into the Dodd-Frank bill, which passed last year. After the Fed proposed the 12¢ cap, the industry quickly mobilized and persuaded the Senate to consider a measure that would have delayed implementation of the new fee structure by six months. The banks lost by a half-dozen votes.
Congress’s decision to drop the contentious issue in the Fed’s lap upset both the central bank’s governors and staff, according to two people knowledgeable about the internal deliberations. They considered the swipe fee provision poorly drafted, and it put the Fed in the uncomfortable position of setting prices—something few economists have any interest in doing. “This was the best available solution,” a weary Fed Chairman Ben Bernanke said at the June 29 meeting where the cap passed on a 4-1 vote. The decision, he said, was “one of our most challenging rulemakings.”
The ruling was announced as the Fed prepares to turn over most of its oversight of credit cards to a new Consumer Financial Protection Bureau on July 21. Nonetheless, the Fed will continue to monitor debit-card fees. Fed governors plan two studies that they hope will determine whether banks with assets of less than $10 billion, which are exempt from the rule, are successful in maintaining higher fees than industry giants subjected to the cap. Small lenders believe a two-tiered system won’t work because they have little clout with merchants and transaction processors, so they fret that their fees will tumble, says Viveca Y. Ware of the Independent Community Bankers of America, a trade group. “We’ll be having an ongoing dialogue with the Federal Reserve regarding the impact of this rule,” she says.
Back in Rhode Island, Cavallaro says her lobbying days are far from finished. Although she says the new rule will roughly halve her debit-card expenses, she feels they’ll still be too high. “I understand now that I’ve gotten involved in this that nothing is ever over in Washington,” she says. “If we are patient over the next few years, we might be able to change the rule.”