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Dodd-Frank Swipe Caps Slow Growth, End Rewards: One Year Later

Dodd-Frank Debit Rule Ends Rewards as Visa Braces for Change
The final rule set by the Federal Reserve calls for a 21-cent cap on debit-card transaction fees. Photo Illustration: Bloomberg

Less than a month after the Federal Reserve approved Dodd-Frank Act rules capping debit-card swipe fees, the limits on so-called interchange are looking like a compromise that displeases almost everyone.

Big banks such as JPMorgan Chase & Co. are looking for ways to make up for $8 billion in lost revenue, payment networks including Visa Inc. are forecasting slower growth and smaller retailers are questioning whether the change will boost their bottom lines. Meanwhile, there is little specific discussion among big retailers of any benefits for consumers.

Dodd-Frank, the regulatory overhaul enacted a year ago today, required the Fed to ensure fees charged for debit-card purchases were “reasonable and proportional” to the cost of processing transactions. The 21-cent cap approved by the central bank on June 29 reflected a pullback from a 12-cent limit it proposed in December, which roiled shares of Visa and MasterCard Inc. and prompted banks to seek to delay or overturn the rules.

Banks basically lost half of their interchange revenue from this proposal “and they are going to look to recoup that,” said Jaret Seiberg, a financial services policy analyst with MF Global Holdings Ltd.’s Washington Research Group. “It’s not going to be the doomsday scenario, but it’s still going to be more expensive for the average consumer.”

The largest debit-card issuers, which stand to lose billions of dollars in annual revenue under the Fed caps, have already begun to eliminate rewards programs and free checking and new fees may be next in the effort to help make up the difference, according to analysts and executives.

Losing Rewards

Earlier this year, JPMorgan sent letters informing customers that that they would be losing many of their debit-card rewards programs this month as a result of the new rules. Citigroup Inc. Chief Executive Officer Vikram Pandit warned that increased fees and reduced rewards programs could make the banking system less attractive -- and viable -- for lower-income Americans.

After the Fed released its final rule, USAA Federal Savings Bank, a thrift catering to the members of the U.S. military and their families, said it would end its debit-card rewards program on Sept. 1. The lender based its decision on a survey of members about which services they could do without, USAA President David Bohne said in a statement.

“USAA’s survey found that members favored free checking and ATM fee refunds over debit card rewards,” Bohne said. “Based on this feedback, we decided to stop the debit card rewards to maintain the other benefits.”

Revenue Growth

“Most, if not all, of the lost revenue will be made up gradually, probably over a period of several years, through a variety of revenue enhancement measures,” Moody’s Corp. said this month in a report on the rules’ effect on banks.

A week after the Fed’s decision, San Francisco-based Visa filed updated expectations with the Securities and Exchange Commission and held a conference call for analysts to lay out the impact of the new rules on its business model.

Revenue growth for the 2012 fiscal year will be in the “high single-digit to low double-digits range,” the company said July 6 in a filing. That’s down from a projection of 11 percent to 15 percent for the 2011 fiscal year.

While financial firms face the loss of half their debit-fee revenue, the question of who wins remains a toss-up, according to retailers. The debit-card market is massive -- more than 38 billion transactions took place in 2009 -- and its participants include grocery and electronics stores, gas stations and large retailers like Wal-Mart Stores Inc. and Target Corp., all of whom lobbied for limits on the power of banks and payment networks to impose fees.


Franchise owners at 7-Eleven Inc. such as Dennis Lane, who became a public face of the issue as national spokesman for the Retail Industry Leaders Association, are trying to calculate whether they will receive any benefit at all.

“I honestly think we’re going to be close to where we were before Dodd-Frank,” Lane, who owns a 7-Eleven in Quincy, Massachusetts, said of the Fed’s decision to cap fees at 21 cents per transaction. “That’s atrocious.”

The biggest retailers, including Wal-Mart, Target and Home Depot Inc. could lower prices for consumers, make investments in technology and workforce and provide more payment options for customers.

“Any significant decrease in rates would have a meaningful impact,” Atlanta-based Home Depot said in a February comment letter to the Fed.

In an industry with thin margins, savings are likely to be plugged into infrastructure, workforce and services, Seiberg said. Merchant acquirers, firms that serve as third parties in transactions between retailers and their banks, also are likely to take a piece of the savings, he said.

$830 Million

Retail groups are continuing to struggle with the scope of the benefits for their businesses.

While the rules will give U.S. convenience stores an estimated $830 million to put back into the economy, the message from store owners was that the Fed could have and should have done more, said Jeff Lenard of the National Association for Convenience Stores, the Alexandria, Virginia-based trade group.

Senator Richard Durbin, the Illinois Democrat who sponsored the amendment in Dodd-Frank, was able to secure the necessary votes in the Senate largely because of an exemption from the rules for banks and credit unions with less than $10 billion in assets. Fed Chairman Ben S. Bernanke and then-Federal Deposit Insurance Corp. Chairman Sheila Bair cast doubt over whether the exemption would be effective, spurring calls to delay the rules.

While Senate efforts to force a review of the exemption fell short, smaller firms remain concerned that the carve-out won’t work, according to Karen Thomas, executive vice president of government relations for the Independent Community Bankers of America.

‘All Eyes’

“It’s been our contention all along that the exemption will not be workable in the marketplace,” Thomas said this week during a conference call with reporters. “All eyes are going to be on the networks to see how they implement these rules.”

For Lane, who attended President Barack Obama’s Dodd-Frank signing ceremony in Washington a year ago today, the fight over the rules is likely to continue in the months ahead. For the moment, though, his focus is on what happens for his 7-Eleven.

“The first 20-odd cents of every transaction will go to the financial services industry and that’s not such a problem if you’re selling computers or wide-screen TVs or digital cameras,” Lane said. “It’s a huge problem when you’re selling newspaper and coffee and donuts and candy bars.”

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