The Federal Reserve may reconsider its proposed cap on the fees that banks charge merchants for debit card transactions, a regulation worth billions of dollars to banks, merchants, and credit card networks.
Fed Governor Sarah Bloom Raskin told a House Financial Services subcommittee on Thursday that the central bank is "reserving judgment" on what its final rule will entail until after processing the thousands of comments they've already received on the issue.
The Fed's ambivalence marks the latest twist in a bruising political fight between banks and retailers. Under pressure from merchants, who charged that banks were imposing exorbitant fees for processing debit card purchases, a provision of the Dodd-Frank financial reform law instructed the Fed to levy "reasonable and proportional" fees tied to banks' costs.
Last December, the Fed proposed a rule that would cap fees at 12 cents per transaction—a huge cut for many transactions. The move stunned banks and the credit card networks, such as Visa and Mastercard, which set the fee levels, get a share of the charge, and stand to lose revenue if the regulation is enacted. Banks now typically charge a fee of between 1 and 2 percent on each purchase.
The two sides have been fighting fiercely ever since, with banks hoping to dilute the rule and merchants hoping to strengthen it. Each group says it is on the side of consumers, though the outcome of the tug-of-war will probably have only a limited impact on consumers one way or the other.
Raskin's comments suggest that heated lobbying may be pushing the Fed to alter the terms of its proposed rule. At a separate hearing on Thursday before the Senate Banking Committee, Fed Chairman Ben Bernanke was questioned by lawmakers about how the issue would affect community banks and consumers.
Bernanke repeatedly sought to avoid taking sides on the regulation and noted that his staff had simply done its best to follow the instructions from Congress. Bernanke said it was possible that the rule's exemption for smaller community banks may fail to work in practice, either because card networks might not discriminate between small and large card issuers or because merchants could opt to reject cards issued by smaller banks to avoid the higher fees.
Sitting next to Bernanke, Federal Deposit Insurance Corporation Chairwoman Sheila Bair took a more critical view of the proposed rule. Bair warned that the proposed fee cap could cause small banks to raise fees elsewhere or get out of the debit card business altogether.
"This really needs to be fixed," she said.