Taking a whack at one of the banking industry's biggest cash cows, the Federal Reserve Board proposed today to slash the "swipe fees" that debit card companies charge retailers for every transaction they process, a move that could cost Mastercard, Visa, and banks billions of dollars.
The Fed unveiled two alternative plans, but both of them would cap the fees at 12 cents per transaction, a huge reduction for billions of purchases. Mastercard and Visa typically charge a fee of between 1 and 2 percent, so a 12-cent cap would mean a reduction on the fee for virtually any debit card purchase of more than $12. Debit card fees generate about $20 billion in annual revenues, and the Fed said the new ceiling would be more than 70 percent below the average fee in 2009. Shares of Visa and Mastercard plummeted more than 10 percent on the news, and analysts said the new rules were likely to put a big dent in bank profits as well.
The proposal, assuming it is adopted as final rule, would have no direct impact on consumers, who are all but oblivious that the fees even exist. But they would provide a major lift to retailers of all sizes, from 7-Eleven to Wal-Mart, who have been fighting a pitched political battle over the issue with banks for almost two years now. And the move could have an indirect benefit to consumers if retailers pass along some of their savings to customers.
The Retail Industry Leaders Association reacted jubilantly to the Fed's action, calling the proposals "a step forward for the effort to bring relief to merchants and consumers who for too long have faced excessive fees and unfair rules imposed by big banks and credit card companies." But the group suggested that it would push for even tougher changes as Fed officials deliberate over the final rule.
The draft rules grew out of an amendment authored by Sen. Dick Durbin, D-Ill., that was added to the Dodd-Frank regulatory reform law. The amendment ordered the Fed to establish "reasonable and proportionate" standards for interchange fees used in debit card transactions. It did not apply to swipe fees for credit cards, which are not currently regulated by the Fed, and it would only apply to fees charged by banks with $10 billion or more in assets.
The Federal Reserve voted unanimously to approve the draft rules this afternoon at a rare televised meeting of the traditionally media-shy central bank.
Major banks and transaction servicers had loudly protested the possibility of a significant restriction on debit card fees. In October, major debit card issuer TCF Bank sued the Federal Reserve Board over the provision, charging that slashing allowable fees would be unconstitutional.
"The statute makes no more sense than regulating the price of a Burger King hamburger solely to the costs of the meat and the bun," TCF Bank CEO William A. Cooper said then.
The Fed will now seek public comment on the proposals until February 22. The Dodd-Frank law requires the Fed to complete the rule by April 21 and implement it by July 21. But the political battle is all but certain to spill out beyond the marbled walls of the central bank.
Indeed, one of the Fed's most powerful supporters in Congress, House Financial Services Chairman Barney Frank, D-Mass., wrote a pointed letter on Wednesday to Fed chairman Ben Bernanke, warning him not to run roughshod over the interests of smaller banks. "I am concerned that the implementing regulations for this section [of the law], if not properly crafted, may have unintended consequences for consumer choice, the protection of consumer information and Congress' intent to reduce the burdens on community banks, credit unions, and government benefit programs,'' Frank wrote.
Edward Yingling, president of the American Bankers Association, denounced the proposed fee caps as an unwarranted interference in free markets.
“The rules proposed today are the result of retailers’ efforts to get Congress to interfere in market pricing, and will result in diminished revenue that banks currently use to fight fraud, make loans, and provide low-cost basic banking services,” Yingling complained in a statement. “They will also discourage further innovation in the payments system.”
Retailers are still pushing for similar regulation over the fees applied to credit card transactions. In fact, Durbin unsuccessfully attempted to limit credit card interchange rates for the federal government through a Senate appropriations bill. And retailers argue that the banks ought to eliminate their fees entirely, given that they are not allowed to charge fees when people use checks to pay for their purchases.
“These regulations are a significant step toward reining in credit card industry fees," said Mallory Duncan, general counsel for the National Retail Federation. "But we still believe debit card transactions should be honored at face value the same as checks."
The Durbin language also allowed merchants to offer a discount for customers who pay by cash, check, or debit card rather than credit card, and permitted them to set minimum purchase amounts of up to $10 for credit cards.