The Federal Reserve on Thursday proposed a 12-cent cap on the fees banks would be allowed to charge merchants for debit card transactions, a limit that some estimate could cut up to 90% of the revenue collected through such fees.
Capping debit interchange fees, sometimes called swipe fees, would help merchants. Under the existing system, the Fed said the average fee in 2009 was 44 cents per transaction, or 1.14% of the transaction. When the customer signed for the purchase in the same way they would for a credit-card purchase, known as signature debit, the average fee was 56 cents, or 1.53% of the transaction amount.
The proposal also would require that merchants have a choice of unrelated networks to process transactions, like Visa and MasterCard. That could cut into revenue for those companies by allowing other networks to process transactions now handled by the two biggest players in the industry.
Credit Companies Could Take a Huge Hit
The network giants could see further revenue hits from banks that try to extract concessions based on the sharp fee cuts, said Thomas McCrohan, an analyst for Janney Capital Markets. The networks set the interchange rates but the fees are paid to the banks that issue debit cards bearing the Visa or MasterCard logos.
he revenue hit could be between 70% and 90% of the fees currently paid, said Jeff Tassey, executive director of the Electronic Payments Coalition, a group that represents banks, credit unions, payment networks and card processors.
"It's a massive reduction," he said. Wall Street was expecting a 60% cut, said McCrohan.
Bank stocks were largely unaffected by the news, but shares of Visa slid $9.75, or 12.7%, to close at $67.19. MasterCard shares plunged $25.73, or 10.3%, to close at $223.49.
Fed staff members said a swipe-fee cap probably wouldn't translate into lower prices for consumers, except in some highly competitive markets. It may, however, result in banks cutting back on debit-card reward programs or searching for other ways to offset the impact of lower fees.
The proposal was made to enact a provision known as the Durbin Amendment that was part of the financial regulatory overhaul bill that became law in July. The provision requires that interchange fees be "reasonable and proportional" to banks' costs for processing transactions.
Critics noted that the Fed did not allow for the costs of fraud prevention and detection in setting the cap. "For a smaller institution, fraud prevention costs and fraud costs, for the most part are the costs," said Bill Cheney, CEO of the Credit Union National Association.
Small Banks Exempt...Sort Of
The law exempts banks and credit unions with market capitalizations under $10 billion. But industry representatives questioned how the exemption would be enforced, and said it could result in merchants refusing to accept debit cards issued by smaller institutions because those transactions would cost more.
The limit would not apply to interchange fees for credit cards, which were not addressed in the financial overhaul.
The National Retail Federation was among merchant groups that praised the proposal, saying fee limits "would result in lower costs for merchants and could lead to discounts for their customers." The American Bankers Association had a vastly different take, charging that the cap would "essentially relieve retailers of paying their fair share" for debit card transactions.
Visa said that the Fed's proposal of "artificial" caps on fees doesn't take into consideration the value of merchants being able to accept debt cards and the costs of running a debit network. It added in a statement that "the proposed routing and exclusivity alternatives put retailer profits ahead of consumer protection, choice and convenience."
McCrohan, the analyst at Janney, said the portion of the proposal that could require two networks for each type of transaction would create a hugely complicated system.
"That just makes people's heads hurt," he said. "How is that going to work exactly?"
Is the Fed's Proposal Fair?
MasterCard issued a statement saying that the Fed's proposal fails to consider the full range of costs incurred by issuers to operate their debit card programs, and that it plans to file formal comments in the coming weeks as part of the public comment period.
"Experience demonstrates that consumers, not banks, or payment networks are the biggest losers as a result of this regulation," Noah Hunt, MasterCard's general counsel said in a statement. "This type of price control is misguided and anti-competitive, and in the end is harmful to consumers."
The Federal Reserve will accept comments on the proposed rule through Feb. 22. The proposal must be finalized by April 21, and would take effect three months later.
In the meantime, the fight over interchange fees may return to Congress. "We're deeply troubled by the approach taken and essentially the direction Congress went in," said Kenneth Clayton, general counsel for the American Bankers Association, a lobby group. "We clearly think the issue needs to be revisited."