Swipe Fees: Good for Banks, Bad for Consumers

NEW YORK (MainStreet) — The recent Congressional vote to get swipe fee reform on the path to passage could have been a significant boost for U.S. consumers, but only if the Federal Reserve would play along. And it looks like that won’t happen.

The news comes after the Federal Reserve’s June 29 decision to reset the current debit card swipe fee at no more than 21 cents per transaction for the biggest banks in the U.S., higher than the 12 cents that the Federal Reserve had originally proposed in December 2010. The rule takes effect on Oct. 1, 2011.

Consumer advocates say the higher limit is a major win for big banks and gives additional basis for the accusation that the Fed favors Wall Street over Main Street. They point out that the 21-cent cap gives more money to huge banks (ones with $10 billion or more in assets) and takes 9 cents away from consumers with every debit card transaction.

Federal Reserve Chairman Ben Bernanke sees the new 21 cent cap as a big accomplishment, but “for who” is the more important question for consumers. Here’s what Bernanke had to say at the Washington, D.C. meeting on June 29, where he addressed the issue of oversight:

"The interchange rule we are considering this afternoon has been one of our most challenging rulemakings under Dodd-Frank to date," he said, adding that "The Board plans to monitor developments in the debit card market; that monitoring will include collecting and publishing data related to debit card costs and interchange fees. These data will help the Board, as well as issuers (both large and small), merchants, networks, consumers and Congress assess whether the statute and the rule are effectively accomplishing their intended goals."

So who are the winners and losers in the aftermath of the Fed’s decision? Let’s take a look:

Winners: Big banks.

Financial institutions with $10 billion or more in assets thought they’d be stuck with the 12-cent cap on debit card fees that the Federal Reserve proposed late last year. But that was then and this is now. With the Fed almost doubling the original cap proposal, banks will have a lot more cash coming in from debit card transactions than they previously thought.

Losers: U.S. consumers.

Advocacy groups say that the hike from 12 cents to 21 cents per debit card transaction is “significantly higher” than promised – and that consumers will pay the price.

“American consumers suffered a major loss today,” says National Retail Federation President and CEO Matthew Shay. “We are extremely disappointed that the Federal Reserve chose to be influenced by special interests and ignored the will of Congress and American consumers. While the rate will provide modest relief, it does not go far enough.”