Fed Proposes Limit on Swipe Fees


NEW YORK (MainStreet) –The Federal Reserve proposed a  12-cent-per-transaction cap on swipe fees that credit card issuers impose on merchants on Thursday, a stipulation that could cost big banks billions of dollars in revenue.

As we previously reported, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Reserve has the right to limit debit card interchange fees established by card networks and paid by merchants to card issuers for each transaction. The new standards, once established, will apply to issuers with assets of $10 billion or more.

“I believe [the] proposal reflects a reasonable approach to implementing these requirements of Dodd-Frank,” Janet L. Yellen, vice chair of the Fed said in a statement. “We will be interested in reviewing commenters' input on the proposal as we determine what refinements should be made when it is adopted as a final rule.”

These final rules are expected to be published in mid-April and go into effect July 2011. Should the Fed adopt the proposed standard, the maximum allowable interchange fees received by banks for debit card transactions would be more than 70% lower than what issuers made off of them in 2009. 

TheStreet contributor Bill Hardekopf, CEO of LowCards.com, sees the proposed fee limit as good news for retailers, but bad news for banks, which currently charge merchants an average of 1% to 2% from each transaction. This means that while a $100 purchase currently nets a bank up to $2 in fees, that would drop to $0.12 if the new rules are implemented.

“These rules will slash debit card revenue, which was almost pure profit for the banks,” Hardekopf said.

According to Fed estimates, debit cards are now used in 35% of non-cash payment transactions, and have eclipsed checks as the most frequently used non-cash payment method. Nearly 38 billion debit card payments were made in the U.S. in 2009, netting banks over $16 billion in debit card interchange fees. This year, estimates place that number at roughly $20 billion.

A new report from CardHub.com, an online credit card comparison guide that monitors the industry, estimates that the Fed’s proposal will decrease swipe fee receipts by around $13 billion. The report is based on data from The Nilson Report, as well as annual reports from both VISA (Stock Quote: V) and MasterCard (Stock Quote: MA), and VISA and MasterCard’s interchange assessments.

The goal of the proposal – to lower the cost for merchants – should theoretically yield lower prices for consumers. But Hardekopf says that might not be the case.

"[Banks] are going to have to make up for this substantial loss of revenue by raising rates and fees in other areas,” Hardekopf said. “In addition, we'll probably see issuers cut rewards on debit cards. More than likely, it will be the consumer who will pay the price for this rate cut for retailers."

According to Hardekopf, some banks have already starting introducing the new charges. Chase (Stock Quote: JPM), for example, began notifying some customers this month that it will add a $6 monthly fee to accounts with small deposits.

What else should you know about the swipe fee battle? Check out MainStreet’s frequently asked questions on the subject.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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