Swipe Fee Limits Help Small Biz, Hurt Big Banks

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NEW YORK (BankingMyWay) – The Federal Reserve’s new rules on debit card fees have their share of winners and losers, but one big winner is small businesses. Small companies like retail shops may save up to 70% on debit card transaction savings, according to Federal Reserve numbers.

The new rules stem from a directive by Congress contained in last summer’s financial reform bill for the Federal Reserve to create a debit card swipe-fee environment that is “reasonable”. The Fed’s response, announced last week, were twin proposals that cap debit card swipe fees at retailer locations at a maximum of 12 cents per transaction.

“If the [Federal Reserve] Board adopts either of these proposed standards in the final rule, the maximum allowable interchange fee received by covered issuers for debit card transactions would be more than 70% lower than the 2009 average, once the new rule takes effect on July 21, 2011,” the Fed said in a statement.

Although debit fees vary among card companies and banks, according to JPMorgan analyst Tien-tsin Huang, the current industry average is between $1 and $1.30 per transaction. In that context a 12-cent cap is a pretty big deal.

The Federal Reserve reports that “debit card use in the United States now exceeds all other forms of non-cash payments and, by number of payments, represents approximately 35% of total non-cash payments.” The Fed also reports that total debit card revenues reached $16 billion in 2009.

On that level alone, the fee cap should help consumers (who could see lower retail prices) and hurt banks (who will see lower fees cut into revenues).

But the real winners are America’s small businesses. The benefits are in the calculus. Every time a consumer swipes or waves a debit card at a retail counter, the retailer is obliged to pay an “interchange” fee to the bank or credit card company.

If Huang’s numbers are on the money, small business owners would reap a big windfall – the difference between paying $0.12 for every debit card swipe versus up to $1.30 is huge. That would leave more money in a retailer’s bank account and, presumably, allow small business owners to share the wealth with consumers.

The proposal, which is open for comments until Feb. 22, might also lead to less ATM use by consumers previously forced to pay cash by small businesses who don’t accept cards. That could further reduce bank revenues, and keep more change in consumers’ pockets.

Between the CARD Act and the financial reform legislation, Uncle Sam is going after banks and credit card companies like Mike Tyson in his prime.

That’s why the chief beneficiary of the latest government move against financial institutions doesn’t reside on Wall Street – but on Main Street.

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