Fed May Reconsider Plan To Limit Debit Card Fees

WASHINGTON (AP) — The Federal Reserve told Congress on Thursday that it may reconsider its proposal to limit the fee that banks charge merchants for debit card transactions to 12 cents per swipe, the latest twist in a battle over billions of dollars.

Fed Governor Sarah Bloom Raskin made the remark at a House hearing at which lawmakers of both parties attacked the Fed’s plan and asked her to reconsider, saying it would batter banks still reeling from the 2008 financial crisis.

The financial overhaul bill that President Barack Obama and Congress enacted last summer ordered the Fed to issue rules that would set the fees at a reasonable rate. Currently, merchants typically pay between 1 and 2 percent of the transaction’s total and those charges average about 44 cents.

The question of where to set the fees has triggered a lobbying battle pitting merchants and some consumer groups against banks and credit card networks like Visa and Mastercard.

The Fed’s proposed 12-cent cap would be a major victory for merchants, who say higher fees are hurting their businesses and their ability to create jobs. Banks say cutting the fees would cause them to lose money and force them to raise their charges for checking accounts and other services.

Raskin told the House Financial Services Committee’s financial institutions subcommittee that the Fed has received thousands of comments on the proposal and expects many more.

“The other board members and I are reserving judgment on the terms of the final rule until we have an opportunity to consider these comments,” she said, citing the complexity of the issue.

The period for reviewing public comments ends next Tuesday. The financial overhaul law requires the Fed to issue final standards by April 21, and they would take effect in July.

The law’s requirement was sponsored by Sen. Richard Durbin, D-Ill., the Senate’s No. 2 Democratic leader, who says the current system is unfair to consumers and merchants.

At Thursday’s hearing, lawmakers of both parties said the Fed has not adequately considered the banks’ and card networks’ costs of fraud prevention in proposing lower fees. They also said the lower fees would especially batter small community banks, a powerful constituency in Congress, because larger banks might be able to charge lower fees. The charges are currently mostly uniform.

“If done incorrectly, this could be the final nail in the coffin for many smaller institutions,” said Rep. Edward Royce, R-Calif.

Several legislators suggested that the Fed should take more time in issuing its rule.

“We owe it to the American people” to delay the rules, said Rep. David Scott, D-Ga.

Raskin told Scott and other lawmakers that since the deadlines were set by law, only a new law could change them.

Under questioning from lawmakers, Raskin said the Fed was unsure how much of the savings merchants would pass on to consumers should the fees be reduced. She also expressed uncertainty over whether it would cause banks to boost charges for their services.

Capping the fee at 12 cents would cost banks $14 billion, according to testimony by David W. Kemper, representing the American Bankers Association and the smaller Consumer Bankers Association.

Kemper said the subcommittee should “immediately take all necessary congressional action to stop the Federal Reserve” from implementing the proposal.

Doug Kantor, a lawyer representing a coalition of merchants, said that for most merchants the fees trail only labor as their highest operating cost.

“Debit card swipe fees as they exist today cannot be justified. Banks benefit every time a debit card is used,” he said in his written statement.

According to a recent Fed survey, debit cards account for 35 percent of noncash payments and are used more often than checks. They have grown from 8 billion payments in 2000 to 38 billion in 2009, and are accepted at 8 million stores.

(© Copyright 2010 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.)

  • Bryan

    Banks need to stop being greedy. Credit Card is now the preferred payment method for most consumers. I understand that they have a technological infrastructure to maintain however at 12 cents per transaction credit card processors will still be able to cover their operation costs while turning a profit. When competing with the internet now days the profit margin on some sales is only 1 or 2%. After the credit card processing fees the merchants are left with a fraction of a percent. There is an average of 30 billion credit card transactions in the USA annually, at 12 cents each that’s still 360 million for the credit card processing companies.

    • Bryan

      my math was incorect that’s 3.6 billion not 360 million.

    • Jim

      Up until recently, banks would offer new customers “free” checking accounts. They were able to do this becuase of the belief that they would generate revenue based on the customer’s use of the debit card. This was a fairly good model for both the bank and the consumer. One unfortunate side effect of this, though, was that is belittled the value of the products and services that banks provide. Now customers expect accounts to be free, but with the Durbin act, that simply can’t be done. By eliminating the source of revenue that allowed banks to offer free accounts, they have caused banks to begin charging fees for their products and services, much to the dismay of customers who think banking should be free. Some banks are being very transparent about monthly service charge changes, enclosure fees, and the like, while others are not. Like the story stated, it will be smaller regional banks that will be hardest hit. They won’t be able to compete with the big, national banks.

  • Cheese_Wonton

    Meanwhile, it gets more difficult every year to be a median income wage earner. What banks and businesses do not seem to realize is that their businesses are built on the ability of large numbers of Americans having enough jingle in their pockets to feel like they can afford whatever it is you sell, be it a good or a service. What happens to business when they have made Americans so poor they no longer buy.
    This question is broad and addresses not just this one issue, but issues of wage levels in general, availability of health care that wage earners can afford, or not, job security, the ability to save for retirement, and the risks of loosing one’s savings. All of the trends in this country are towards more people having less to spend, living lower quality lives and this will degrade our nation in many ways.
    But no one wants to talk about this.

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