Fed to banks: Lower stores’ debit fees

Associated Press

WASHINGTON

The Federal Reserve said Wednesday that banks can charge retailers only 21 cents each time they swipe a debit card.

The board raised the cap from its initial proposal of 12 cents per swipe. Banks and big payment processors such as Visa and Mastercard convinced the Fed that was too low to cover the cost of handling transactions, maintaining networks and preventing fraud.

Banks currently have no limit and charge an average of 44 cents per swipe.

The Fed voted 4-1 to adopt the rule, which was required under the financial regulatory law enacted last year. Gov. Elizabeth Duke opposed the rule. It takes effect Oct. 1, later than expected.

It was “one of our most challenging rule-makings” under the financial regulatory law, Fed Chairman Ben Bernanke said Wednesday. He said the Fed will monitor developments in the debit-card market “on an ongoing basis” to gauge if it’s accomplishing the intended goals.

Fed staff said the higher cap reflects a broader range of costs incurred by banks that issue debt cards. The rule will also allow banks to charge a fraction more to cover the costs of fraud prevention.

It does not apply to government-issued debit cards, prepaid cards or cards issued by banks and credit unions with assets under $10 billion.

The move to limit swipe fees pitted the nation’s largest banks and payment processors such as MasterCard Inc. and Visa Inc. against Wal-Mart and retailers of all sizes. The decision to settle on a higher cap lifted bank and payment processors stocks in late afternoon trading on Wall Street.

Banks said roughly $16 billion was at stake if the 12-cent cap took effect. That would be more than 80 percent of the $19.7 billion in debit transaction fees paid by merchants in 2009, according to the Nilson Report, which tracks the payments industry.

The banks warned that they would have to make up for some revenue lost by shifting costs to consumers. Many already eliminated unrestricted free checking accounts, and some ended debit-card-rewards programs. Other potential actions include annual fees for using debit cards, which are already being tested in some markets.

The higher cap may lead some to avoid taking such action, said Brian Riley, a bank card analyst with the consultant The Tower Group. Banks must still review their costs but the rule allows them to avoid a “slash and burn” process for customers that don’t provide much profit, he said.

Merchant groups said that their savings would be passed on to customers in the form of lower prices.