Fed Caps Debit Card Fees for Merchants

The cap is a defeat for banks generally, although the news was not as bad as banks expected. The limits are significantly higher than the initially proposed cap of 12 cents a transaction laid out by the Federal Reserve in December. Banks currently charge merchants an average of 44 cents for a debit card transaction.

The rules were approved on a 4-to-1 vote by the Fed’s Board of Governors.

The new limits include a transaction fee of 21 cents plus an assessment of 5 basis points — 0.05 percent of the transaction amount — for fraud reduction costs, an element that could raise the overall fee by a penny or two on average. The rules would go into effect on Oct. 21, and the Fed is asking for public comment on the fraud portion of the fee cap.

The fee cap is a result of the Dodd-Frank financial regulation act, which was signed into law last July. The law required the Federal Reserve to determine whether the fees charged to process debit card transactions were “reasonable and proportional to the cost incurred” by the bank that issued the cards.

The law allowed, but did not require, the Fed to make an allowance in its fee cap for the cost of preventing fraud, which banks say is a substantial expense. Under the new law, the revamped fees are scheduled to take effect on July 21, the first anniversary of the signing of the Dodd-Frank Act into law.

In December, the Fed proposed a rule that that would cut the allowable “swipe” fee to an average of 12 cents a transaction from an average of 44 cents in 2009, when total interchange fees on debit and prepaid cards reached $16.2 billion, according to the Federal Reserve. According to merchant trade groups, retailers paid $20.5 billion in fees last year to accept debit cards, including processing fees.

Those fees rose significantly during the 2000s, the Federal Reserve found. In the early 1990s, when debit cards were first beginning to expand in popularity, card networks and banks often compensated merchants for the cost of installing terminals that allowed them to accept debit cards at the point of sale.

The direction of fees began to reverse in the mid-1990s, however, with merchants who accepted cards paying the card networks for processing.

Merchants asserted that banks and the major credit card networks steadily raised the fees they charged even as improvements in technology and economies of scale meant that the fees should be falling. And they charged that the two major card networks, Visa and MasterCard, unfairly controlled prices and stifled competition.

The card companies, in turn, said that along with greater debit card use came greater fraud, which the banks had to pay to police. In addition, they said, the costs reflected constant investments in technology, which gave faster transaction confirmations to consumers.

Card companies also frequently offered perks or rewards to debit card users, which also affected costs.

Debit cards grew faster than any other form of electronic payment over the last decade, increasing to 37.9 billion transactions, according to Federal Reserve research.

Congress exempted banks, credit unions and other debit card issuers with assets of less than $10 billion from the cap on debit fees. But officials from the Federal Reserve and the Federal Deposit Insurance Corporation raised doubts earlier this year that regulators could effectively require large banks to charge a lower fee and still allow small banks to charge a higher fee.

Ben S. Bernanke, the Fed chairman, told members of Congress that basic economics precluded such an arrangement — that retailers would naturally favor cards that resulted in them paying lower fees, leaving smaller banks to lose business despite the exemption from the fee cap.

Credit unions and community banks argued strongly against the fee caps, saying that a reduction in those fees might cause them to have to eliminate debit cards or to charge customers higher fees for checking accounts and other services. Large banks, too, said consumers would pay for any reduction in their revenue from debit fees, and some institutions said they might set limits on debit card use.

The debit card rules were the subject of a furious lobbying battle on Capitol Hill and at the Federal Reserve. A bill to delay the rules failed in the Senate earlier this month, garnering 54 votes but falling short of the 60-vote majority required for passage.

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