By Denny Gulino
WASHINGTON (MNI) – In a decision that promises to tilt the balance
of profits toward merchants and fulfill the fears of big-bank
shareholders, the Federal Reserve Thursday is proposing a drastic cut in
interchange fees for bank debit card transactions.
Fed staff recommended for Board approval a 12-cent per transaction
cap on such transactions, ruling out the trend toward marking up the
debit card service to whatever the market will bear. While directly
affecting bank profits and granting relief merchants asked Congress to
provide, the change’s direct effect on consumers will be far more
gradual and at this point, is uncertain.
The staff proposed a set of standards for debit card fees that
would apply to anything more than the 12-cent “safe harbor” and for
the most part ruled out charging for anything but transaction costs, not
technology development and fraud protection. The restrictions would not
apply to banks with less than $10 billion in assets.
The Fed showcased the decision-making process in its first Webcast
of a Board meeting, making the Board’s discussion available to anyone
with a computer for the first time.
When Congress put the provision to slash debit card fees
in the Dodd-Frank financial reform package, via an amendment offered
by Sen. Dick Durbin, bank stocks and to some extent, card processing
company shares were hit hard, but have recovered since.
The Fed had not said exactly how it would accomplish the mandate
until its staff recommendations were published shortly before the
afternoon meeting. Critics of the limitations said the Fed risked adding
complications that would dampen consumer spending. Critics of the banks
said the Fed would push them to add fees elsewhere to make up the
lost revenue, perhaps by shifting their sales promotions to sell
reloadable pre-paid cards not covered by the new law.
Vice Chairman Janet Yellen read the staff’s report and said, “I
believe staff’s proposal reflects a reasonable approach to implement
these requirements of the Dodd-Frank legislation.” However the Board
will wait to implement the new rules until comments on its proposal can
be evaluated in the months ahead. The deadline for
publication of final rules is April 21 with actual implementation by
July.
The EU, Canada, Australia and several other countries for years
have limited the fees debit card and network providers can charge. Fed
Chairman Ben Bernanke asked the staff during the meeting to recount
practices in other countries.
The new law dictates that debit card transaction fees, which have
pumped many billions in profits into banks up to now, have to be linked
to the actual cost of the service rather than marked up as banks have
done, by tying the fee to the size of the transaction.
U.S. merchants pay some of the highest debit fees in the world
despite the fact debit cards do not present the credit risk of credit
cards.
A Kansas City Fed study early in the year found debit cards carry
37% of all consumer retail payments. The study said 60% of the debit
transactions were with debit cards requiring a signature, which carry
higher charges than debit transactions requiring a personal
identification number.
The Fed proposal would require each merchant to have a choice of
two network providers both for signature debits and PIN debits.
The Kansas City Fed study suggested that under some scenarios
consumers actually benefited when merchants were hit with higher fees
because more money was available to build and modernize the transaction
networks. But the Board’s proposal was written to link payments
to actual transaction costs but still allowed flexibility enough
to accommodate future evolution of the service.
** Market News International Washington Bureau: 202-371-2121 **
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