–Retransmitting Updated Story Published 14:58 ET Thursday

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 and credit
card company shareholders, the Federal Reserve Thursday voted without
any objections to propose a drastic cut in fees for bank debit card

Fed staff recommended for Board approval proposals that centered on
12-cent per transaction caps on such transactions, ruling out the trend
toward marking up the debit card service to whatever the market will
bear. The proposed fee cap was far more restrictive than expected. The
Fed is asking for comments on some alternatives within the proposal
being published in the Federal Register.

“It’s very important,” Fed Chairman Ben Bernanke said, “to do all
we can to preserve the dynamism, competition and innovation in payments
which has obviously been an important feature” of debt cards. “At the
same time,” he continued, “we should do all we can to minimize the
administrative and regulatory burden implied by these rules.”

While directly affecting bank profits and granting relief merchants
asked Congress to provide, the changes’ direct effect on consumers will
be far more gradual and at this point, are uncertain, a Fed staffer
said. “On the whole, we don’t know what the outcome will be in the
market,” she said. It remains to be seen whether banks will come up with
more efficient delivery of existing services, or push a shift toward
some other payments alternative with higher margins not covered by the
proposed regulations.

The staff proposed a set of standards for debit card fees that
would include the 12-cent “safe harbor” and, for charges outside the
safe harbor, 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

The Fed blended its proposed price regulation with a key
requirement encouraging competition, forcing merchants to always have a
choice of two network providers both for signature debits and PIN
debits. “There will be some pressure on the signature debit networks,”
under the proposal, a staff member told the Board. Now only Visa and
Mastercard provide signature network services. PIN transaction services
are provided by more than a dozen networks.

The effect of the new rules depends on how they are implemented but
although estimates varied, half or more of those debit card profits
could disappear. Shares of Visa were down 10.8% in afternoon trading,
while Mastercard shares were down 8%. Shares of big banks, on the other
hand, having been hit earlier, seemed little affected by the latest

Small details in the final regulation could have a large effect on
how much banks earn for the services. The staff said it proposed using
median costs to calibrate its standards after examining several
alternatives but the final choice is still pending the comment process.

The Merchants Payment Coalition which lobbied Congress to lower the
fees said the proposed rules “are a step forward in bringing fairness
and transparency to the debit fee system.”

The group, which has been fighting “swipe fees” for more than a
year, said the Fed’s proposals “demonstrate real progress” toward the
group’s goal of completely eliminating interchange fees for debit

The Fed showcased the decision-making process in its first Webcast
of a Board meeting, making the Board’s afternoon 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 recovered since.

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.
Bernanke asked the staff during the meeting to recount practices in
other countries.

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 could 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.

The new law dictates that debit card transaction fees, which have
pumped by one estimate more than $20 billion a year in profits to banks
and servicers up to now, have to be linked to the actual cost of the
service rather than marked up as banks have done, by tying a so-called
ad valorem fee to the size of the transaction.

U.S. merchants pay some of the highest debit card fees in the world
despite the fact debit cards do not present the credit risk of credit

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 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, still allowing flexibility enough to
accommodate future evolution of the services.

** Market News International Washington Bureau: 202-371-2121 **

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