Many retailers expected the Federal Reserve would support their interests today and significantly drop the fees associated with debit card transactions. However, the drop was less than expected, and it has some business groups outraged.
Everytime a debit card is swiped, the retailer pays an interchange fee to the payment network. The Federal Reserve passed a new rule that caps the interchange fee at 21-cents per transaction. The original proposal last December was a 12-cent cap.
The higher than expected cap surprised groups including the Merchant Payments Coalition who added that the Federal Reserve made significant concessions for banks. The law’s intention was to create a fee cap that was reasonable and proportional to the costs issuers incur for every debit card transaction. The problem is the bankers and retailers are very far apart in describing what’s reasonable and proportional.
“The Federal Reserve very clearly did not follow through on the intent of the law,” said Mallory Duncan, Chairman of the Merchants Payments Coalition. “This rule is unacceptable to Main street merchants and consumers, who were counting on the Fed to issue a fair rule that followed Congress’ law. Unfortunately, this rule does not meet those qualifications.”
The Merchant Payments Coalition which represents about 2.7 million grocery, gas, drug store, online businesses, and other retailers is now looking at its legal options.
Will this help or hurt consumers?
There’s been a lot of controversy over this issue. Businesses said the 12-cent cap would mean they could pass savings on to consumers, while banks said consumers would see higher prices for banking if they lost a valuable revenue stream.
The American Bankers Association was critical of the original proposal to drop fees by 70%, but today commended the Federal Reserve for recognizing that banks rely on these fees to cover fraud losses, network fees, fixed costs, and fraud prevention. The ABA says while the cap is not as significant as originally proposed, consumers will still feel the impact.
“The final rule still represents a 45 percent loss in revenue that banks use to provide low-cost accounts to our customers, fight fraud and maintain our efficient U.S. payments system. This remains a real concern to banks everywhere and the consumers and communities they serve. Consumers will still feel the impact of this direct transfer of costs from big box retailers to everyday Americans. Consumers will see higher fees for basic banking services, and banks – particularly community banks – will still feel the revenue pressures that this rule will cause,” said Frank Keating, ABA president and CEO.
The ABA went on to say they’ll be watching retailers. “We will also watch to see whether retailers reward customers with lower prices from their billion dollar windfall or simply pocket the money.”
While 21-cents is generally the cap, there will be an additional fee that can be added based on the transaction amount. That percentage fee is expected to add another penny or two to the fee. Plus, there’s a 1-cent fee that can be added if the issuer develops and implements fraud-prevention standards. It’s expected most fees will average about 24-cents per transaction.
It will be interesting to watch this issue develop over the next several months, as it seems both sides are still worlds apart on their views of this issue. The rule was supposed to take effect in July, but the effective date was pushed back to October 1, 2011.
There will also be an exemption to these limits for issuers with assets less than $10 billion.