Fed Softens 'Swipe' Fees

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The Wall Street Journal
By: Victoria Mcgrane & Robin Sidel
June 30, 2011

The Federal Reserve ordered the nation's banks to cut the rate they charge merchants for debit-card transactions roughly in half, dealing banks a softer blow than many had feared, but one that will still likely cost them billions in annual revenue.


The rule, which goes into effect Oct. 1, caps the amount banks can charge merchants for processing debit-card payments at 21 cents, plus a little more to cover fraud-related costs. The cap is almost twice as high as a 12-cent limit the Fed originally proposed in December and nearly half of the current 44-cent average banks now charge. The Fed also gave banks more time to comply with the new rule; it was to kick in July 21.

Fed Governor Elizabeth Duke was the only one of the five-member Fed board to vote against the rule. Like many in Congress, she said it would hurt small banks and credit unions, despite its attempt to give them an exemption, and would result in "an increased regulatory burden."

Shares of card companies Visa Inc. and MasterCard Inc. surged after the Fed revealed the more generous cap.

The rule will still take a significant bite out of banks' revenue. The limits will slice the industry's annual debit-card revenue revenue roughly in half to about $10 billion, according to consulting firm Oliver Wyman. That's less than the $11.8 billion revenue hit that would have resulted if the Fed's initial proposal had stuck. The Fed estimates large banks will see their fee revenue decline by more than 40% under the revised rule.

"It's better than it was, but it is still below our cost," William Cooper, chief executive of TCF Financial Corp., said in an interview. The Wayzata, Minn. bank, which has $18.7 billion in assets and more than 400 branches, has sued the Federal Reserve to block the rules.

That view was echoed by Wells Fargo & Co., one of the country's largest retail banks, which also said it is reviewing the rules and " and determining how to implement them accordingly."

The Fed's ruling ends a ferocious lobbying battle between banks and retailers that fought over a once-obscure corner of the financial world. These fees charged by banks to retailers are rarely seen by consumers, and the financial impact on individuals remains a matter of fierce dispute. The provision was added to the Dodd-Frank financial overhaul as part of a populist backlash against Wall Street.

After the bill was signed, the swipe-fee provision became the No. 1 target of the banking industry, given the impact on revenue. A campaign by banks and their supporters in Congress went further than any other effort to change the bill, before being defeated in the Senate. The Fed received 1,558 comment letters and 8,337 form letters on the issue. Fed Chairman Ben Bernanke called it "one of our most challenging rule makings."

The provision is the one of the most significant parts of Dodd-Frank that directly touches consumer finance. The other major piece, the Consumer Financial Protection Bureau, is up and running but constrained by not having a full-time director.

The final rule sets out a three-part formula for determining how much banks can charge for each debit-card transaction. It sets a 21-cent base fee and allows banks to assess an additional 0.05% of the transaction's value to cover overall losses from fraud. The Fed will allow certain banks to charge an additional one cent per transaction to cover the costs of investments in fraud-prevention measures. To qualify for this extra penny, banks must meet standards set out by the Fed.

All together, on a $100 purchase, a bank could receive 27 cents: the 21-cent base fee, plus five cents for fraud losses and an extra one cent for fraud-prevention measures.

The Fed said it "is difficult to predict the overall effect" on consumers. Merchants say the reduced rates will trickle down to customers in the form of lower prices. But banks have scrambled to recoup anticipated losses by eliminating free checking and raising fees on other bank services. Many big banks have also eliminated rewards programs that were tied to debit cards.

"Everything from checking to savings to other retail and commercial bank products will be revaluated," says Robert Hammer, who runs a payments consulting firm in Thousand Oaks, Calif.

Merchants didn't fight this battle to lower their prices, argued Rep. Barney Frank (D-Mass.). "I think they were fighting to raise their revenue," he said in a recent interview. A key architect of the financial overhaul, Mr. Frank opposed the debit-fee provision, which was added in the Senate by Sen. Richard Durbin (D., Ill.), and supported efforts this year to delay the Fed rule.

Merchants have long grumbled about the fees they pay to accept plastic. Merchants paid $62.75 billion in card-related fees last year, up from $48.56 billion in 2005, according to the Nilson report, a Carpinteria, Calif.-based newsletter that tracks the payments industry. Those fees have risen dramatically in recent years due to greater use of plastic overall. At the same time, Visa Inc. and MasterCard Inc., which set the fees charged by card-issuing banks, have significantly raised their rates as well.

Chicago restaurant owner Ina Pinkney says the new rate likely won't make much of a difference in her expenses because the company that processes her transactions just imposed some new fees on her account.

"I'm still getting screwed," said Ms. Pinkney, who pays more than $30,000 a year to accept credit cards and debit cards.

--Maya Jackson Randall and Alan Zibel contributed to this article.
Write to Robin Sidel at robin.sidel@wsj.com

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