Fed orders banks to lower retailers' debit fees

WASHINGTON (AP) -- The Federal Reserve is set to limit the fees that banks charge retailers for swiping debit cards to 21 cents, a higher cap than initially proposed.
Banks succeeded in convincing the Fed that its initial proposal of 12 cents was too low after a six-month lobbying blitz. They currently charge an average of 44 cents per swipe.
The Fed will formally adopt the rule Wednesday, which was required under the financial regulatory law enacted last year. The rule takes effect Oct 1, later than expected.
In addition to the 21-cent cap, the rule will also allow banks to charge a fraction more to cover the costs of fraud prevention.
The move to limit swipe fees pitted the nation's largest banks and payment processors like MasterCard Inc. and Visa Inc. against Wal-Mart and retailers of all sizes. The decision to settle on a higher cap pushed up bank and network stocks in late afternoon trading on Wall Street.
Banks said roughly $16 billion was at stake if the 12-cent cap took effect. That would be more than 80 percent of the $19.7 billion in debit transaction fees paid by merchants in 2009, according to the Nilson Report, which tracks the payments industry.
The banks warned that they would have to make up for some revenue lost by shifting costs to consumers. Many already eliminated unrestricted free checking accounts, and some ended debit card rewards programs. Other potential actions include annual fees for using debit cards, which are already being tested in some markets.
The higher cap may lead some to avoid taking such action.
Merchant groups said that their savings would be passed on to customers in the form of lower prices. But many questioned whether retailers would simply pocket the difference. Some big retailer stocks declined late in Wednesday's trading session.
Banks and credit unions with assets under $10 billion are exempt from the rule, under the premise that they rely more on swipe fees, also known as interchange fees. But those smaller institutions argued that the exemption won't help. That's because it invites merchants to discriminate against their cards. It also leaves the decision on which network to use to process the transaction in the hands of merchants, who could choose to bypass networks that charge higher fees.
Fed Chairman Ben Bernanke acknowledged small banks' concerns during a May 12 hearing by the Senate Banking Committee. He said allowing them to charge more than big banks for processing debt card transactions could make debit cards issued by smaller banks less attractive to merchants.
"There's good reason to be concerned about it," Bernanke said. It could result in some smaller banks "being less profitable or even failing."
Separately Wednesday, a federal appeals court in South Dakota ruled that a lower court judge was correct to deny a preliminary injunction against the fee limits taking effect.
The case challenging the regulations' constitutionality was brought in October by Minnesota-based TCF National Bank, the unit of TCF Financial Corp., considered the first bank to offer free checking accounts. TCF is among the banks that no longer offer free checking without requirements such as using direct deposit or maintaining minimum balances.
In a twist, TCF's attorneys argued that the provision of the law exempting small banks and credit unions gave those unaffected banks an unfair advantage.