U.S. Fed Softens Blow of Debit Fee Crackdown

The U.S. financial industry won a massive lobbying fight in getting the Federal Reserve to almost double a proposed cap on the amount banks can charge retailers when a debit card is used.

Under the Fed's final rule approved Wednesday, banks would be allowed to charge 22 cents per debit card transaction.

That is 10 cents more than the cap that was proposed in December, and includes a one cent allowance for meeting certain fraud prevention standards.

In addition, banks would be allowed to charge 5 basis points per transaction to accommodate for fraud losses.

``Talk about generous -- wow,'' said payments consultant Eric Grover of Intrepid Ventures.

Last year's proposal, which would have cut fees by about 75 percent, took banks such as Bank of America and Citigroup, and card network companies such as Visa and MasterCard, by surprise.

It pitted the financial industry against retail giants like Wal-Mart Stores and Target Corp who have long argued they are taken advantage of by banks.

The result was a vigorous lobbying fight that included nationwide advertising campaigns and the Fed having to comb through more than 11,000 comment letters.

The Fed said Wednesday it could bump up the cap because the provision in last year's Dodd-Frank legislation that called for the fee limit ``is ambiguous and may be read in several ways.''

Shares of MasterCard gained 11 percent and Visa closed 15 percent higher after news of the Fed staff recommendation to raise the cap. Shares of major banks that issue debit cards got a more modest boost.

Banks pay Visa and MasterCard for processing debit transactions, and investors had worried that a cut in the fees that banks earn would translate into a cut in the fees they were willing to pay the networks.

Before the final rule was released, some bank analysts were expecting a 20-cent cap to be the best-case scenario for the industry.

``The fact that they raised it is quite a win for the branded networks,'' like Visa and MasterCard, said Tom Layman, a former chief economist for Visa who now runs the payments consulting firm Global Vision Group.

The Merchants Payments Coalition, an industry group of retailers and merchants, said it was ``exploring all available legal options to address the irresponsible mistakes made in writing this rule.''


Card companies also got a win with a more limited method of introducing card network competition.

Under the Fed's final rule, a transaction will have to be able to be processed over at least two unaffiliated card networks. The Fed proposal in December would have potentially required at least four card networks.

The financial industry also got a break in the implementation schedule.

Under the Dodd-Frank law, the fee cap is supposed to go into effect on July 21. The Fed voted Wednesday to set Oct. 1, 2011, as the date for complying with the fee cap standards.

However, banks still stand to lose billions of dollars from the fee crackdown.

The Fed has said the average amount of fees charged by banks to retailers per transaction was 44 cents in 2009.

The previously proposed 12-cent cap would have cost banks about $14 billion annually, according to card comparison website CardHub.com.