Third U.S. Bank Regulator Criticizes Debit Card Fee Limit

The regulator of large U.S. banks said a Federal Reserve proposal to crack down on the fees banks charge retailers when debit cards are used goes too far and could hurt banks over the long run.

John Walsh, acting head of the U.S. Office of the Comptroller of the Currency, wrote to the Fed on March 4, expressing his concerns over the rule.

"We believe the proposal takes an unnecessarily narrow approach to recovery of costs that would be allowable under the law and that are recognized and indisputably part of conducting a debit card business," he wrote. "This has long-term safety and soundness consequences -- for banks of all sizes -- that are not compelled by the statute."

Banks and retailers are waging a heated lobbying fight over "interchange" fees, which merchants pay banks every time a customer buys something with a debit card.

The crackdown is required by the Dodd-Frank law, which directs the Fed to establish a "reasonable and proportional" fee that banks can charge.

Walsh is the third major banking regulator to voice concerns about the provision.

Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp Chairman Sheila Bair have argued it could hurt small banking institutions.

In December, the Fed proposed capping fees at 12 cents per debit transaction -- a 75 percent cut from the 2009 average of 44 cents per transaction.

A cap at this level would cost banks about $13 billion in annual revenue, according to CardHub.com.

In a Feb. 22 letter to the Fed, Bank of America (BAC.N) said it would get $1.8 billion to $2.3 billion less in fees annually under the crackdown.

Retailers argue banks are charging more than needed to beef up profits.

Community banks and credit unions have been aggressively pushing to have the rule delayed or changed.

The law exempts institutions with less than $10 billion in assets from the crackdown, but these banks argue the Fed rule will set the de facto rate that merchants will charge, an argument rejected by supporters of the crackdown.

Whether Congress will intervene remains unclear.

On Monday, House Financial Services Chairman Spencer Bachus said the House of Representatives would not move legislation unless the Senate supports changing the law.