Federal Reserve sets swipe fee cap, delays implementation

Thursday, September 19th, 2013 By

Chase debit card

The Federal Reserve has set the swipe fee cap mandated by legislation, and higher than expected. Image from Wikimedia Commons.

The Federal Reserve has announced it will cap interchange fees, or swipe fees, at 21 cents per transaction. The fees are now half what merchants have been charged on average, but the nation’s central bank has also announced that the cap will not take effect until October.

Swipe fee takes effect in October

Last year, the Federal Reserve was mandated to institute a cap on interchange fees, also called swipe fees, by a portion of the Dodd-Frank Act referred to as the Durbin Amendment. The Durbin Amendment ordered the Fed to determine an appropriate limit to the fees banks charge to merchants to deliver payment on purchases made by customers using bank cards. The cap was legislatively set to take effect on July 21 of this year, but the Fed has announced that the swipe fee cap will not take effect until Oct. 1 unless a new start date is announced, according to USA Today. The fee cap has been set at 21 cents per transaction, nearly double the original estimate that the Fed gave of 12 cents.

Fraud protection preserved

The Fed has still slashed the current average in half, as banks normally charge about 44 cents per transaction and now will collect 21 cents per debit card transaction, beginning on Oct. 1. The fee cap was expected to be no higher than 20 cents, but an additional 1 cent per transaction fee is also allowed for fraud prevention. The cap also allows for five “basis points” per transaction for insurance against fraud, according to the New York Times, or an additional 0.05 percent of the amount of the transaction. Retailers were estimated to have paid more than $20 billion last year in interchange fees and processing fees, and banks were estimated to have collected almost $17 billion in interchange fees. The average fee, with the cap, could average about 23.9 cents per transaction, according to MarketWatch.

Coming fallout

Interchange fees have been a money maker for the banking industry since they were instituted in the early 2000s. Prior to that, banks had previously reimbursed merchants for installing debit card and credit card terminals. Though banks with $10 billion or less in assets are exempted from the cap, there will to be fewer benefits for many customers as a result of the fee cap. Banks have been steadily eliminating programs such as debit card reward programs and free checking accounts. Banks are anticipated to raise fees, according to USA Today, in response to the loss in revenue. Minimum balances in checking accounts may become required to avoid an account fee, and people may start getting billed for receiving paper bank statements. Banks may also start encouraging people to use credit cards instead of debit cards, as credit cards are not affected by the swipe fee cap.

Sources

USA Today on Fee Cap

New York Times

Reuters

MarketWatch

USA Today on bank fallout

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