New Fed proposal takes aim at excessive debit card swipe fees

fed swipe fee limits

The Fed wants to bring swipe fees closer to what it costs banks to process debit card transactions. Image: CC MC2 Honey Nixon/Wikimedia Commons

Capping debit card swipe fees at 12 cents a transaction is part of a proposal submitted by the Federal Reserve on Thursday. The Fed is proposing the swipe fee cap and other curbs on debit card abuse by banks to comply with the financial reform bill. As expected, merchants support the measure and major credit card companies oppose it as they watched their stock take a hit on the news.

The Fed swipe limit proposal

Under the current system of debit card swipe fees, credit card companies charge retailers 1 to 2 percent of the transaction, regardless of the dollar value. The Fed debit card swipe fee proposal also includes giving merchants a choice from at least two independent debit card networks, a move that would create more competition for Visa and Mastercard. The Fed swipe limit proposal was made to comply with a provision of the financial reform bill requiring debit card swipe fees to be “reasonable and proportional” to how much it costs a bank to process electronic transactions. The Fed offered the reasoning that debit card swipe fee limits will force banks to be more cost efficient.

Banks to lose billions in easy money

Swipe fees earned credit card companies about $15 billion in 2009. The Fed swipe fee limit proposal would be a boon for retailers. An analyst at JPMorgan Chase told Bloomberg that banks that issue Visa and Mastercard credit cards could lose 80 to 90 percent of that revenue. According to UBS Investment Research, the 12 cent swipe fee cap will drive down average debit card swipe fees about 75 percent. The Fed said the new debit card swipe fee limits probably won’t translate into lower prices for consumers. But banks looking for ways to make up for their ill-gotten gains could cut back on debit card reward programs and come up with more of the creative ways to gouge consumers they are known for.

Reactions to Fed swipe fee limits

The National Retail Federation said lower costs for merchants could lead to discounts for consumers. The American Bankers Association said the Fed would allow retailers to avoid paying their fare share for the benefits they get from the card payment network. Shortly after the Fed presented the swipe fee proposal Thursday, Visa stock fell 11 percent and Mastercard stock fell 9 percent.


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