Federal Reserve proposes to cap interchange fees for debit card transactions

Good for merchants, but consumers may not reap any benefit

December 20, 2010|By Eileen Ambrose, The Baltimore Sun

Use your debit card to make a purchase, and the merchant will pay a fee to the bank for processing the transaction.

You don't see this interchange fee, which is equal to about 1.5 percent of the amount of your purchase. But you can end up paying for it anyway if the merchant passes the cost to you through higher prices.

As part of financial reform last summer, the Federal Reserve was charged with writing rules to ensure that interchange fees were "reasonable and proportional" to processing costs. This month, the Fed proposed capping the fee collected by big card issuers to no more than 12 cents per transaction — a decrease of more than 70 percent from the typical fee last year.

Merchants are happy. But banks oppose this government intervention.

As for consumers, they might want to put off celebrating just yet. There is no guarantee that merchants will share their savings with consumers. And some financial experts expect banks will try to make up for this lost revenue by raising other fees on customers.

"We're not clear as to whether it's good for consumers," says Ruth Susswein, a spokeswoman for Consumer Action. "That's the big question."

The Fed is now seeking public input on its proposal. The fee cap has some notable exceptions. It applies to debit cards, not credit cards or prepaid cards. And small banks and credit unions with less than $10 billion in assets would be exempt.

You would think members of that last group would be in favor of the proposal because they can still collect higher interchange fees. Not so.

Small banks and credit unions worry, for example, that merchants won't accept their debit cards because they carry higher interchange fees. Merchants aren't supposed to discriminate against cards in the same network, but there is no enforcement, warns Viveca Ware, senior vice president of regulatory policy with the Independent Community Bankers of America.

But Odysseas Papadimitriou, chief executive of CardHub.com, a credit card comparison site, says the proposed rules should help smaller institutions. By being able to collect higher fees, they will be able to put some of that money toward offering more attractive products and build their market share, he says.

The big changes, though, are likely to come from the major banks that stand to see their annual interchange fee income drop by $13 billion, according to CardHub.com.

"Banks are not nonprofit organizations. They need to make a profit for the services they provide," Papadimitriou says. "Banks are going to take their money from consumers in a different way."

Papadimitriou predicts banks will begin promoting prepaid cards, not subject to the fee cap, as an alternative to a checking account. And banks likely will stop offering debit cards with rewards, while raising the fees and minimum balances on checking accounts, he adds.

This doesn't sound good for the consumer.

But Ed Mierzwinski, a consumer advocate at the U.S. Public Interest Research Group, says interchange fees haven't been fairly applied.

Merchants, unable to negotiate with banks and card networks for reduced interchange fees, have raised the price of goods for all customers to cover the cost, Mierzwinski says. So even customers using cash pay for the privilege for others to use plastic, he says.

Moreover, if retailers end up saving money on interchange fees, the stiff competition in the marketplace will push them to lower their prices for consumers, Mierzwinski says.

We won't know for a while. The Fed's final regulation on interchange fees won't kick in until in mid-July.


Debit Card Facts

Large banks collect $22.8 billion annually in interchange fees on debit card transactions, according to CardHub.com.

More than one out of three non-cash payments last year were made with a debit card, surpassing all other forms of non-cash payments. Debit transactions reached 37.9 billion last year, according to the Federal Reserve.

Credit card transactions declined slightly to 21.6 billion in 2009.

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