Federal Reserve’s Swipe Fee Cap Set Higher Than Senate’s

The Federal Reserve Board issued a final rule Wednesday establishing standards for debit card swipe fees, but does not match what was previously approved by the U.S. Senate.

The board announced today that under the final rule, called Regulation II, the maximum permissible swipe fee that an issuer may receive for an electronic debit transaction will be 21 cents per transaction, and 5 basis points multiplied by the value of the transaction. The rule will go into effect Oct. 1.

When combined with the maximum permissible interchange fee under the interchange fee standards, a covered issuer eligible for the fraud-prevention adjustment could receive an interchange fee of up to approximately 24 cents for the average debit card transaction.

Illinois Senator Dick Durbin’s amendment to the Dodd–Frank Wall Street Reform and Consumer Protection Act was set to go into effect on July 21, and would have capped the interchange fee that a merchant’s bank pays a customer’s bank when merchants accept debit cards at 12 cents per transaction.

The Durbin amendment was challenged by one pushed by Sen. Jon Tester (D-MT) earlier this month. Tester’s amendment would have delayed implementation of swipe fee reform for two years did not get enough votes in Senate yesterday to break a filibuster.

In a statement released by the Federal Reserve today, chairman Ben S. Bernanke said this has been one of its most challenging rulemakings under Dodd-Frank to date. The Federal Reserve has received more than 11,000 comments on the rule.

“I believe the final rule gives careful consideration to the statutory language, the cost data available to us, and the complexities of the debit interchange payment system,” Bernanke said in the statement.

Bernanke said the board plans to examine developments in the debit card market, and that the monitoring will include collecting and publishing data related to debit card costs and interchange fees.

When Durbin submitted the amendment last May, swipe fees were averaging 44 cents per transaction. Though the swipe fees implemented by the Federal Reserve will be half of what was being charged on average last May, both the National Retail Federation and the Retail Industry Leaders Association have criticized the decision.

“The Federal Reserve’s about-face suggests it abandoned the facts that the Board embraced in the December proposed rules, instead ceding to the wishes of the big banks and credit card companies,” RILA president Sandy Kennedy said.

Kennedy said data released by the Federal Reserve in December showed that, although merchants paid on average 44 cents on every debit transaction, the transaction cost just 4 cents to process. By comparison, paper checks have been processed without any interchange fee for nearly a century.

In December, the Federal Reserve proposed a cap between 7 and 12 cents for banks with $10 billion in assets, ensuring 200% profit for the issuing banks. Today’s final rule guarantees those issuers a 525% profit on every transaction, Kennedy said.

NRF president/CEO Matthew Shay said he, too, felt the Federal Reserve caved into pressure from banks and other special interest groups. Shay said he is happy his group, which rallied against the Tester amendment, was “able to shine a light on these deceptive practices and bring some relief to merchants and their customers.”

“The Federal Reserve very clearly did not follow through on the intent of the law,” said Mallory Duncan, NRF senior vice president/general council. “This rule is unacceptable to Main Street merchants and consumers who were counting on the Fed to issue a reasonable and proportional rule. Unfortunately, this rule does not meet those qualifications.”

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