Fed Proposes Limit on Swipe Fees

NEW YORK (MainStreet) –The Federal Reserve proposed a  12-cent-per-transaction cap on swipe fees that credit card issuers impose on merchants on Thursday, a stipulation that could cost big banks billions of dollars in revenue.

As we previously reported, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Reserve has the right to limit debit card interchange fees established by card networks and paid by merchants to card issuers for each transaction. The new standards, once established, will apply to issuers with assets of $10 billion or more.

“I believe [the] proposal reflects a reasonable approach to implementing these requirements of Dodd-Frank,” Janet L. Yellen, vice chair of the Fed said in a statement. “We will be interested in reviewing commenters' input on the proposal as we determine what refinements should be made when it is adopted as a final rule.”

These final rules are expected to be published in mid-April and go into effect July 2011. Should the Fed adopt the proposed standard, the maximum allowable interchange fees received by banks for debit card transactions would be more than 70% lower than what issuers made off of them in 2009. 

TheStreet contributor Bill Hardekopf, CEO of LowCards.com, sees the proposed fee limit as good news for retailers, but bad news for banks, which currently charge merchants an average of 1% to 2% from each transaction. This means that while a $100 purchase currently nets a bank up to $2 in fees, that would drop to $0.12 if the new rules are implemented.

“These rules will slash debit card revenue, which was almost pure profit for the banks,” Hardekopf said.

According to Fed estimates, debit cards are now used in 35% of non-cash payment transactions, and have eclipsed checks as the most frequently used non-cash payment method. Nearly 38 billion debit card payments were made in the U.S. in 2009, netting banks over $16 billion in debit card interchange fees. This year, estimates place that number at roughly $20 billion.

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