The long-anticipated Federal Reserve ruling on the Durbin Amendment swung decisively in favor of the banks: the new ceiling on swipe fees, at 21 cents, is substantially higher than the 12-cent cap initially proposed. The Fed’s final judgment limited so-called swipe fees to 21 cents, plus 0.05% of the transaction. What’s more, the law will take effect in October instead of July 21st as planned.
The final ruling: 21 cents, plus a little bit more
Card issuers cannot charge swipe fees of more than 21 cents. These rules will take effect on October 1st, but will exempt prepaid debit cards. According to the Fed, 21 cents is the 80th percentile of fraud costs, and that the cap satisfied the “reasonable and proportional” stipulation. On top of the 21-cent-plus-5-basis-points cap, issuers can charge an extra penny if they comply with certain fraud protection procedures. For a transaction of $38, which the Fed estimates to be the average, the interchange fee would come out to 24 cents. That’s nearly half of the current average of 44 cents.
The Federal Reserve promised to study the debit interchange market to ensure that the regulations are having the desired effect without the collateral damage threatened by banks. Chairman Ben Bernanke said that the Fed had taken the public’s comments into consideration, and ruled accordingly.
In particular, Bernanke said that the 9-cent increase stemmed from consideration of the network connectivity, labor, hardware and software costs that went into fraud protection. It did not consider other, broader costs like human resources, legal fees and executive compensation. The new ceiling is higher than many analysts expected: Goldman Sachs thought that the final regulation would cap swipe fees at 16-18 cents.
Banks’ lobbying pays off
Since the passage of the Dodd-Frank bill, banks and credit unions petitioned to water down the regulations or remove them altogether. In addition to lobbying the Fed itself, they threw their weight behind a bill to delay the regulations sponsored by Senator Jon Tester (D-Montana). Covering all three branches of government, TCF National Bank sued the Fed alleging that capping swipe fees amounted to unreasonable search and seizure. Other banks chipped in with amicus briefs and promises to challenge the final rules in court.
Banks argued that debit interchange fees are necessary for fraud protection, and that decreased revenue would force them to levy new charges on consumers. They cited a slew of new fees and terminated debit rewards programs. For one, Chase ended its debit rewards program because of lost interchange revenue. The Fed estimated that bank revenue could fall by more than 40% once the new rules take effect, but as an appeals court ruled in the TCF case today, nothing is stopping banks from assessing new fees on their customers.
Bank and card network stocks surged in the wake of the ruling. Visa closed 15% higher, while MasterCard rose 11%, and other financial institutions saw smaller gains.
Retailers lost a battle but seem to have won the war
Retailers, of course, had lobbied just as hard to keep the Durbin Amendment intact. The 75% increase on the cap is sure to hit merchants hard, especially the smaller ones who are charged higher swipe fees. The Fed estimates that retailers hand over $1.3 billion in swipe fees every month. This setback comes on the heels of a major triumph for merchants: they successfully lobbied Congress to prevent Senator Tester’s delay bill. They can still declare victory, though, that the Durbin Amendment’s regulations are implemented at all.
Major retailers’ stocks moved little, at least in comparison to financial corporations’ rise. Macy’s and Walmart actually saw a slight rise for the day, while Kohl’s, JC Penney and Target all fell by less than 1%.
When big banks battle big merchants, do consumers win?
Lost in the scuffle is how lowered debit swipe fees will impact consumers. Retailers contend that they will pass some of their savings onto their customers, but banks and credit unions argue that free and rewards checking will become extinct. The Federal Reserve took both concerns into consideration. Bernanke predicted that retailers in low-margin, competitive markets would end up passing the savings on, while those in less competitive markets would pocket more of the savings. In sum, though, the Federal Reserve said that it is “unclear” whether debit interchange regulation will benefit or hurt consumers.