Fed Rule Would Cap Debit Interchange Fees

MARK HAMSTRA

WASHINGTON — In a first-ever webcast meeting of the Federal Reserve Board last week, its members voted unanimously in favor of a proposed rule that would limit debit-card interchange fees.

Retailers have long sought government intervention on the fees, which are assessed on both credit- and debit-card transactions by the card issuers. Retailers have claimed — and the Federal Reserve Board seemed to agree — that the free-market system was not having the effect of restraining the fees through open competition. In fact, the board concluded, since customers choose which cards to use, but are not aware of the cost to the merchant for accepting the card, the free-market system is essentially being circumvented.

Directed by Congress in the financial reform legislation that passed this year to ensure that debit-card interchange fees are “reasonable and proportional” to the costs incurred by issuers, the Fed suggested two alternatives, one of which would allow issuers a “safe harbor” interchange fee of 7 cents per transaction, based on the median actual cost, with a cap of 12 cents, while the other would simply cap debit-interchange at 12 cents per transaction.

“If the board adopts either of these proposed standards in the final rule, the maximum allowable interchange fee received by covered issuers for debit-card transactions would be more than 70% lower than the 2009 average, once the new rule takes effect on July 21, 2011,” the Fed said.

The proposed rule would also require issuers to allow their cards to be processed on at least two unaffiliated networks per debit card.

“The Federal Reserve Board of Governors' proposal demonstrates real progress toward achieving a reasonable goal and having parity between checks and debit cards,” said Leslie G. Sarasin, president and chief executive officer, Food Marketing Institute, Arlington, Va. “Anything that can be done to take excessive costs out of grocery purchases is good for the consumer.”

In a prepared statement, Peter J. Larkin, president and chief executive officer, National Grocers Association, said NGA "strongly believes there should be no swipe fees on debit transactions similar to the way checks are treated today."

"However, the Federal Reserve has taken an important step to fulfill
Congress' intent to reform debit swipe fees this year."

The board noted that it could not restrict card issuers from assessing fees on consumers for using debit cards, and also noted that issuers would be free to offer incentives to steer customers toward the use of credit cards, on which interchange fees remain unregulated.

The board also seemed to agree with retailers' assertion that reduced interchange fees could result in lower costs for consumers, but noted that the overall effects of debit-card interchange regulation will depend on whether consumers respond to incentives offered by merchants and issuers.

The proposed rule is open for public comment until Feb. 22.