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Debit fee cap: Don't expect any windfall

  • Article by: EDWARD WYATT
  • New York Times
  • June 29, 2011 - 9:55 PM

WASHINGTON - Fees paid by retailers to banks for debit card purchases, a $20 billion annual expense that has been the subject of a furious political battle in the past year, will be cut in half after the Federal Reserve voted Wednesday to cap the charges.

The cap was mandated last year in the Dodd-Frank financial regulation law, but the Fed action was far less draconian than bankers had feared. The new cap of 21 to 24 cents a transaction, down from an average of 44 cents before the law passed, is roughly double the 12 cents tentatively proposed by the Fed in December.

Consumers are unlikely to see any immediate change at the register because they do not pay the fees directly. But merchants have complained that as the cost of debit fees -- a charge for processing payments -- has risen in recent years, they have had to add it to the prices they charge.

The new lower fees may eventually be reflected in lower retail prices for consumers or, most likely, in a slight slowing of price increases. But banks said the caps would not pay for the cost of operating their electronic debit card networks, and they have warned that their customers can expect higher fees for other banking services as a result.

Minnesota reaction

Minnesota retailers were far from pleased with the Fed's decision.

Courtney Foster, a spokeswoman for Minneapolis-based Target Corp., said, "We believe the final rule falls far short of providing the expected relief for merchants and consumers."

Swipe fees are one of Target's largest single-expense categories, costing the retailer hundreds of millions annually.

Richfield-based Best Buy Co. Inc. said in a statement that it was still reviewing the 400-plus pages in the regulation but that the proposed rule "deviates greatly from the statute enacted with bipartisan support last year."

A state association of retailers, grocers, auto dealers and convenience stores said it was "disappointed" by the new rule. "While this does partially mitigate what has been a constantly growing burden on consumers and businesses for far too long, we do still believe that, at this level, the fees still present a significant cost to small businesses and consumers," Brian Steinhoff, chairman of the Minnesota Debit/Credit Fair Fee Coalition, said in a statement.

The state's banks were also upset.

While the higher 21-cent cap will "soften the short-term financial impact" of the change, the state's small banks will get hurt because they won't be able to compete on debit cards at that price, said Marshall MacKay, head of the Independent Community Bankers of Minnesota.

"In the long run, what it means to the small community banks is they're going to be forced out of the business," MacKay said.

Wells Fargo & Co., with major operations in the Twin Cities, issued a statement saying it was "pleased" the new rule took into account the range of costs of providing debit services.

"Unfortunately, the new cap is still below the cost of administering a quality debit card service to our customers," the bank said.

Minneapolis-based U.S. Bancorp, one of the nation's largest banks, declined to comment.

A wait-and-see approach

In approving the lower fees, the Fed's Board of Governors said there was no way of knowing what the effect of the new rules would be, although they will be watching the results closely.

"I think this is the best available solution that implements the will of Congress and makes good economic decisions," Ben Bernanke, the Fed chairman, said in voting to approve the rule. The board voted 4-1 in favor, with Elizabeth Duke dissenting.

Duke said her primary concern was about an exemption built into the law that gives smaller banks with less than $10 billion in assets a pass on the fee cap. These smaller institutions could charge retailers a higher transaction fee for debit card purchases.

Duke and other governors questioned whether and how that exemption would work. The board agreed to monitor the charges, known as interchange fees, to see how the revenue of small banks was affected and whether merchants appeared to be rejecting cards that they knew would require them to pay a higher processing fee.

The new fee schedule includes three parts: a maximum interchange fee of 21 cents; a 1-cent addition that is allowed if the bank issuing the debit card develops a fraud-prevention program; and a variable charge of 5 basis points, or five one-hundredths of a percentage point, of the value of the transaction to recover a portion of fraud losses.

For the average debit card transaction of about $38, that variable fee would be roughly 2 cents, which would produce an upper limit, on average, of 24 cents a transaction.

The new rules will go into effect on Oct. 1. The Fed will accept comments on the proposal to allow a 1-cent addition for fraud-prevention efforts.

Since the Dodd-Frank law passed last year, lobbyists for consumers and retailers have been butting heads with bankers over the fee-setting process. At one point this month, banks pushed hard for a Senate measure aimed at delaying the fee caps, which was defeated in a floor vote.

Banking trade groups, retailers and consumer advocacy organizations all expressed some dismay at the Fed's announcement -- the bankers because they stand to lose fees and the retailer and consumer groups because the final charges rose sharply from the Fed's initial proposal.

Staff writer Jennifer Bjorhus contributed to this report.

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