Federal Reserve Proposes Cap on Debit Card Fees

by Kevin Casey on December 20, 2010
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You could soon be seeing better margins when your customers swipe their debit cards at the cash register. The Federal Reserve has proposed new limits on the interchange fees that banks charge businesses on every debit card payment.

The new rules would cap fees levied by card issuers at 12 cents per transaction rather than a percentage of the purchase price. That would lower transaction costs to merchants by more than 70% — and potentially quite a bit more — compared with the average fee paid in 2009, according to the Fed. The National Federation of Retailers, which praised the rules, says that the change means a merchant business would pay 12 cents to process a $100 purchase instead of around $1.50 today.

Debit cards now account for roughly 35 percent of all noncash transactions in the U.S., according to the Fed, eclipsing paper checks as the most frequently used noncash form of payment. A recent survey by the Fed found that consumers swiped their debit cards 38 billion times in 2009. Those payments cost businesses $16 billion in transaction fees.

The proposal would also prevent card issuers from restricting access to payment networks — under the new standards, there would need to be at least two networks available for every debit card, which could create new competition for merchant fees.

Though small businesses, in particular, may have cause to celebrate the proposed rules, not all companies are applauding. Visa and MasterCard both saw their stock prices drop more than 10 percent last week. Though neither actually issues cards, they stand to see revenues derived from their payments systems take a significant hit. Both companies say consumers will be the ultimate losers if the rules are implemented as written.  In a press release, MasterCard said “the regulations would shift merchant costs directly to consumers.” In its own statement, Visa said “the proposed routing and exclusivity alternatives put retailer profits ahead of consumer protection, choice, and convenience.”

The Fed was directed to examine debit card fees by Congress by the Dodd-Frank Act, which enacted broad changes to the financial industry. The proposed rules are open for public comment through February 22 and would take effect next July, roughly one year after the Dodd-Frank Act was signed into law.

Kevin Casey is a business writer for Intuit and is passionate about solving small business problems.

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