Debit card fee limits hit a snag


Proposed limits on the hidden fees behind most debit card purchases — caps designed to bring down prices for consumers — could be changed or delayed after an outcry from the financial industry and lawmakers.

Every time a debit card is swiped, the merchant pays the bank an average of 44 cents to process the transaction. The Federal Reserve, saying the actual cost was drastically lower, proposed in December to cut the fee that large banks charge to 12 cents per transaction.

The Fed’s proposal has sparked a major battle between bankers and retailers. On Thursday, Congress and financial regulators weighed in, with the Fed even suggesting that the rules could be revised before they take effect in April.


“We are committed to doing everything we can to get this right,” Federal Reserve Gov. Sarah Bloom Raskin told a House subcommittee.

Retailers persuaded Congress last year to limit the fees, complaining that banks were gouging them in processing debit card transactions that have become increasingly popular among consumers.

The financial overhaul law required the Fed to set so-called debit card interchange fees for large banks that are “reasonable and proportional” to the costs of processing the transactions, and implement them by April.

But bankers decried the limit the Fed proposed, saying it would force them to eliminate free checking accounts or increase other fees on customers.

At two congressional hearings Thursday, many Republicans and Democrats pushed Fed officials to delay the rules to study possible unintended consequences.

They were joined by Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., which oversees the banking industry. She echoed concerns that the new fees would hurt the bottom lines of banks with no guarantee that the savings would be passed on to consumers, but would instead be pocketed by retailers.


“I think the full policy ramifications — who’s paying for what, who’s going to pay more and who’s going to pay less under this — is something that maybe wasn’t dealt with as thoroughly as it might have been,” she told the Senate Banking Committee.

Raskin said it had been difficult to implement the rules under the short timetable.

“If it’s something you are concerned about and want us to take more time, we will do that,” she told lawmakers. But Raskin noted that Congress had to change the deadline set into law.

Retailers said the new fee limit was fair and necessary.

“These fees have grown at an incredible rate,” said Gus Prentzas, a New York florist and health club owner. He told the House subcommittee that his debit card fees had doubled in the last two to three years.

David Seltzer, vice president and treasurer for 7-Eleven Inc., said average interchange rates had risen fivefold over the last 10 years. And the market is not competitive because the networks to clear debt transactions are dominated by Visa and MasterCard.

Debit card use has exploded in that time, the Fed said. There were nearly 38 billion debit card payments in 2009 compared with 8 billion in 2000.

The financial industry said the limits on fees would shift $14 billion annually from banks to retailers. The loss of that money would force banks to raise fees on their customers.


David Kemper, chief executive of Commerce Bank in Kansas City, Mo., said the fee limit would push the bank’s personal checking account operation from a 13% annual profit to a 12% loss.

“We just want a fair deal,” Kemper said.

Congress exempted small banks — those with less than $10 billion in assets — from the new limits. But those bankers argue that the limits would hit them anyway because they would be unable to continue charging higher fees if they wanted to compete with large banks.

Fed Chairman Ben S. Bernanke agreed that the exemption might not work.

“There is some risk that that exemption will not be effective and that the interchange fees available through smaller institutions will be reduced to the same extent that we would see for larger banks,” he told the committee.

Lawmakers from both parties said they were worried that the new fee limits were being rushed into place without enough study.

“We need more time on this issue,” said Rep. David Scott (D-Ga.).

Republicans complained that requirement for the Fed to set debit card fee limits was rushed into the financial overhaul legislation last year without hearings on its consequences.

“It’s not about how fast we get it done,” said Rep. Jim Renacci (R- Ohio). “It’s about getting it right.”


Supporters of the proposal said the limits needed to go into effect.

Rep. Peter Welch (D-Vt.), a leading proponent along with Sen. Dick Durbin (D-Ill.), said small businesses are “ripped off” by the financial industry “every time a customer swipes a card.”

“When passed on to the customer, those charges result in higher prices for consumers for everything from groceries to gasoline,” he said, slamming the industry for fighting the limits.

But Visa General Counsel Josh Floum called the limits government “price controls” and said that they would curb investments in computer security and fraud protection.