Responding to an outcry from financial institutions, federal regulators nearly doubled their proposed limit on fees that large banks can charge merchants for processing debit card purchases.
Still, the new cap of 21 cents per transaction — plus a small percentage of the purchase price — for so-called swipe fees is a major reduction from the average charge of 44 cents that retailers are now paying.
The Federal Reserve voted 4 to 1 on Wednesday to set the limit, then delayed implementation until Oct. 1. Otherwise, the new fee would have gone into effect next month for banks with more than $10 billion in assets.
In addition, the Fed allowed debit card issuers to impose a fee of 0.05% of each purchase — 1 cent for every $20 paid — to cover a portion of fraud losses. Debit card issuers that set up tougher fraud prevention policies and procedures also could add a 1-cent fee per transaction.
All that would make the total fee 24 cents for the average debit card transaction of $38, the Fed said.
Small banks and credit unions are exempt from the cap, though they worry that merchants no longer will accept their cards if they continue to charge higher fees. The Fed’s initial proposal to cap fees at 12 cents per transaction infuriated banks, along with Visa and MasterCard, which run the networks that process debit card payments.
Fed Chairman Ben S. Bernanke said the higher fee took into account many of their concerns.
“I think this is the best available solution,” he said.
Elizabeth Duke was the only member of the Fed’s board of governors to oppose the increase. She cited concerns about its effect on small financial institutions.
Retailers were not happy with the higher fee. The Retail Industry Leaders Assn., which represents more than 200 retail chains, manufacturers and suppliers, accused the Fed of “ceding to the wishes of the big banks and credit card companies” at the expense of consumers and merchants.
And despite the increase in the cap, financial institutions still were not pleased. The American Bankers Assn. said the new limits would cause a 45% loss in debit card revenue.
“Consumers will see higher fees for basic banking services, and banks — particularly community banks — will still feel the revenue pressures that this rule will cause,” the group said.
Under the financial reform law enacted last year, the Fed was required to study debit card fees and cap them at a rate that was “reasonable and proportional” to the costs.
The provision was championed by Sen. Richard J. Durbin (D-Ill.), who had pushed for years to limit debit card processing fees after complaints from merchants that they were being gouged as consumers increasingly used debit cards to make purchases.
Banks fought back vigorously, arguing that the cap set by the Fed didn’t take into account fraud losses and other costs. The issue has led to a major battle in Washington between financial institutions and merchants.
This month, the Senate narrowly rejected a measure that would have delayed implementation of the new fees for six months so the Fed could study the effect more.
The Fed received more than 11,000 comments on its proposed debit card fee cap, and Bernanke promised that the central bank would closely monitor the debit card market.
Also Wednesday, the U.S. 8th Circuit Court of Appeals declined to force a temporary injunction on the rules, agreeing with a lower court’s denial of an injunction sought by TCF National Bank of Minnesota to stop the new debit card fee limits from taking effect.