The Federal Reserve said Wednesday that banks can only charge retailers 21 cents each time they swipe a debit card, imposing under a new federal law a first-time cap on a fee that currently averages twice that amount.
The board initially proposed a cap of 12 cents per swipe, but banks and big payment processors such as Visa and Mastercard convinced the Fed that was too low to cover the cost of handling transactions, maintaining networks and preventing fraud.
Banks currently have no limit and charge an average of 44 cents per swipe.
The Fed voted 4-1 to adopt the rule, which was required under the financial regulatory law enacted last year. Elizabeth Duke was the only opponent of the rule, which takes effect Oct. 1, later than expected.
It was “one of our most challenging rulemakings” under the financial regulatory law, Fed Chairman Ben S. Bernanke said Wednesday. He said the Fed will monitor developments in the debit card market “on an ongoing basis” to gauge whether it is accomplishing the intended goals.
Fed staff said the higher cap reflects a broader range of costs incurred by banks that issue debt cards. The rule will also allow banks to charge a fraction more to cover the costs of fraud prevention.
It does not apply to government-issued debit cards, prepaid cards or cards issued by banks and credit unions with assets under $10 billion.
The move to limit swipe fees pitted the nation’s largest banks and payment processors like MasterCard Inc. and Visa Inc. against Wal-Mart and retailers of all sizes. The decision to settle on a higher cap lifted bank and payment processors stocks in late afternoon trading on Wall Street.
Banks said roughly $16 billion was at stake if the 12-cent cap took effect. That would be more than 80 percent of the $19.7 billion in debit transaction fees paid by merchants in 2009, according to the Nilson Report, which tracks the payments industry.
The banks warned that they would have to make up for some revenue lost by shifting costs to consumers. Many already eliminated unrestricted free-checking accounts, and some ended debit-card rewards programs. Other potential actions include annual fees for using debit cards, which are already being tested in some markets.
The higher cap may lead some to avoid taking such action, said Brian Riley, a bank card analyst with the consultant the Tower Group. Banks must still review their costs but the rule allows them to avoid a “slash and burn” process for customers that don’t provide much profit, he said.
Fed staff said they think it’s unlikely that issuers would impose fees on debit card transactions or steer their customers away from using the cards. Merchants in highly competitive regions would likely reduce their prices once fees go down, the staff members said.
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