Senate OKs cap on debit fees

The Senate sided with retailers over bankers Wednesday, voting to let the Federal Reserve move forward with a plan to cap the “swipe fees” the financial institutions charge merchants to accept their customers’ debit cards — but it is still unclear what impact the decision will have on consumers.

Merchants say the swipe fees — the highest in the world — if left uncapped would force them to raise prices for all consumers. But the financial institutions that lobbied hard against the caps warned that the loss of revenue will force banks to raise fees on other services.

“It’s a win for consumers to take a broken market and fix it,” said Ed Mierzwinski, spokesman for U.S. Public Interest Research Group, a consumer organization. “I’m excited that consumers may finally begin to benefit from reduced swipe fees.”

Last year, Congress voted to cap debit card fees as part of a financial reform bill that President Barack Obama supported.

The Federal Reserve, citing a study that showed the transaction costs 4 cents to process, proposed a 7 cents to 12 cents cap per transaction.

But intense lobbying efforts by banks convinced a bipartisan group of senators, led by Sen. Bob Corker, Tennessee Republican, and Sen. Jon Tester, Montana Democrat, to push for a delay to the law.

The Senate voted 54-45 in favor of their proposed delay, but they needed 60 votes — leaving the caps to go into effect, as planned, on July 21. Lawmakers are still waiting on the Fed to finalize the rules.

“Let us, at the end of the day, finally, finally, finally stand up for consumers,” Sen. Richard J. Durbin, the Illinois Democrat who introduced the caps last year and opposed the delay. He warned lawmakers that a vote in favor of the delay would be like giving a “big sloppy kiss” to banks.

Still bitter over the defeat of his “delay and study” bill, Mr. Corker said price fixing is not American.

“We don’t live in a country where price fixing is typically the way we deal with issues,” he said.

Retailers breathed a big sigh of relief when the caps survived Wednesday’s vote: Right now, they pay an average of 44 cents per transaction. If a customer only buys a candy bar or a drink at a gas station, that eats up about half of the revenue.

“The long road toward interchange reform can continue on,” said David French, senior vice president for government relations at the National Retail Federation. “Our little speed bump is over, and now we can move on to the next fight.”

For the National Retail Federation, the next fight is extending these same interchange caps to the credit card industry, he said, which are even higher than those in the debit card industry.

But some wonder whether the retail chains will actually pass along the savings to consumers. Even if they do, consumers might not notice the price differences, when retailers would be saving only about 32 cents to 37 cents not on each product, but on the entire order.

“I think retailers did not look at the best interest of the consumers,” said Richard Hunt, president of the Consumer Bankers Association. “Merchants are trying to get a benefit for free and it’s going to hurt consumers.”

Mr. Mierzwinski, though, said market competition will force retailers to pass the savings on to customers.

“Once banks lower their swipe fees, retailers should start passing along savings,” he said. “The market will force the retailers to pass the savings along, otherwise they’ll lose business. Even though it’s not required in the law to pass it on, I would be shocked if they don’t, totally shocked.”

For banks, the debit card caps are a devastating blow that will cost them about $16 billion a year, or up to 80 percent of their profits from debit cards.

But banks say it’s consumers who will ultimately pay for these losses. It’s a “mathematical certainty” that banks will compensate with new fees in other areas, Mr. Hunt said. That could mean new charges and fees for checking, debit, and online accounts. It could also lead banks to drop checking accounts for customers with low activity or balances under $200.

JPMorgan Chase has even floated the idea of capping debit-card purchases at $50 to $100 if the regulation is imposed.

“There’s no question we will see an increase,” Mr. Hunt said. “So those Americans who once enjoyed free products, by and large, will not see that anymore.”

Consumer groups say the banks are employing a “stupid bank trick” to scare shoppers and protect profits. They point to similar threats banks made against credit card and overdraft fee regulations in recent years.

“I think the banks are like the boy crying ’wolf,’“ Mr. Mierzwinski said. ”They’re running around on Capitol Hill acting like their job is to protect consumers. But their job is to make money. That’s all they’ve ever cared about.”