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Retailers, Banks Take Swipes Over Debit Card Fees

Every time a consumer uses a debit card, the bank or company that issued that card charges the store a transaction or swipe fee. On average, it’s just over 1 percent of the purchase price.

But a bill passed by Congress last year - set to go into effect July 21 -- would allow the Federal Reserve to set a cap on that swipe fee. Although it has not been finalized, the Fed has suggested setting that cap at 12 cents per purchase.

It’s a move welcomed by the National Retail Federation, which is and has been lobbying on behalf of the law. David French, the senior vice president of government relations for the NRF, calls the fees a "hidden tax" and argues that debit card swipe fees are “a classic example of a broken market that needs some government intervention to set it right.”

The banking industry disagrees, and says the fees cover technology and fraud protection costs. They further contend that this "price-fixing" by the federal government will not allow banks to cover the cost of doing business.

“If that's the case,” says Frank Keating, CEO of the American Bankers Association, and former Republican governor of Oklahoma, “then what is the bank going to do? Either get out of debit card business entirely or charge for checking accounts or charge for other areas of bank services."

The law exempts banks with assets less than $10 billion.

That concerns Montana Democratic Sen. Jon Tester, who says this will drive business away from smaller banks to the bigger ones with lower swipe fees. He has proposed a bill delaying the new law in order to study the impact.

“If we don’t do this study,” Tester argues, “it will result in fewer banks, more consolidation in our financial industry, less opportunity for small businesses and consumers, particularly in rural America.”

But fellow Democrat, Illinois Sen. Dick Durbin, disagrees and says further study is not necessary. Durbin, who sponsored the original cap-on-swipe-fees legislation, has said the banks' arguments are "misleading" and that the new law is "reasonable."

Federal Reserve Chairman Ben Bernanke, who voiced concern last week about the exemption of smaller banks, also suggested that further study may not be necessary.

"We have plenty of information," Bernanke said.

In 2009, consumers used debit cards in nearly 38 billion retail transactions valued at $1.45 trillion, according to the Federal Reserve. Banks collected on average 44 cents in debit card swipe fees that year -- which adds up to about $16 billion.

The NRF opposes any new legislation to delay the new law, arguing it would be the first step to killing a cap on debit card fees altogether.

Molly Henneberg joined FOX News Channel (FNC) in 2002 and currently serves as a correspondent based in the Washington bureau. Click here for more information on Molly Henneberg