WASHINGTON – The Federal Reserve has taken a gentle swipe at the banking industry's multibillion-dollar business of collecting debit-card fees from retailers.
Beginning this fall, the Fed said Wednesday, banks will only be allowed to charge retailers 21 cents for each debit card transaction, plus an additional 0.05 percent of the purchase price to cover the cost of fraud protection.
The final rule is not as punitive for banks as the Fed's earlier proposal, which had sought to cap fees at 12 cents per transaction. Banks currently charge an average of 44 cents per transaction. Shares of Visa, MasterCard and bank stocks rose after the announcement was made.
It's unclear how consumers will be affected by the change, which was required under last year's overhaul of financial regulations and goes into effect in October.
Merchants have said reduced fees would allow them to lower their prices. But banks had warned that a limit on what they can charge retailers would force them to cut back on other services, such as free checking and rewards programs. Some might even charge annual fees for debit cards.
The Fed's board of governors sealed the decision with a 4-1 vote. It was "one of our most challenging rulemakings" under the financial regulatory law, Fed Chairman Ben Bernanke said.
Fed Gov. Elizabeth Duke cast the dissenting vote. She said the industry will inevitably find other ways to profit and consumers will bear that cost.
The cap will be the first limit on debit card fees. Currently, banks negotiate such fees with merchants. A big chain like Starbucks would likely get a better rate than a local coffee shop because it handles more customers. The fees are typically based on a percentage of the purchase price.
The rule does not apply to credit cards, government-issued debit cards, prepaid cards or cards issued by banks and credit unions with assets under $10 billion.
Banks and big payment processors said the lower cap wouldn't cover the cost of handling transactions, maintaining their networks and preventing fraud. They argued that they would lose $16 billion 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 higher cap may lead some banks to avoid seeking revenue elsewhere, 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.
Merchant groups were unhappy with the Fed's decision.
Sandy Kennedy, president of the Retail Industry Leaders Association, said the central bank was "ceding to the wishes of the big banks and credit card companies." The group, which represents large merchants like Target Corp. and Best Buy Co., vowed to continue fighting the decision.
Small banks and credit unions had mixed reactions. They had argued that the exemption for banks under $10 billion wouldn't help if the cap was as low as originally proposed. That's because it would have invited merchants to discriminate against higher cost cards. Mary Dunn, deputy general counsel of the Credit Union National Association said the Fed "gave our concerns some consideration."
But the National Association of Federal Credit Unions complained that the rule "still falls far short of covering all the interchange costs for credit unions."
Separately Wednesday, a federal appeals court in South Dakota ruled that a lower court judge was correct to deny a preliminary injunction against the fee limits taking effect.
The case challenging the regulations' constitutionality was brought in October by Minnesota-based TCF National Bank, the unit of TCF Financial Corp., considered the first bank to offer free checking accounts. TCF is among the banks that no longer offer free checking without requirements such as using direct deposit or maintaining minimum balances.
In a twist, TCF's attorneys argued that the provision of the law exempting small banks and credit unions gave those unaffected banks an unfair advantage.