Feds Propose Rule To Limit Debit Card 'Swipe' Fees

In a win for retailers, and perhaps consumers, the Federal Reserve has proposed a new rule that would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions.

As a result, those "swipe" fees could drop as much as 90 percent, according to industry analysts. The interchange fee is what the business pays the credit card network each time a customer uses a debit card. The new Fed proposal would cap them at 12 cents per transaction.

The Fed has requested comment on its proposed rule, which would be implemented as part of the recently passed financial reform legislation.

New standards

The rule would establish standards for determining whether a debit card interchange fee received by a card issuer is reasonable and proportional to the cost incurred by the issuer for the transaction. These standards would apply to issuers that, together with their affiliates, have assets of $10 billion or more. Certain payment programs administered by the government would be exempt from the interchange fee limitations.

The Retail Industry Leaders Association (RILA), an industry group, was quick to offer its comment through a statement to the media.

"Although Federal Reserve's proposal is not entirely conclusive, it does validate the long-held claims of merchants and consumers that the electronic payments market is broken and needs to be fixed," said Katherine Lugar, executive vice-president for public affairs for the group. "Today's announcement is a step forward for the effort to bring relief to merchants and consumers who for too long have faced excessive fees and unfair rules imposed by big banks and credit card companies."

'Savings for consumers'

Lugar also said the proposal "will undoubtedly result in savings for consumers."

The Electronic Payments Coaltion,  representing banks and payment networks, said the rule would end up costing consumers, claiming big chain stores would likely pocket the savings.

The Fed is requesting comment on two alternative interchange fee standards that would apply to all covered issuers: one based on each issuer's costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap (initially set at 12 cents per transaction).

Under both alternatives, circumvention or evasion of the interchange fee limitations would be prohibited. The Board also is requesting comment on possible frameworks for an adjustment to the interchange fees to reflect certain issuer costs associated with fraud prevention.

While banks stand to lose profits on the proposed new rule, analysts say they would be free to make up that revenue by phasing out rewards programs on debit cards and even charging some customers a fee for using them.