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Federal Caps on Debit Card Fees May Backfire, Consumer Group Warns

Banks may increase the cost of checking accounts and other services, CFA cautions

Banks have been complaining loudly about new federal caps on debit card processing fees, and now they've picked up an unlikely ally: the Consumer Federation of America (CFA).

After years of complaints by merchants and consumer advocates, the Federal Reserve is proposed to cap so-called “interchange” fees at roughly 12 cents per transaction, a 75 percent drop from its current level.

Merchants have long argued that the fees force them to raise the prices consumers pay for goods and services. The common wisdom has long been that the fees hit poorer consumers hardest and that capping them would help those struggling to make ends meet.

But in a filing with the Federal Reserve the CFA, while saying it “strongly endorses the intent of the statute,” echoes some of the objections being raised by banks.

[The rule's] implementation could have a very significant impact on consumers who use debit cards or participate in the banking system, as well as the many who do not,” said Travis Plunkett, the CFA's legislative director.

Many banks have said they will offset the loss of debit card fees by adding new fees to checking accounts and other services, meaning that the poorest consumers may no longer be able to afford traditional bank accounts.

Plunkett also expressed concern about the health of smaller banks: “We also urge the Federal Reserve to pay close attention to how this rule would affect the financial viability of small depository institutions, especially credit unions, which often provide safe, lower-cost financial products to millions of Americans.”

Fed Chairman Ben Barnanke and Federal Deposit Insurance Corporation Chairman Sheila Bair have also cautioned that the Fed's proposal could hurt smaller banks and poorer consumers.

Plunkett quoted a CFA member, the Navy Federal Credit Union, as warning that the 7-to-12-cent fee proposed by the Fed would not cover the credit union's actual cost of providing debit cards.

We recommend that the Federal Reserve consider broadening its pricing standard to include compensation for additional, legitimate incremental expenses. Such expenses could include, for example, network processing fees for each transaction processed, charge-backs involving billing errors, and fraud losses over which the Federal Reserve determines issuers have no ability to prevent,” Plunkett said. “These types of costs are associated with the authorization, clearance and settlement of particular transactions, as required by the statute. A separate adjustment for effective fraud prevention measures, as allowed in the law, is also justifiable. ”

The Fed's final proposals will be unveiled in April and implemented in July. 

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