The Federal Reserve has apparently been swayed by banking industry criticism of its proposed 12 cent cap for debit swipe fees, also known as debit interchange fees. After a hard and sustained lobbying campaign by large and small banks and credit unions, the Federal Reserve Board of Governors today voted to finalize a version of the Durbin Amendment rule that more than doubles its initial swipe fee cap, from 12 cents per transaction to up to 21 cents per transaction, plus a 5 basis point "ad valorem" charge. The only dissenting board member was Elizabeth A. Duke.
The final version of the rule likely surprised a lot of people on both sides of the debate over swipe fee limits. Up until today, the Fed appeared to be standing pat on the 12-cent figure, news broke this afternoon that they would both up the limit and impose a delay on the rule favorable to banks. From Donna Borak and Rob Blackwell at American Banker:
Although banks would prefer to avoid any interchange fee limit, the final rule is a partial victory for them. Banks had been arguing since December that the proposed 12-cent cap was too low and did not adequately take into account the costs involved. In its final rule, the Fed clearly agreed.
Banks also received extra time to comply with the rule, which under Dodd-Frank was supposed to go into effect on July 21. Instead, banks will have to comply with the new limits on Oct. 1.
While the 21-cent figure is much less than the average that of 44 cents per transaction banks have been getting up to this point, this shift, along with the rule delay, represent a pretty huge victory for the banking industry.
The upshot for consumers is that the higher fee should in fact blunt some of the fee hikes and attrition of free checking accounts that were expected to follow the swipe fee cap. On the other hand, it will also likely reduce any impact the cap may have had on retail prices, which were expected to fall somewhat as retailers passed the savings from lower swipe fees on to consumers.
As I've said before in this space, consumers were always going to continue to bear the burden of paying for the debit card interchange system. The only difference is less of that burden will likely come in the form of higher banking fees.
The board offered several justifications for raising the swipe fee cap. The first was that it didn't take into account all the costs banks pay to process debit transactions. The 12-cent limit had primarily taken into account the basic costs of authorizing, clearing and settling each debit card transaction. In contrast, the 21-cent limit took into account a variety of less direct but significant costs such as fixed processing costs for computer software and hardware, networking fees and fraud losses. However, costs for debit card rewards did not figure into that limit.
The second big justification was a fear that consumers' banking fees would rise, and that the number of low-cost bank accounts would fall, under the lower limit. Board member Sarah Bloom Raskin in particular mentioned a desire to minimize bank fee hikes on consumers as a justification for raising the cap.
It's also clear the concern these swipe-fee limits would eventually impact small banks and credit unions that were exempted in the law also figured into this decision. Duke in particular mentioned the issue as a justification for her voting against the adoption of the final rule. A higher cap fee means that if debit networks do end up applying the capped fee to smaller institutions, the impact won't be quite as catastrophic.
I can't say I'm too surprised to see the Fed nudge the swipe fee cap upward. They're an organization staffed in large part by former bankers who seem more likely to be more receptive to the concerns of other bankers than to those of retailers.
Still, it's pretty clear it was a tough decision for the Fed. Bernanke said it's one of the most difficult rules the Fed has written under his watch, with over 11,000 formal comments made on the proposed rules prior to the vote.
What do you think? Was the Fed too easy on the banks at the expense of retailers, or was it the right choice? Do you expect to be affected?