Regulator warns Fed that debit card rules are too narrow

by Peter Schroeder - 03/08/11 2:53 PM ET

The central bank’s proposal, released in December, would dramatically curtail those fees, leading to billions in savings for merchants and billions in lost revenue for banks. To be precise, the Fed’s proposal would limit debit card fees to seven to 12 cents per transaction, a 73 percent decrease from the current 44-cent average.

As the Fed scrambles to meet the statutory April 21 deadline for finalizing the rules, a full-court press is under way by banks to push that deadline back, forcing lawmakers to introduce legislation that would require the Fed to conduct further study on the issue, potentially for upward of two years.

Specifically, Walsh is taking issue with how the Fed interpreted the provision, and its requirement that fees be limited so that they are “reasonable and proportional” to a debit card transaction.

He argues that the law does not require the Fed to set hard caps on debit card fees, but merely to “establish standards” for reasonable fees.

Walsh goes on to say that even if the Fed wants to keep the hard limits, it has failed to weigh other costs to banks that should boost that ceiling — such as rewards programs or cardholder inquiries. He said the law gives the Fed flexibility to weigh other costs, and it simply chose not to do so.

He added that the Fed should be sure to be flexible enough in its rules to allow banks to investigate and implement new fraud-prevention measures. The Fed’s proposed rules say the fee limit could be raised to accommodate such measures, but instead of delving into specifics, it offered two broad suggestions. Under the first, banks could boost fees for current fraud-prevention efforts, and in the second, banks could recover costs only for major technological innovations.

Walsh said that he was concerned that under the second option, the Fed makes itself “the gatekeeper” for determining what inventions qualify as major innovations.

“Adopting the second alternative could discourage issuers from engaging in incremental improvements to existing fraud-prevention technologies,” he wrote.