Fed hands banks win with debit card rule

Banks might have lost the broader war over debit-card fees, but they scored a small victory Wednesday when the Federal Reserve proposed a fee less severe than originally intended.

The central bank’s decision brought to a close a long and contentious lobbying battle on Capitol Hill.

{mosads}Under the newly approved rules, the Fed capped the amount banks can charge businesses for swiping debit cards at a base of 21 cents per transaction — a substantial boost from the seven- to 12-cent cap originally proposed by the Fed in December.

In addition, 0.05 percent of the transaction can be added to the fee, as well as another cent if the bank employed certain fraud-prevention practices. The Fed also pushed back the effective date of the limits, from the original July 21 start date to Oct. 1.

Retailers and merchants, which beat back legislative efforts to delay the limits, were dismayed by the final fee.

“We’re extremely disappointed,” said Mallory Duncan, senior vice president and general counsel for the National Retail Federation. “The [Fed] board members are overwhelmingly bankers, so they decided to take several billion more from the public and give it to the banks.”

Duncan added that retailers would be looking at ways to challenge the Fed’s rule.

Despite the dismay, the new rules represent a broader loss for the banking industry. The current swipe fee averages 44 cents per transaction, and Wednesday’s decision cuts that number roughly in half.

“While the new price set by the Fed is a pleasant surprise, the fact remains banks are still not allowed to even recoup the costs associated with their products — thanks to the United States Senate,” said Richard Hunt, president of the Consumer Bankers Association.

The Fed’s action ends a chapter in a prolonged battle pitting the two major industries against each other. While the subject matter might seem technical, it was ubiquitous on Capitol Hill for months as banks and retailers squared off over the $1.3 billion banks earned every month from the fees.

The banking industry was furious with the so-called Durbin amendment — named after its primary backer, Sen. Dick Durbin (D-Ill.) — which allowed the Fed to set the limit on the debit-card transaction fees.

Once the amendment made its way into the Dodd-Frank financial reform law, the push to delay or repeal it was under way.

Banks argued the amendment amounted to nothing more than government price-fixing of a private industry practice; that it would force banks to slash all sorts of benefit and rewards programs to deal with the trimmer margins; and that giant retailers like Wal-Mart would simply pocket the windfall and not pass the savings, resulting in higher costs across the board for consumers.

They also argued that an intended exemption for smaller banks would not prove effective, as competitive market forces would require small banks to lower fees to compete with capped big banks. That argument actually found some purchase with banking regulators, including Fed Chairman Ben Bernanke, who warned the small-bank exemption might not be workable.

In response, retailers touted dozens of small businesses that would benefit from the new rules, and maintained that consumers would ultimately benefit because retail costs would drop now that businesses did not have to pay out hefty fees for accepting debit cards.

Lingering public anger toward banks in the aftermath of the financial crisis also buoyed their case as advocates railed against big-bank lobbying efforts.

And both sides contended they represented the interests of the consumer.

{mosads}The extreme level of interest was apparent at the Fed. The central bank told lawmakers in March that it would miss the April 21 deadline for finalizing the rules, and instead would focus on getting them done before they took effect on July 21. Bernanke cited an “extraordinary volume” of public comments — over 11,000 all told — as a major reason for the postponement.

Beyond two major industries duking it out, the swipe-fee fight was further complicated by the murky politics surrounding it. A combination of Republicans and Democrats helped add the Durbin amendment to Dodd-Frank, and a similar bipartisan coalition emerged to try and delay the measure.

One of Durbin’s fellow Democrats, Sen. Jon Tester (Mont.), emerged as the primary sponsor of legislation that would delay the rules as their impact was studied. However, that effort ultimately fell short by six votes of the 60 it needed, being rejected by the Senate in June, 54-45, as members of both parties fell on opposite sides of the issue.

While the Fed’s rules provide a sort of bookend to the swipe-fee fight, it was clear avenues for the battle continue to loom large. Retailers are already setting their sights on similar limits for credit-card fees, while banks will be looking for ways to revisit the issue in future Congresses.

“We’re going to be watching this like a hawk,” said Hunt. “The book is never closed on the Durbin amendment.”

— This story was updated at 6:13 p.m.