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article imageFederal Reserve proposes rules to see debit card fees cut

By Chanah Rubenstein     Dec 16, 2010 in Business
The Federal Reserve, by order of Congress, proposed new rules for fees on debit card transactions Thursday. The rules could see more competition between banks and payment card networks.
Wall Street analysts had expected a reduction of 50 percent, but today, according to the New York Times, analysts are speculating a reduction of as much as 90 percent.
In the NY Times, Rod Bourgeois, a payment analyst at Sandford C. Bernstein, is quoted as saying, “It’s bad for the issuers and the card networks.”
It would seem he’s not far off; Thursday saw shares of VISA and MasterCard drop more than 12 percent. If the Federal proposal goes through, they could lose billions of dollars in revenue.
Congress wants swipe fees to be “reasonable and proportional” to the cost of administering the transaction.
In the Federal Reserve’s proposal, it has been recommended to limit the transaction fees from 7 cents to 12 cents per transaction. That translates to roughly three-tenths of a percent of the value of the purchase. Currently, merchants pay an average of 1.3 percent processing fee, the NY Times quotes a Nilson report (a payment industry newsletter.)
Presently, smaller retailers are hit with higher fees, because they have less transactions and less bargaining power.
MasterCard has spoken out against the Federal Reserve’s proposal, commenting that not all the costs of operating debit card programs were considered. In a written statement, Noah J. Hanft, MasterCard’s general councel, said “This type of price control is misguided and anticompetitive, and in the end is harmful to consumers.”
Henry O. Armour, chief executive of the National Association of Convenience Stores, disagrees. While pleased with the proposal, Armour believes the fees are still too high. “You look at checks clearing at par, which means there is no interchange. We believe the standard for debit should be the same,” he said, according to the NY Times.
The Federal Reserve’s final rules will be completed by April and put in place in July; they will be open for public comment until February.
Under a section of the Dodd-Frank Act, some companies have been charging different prices for different forms of payment.
The NY Times used Gate Petroleum as an example in their report. Gate Petroleum has about 100 gas stations in the Southeast. They have recently started offering discounts to those who bought, in cash, a prepaid gas card from the company. In just over two months, 20,000 cards are in use. The company has saved 4 cents a gallon for every sale made in cash. The customers save 3 cents a gallon (1 cent of each sale goes toward the cards operating costs.)
The NY Times reports that analysts are expecting merchants to use their bargaining power to bring prices down much lower with the banks and even reclaim a portion of the tens of billions of dollars spent last year on processing fees.
Rod Bourgeois of Sanford C. Bernstein is quoted as saying, “They have an ability to drive prices down because there will be multiple payment brands on every card, and on top of that, the merchants will have the ability to use the lowest-cost route of whatever payment network they choose.”
To counter the expected loss in revenue, banks are assessing whether or not to raise monthly fees for deposit accounts. Debit cards that offer reward points may also suffer.
The NY Times report concludes that while merchants are going to benefit, the customers probably won’t see much benefit from this.
More about Debit cards, Federal reserve, Visa, Mastercard, Fees
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