Fed proposes 12-cent cap on merchant debit fees
New York • The Federal Reserve proposed a 12-cent cap Thursday on the fees banks would be allowed to charge merchants for debit card transactions, a limit that could sharply cut into the revenue of the banks that issue debit cards.
Capping debit interchange fees, sometimes called swipe fees, would help merchants by replacing the current system, in which they generally pay between 1 percent and 2 percent of the dollar value of each transaction.
The proposal also would require that merchants have a choice of unrelated networks to process transactions, like Visa Inc. and MasterCard Inc., which could limit revenue for those companies.
Fed staff members said consumers would not likely see a swipe fee cap translate into lower prices, except in some highly competitive markets. It may, however, result in banks cutting back on debit card reward programs or searching for other ways to offset the effect of lower fees.
The proposal contains two alternatives, both capped at 12 cents, that take into account a bank's costs to authorize, clear and settle electronic transactions. Limiting the size of the fees would give banks incentives for keeping their costs low, the Fed staff said in outlining the plan.
The law doesn't apply to interchange fees for credit cards.
The National Retail Federation was among merchant groups that praised the proposal, saying fee limits "would result in lower costs for merchants and could lead to discounts for their customers."
The American Bankers Association had a vastly different take, charging that the cap would "essentially relieve retailers of paying their fair share for a card payments system that offers them tremendous benefits."
The proposed rule also has two alternatives regarding network choice. The first would allow a debit card to be linked to one network for signature debit transactions and another for PIN transactions, and once the type of transaction is chosen the merchant would have no further choice on network. It is the less costly of the two, Fed staff said.
The second alternative would require a card to be linked to two networks for each type of transaction if it can be used for both signature and PIN purchases. That would allow more merchant choice but would "substantially increase the cost of compliance for issuers (banks) and networks," the Fed staff said. While networks usually have two PIN options, right now two signature options are not available and would require major changes to the systems used to handle electronic payments.