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In Fight Over Debit Card Fees, a Loss for the Banks



What’s arguably been the biggest lobbying brawl so far this year came to a head Wednesday in the Senate [1] when lawmakers voted against delaying a controversial element of the Dodd-Frank financial reform legislation. The vote clears the way for the Federal Reserve to set rules that would limit banks’ revenue from debit card fees and cut costs for retailers—potentially lowering prices for consumers in the checkout line.

For months, the nation’s biggest banks and retailers have been fighting fiercely over the Federal Reserve’s proposal to cap debit card fees—specifically, the fees that retailers have to pay to banks each time a transaction is made using a debit card. (Here’s our guide on the issue [2].) Wednesday’s vote—a win for the merchants—defeated a major effort by the banks to delay the cap, which is now scheduled to take effect mid-July.  

Banks had pushed hard to roll back the cap and thus avoid a big loss in revenue. They advertised in D.C. subways [3], started a website aimed at debit card users [4], and even launched a rather confusing Twitter campaign [5], as we’ve reported. They scored a small victory when Sen. Jon Tester, a Montana Democrat, introduced legislation to delay the rules, and they showered him with thousands of dollars [6] in campaign donations. Huffington Post reports that from January to April, the banks and others opposed to the fee cap spent about $2.5 million [7] fighting to kill or delay it.

Wednesday’s vote on Tester’s amendment was what some saw as the ultimate test of the influence of Wall Street [7]. “If banks win, it will not just be the traditional story of the banks’ routing the consumer groups,” wrote Georgetown University law professor Adam Levitin on his blog [8], Credit Slips. “If the banks win, it will show that the financial services sector is more powerful than the largest retailers in the US.”

Major retail groups fought against the delay just as hard as the banks fought for it. The more vocal groups advertised and sent merchants to D.C. to make their case, though others were supportive but mostly silent [9].

We’ve written quite a bit on the Fed’s rules and what they would mean. Now that the bid to delay them has failed, here’s an overview of the issue and what will happen when the proposal takes effect next month:

  • According to the Federal Reserve, debit card interchange fee rates have been rising [10] along with the popularity of debit cards generally, meaning merchants have been handing over larger sums to the banks that issue debit cards. 
  • The Fed has proposed capping the fees at 12 cents per transaction. Banks currently get about 1 to 2 percent of each debit transaction, which averages out to about 44 cents [11]. The plan will bring U.S. debit fee rates closer to the rates of other countries [12], including Australia and the EU.
  • The rules only apply to banks with more than $10 billion in assets [11]. Despite that, credit unions and smaller banks lobbied fiercely alongside the big banks. 
  • Some merchants have promised that if the Fed rules go through, they’ll pass along the savings to consumers. The law doesn’t require them to do so—it leaves it to consumer price sensitivity and competition between merchants to make that happen. Whether it will, of course, isn’t clear. 
  • The fee battle isn’t the only part of the debit card regulations—it’s just the part that’s gotten the most attention. As we’ve noted, another part of the Fed's rules is expected by many to increase competition [13] in a market dominated by Visa, and that increased competition could also bring debit card fees down.

If you’re interested in reading more, here’s our backgrounder on debit card fees [11] and our guide to cutting through the spin [2]

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