WASHINGTON -- The Federal Reserve delivered the punchline Wednesday to the year-long joke that has been the lobbying blitz over debit card swipe fees. Amid heavy Wall Street pressure, the Fed nearly doubled the amount it will allow banks to charge retailers and consumers under a new regulation while effectively exempting an entire class of debit card transactions from the rule altogether.
The swipe fee debate dominated the Senate for months, as nearly the entire U.S. retail industry battled banks in Capitol Hill backrooms. Last year's Wall Street reform bill required the Fed to write a rule capping swipe fees on debit cards, which banks charge retailers for the privilege of accepting plastic.
The central bank initially proposed a 12-cent limit on those fees in December, following a Fed survey of banks that found that the median cost of processing a debit card transaction was 7 cents, with an average cost per swipe of 4 cents. The 12-cent cap would have left banks with a profit margin of about 70 percent on debit cards based on the median cost, but represented a reduction of almost 75 percent from the current average swipe fee of 44 cents per transaction.
Wall Street has been pressuring the Fed all year to reconsider the rule, and on Wednesday, that pressure paid off: The central bank raised its proposed cap on swipe fees to 21 cents, plus 0.05 percent of the transaction amount and 1 cent to cover the costs of protecting against fraud. All told, the Fed said it will allow banks to charge a maximum of 24 cents per transaction, on average.
That's actually higher than the current average amount that retailers pay for swipes that require customers to enter a personal identification number -- meaning PIN swipes are effectively exempted from the new rules. According to the Fed's December study, banks charge an average of 56 cents on debit card transactions that require a customer's signature for authorization, compared to 23 cents for the more secure PIN payments.
While the cost per purchase appears small, they add up to billions of dollars every month. According to data from the Nilson Report, an industry publication, banks scored $16 billion in 2009 on debit card swipe fees, with half of the total flowing to just 10 banking behemoths.
The Fed also said its rule will not go into effect until Oct. 1 instead of July 21, when the regulation was originally expected to be implemented. The extra months with higher swipe fees will mean much better 2011 earnings for bank shareholders: Wall Street scores $1.35 billion for every month that the rules are delayed, the Nilson Report found. Since the new rules basically cut swipe fees in half, the extra time is equivalent to a roughly $1.5 billion gift for the banking industry.
Retailers were immediately outraged. "The Federal Reserve very clearly did not follow through on the intent of the law," said Mallory Duncan, chairman of the Merchants Payments Coalition, which represents stores both large and small.
The bank lobby continued to express formal opposition to the rule, despite the victory the Fed delivered to it. "We continue to be concerned about the impact on consumers and small financial institutions from this price fixing policy," said Trish Wexler, head of the Electronic Payments Coalition, an umbrella group lobbying on behalf of Wall Street. But small banks with less than $10 billion in assets are explicitly exempted from the new fee limits by the financial reform bill.
On Capitol Hill, swipe fees represented one of the most heated corporate lobbying battles in recent history, with both Walmart and Wall Street pouring money into the campaign coffers of Republicans and Democrats alike.
The public pays for much of the swipe fees banks charge retailers, as merchants pass on the costs in the form of higher prices for consumers -- even those paying with cash. But retailers had hoped to profit from a rule capping debit card fees by keeping at least some of the savings for themselves.
Currently, banks compensate cardholders for the higher prices charged by retailers in the form of rewards programs. This is effectively a transfer of wealth from poor consumers, who are more likely to pay in cash, to richer consumers, who use plastic.
Despite Wendesday's setback from the Fed, retailers already won the bigger battle in Congress, where a measure to delay the rules failed to overcome a filibuster on June 8.
The swipe fees struggle also served as a proxy leadership contest between Illinois Sen. Dick Durbin, the second-ranking Democrat in the upper chamber, and New York Sen. Chuck Schumer, who is formally third-ranking but is performing many of the duties of top-ranked Senate Majority Leader Harry Reid (D-Nev.). Durbin has pushed the swipe fee crackdown for years at the behest of Midwestern supermarket kingpin Richard Niemann, founder of Niemann Foods. Schumer, a prolific Wall Street fundraiser, has quietly backed the banks, but left the public advocacy on the issue to his protege, Sen. Jon Tester (D-Mont.).
The bizarre political contest pitted Durbin against Tester, one of the most vulnerable Democrats coming up for reelection in 2012, on an issue that has become a signature policy for the Montana senator.
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