NEW YORK - A proposed cap on the fees that banks charge for debit-card transactions would substantially reduce the cost for businesses.
But it's started a death watch for debit-card rewards and renewed predictions that free checking is done for.
At issue is who will ultimately benefit from the savings. The Federal Reserve's proposal to cap these fees, officially known as interchange fees, at 12 cents per transaction would enable retailers to pass on annual savings of $10 billion to $13 billion to consumers. But banks and card networks maintain that retailers will pocket the savings. This would leave consumers to bear the brunt of the new law through higher costs for banking and reduced rewards programs.
In releasing its proposal, Fed staff members said they found the cost to banks for processing is between 7 cents and 12 cents per transaction. Yet, every time a customer swipes a debit card, the average fee is 44 cents.
"The banks have a very sweet deal here," said Sen. Dick Durbin, D-Ill., who sponsored the provision in the financial-regulatory overhaul that ordered the Fed to set rules on these fees. He acknowledged that the legislation does not require merchants to share any cost reductions with customers, but said they're likely to benefit at the checkout.
"The retailer who is in competition with the restaurant around the corner is going to use this as an opportunity to lower prices," Durbin said, comparing the swipe-fee reduction to a business-tax cut.
If implemented, slashing interchange rates would be another revenue hit for banks. They're already dealing with increased costs linked to other regulations in the financial overhaul, plus restrictions on overdraft fees and credit cards.
Shawn Miles, group head of public policy for MasterCard Inc., said banks will have to compensate for the loss of revenue by adjusting the fees they charge consumers. "That's the only way they could deal with something that was this dramatic," he said. Wall Street and the banking industry were expecting the proposed cut would call for fee cuts of no more than 60 percent. The proposal is close to a 73 percent cut.
Banks may see another, indirect, impact if debit fees are lowered so sharply.
Analyst Burt Flickinger, of Strategic Resource Group, suggested that many retailers will encourage consumers to use their debit cards instead of credit cards, which carry higher interchange fees that are not addressed in the law. Industry watchers predict that banks will respond by trying to make up at least some of the lost merchant revenue from consumers.