New Fed rules will limit debit card fees for businesses

New rules coming from the Federal Reserve will limit the fees merchants pay for debit card transactions but could end up costing customers more.

Local bankers say while lowering the fees is intended to help consumers, bankers will be forced to charge higher fees for other banking services in an attempt to offset lost revenue from debit card transactions.

Currently, merchants pay an average processing fee of 44 cents per swipe. In December, the Fed proposed capping that fee at about 7 cents, but Wednesday it issued a revised proposal of a debit card interchange fee cap of 21 cents per transaction and 0.005 percent of the value of the transaction. An additional one cent can be charged by debit card issuers who implement fraud prevention measures. For the average debit card transaction, valued at $38, the swipe fee would be about 24 cents, according to Fed estimates. The rule is scheduled to go into effect Oct. 1 for banks with assets of more than $10 billion.

Kent Puchbauer, community bank president at Montgomery Bank, said the revised rule does offer some relief to banks who feared their income from debit card fees would be cut to a quarter of what it is now.

"The original proposal would have driven banks to make major changes somewhere else in their fee structure," Puchbauer said. "They will still have to, but they won't be as severe."

In a survey earlier this year by the American Bankers Association, 81 percent of the 1,600 banks surveyed said they would eliminate free checking accounts in response to the Fed's cap on debit card interchange fees. Eighty percent said they would raise other banking fees including maintenance fees for checking accounts, for safe deposit boxes, loan applications and travelers checks.

"When the federal government stepped into the free enterprise system with this legislation, they may have thought they were doing customers a favor, but the unintended consequence is that in the end, the consumer won't benefit," said John M. Thompson, president of Bank of Missouri.

Thompson said the current debit card interchange fees, which are determined by the market and not regulated by the government, are reasonable to cover the costs associated with processing these transactions.

Both Puchbauer and Thompson emphasized that banks are left responsible to pay merchants in cases of fraud or account overdrafts.

"You have the argument that a debit card is like a plastic check. If I pay by check, there is no interchange fee there," said Gary Corner, senior examiner with the St. Louis Federal Reserve Bank.

But local bankers say debit cards present them with more risk than paper checks. A check can be returned to a merchant, while they're left responsible for paying an electronic transaction.

It is not up to banks to determine what debit card interchange fees are charged, Corner said.

"Banks are typically just a party to this, not the driver. Visa and MasterCard control most of the interchange fees, both credit and debit," he said.

Banks will issue the cards to their customers and merchants pay the interchange fees to the card networks including MasterCard, Visa and Star. A slice of the fee comes back to the banks when their customers use their cards.

Every year in the U.S. there are 38 billion debit card transactions, according to Fed research, with purchases totaling $1.45 trillion annually.

The Fed was charged with establishing a fee cap that was "reasonable and proportional" to the costs incurred by card issuers for electronic debit transactions as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

"The issue is being pushed by the merchants of the world who see debit interchange fees as a growing thorn in their side and they're looking for a way to cut costs," Corner said.

Barry Robinson, owner of Cup 'N' Cork on Main Street in Cape Girardeau, said he typically isn't a fan of big government regulation, but in this situation he thinks imposing a cap on debit card interchange fees will be beneficial to businesses.

He doesn't like paying the fee each time he swipes a customers debit card for a cup of coffee, but he knows customers like the convenience of using them so he's willing to do it.

"If you're looking at a cup of coffee, I lose about 20 percent of the sale price to the card fee. You factor that in with the rising cost of the coffee and there's not much profit left."

Although some businesses have gone to accepting cash or checks only, he said he's certain he would lose customers if he tried that.

"For customers it's easier to carry a piece of plastic than a lot of cash," he said.

But providing this convenience for customers comes at a cost to him. His business pays between $4,000 and $5,000 a year in card processing fees.

The Fed is accepting public comments on its revised proposal to cap debit card interchange fees on its website, http://stlouisfed.org/regreformrules/.

mmiller@semissourian.com

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