Federal Reserve Cuts Debit Fees Less Than Expected: A Defeat for Financial Reform?

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The Federal Reserve decided to cut the amount banks could charge on debit card transactions in half. The Fed, which was required under the financial reform bill Dodd-Frank to set a limit for what banks could charge retailers to process debit card transactions, capped the so-called swipe fees at $0.21 to $0.24 – depending on the size of the transaction – down from an average of $0.44 before the law was passed.

That decision had both sides of the debate – retailers and banks – claiming defeat. And it has some saying the prospects for financial reform in general are doomed. Here’s why:

Swipe fees have been the subject of a fierce debate ever since the rule got thrown into the financial reform mix. Retailers were pushing for the Fed to set the limit as low as $0.12, and back in December the Fed said it would comply. But after some heavy lobbying from the banks, the Fed appears to have balked, and raising the limit to double what they originally proposed. Nonetheless, the banks still are claiming defeat. They say the fees at half of what they used to be won’t be high enough to cover the cost of running their debt card networks, forcing them to raise rates elsewhere or take a loss. Retailers say the Fed did not follow through on the intent of the law. Consumer advocacy groups say banks will continue to be able to sneak into purchases billions of dollars in unnecessary fees.

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So who really won and lost? It does appear that the banks more won than lost this battle. Yes, the max banks can charge for debit transactions will drop in half. But banks already charged around $0.24 for debt card transactions when you use a pin. So it is really only transactions where customers choose to sign where the banks will be losing out in fees. What’s more, a Fed study last year found that debt card transactions on average cost banks between $0.04 to $0.07. So $0.24, seems like a big win for the banks, preserving their hefty profit margins in the debit card market.

But when it comes to financial reform in general, I think the debit card swipe fight says little about how the fight over financial reform rules, many of which still need to be written, in general will play out. That’s because debit card transactions were really not part of financial reform. Debit card fees didn’t cause the financial crisis. Swipe fees are a long-standing fight between merchants and banks that really has nothing to do with making the banking system any safer, just about punishing the banks. And that’s why I think the Fed was willing to split the difference, landing perhaps more on the side of the banks than they should have. But when it comes to rules that really would help protect our financial system from future blow ups, and really protect consumers, my feeling is the Fed and Treasury will be less willing to balk on say living wills, just as they were unwilling to budge earlier this week on higher capital requirements for the largest banks. So score one win for the banks, but it is probably their last.

UPDATE: Perhaps, I should have said hopefully their last win. The Audit points out that the banks might have been even fair better in the swipe fight if Wal-Mart hadn’t been on the other side. I hope the Fed was more lenient because this was not a financial stability issue, but I think it’s a fair point to say on issues where the bank is the only real lobby we could have worse outcomes.

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