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Fed Report Says Debit Swipe Fees Have Fallen Under Reform Law

By J. Craig Shearman
Washington Retail Insight
May 2, 2012

Numbers released by the Federal Reserve this week show debit card swipe fees collected by the nation’s largest banks dropped significantly after reform regulations took effect last fall, but NRF expressed disappointment that the fees did not fall further.

“We believe the numbers for the big banks are too high and had the Fed followed the law there would be significantly greater savings for merchants and their customers,” NRF Senior Vice President and General Counsel Mallory Duncan said. “This is working the way the Fed set it up to work, but the Fed didn’t fully comply with what Congress required. This is better than paying the full monopoly prices we paid before but they are still partial monopoly prices.”

A Fed report showed that the average debit card swipe fee charged by large banks covered under last year’s regulations dropped to an average 24 cents in the fourth quarter of 2011, down from an average 43 cents in 2009. Debit swipe fees for banks with less than $10 billion in assets, which were not covered by the regulations, remained unchanged as expected.

The fees are largely in accordance with the cap set under the regulations, but NRF and other merchant groups filed a lawsuit against the Fed in federal court in November arguing that the agency set the cap nearly twice as high as what was allowed under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Dodd-Frank said the Fed could consider the incremental costs of acquiring, clearing and settling each transaction and specifically prohibited any other expenses from being used to inflate those costs. Under those guidelines, the Fed initially determined that it costs banks an average 4 cents to process a debit transaction, and proposed that the fees be capped at between 7 and 12 cents per transaction. After intense lobbying by banks and the card industry, however, final regulations adopted in July 2011 set the cap at more than five times the actual cost – 21 cents plus 0.05 percent of the transaction and, in most cases, an additional 1 cent for fraud prevention.

Small banks argued last year that competitive pressures would force them to lower debit swipe fees even though they were exempt from the law, but the Fed numbers showed that didn’t happen.

“Today’s data confirms that small institutions are unaffected,” said Douglas Kantor, counsel to the Merchants Payments Coalition, which NRF and other merchant groups formed in 2005 to fight soaring swipe fees. “The gloom and doom predictions of reform opponents have proved false.”

The regulations took effect October 1, making the fourth quarter the first reporting period for which numbers were available.

© 2012 National Retail Federation

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