The Federal Reserve recently proposed a 12-cent cap on the fees banks charge merchants for debit card transactions. If implemented, the new limit could shave more than 80 percent off the revenue banks collect through debit card interchange fees. The move is raising questions about whether credit card swipe fees might be next.
Swipe fees, or “interchange” fees, are a major source of revenues for banks. According to the Fed, in 2009 the average swipe fee on debit cards was between 1.14 and 1.53 percent of the purchase amount. The Fed’s proposed cap on debit card swipe fees is a flat rate ranging between 7 and 12 cents, a drop of more than 80 percent, and higher than the 60 percent decrease expected by analysts and banks.
The Fed proposal sent shares of Visa and MasterCard plunging. Visa and MasterCard don’t directly profit from interchange fees, since they merely process credit card transactions, however, they are likely to still be affected by the Fed’s proposal. If banks make less money from debit cards, they will theoretically market fewer of them to consumers, and Visa and MasterCard—for whom debit cards are a primary growth driver—will also lose out.
The Fed’s action was part of the Durbin amendment in the Dodd-Frank Wall Street Reform and Consumer Protection Act passed by Congress in May 2010. The act asked the Fed to lay out new standards for debit card interchange fees to ensure that fees are “reasonable and proportional” in relation to the costs of processing debit card transactions. Merchants have complained that even as processing costs have come down, interchange fees have continued to rise. Credit and debit card issuers collected $50 billion in interchange fees in 2008 alone; 80 percent of those fees went to the 10 largest banks.
Merchants have long claimed that high swipe fees on debit and credit cards hurt their businesses, in some cases causing them to lose money. The interchange fees are much higher in the United States than in other parts of the world. Visa recently agreed to voluntarily lower debit interchange fees in the European Union following an antitrust investigation by the EU; Visa and MasterCard interchange fees are subject to antitrust investigations in Canada as well.
Still, experts question whether the swipe fee cap will result in lower prices on goods, except in a few, highly competitive markets. Additionally, some predict that banks will charge new fees to make up for the money they will lose: monthly fees for free checking accounts, for example. Australia passed similar regulations on swipe fees in 2003, and the Australian Government Accountability Office found that, while there was “no conclusive evidence” that merchants reduced retail prices, other costs for cardholders increased.
So far, the new rules only apply to debit card transactions. Credit card swipe fees are even higher than debit card fees, ranging from 2 percent to as high as 5 percent per transaction. Card issuers argue that the high credit card swipe fees are needed to compensate banks for the risk of lending money, since banks are essentially giving out an unsecured loan each time a consumer makes a credit card charge. However, retailers counter that the higher interchange fees, particularly on rewards credit cards, are essentially used by card issuers to pay for the rewards offers used to compete for consumers’ business. The higher swipe fees, merchants argue, have nothing to do with the cost of processing transactions; and retailers essentially end up footing the bill for card issuers’ rewards programs.
Currently, American Express, which charges some of the highest swipe fees in the industry, is involved in a federal antitrust suit, which claims the card issuer’s contract violates antitrust laws, because AmEx excludes competition by prohibiting merchants from steering customers to cheaper card brands. Visa and MasterCard were initially named in the suit too, but settled out of court by agreeing to allow merchants to offer consumers discounts and other incentives to encourage cardholders to use less expensive payment methods.