US Fed proposes shrinking fees banks charge on debit card transactions

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WASHINGTON (Reuters) -The U.S. Federal Reserve on Wednesday proposed slashing by nearly a third the amount of so-called “swipe fees” banks can charge merchants for processing debit card transactions, setting up a pitched battle between the two industries over potentially billions of dollars in revenue.

Citing data that showed the costs of processing such transactions had fallen by roughly half in recent years, the Fed proposed cutting the current cap from 21 cents per transaction to 14.4 cents per transaction.

The proposal, which is now open to public feedback, marks the first time the Fed has adjusted the fee cap after it was first set in 2011. Banks charge retailers the fee when processing debit card transactions, and the Fed was ordered to limit those costs to a “reasonable and proportional” level as part of the 2010 Dodd-Frank financial reform law.

The potential sizable reduction in the fees, which generated $31.59 billion for lenders in 2021, according to Fed data, will set off an intense lobbying battle between the two industries.

Retailers and banks have sparred over the fees for years, with merchants complaining they are excessively high and pad profits for banks, while financial firms argue retailers have failed to pass savings on to consumers via lower prices on products.

Retailers, who have pressed the Fed for a lower cap for years, were quick to praise the proposal Wednesday, while vowing to try and push the limit even lower.

“Today’s proposed rulemaking signals an end to these outrageous markups,” said Austen Jensen, executive vice president of the Retail Industry Leaders Association, which represents larger retailers.

The proposal would also slightly trim an added fee that banks can charge from 0.05% of the cost of the transaction to 0.04%. However, the Fed did propose expanding a supplemental fee banks can charge to cover fraud prevention services from 1 cent per transaction to 1.3 cents per transaction, citing a slight uptick in those costs over the years.

In practice, the proposed changes would result in, on average, a 17.7 cent fee on a $50 transaction, down from what would be a 24.5 cent fee today, according to Fed officials.

The Fed also proposed automatically adjusting the cap every two years in response to fresh data.

In a letter to the Fed sent Friday, nine major bank trade groups said retailers don’t pass on to consumers savings and that claims they would do so in the future “should be viewed with robust skepticism.”

Analysts said that it is likely the Fed could face a legal challenge from either industry as it considers a new cap.

TD Cowen analyst Jaret Seiberg said in a research note the Fed “likely expects both the banks and the merchants to challenge any final…rule even if that final proposal simply ratifies the status quo.”