Fed Lowers the Boom on Swipe Fees

Charged by Congress with making the call on mandates governing interchange fees paid by merchants for debit card transactions, the Federal Reserve proposed greatly reducing the fees which financial institutions can charge and network exclusivity agreements.

As part of the Dodd-Frank Act, the sweeping financial reform package inked into law earlier this year, the Fed unveiled a proposal that would set a maximum cap on interchange fees ("swipe fees") at $0.12 per transaction. The Fed estimated that merchants were charged, on average, $0.44 per transaction, and that revenue from said fees comprised upwards of $16 billion for the industry last year alone.

The proposal, if implemented - there is a traditional public comment period that extends through February 22 - would be a significant victory for small businesses who saw the fees as unfair and a serious financial burden. Subsequently, the move at best would leave uncertainty at Visa and Mastercard and, at worst, would have a severely negative impact on their revenue streams.

The Fed noted the following: "The proposed new Regulation II, Debit-Card Interchange Fees and Routing, would establish standards for determining whether a debit card interchange fee received by a card issuer is reasonable and proportional to the cost incurred by the issuer for the transaction. These standards would apply to issuers that, together with their affiliates, have assets of $10 billion or more. Certain government-administered payment programs and reloadable general-use prepaid cards would be exempt from the interchange fee limitations."

The Fed went on to request public comment on two alternative interchange fee standards: "one based on each issuer's costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap (initially set at 12 cents per transaction)...The Board also is requesting comment on possible frameworks for an adjustment to the interchange fees to reflect certain issuer costs associated with fraud prevention."

Short of delays or a significant shift in the requirements, the new rule is scheduled to take effect on July 21, said the Fed.

Brian Shappell, NACM staff writer

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