Debit Cards About to Get Cheaper

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If the Wall Street Journal is to be believed, the Fed is about to crack down pretty hard on debit card swipe fees. Apparently they’re considering two similar plans:

Both plans involve a cap of 12 cents per transaction and could cost banks billions of dollars in lost revenue but represent a victory for retailers.

Under one plan recommended by Fed staffers, card-issuing banks could use a formula to determine the maximum amount of an interchange fee that it may receive, based on certain costs incurred by the bank to process debit transactions. The Fed would set a “safe harbor” standard at seven cents per transaction. But then, any costs in excess of the safe harbor could be recovered up to the 12-cents-per-transaction cap….The alternative plan doesn’t involve a safe harbor plan, just the 12-cents-per transaction cap.

Unless I’m missing something, this is a pretty stiff regulation. Current swipe fees generally amount to 1-2% of the transaction, so the fee on a $100 purchase is upwards of a dollar or two. Under either of the new rules, the maximum fee would be 12 cents.

It’s not clear how much of this reduction will be passed on to consumers and how much will end up in retailers’ pockets. But considering the monopolistic nature of the debit card market and the heavy-handed contracts it allows card companies to force on merchants, this rule seems eminently reasonable. Dodd-Frank says debit card charges have to be “reasonable and proportional” to the cost of providing the service, and 12 cents sounds about right to me.

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