Banks Stand to Lose $12B from Debit Card Fee Reduction

We recently discussed the possible effects that the limits on debit card interchange fees, proposed by the Federal Reserve in December, would have on issuer banks’ revenues. Over the past few days there have been some new developments that have changed the landscape considerably.

The Durbin Amendment of last year’s sweeping Dodd-Frank financial overhaul legislation mandated that the Fed ensures that debit card interchange fees are “reasonable and proportional.” The Fed responded by putting forward a proposal that many considered to be quite drastic. Debit card interchange fees were to be slashed to $0.12 per transaction, which, according to a Fed analysis, is about 70 percent lower than the average fee of 44 cents per transaction last year.

The Durbin Amendment was not included in the initial version of the financial overhaul bill, but was eventually added after a successful push from retailer lobbying groups, overcoming strenuous resistance from the credit card industry. The retailers succeeded in convincing legislators that consumers would be the ultimate beneficiaries of an interchange fee reduction, which would lead to reduced prices. Credit card companies were left to console themselves with the fact that a similar legislative limit on credit card interchange was averted, at least for the time being.

If passed, the proposed interchange fee limit on debit card transactions could reduce annual revenue for U.S. issuing banks by more than $12 billion. Debit card interchange fees totaled $16.2 billion in 2009, according to the Federal Reserve.

Now, however, opposition to the proposed changes is mounting in Congress that would force the Fed to amend its proposal. House Republicans have been joined in their efforts by none other than one of the co-sponsors of the Dodd-Frank legislation — Barney Frank, a Democratic Representative from Massachusetts. “The amount the credit card companies are allowed to charge is too low,” he said in an interview with CNBC’s Maria Bartiromo. “If they want to do something on it, I’ll work with them,” he said, referring to his Republican colleagues.

It is not yet clear exactly what the opposition to the 12-cent limit would want to replace it with. The language is vague, stating a goal to “correct, replace or repeal the job killing provisions,” in the words of Republican Representative Spencer Bachus, the new Financial Services chairman.

The new rules, defining what “reasonable and proportional” means when debit card interchange fees are concerned, must be finalized by April 21^th and enacted by July 21^th to comply with the legislation’s mandate. Whatever their eventual shape, however, the achievement of the stated goal of passing the savings on to consumers is far from certain.

Image credit: Wikimedia Commons.