WASHINGTON — The Federal Reserve said Wednesday that banks can charge retailers a maximum of 21 cents each time they swipe a debit card.
The board raised the cap from its initial proposal of 12 cents per swipe. Banks and big payment processors like Visa and Mastercard convinced the Fed that was too low to cover the cost of handling transactions, maintaining networks and preventing fraud.
Banks currently have no limit and charge an average of 44 cents per swipe.
The Fed voted 4-1 to adopt the rule, which was required under the financial regulatory law enacted last year. Elizabeth Duke opposed the rule. It takes effect Oct. 1, later than expected.
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It was "one of our most challenging rulemakings" under the financial regulatory law, Fed Chairman Ben Bernanke said Wednesday. The Fed will monitor developments in the debit card market to gauge if it's accomplishing the intended goals, he said.
Fed staff said the higher cap reflects a broader range of costs incurred by banks that issue debit cards. The rule will also allow banks to charge a fraction more to cover the costs of fraud prevention.
It does not apply to government-issued debit cards, prepaid cards or cards issued by banks and credit unions with assets under $10 billion.
The move to limit swipe fees pitted the nation's largest banks and payment processors like MasterCard and Visa against Wal-Mart and retailers of all sizes. The decision to settle on a higher cap lifted bank and payment processors stocks in afternoon trading on Wall Street.
Banks said $16 billion was at stake if the 12-cent cap took effect. That would be more than 80 percent of the $19.7 billion in debit transaction fees paid by merchants in 2009, according to the Nilson Report, which tracks the payments industry.
Banks warned that they would have to make up for some revenue lost by shifting costs to consumers. Many already eliminated unrestricted free checking accounts, and some ended debit card rewards programs. Other potential actions include annual fees for using debit cards, which are already being tested in some markets.
The higher cap may lead some to avoid taking such action, said Brian Riley, a bank card analyst with the consultant the Tower Group. Banks must still review their costs but the rule allows them to avoid a "slash and burn" process for customers that don't provide much profit, he said.
Merchant groups said that their savings would be passed on to customers in the form of lower prices. But many questioned whether retailers would simply pocket the difference.
Staff members said they think it's unlikely that issuers would impose fees on debit card transactions or steer their customers away from using the cards. Merchants in highly competitive regions would likely reduce prices once fees go down, the staff members said.
Small banks and credit unions argued that the exemption for banks under $10 billion wouldn't help if the cap was as low as originally proposed. That's because it would have invited merchants to discriminate against higher cost cards. Bernanke had acknowledged small banks' concerns in testimony before the Senate last month.
"It certainly appears that the board gave our concerns some consideration," said Mary Dunn, deputy general counsel of the Credit Union National Association.
Separately Wednesday, a federal appeals court in South Dakota ruled that a lower court judge was correct to deny a preliminary injunction against the fee limits taking effect.
The case challenging the regulations' constitutionality was brought in October by Minnesota-based TCF National Bank, the unit of TCF Financial Corp., considered the first bank to offer free checking accounts. TCF is among the banks that no longer offer free checking without requirements such as using direct deposit or maintaining minimum balances.
In a twist, TCF's attorneys argued that the provision of the law exempting small banks and credit unions gave those unaffected banks an unfair advantage.