By Christopher Maag
In a down-to-the-wire decision that could affect how much Americans pay for everything from gas to checking accounts, the Federal Reserve announced new rules Wednesday that it will cut the debit card swipe fees that retailers pay in half.
Consumers are unlikely to notice big changes any time soon in the price of things they buy. But over time, the decision could translate into slightly lower costs at the register, and slightly higher costs for bank services like credit cards, checking accounts and prepaid cards.
“Rather than this causing a dramatic change for your checking account or your debit card, I think any changes in fees for those accounts will be gradual,” says Gerri Detweiler, Credit.com’s consumer credit expert. “And it’s not as if the local bagel shop is suddenly going to have all this money in their cash register to pass along to their customers.”
But to all kinds of businesses, large and small, the Fed’s announcement was a very big deal. It could save retailers $500 million a month, according to a report by the Government Accountability Office. You might think that would make merchants happy.
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It doesn’t. They were hoping the Fed would impose tougher rules on banks, saving retailers twice that—up to $1 billion every month.
“American consumers suffered a major loss today,” the federation’s president, Matthew Shay, said in a press release. “While the rate will provide modest relief, it does not go far enough.”
But then, banks will see their debit card income chopped in half when the new rule takes effect Oct. 1. Which means they’re not too happy about the announcement, either.
“What’s the saying—you know it’s a good compromise when no one is happy?” Trish Wexler, spokeswoman for the Electronic Payments Coalition, which represents banks in the fight, wrote in an email to Credit.com. For banks, “a 50% cut in their revenue will force all card issuers to make some tough decisions—raise fees, cut benefits, or stop issuing cards altogether?”
The decision comes just three weeks before the rules were originally supposed to take effect, and after nearly a year of very expensive lobbying and advertising campaigns by both banks and retailers. Banks pushed hard to get a bill by Rep. Jon Tester (D-MT) passed through Congress that would have delayed implementation of the rule by a year, giving the Fed more time to study the issue. But they failed to get the 60-vote supermajority needed to pass the bill (not to mention the nearly impossible task of getting President Obama and the Democratically-led Senate to agree to changing a law they still support).
After that legislative battle royale ended in early June, banks pushed their lobbying attention to the Fed. The pressure appears to have paid off. Originally the Fed proposed capping fees at 12 cents per swipe, almost 75% lower than their current average of 44 cents.
In its new proposal, the Fed decided to cut fees only in half. Each swipe will earn the banks 21 cents, plus .05% of the value of some transactions. Some advocates for consumers find the compromise unconscionable.
“We’re really disappointed and we don’t think consumers will be helped,” says Ed Mierzwinski, director of consumer programs for U.S. Public Interest Research Group.
Others are reserving judgment until they have time to decipher the Fed’s 307-page decision.
“We don’t like the current system. It doesn’t serve consumers,” says Travis Plunkett, spokesman for the Consumer Federation of America. “But you’ve got to set the reimbursement rate high enough so that banks don’t raise fees on the consumers that are least desirable for them, and that are the most vulnerable, meaning low- to moderate-income consumers.”
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Some banking industry representatives took a similarly moderate tone. While they don’t agree with the concept of a cap, equating it with government price fixing, industry groups suggested they could live with the compromise.
“While price controls remain an anathema to free market principles, the Federal Reserve has taken a significant step in reducing the harm that could have resulted from the proposed rule,” the American Bankers Association said in a prepared statement.
In addition to setting the cap halfway between the current average and its original proposal, the Fed also gave banks a break by compromising on the start date for the new rules. Banks have until Oct. 1 to change their pricing for debit card swipe fees, rather than the original deadline of July 21.
But don’t expect parties in the street on the first day of October. The changes, if they come at all, will be especially slow to affect small stores, many of which are already locked into long-term contracts to access the major debit card networks and may not have the power or the knowledge of the new rules to negotiate any deals.
“Don’t wait till Oct. 1 to purchase anything,” Detweiler says. “It’s not as if prices are going to lower dramatically. If we see lower prices at the register, and that’s a big if, it’s more likely to start with larger retailers than the smaller ones.”
Christopher Maag is Credit.com’s Staff Writer. Chris graduated with honours from the Columbia University Graduate School of Journalism, and has reported for a number of publications including The New York Times, TIME magazine and Popular Mechanics.
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