(V) Debit Card Cap Battle in Final Leg

The fate of the pending cap on interchange fees for debit cards will be decided today in a U.S. Senate vote, according to a Reuters report on Tuesday. This would put an end to the tussle on the enactment and deferment of the cap that has been in question for quite some time now.

According to a provision in the 2010 Dodd-Frank Act, the Federal Reserve needs to cap the interchange fees for U.S. banks. The rule was supposed to be enacted effective July, but faced lobbying resistance.  The anti-party wants to delay the cap setting for as long as a year. Accordingly, on Tuesday, they proposed to hold up the cap that the Fed is supposed to set.

The cap setting will now depend entirely on the result of senators’ vote. In order to enact the law, 60 votes are required.

What are Interchange Fees?

For every swipe of a debit card, the related bank charges a fee to the retailer. The bank then shares the amount with its card partners such as Visa Inc. (V) and Mastercard Incorporated (MA). The charged amount is called interchange fees.

Magnitude of the Cap

In December, Federal Reserve proposed to cap interchange fees for big banks at 12 cents per transaction. This represents a decrease of about 75% from the previous average. According to the estimates of the banking industry, this would drain about $12 billion in revenues annually from the sector.

Banks Off the Hook

Small banks with less than $10 billion in assets are exempt from the law. Nevertheless, these banks have willingly joined larger banks in the lobbying battle on interchange fee cap. A general fear that the capping would hurt the profitability of the industry explains the support from small banks.

Cause and Effects of the Battle

Following the Federal Reserve’s proposal to set a cap on the interchange fees in December, the banking industry requested Congress to delay or reconsider the rule. This was the beginning of the battle. Finally, on Tuesday, a group of Democrats and Republicans proposed Fed and other regulators to study the rule for six months.

The regulators will have to determine whether the rule takes into account all the costs to a bank for its debit card. They have to check if eventually card users would have to bear the brunt.

More importantly, they should figure out the consequences of the exclusivity that small banks would enjoy. Quite obviously, if the small banks are exempt from this rule, customers will use more and small-bank bank debit cards, damaging the debit card revenue of big banks even more.

If one of the regulators and the Fed find these considerations valid, then the cap would be scrapped. The Federal Reserve will then draft a new proposal within six months.

Are Banks Sitting Idle?

If Federal Reserve wins today’s vote, capping will be adopted, making it significantly difficult for big banks to earn revenues from debit card interchange fees. Banks are already chalking out plans to recover some money that they are bound to lose if interchange fees are slashed.

The proposed capping on interchange fees is expected to cost JPMorgan Chase & Co. (JPM) more than $1 billion per year. However, JPMorgan is contemplating a limit of either $50 or $100 per transaction on customers’ debit card. Debit cards will bounce at the time of swiping if purchases cross the specified amount.

What’s more, JPMorgan has already imposed a $3 monthly fee on its debit cards and a $15 fee on its checking accounts in some of its operating areas. The company has also stopped issuing debit rewards.

Among others, Bank of America (BAC) and Wells Fargo (WFC) are also considering to recover their debit card fees. Some banks are also planning to issue more prepaid cards that would provide customers with the facilities of plastic money.

Was This Needed?

The Federal Reserve’s proposal to slash interchange fee was primarily intended to resist banks from earning super normal profits. This idea was backed by the noble intension of trickling the money thus saved into the market through consumers, thereby increasing consumption and ultimately fueling economic growth.

However, banks are moaning that slashing interchange fees would reduce their financial ability to protect themselves against fraud as money from interchange fees helps to offset what they lose due to fraudulent transactions.

They are trying to shield themselves by capping transaction amounts not just to recover some lost money, but also to reduce the risk of bulk transactions. After all said and done, the ultimate impact would still fall on consumers who genuinely depend on a debit card.

BANK OF AMER CP (BAC): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MASTERCARD INC (MA): Free Stock Analysis Report

VISA INC-A (V): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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