Everybody Hates Interchange: Bankers, Retailers Object to Fed Final Rule

WASHINGTON — It was a compromise that pleased no one, including the Federal Reserve Board officials who voted for it.

Although the central bank agreed to raise the cap on debit interchange fees to 21 cents, plus extra for fraud costs, bankers said it would gut profits and hurt consumers. Retailers, meanwhile, accused the Fed of giving into pressure from the financial services industry, and hinted they may sue over the rule.

Nearly every Fed governor who voted on the final rule also sounded unhappy about it, but defended it as the best they could do considering the requirements foisted upon them by Congress.

"This is the best available solution to implement the will of Congress," said Fed Chairman Ben Bernanke.

Fed Gov. Sarah Bloom Raskin listed multiple potential problems with the measure, including that it may hurt small banks despite a nominal exception carved out for them.

"We didn't craft the Durbin amendment," she said, referring to Sen. Richard Durbin, who authored the provision as part of the regulatory reform law enacted last year. "We are only doing what Congress directed... It appears to me that we have no choice in this matter, but to adhere to Congress' directive even when the guide posts for achieving its requirements are far from clear."

Only one Fed official, former banker Betsy Duke, voted against the rule. She said it will hurt consumers by eliminating free checking accounts and forcing hikes in other bank fees.

"This has not been an easy law to implement," Duke said.

At issue was a final rule approved 4 to 1 by the central bank which will raise the base debit swipe fee to 21 cents from its original 12-cent proposal. The central bank also allowed institutions to charge a 1-cent extra fee if they comply with certain fraud prevention criteria, and assess a 5-basis-point charge based on the amount of the transaction to offset fraud losses.

As a result, the interchange fee on the average debit card transaction of $38 would be roughly 24 cents — double what the Fed initially proposed. The interchange fee could potentially be larger, depending on the size of the transaction.

Despite the increase, bankers were far from pleased, denouncing the cap as price-fixing and saying it will damage community banks.

"The Fed deserve credit for pushing the interchange cap as far as it thought it could go and still defend its action if challenged," said Gil Schwartz, a partner at Schwartz & Ballen LLP and a former lawyer for the central bank. "While it provides some relief to issuers, it seems to me that it is like throwing a 10 foot rope to someone who is drowning 20 feet from shore. It helps, but doesn't exactly achieve the goal."

Richard Hunt, the president of the Consumer Bankers Association, agreed.

"Unfortunately, it is consumers who will ultimately bear the burden of Congress' gift to big box retailers," he said.

Fred Becker, president of the National Association of Federal Credit Unions, said the final rule "still falls far short of covering all the interchange costs for credit unions. This means consumers will ultimately pay a higher price for basic financial services because of the limitations this final rule creates."

Trish Wexler, spokeswoman for the Electronic Payments Coalition, said the group continues "to be concerned about the impact on consumers and small financial institutions from this price fixing policy. We hope Congress will exercise vigorous oversight of this new policy and monitor its implementation in order to assess and minimize its negative consequences to consumers, small financial institutions and the American economy."

But the retailers were equally unhappy with the final rule. In a press release, the Merchant Payments Coalition claimed the Fed had succumbed to pressure from big banks.

"The Federal Reserve very clearly did not follow through on the intent of the law," said Mallory Duncan, chairman of the Merchants Payments Coalition. "This rule is unacceptable to main street merchants and consumers, who were counting on the Fed to issue a fair rule that followed Congress' law. Unfortunately, this rule does not meet those qualifications."

The trade group said it is "exploring all available legal options to address the irresponsible mistakes made in writing this rule."

Bankers, meanwhile, hit a roadblock in their effort to block the Fed from promulgating the rule. A federal appeals court on Wednesday rejected TCF Financial Corp.'s request to delay the rule.

The Fed did give banks some added relief. The central bank said the new interchange limits would not take effect until Oct. 1, despite the fact that they were supposed to be effective on July 21, the one-year anniversary of the Dodd-Frank Act.

The Fed also tried to alleviate concerns about the rule's impact on banks with less than $10 billion of assets, which are technically exempted from the cap. The central bank said it will annually publish a list of banks that are exempted, and list the average interchange fee by network for exempt banks. Fed Gov. Dan Tarullo separately asked the Fed to study the issue within six months.

The central bank has been under pressure by banks, credit unions and others to raise its cap.

The Fed decided to raise the fee cap largely because it included other costs than were covered in its initial proposal. In the rule, the Fed said the 21-cent base cap accounts for: network connectivity costs, costs of hardware, software and labor, and transaction monitoring costs. It also addressed another industry point by allowing banks to charge 5 basis points per the size of the transaction to account for fraud losses.