It's not every day that an announcement from a regulatory body causes the stock of 10% in the stock of MasterCard and 13% in the stock of Visa. But that's just what happened today after the Federal Reserve proposed a cap on the amount of money debit card issuers can charge merchants for purchases at 12 cents for swipe fees, a major source of income for the issuers.
"Nobody expected it to be this draconian," said David Robertson, publisher of credit-card industry newsletter the Nilson Report. One bank executive said the cut was larger than the company's worst-case scenario. Banks, he said, will "push back."
A 12 cent cap is considered draconian because it is a hard cap rather than a set of more flexible standards, and the size of any cap was expected to be more like 60 cents. The new rules would also loosen card issuers' control over the fees and allow merchants to choose rival payment networks, creating more competition for Visa and Mastercard. Banks' debit card business models are equally hit, but larger banks' shares fell less after the announcement because they are more diversified.
But the lower fees mean savings to merchants, some of which is passed on to consumers, depending on how elastic demand is for the merchant's goods.
For consumers, the proposed rules could allow merchants to cut prices, reflecting their reduced costs. A $100 transaction today, for example, means merchants currently pay banks as much as $1.30 in debit interchange fees, according to figures provided by the Nilson Report. Under the proposals, the merchant would pay no more than 12 cents, said David Balto, a fellow with the left-leaning Center for American Progress.
The current reform was a provision of the Dodd-Frank Financial Reform Bill and was a pet project of Senator Durbin (D-IL). Lenders with assets of less than $10 billion are exempted. These changes would bring US practices on in line with those of the European Union:
A 75 percent cut in the interchange rate would put the U.S. on par with the 27 nations of the European Union. Visa Europe Ltd., operator of the continent’s biggest payments network, agreed to cut the fees to 0.2 percent as part of a deal to end EU antitrust action, the European Commission said last week. MasterCard agreed to the same rate last year.
Use of debit cards has been rising in the American economy in recent years as consumers shy away from debt. In last quarter of 2008, Visa reported that debit card usage for the company exceeded credit cars usage for the first time in its history.
The reform bill left many issues, such as how to deal with debit card fees, up to regulators such as the Federal Reserve to handle. Hence many of the real battles are being fought out now, after the passage of the legislation, to influence how strict regulatory bodies decide to be. Besides the Fed, another key battleground is the Commodities Futures Trading Commission, which is tasked with coming up for new rule for derivatives.
The Fed's rules today are far more draconian that had been anticipated. But they are just a proposal and could still be subject to change. Some are already fighting back. Even before today's announcement was made, a bipartisan group of Senators, including Thomas Carper (D-DE), Richard Shelby (R-AL), Judd Gregg (R-NH), David Vitter (R-LA) and Evan Bayh (D-IN) had already written to the Fed urging it to go soft. Unfortunately, regulatory battles are much less visible than those in Congress and many average Americans may lose interest in this fight while the banks send in hundreds of lobbyists. It is up to those at the Fed to stand firm.