Fed Weakens Final Swipe-Fee Rule

July 6, 2011

Bowing to an intense advocacy campaign by the banking lobby, the Board of Governors of the U.S. Federal Reserve (Fed) adopted June 28 a final swipe-fee reform rule that significantly varied from its proposed rule and represented a windfall for big banks.

The Fed was required to implement a rule ensuring that the swipe fees charged for debit-card transactions are “reasonable and proportional” to the actual costs incurred by the issuer in processing the transaction. The rule was the result of an NSBA-supported amendment to the Restoring American Financial Stability Act (S. 3217), introduced by Sen. Whip Dick Durbin (D-Ill.).

In December 2010, the Fed issued a proposed rule that would have capped swipe fees at 12 cents per transaction. This cap still represented a windfall for big banks, as the Fed found that it costs banks only four cents to process the average debit-card transaction. The proposed rule exempted banks with less than $10 billion in assets and did not apply to credit cards.

In a major capitulation to the banking lobby, however, the Fed adopted a final rule on swipe fees with a base of 21 cents per transaction—and no set cap. The rule would allow big banks to charge five basis points per transaction cost to account for fraud losses and an additional cent for fraud-prevention costs, if the bank had an appropriate system in place.

Banks with less than $10 billion in assets remain exempt.

The final rule grants big banks a more than 500 percent profit every time a consumer uses a debit card. To the small-business owners forced to bear the burden of this exorbitant profit margin, this hardly seems “reasonable and proportional.”

It is especially troubling that the Fed failed to provide new financial data or any further justification for adopting a final rule with a “cap” more than 75 percent higher than its proposed rule.

While highly disappointing, the rule will provide some relief to small-business owners. In 2009, the average swipe fee in 2009 was 44 cents, according to the Fed.

The final rule will take effect on Oct. 1, 2011. The original amendment called for the rule to take effect July 21, 2010.