Financial institutions set to lose big profits from debit card swipe costs

Capping debit card swipe fees at 12 cents a purchase is part of a proposal submitted by the Fed on Thursday. The swipe fee limit is a component of a set of new debit card rules. The Federal proposal is an effort to adhere to requirements specified in financial reform legislation passed last summer. Not surprisingly, retailers support the measure and major credit card companies opposed it as they viewed their stock take a hit on the media.

Swipe limit proposal coming from the Fed

No matter what the value is, most credit card companies charge 1 to 2 % of each and every transaction with the current system of debit card swipe fees. At least two debit card networks would be presented to merchants to choose from with the Fed debit card swipe proposal. Visa and Mastercard would face a lot more competition this way. The financial reform bill requires swipe fees for debit cards to be "reasonable and proportional" to how much the bank has to pay for the electronic transfers to happen which is what began the Fed swipe limit proposal. The Fed suggests that banks are going to have to be more cost efficient. This is what the debit card swipe fee limits would force.

Easy money for banks lost quickly

About $15 was made in swipe fees by credit card companies. This was in 2009 alone. The Fed swipe fee limit proposal would be a boon for retailers. Any banks using Visa or Mastercard may lose up to 80 to 90 % in revenue. A JP Morgan Chase analyst told this to Bloomberg. Average debit card swipe fees would go down about 75 % with the 12 cent swipe fee cap, says UBS Investment Research. The Fed said the newest debit card swipe fee limits probably won’t translate into lower prices for consumers. It seems like customers can be engaged with different ways rather than the credit card reward programs that banks try so hard to get customers started on.

Many react to proposed Fed swipe fee limits

The National Retail Federation said lower costs for merchants could lead to discounts for consumers. The American Bankers Association said the Fed would allow retailers to keep away from paying their fare share for the benefits they get from the card payment network. Visa stock went down 11 % when Mastercard dropped 9 % following the Fed announced the swipe fee proposal on Thursday.

Citations

Washington Post

washingtonpost.com/wp-dyn/content/article/2010/12/16/AR2010121604553.html

Bloomberg

bloomberg.com/news/2010-12-16/federal-reserve-moves-to-reduce-debit-card-fees-visa-mastercard-decline.html

Wall Street Journal

online.wsj.com/article/BT-CO-20101216-713515.html