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Fed Proposes 12-Cent Cap on Debit Card Fees

Fee limits would cause banks' interchange fee income to drop by 70%, the Fed estimates.

The Federal Reserve Board of Governors this afternoon approved a proposed 12-cent cap on the debit card fees that banks charge merchants. The Fed estimates that this rule would lower such interchange fees by about 70 percent from 2009 levels. Interchange fees are typically about 2 percent of the value of the transaction.

The new rule stems from the Dodd-Frank Act, which required the Fed to adopt regulations to reduce the "swipe fees" merchants pay banks. In addition to limiting debit card interchange fees, the rule would also prohibit network exclusivity arrangements and routing restrictions.

This rule would apply to issuers that, together with their affiliates, have assets of $10 billion or more. Certain government-administered payment programs and reloadable general-use prepaid cards would be exempt from the interchange fee limits.

The Board is requesting comment on two alternative interchange fee standards that would apply to all covered issuers: one based on each issuer's costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); and the other a stand-alone cap (initially set at 12 cents per transaction). The Board also is requesting comment on possible frameworks for an adjustment to the interchange fees to reflect certain issuer costs associated with fraud prevention.

According to a 2010 Federal Reserve payment study, debit card use in the U.S. now exceeds all other forms of noncash payments and, by number of payments, represents approximately 35 percent of total noncash payments. Nearly 38 billion debit card payments were made in the U.S. in 2009 and debit cards are now used in 35 percent of noncash payment transactions, and have eclipsed checks as the most frequently used noncash payment method. In 2009, debit card interchange fees totaled over $16 billion in the U.S.

The Fed is seeking comment on this rule until February 22, 2011. The rule is due to take effect July 21, 2011.

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