The banks lobbied in vain against an amendment included in
the financial reform act passed in July that limits some of their transaction
fees.
Banks and analysts say billions of dollars in potentially
lost revenue is at stake.
Banks are now trying to salvage what they can during the
rulemaking process by trying to convince the Fed that some processing fees,
like fraud prevention costs, should be broadly defined.
The Fed is preparing a survey that will likely be sent out
in September to card issuers and card networks to collect the information that
will be used in writing the regulations. The regulator has been having
conference calls in recent weeks with banking and merchant groups while
separately reaching out to consumer advocates.
The Fed declined to comment for this story.
The Dodd-Frank Act calls for new limits on so-called
interchange transaction fees that banks receive from merchants, via card
networks like Visa Inc and MasterCard Inc, when a customer uses a debit card.
The National Retail Federation estimates debit card fees,
which are about 1 percent to 2 percent of each transaction, total $20 billion
annually.
Bank of America spooked investors earlier this year by
saying the processing fee limits could cost it between $1.8 billion to $2.3
billion annually, although analysts said that estimate is high.
The survey is expected to go out in September, with an eye
toward a formal proposal later in the fall, and a final regulation in place by
the law’s mandated April deadline.
While the process will take months it is moving quickly by
Washington’s sometimes glacial rulemaking standards.
“Often the Fed lets rules simmer a long time if they don’t
get a timeline from Congress,” said Ed Mierzwinski of the consumer group US
Public Interest Research Group (US PIRG).
The Fed is required to establish standards to determine
whether the fees being charged by card issuers are “reasonable and
proportional” to what it costs them to process the transaction.
Among the top concerns for banking groups is how fraud
prevention costs will be factored into fee limits and what type of impact the
rules may have on smaller institutions.
The law allows fraud costs to be considered as part of a
transaction’s cost and banking groups argue it should not be limited to just
direct losses, but include protecting customer data and investigating claims.
They want that information collected in the survey.
“Our big concern, at least initially, is that all the costs
of fraud are captured,” said Nessa Feddis, a vice president at the lobbying
group the American Bankers Association. “That is clearly the intent of the
legislation.”
But some merchant representatives on the conference calls
have questioned whether data protection costs should be included in the survey.
A representative for the National Retail Federation, a
lobbying group for US retailers, declined to comment directly on the Fed talks
but said card issuers should shoulder fraud costs.
“If they can eliminate fraud, then they’ve eliminated the
expense,” NRF spokesman J. Craig Shearman said.
Consumer groups are concerned banks will inflate how much
they actually spend on fraud prevention US PIRG’s Mierzwinski said. These
groups have joined with retailers in arguing against the fees that are
ultimately passed on to consumers.
The attempts to blunt the impact of the new debit fee limits
comes as issuers cope with prior legislative crackdowns on credit cards that
have resulted in reduced fee revenues and higher interest rates for consumers.
Smaller financial institutions are also following the Fed’s
deliberations even though the law specifically exempts those with less than $10
billion in assets from the new regime.
The groups representing credit unions and community banks
say their members will likely be impacted and are pushing the Fed to seek their
input when conducting the survey.
Cary Whaley of the Independent Community Bankers of America
said the law fails to clarify how small banks will be exempted. They fear that
while the Fed will set the fee limits based on debit card transactions’ costs
to large banks, there is nothing to stop merchants from applying that same rate
to smaller institutions for whom the transactions are more costly.
“If you are measuring the industry, you really should
measure the entire industry to get a feel for what the pricing curve is,”
Whaley said.
