Federal Reserve Proposes Huge Cuts in Credit Card ‘Swipe’ Fees

Published January 24, 2011

Interchange fees on credit card purchases may soon be slashed by order of the Federal Reserve, and consumers may feel the results. Interchange fees—also called “swipe” fees—are calculated as a percentage of the transaction amount using a formula incorporating several factors: account authorization costs, fraud and credit losses, and the average bank cost of funds. The fees generated about $20 billion for the credit card industry last year.

Retailers’ groups say the fees are unfair and the Federal Reserve’s proposed reduction would be good for the economy. The Merchants Payments Coalition (MPC), for example, argues the fees amount to a hidden tax of nearly 2 percent on just about every credit card transaction.

‘Historic Fee Reforms’
The federal rules “are a step forward in bringing fairness and transparency to the debit fee system,” said Merchants Payments Coalition Chairman Mallory Duncan in a statement. “The Merchants Payments Coalition welcomed the historic swipe fee reforms passed by Congress earlier this year, and is committed to fighting for rules that reflect the intent of Congress and protect merchants and consumers from hidden swipe fees.”

Duncan added, “Allowing consumers to get discounts and fees to be transparent are good results for everyone. While no interchange fees should be allowed on debit transactions, the Fed’s proposal demonstrates real progress toward that reasonable goal—and parity between checks and debit cards.”

Possible 90 Percent Cut
The Federal Reserve’s proposed new rules on interchange fees were mandated by a last-minute amendment to the Dodd-Frank Financial Reform Act by Sen. Dick Durbin (D-IL). A New York Times article examined the new rules and determined the effects on banks and credit card providers could be severe.

Credit providers say the fees are needed to cover the risk of nonpayment, the costs of processing transactions, and the expenses of maintaining the credit system infrastructure. They argue the fees are justified and fairly reflect the cost of building and maintaining the debit and credit networks that make instant credit possible and beneficial for retailers, consumers, and issuing banks.

They note merchants have never contributed a penny to the cost of building the networks and voluntarily participate in them.

‘Bad for Issuers, Networks’
“It’s bad for the issuers and the card networks” to have the interchange fees slashed, said Rod Bourgeois, a payments analyst at investment research firm Sanford C. Bernstein and Co.

Critics of the proposal say it could end up hurting consumers by reducing credit card perks and resulting in new card fees.

In a Dec. 9 letter, a bipartisan group of 13 senators warned the Fed to avoid “price-fixing” in its rules. Such price fixing, they warned, “creates more problems than it solves and is antithetical to our capitalist system and the notion of free enterprise.”

Matthew Glans ([email protected]) is a legislative specialist in financial services for The Heartland Institute.