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Fed raises new cap on retailers' debit fees; Per-swipe cost goes from 12 cents to 21

The Federal Reserve said Wednesday that banks can charge retailers 21 cents each time they swipe a debit card.

The board raised the cap from its initial proposal of 12 cents per swipe. Banks and big payment processors like Visa and Mastercard convinced the Fed that was too low to cover the cost of handling transactions, maintaining networks and preventing fraud.

Banks currently have no limit and charge an average of 44 cents per swipe.

The Fed voted 4-1 to adopt the rule, which was required under the financial regulatory law enacted last year. Fed Gov. Elizabeth Duke opposed the rule. It takes effect Oct. 1, later than expected.

It was "one of our most challenging rule-makings" under the financial regulatory law, Fed Chairman Ben Bernanke said Wednesday. He said the Fed will monitor developments in the debit card market "on an ongoing basis" to gauge if the cap is accomplishing the intended goals.

Fed staff said the higher cap reflects a broader range of costs incurred by banks that issue debit cards. The rule will also allow banks to charge a fraction more to cover the costs of fraud prevention.

It does not apply to government-issued debit cards, prepaid cards or cards issued by banks and credit unions with assets under $10 billion.

The move to limit swipe fees pitted the nation's largest banks and payment processors against Walmart and retailers of all sizes. The decision to settle on a higher cap lifted the stocks of banks and payment processors on Wall Street.

Banks said roughly $16 billion was at stake if the 12-cent cap took effect. That would be more than 80 percent of the $19.7 billion in debit transaction fees paid by merchants in 2009, according to the Nilson Report, which tracks the payment industry.

The banks warned that they would have to make up for some lost revenue by shifting costs to consumers. Many banks already eliminated unrestricted free-checking accounts, and some ended debit-card rewards programs. Other potential actions include annual fees for using debit cards. Such fees are already being tested in some markets.

The higher cap may lead some banks to avoid taking such action, said Brian Riley, a bank card analyst with the Tower Group, a consultant. Banks must still review their costs, but the new cap allows them to avoid a "slash-and-burn" process for customers who don't provide much profit, he said.

Merchant groups said their savings would be passed on to customers in the form of lower prices. But many questioned whether retailers would simply pocket the difference.

Staff members said they think it's unlikely that issuers would impose fees on debit card transactions or steer their customers away from using the cards. Merchants in highly competitive regions would likely reduce their prices once fees go down, they said.

Small banks and credit unions argued that the exemption for banks under $10 billion wouldn't help if the cap was as low as originally proposed. That's because it would have invited merchants to discriminate against higher cost cards. Bernanke had acknowledged small banks' concerns in testimony before the Senate last month.

"It certainly appears that the board gave our concerns some consideration," said Mary Dunn, deputy general counsel of the Credit Union National Association.

Separately Wednesday, a federal appeals court in South Dakota upheld a lower court judge's refusal to issue a preliminary injunction that would have blocked the fee limits from taking effect.

The case challenging the regulations' constitutionality was filed in October by Minnesota-based TCF National Bank, the unit of TCF Financial Corp., considered the first bank to offer free-checking accounts. TCF is among the banks that no longer offer free checking without requirements such as using direct deposit or maintaining minimum balances.

In a twist, TCF's attorneys argued that the provision of the law exempting small banks and credit unions gave them an unfair advantage.

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