Fed proposal would slash debit-card fees

Visa and MasterCard may face permanent damage to the fastest-growing part of their business after the Federal Reserve proposed rules that could cut debit-card transaction fees by 84 percent, Bloomberg.com reported.

“It is negative all around,” wrote Scott Valentin, an analyst at FBR Capital Markets, in a note to clients. “This significantly impacts the business model for the networks.”

Visa and MasterCard, the world’s biggest payment networks, plunged more than 10 percent in New York trading Friday after the Fed proposed capping so-called interchange fees at 12 cents each. Currently, the networks charge merchants an average of 1 percent of the purchase price, regardless of cost, and pass that money to banks that issue cards.

The change, if approved by the Fed after a public comment period, would wipe out most of the $16.2 billion in revenue that debit cards generated last year for U.S. lenders, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co.

The National Retail Federation, however, welcomed the proposed regulations, which would result in “reasonable” swipe fees for debit cards, according to the association. NRF added that significant reduction in the fees would result in lower costs for merchants and could lead to discounts for their customers.

“Any reduction in debit card swipe fees at all, large or small, is a benefit for consumers because retailers are highly competitive and will share that savings with their customers – but the law requires a major reduction,” NRF senior vice president and general counsel Mallory Duncan said. “The combination of reducing rates and allowing retailers to offer discounts will go a long way toward stopping the current scheme where big banks take a bite out of consumers’ wallets every time they use a debit card.”

The proposed regulations will be subject to a 60-day comment period, and the Fed is scheduled to issue a final version by April 21, 2011, with the rule going into effect June 21, 2011.