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BANKING COSTS MAY RISE WITH FEE CAP

By NBF News
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A PROPOSED cap on the fees that banks charge for debit card transactions would substantially reduce the cost for businesses, but it's started a death watch for debit card rewards and renewed predictions that free checking is done for.

At issue is, who will ultimately benefit from the savings? The Federal Reserve's proposal to cap these fees, officially known as interchange fees, at 12 cents per transaction would enable retailers to pass on annual savings of $10 billion to $13 billion to consumers.

But banks and card networks maintain that retailers will pocket the savings. This would leave consumers to bear the brunt of the new law through higher costs for banking and reduced rewards programmes.

In releasing its proposal late recently, Fed staff said that they found the cost to banks for processing was between seven cents and 12 cents per transaction. Yet every time a customer swiped a debit card, the average fee was 44 cents.

'The banks have a very sweet deal here,' said Senator Dick Durbin, who sponsored the provision in the financial regulatory overhaul that ordered the Fed to set rules on these fees. The Illinois Democrat acknowledged that the legislation did not require merchants to share any cost reductions with customers, but said that they're likely to benefit at the checkout.

'The retailer who is in competition with the restaurant around the corner is going to use this as an opportunity to lower prices,' Durbin said, comparing the swipe fee reduction to a business tax cut.

If implemented, slashing interchange rates would be another revenue hit for banks. They're already dealing with increased costs linked to other regulations in the financial overhaul, plus restrictions on overdraft fees and credit cards.

Shawn Miles, group head of public policy for MasterCard Inc., said that banks would have to compensate for the loss of revenue by adjusting the fees they charged consumers. 'That's the only way they could deal with something that was this dramatic,' he said.