Fed’s debit-card U-turn doesn’t mean it’s caving

June 30, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Federal Reserve’s U-turn on debit-card charges doesn’t mean it’s caving on financial regulation. It’s true the agency’s decision to double the cap on swipe fees it first proposed in December makes it look as if it can be cowed by the kind of intense lobbying the banks unleashed. It raises fears the Fed might go soft on other parts of Dodd-Frank. But its new debit fee plan is actually a decent compromise.

Debit card charges are higher in the United States than elsewhere. That’s partly why Senator Dick Durbin shoe-horned an amendment into the broad reform legislation. Though completely unrelated to preventing another crisis, Durbin’s proposal instructed the Fed to set fees “reasonable and proportional to the cost incurred.” But the Fed advocated slashing the average fee of 44 cents a swipe to just 12 cents, just enough to cover average direct costs.

Not only did large banks think this was a bad idea; so too did small ones, which would have been exempted from the cap, as did other senior banking authorities. Though it rethought the fees, the Fed still missed an opportunity. U.S. debit fees are higher than elsewhere because Americans still sign for almost two-thirds of transactions — and banks keep pushing signature debit despite its being more susceptible to fraud. Browbeating banks to use PIN codes more would be safer and cheaper for all.

Still, the Fed made the right call. The trouble is it started with such an extreme stance. By digging in so early, it jeopardized the Fed’s important task of building a reputation as a regulator with a stiff resolve. Similarly, markets moved earlier this month when Fed governor Daniel Tarullo suggested banks should hold capital reserves of up to 14 percent — only to see international standards come in capped at around 10 percent.

The Fed needs to strike a delicate balance as it overhauls the way Wall Street operates. As it does, how its own toughness is judged will be as important to the safety of the financial system as the rules themselves. It needs to be careful to be seen as a watchdog and not a lapdog.

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The new debit limit benefits exclusively retailers, although their CEOs and lobbyists are telling us that consumers will be the ones who will reap the biggest advantage from the cap on debit fees. Any revenues lost by card issuers will translate directly into a positive revenue flow of an equal aggregate amount for retailers.

It is very unlikely that any of the windfall will be passed on to consumers. Anyway, even if that did somehow happen, consumers would still be net losers, due to the fact that banks will inevitably make up for their interchange-related losses by generating higher revenues elsewhere. Actually, they are already doing it. http://blog.unibulmerchantservices.com/s enate-hands-u-s-retailers-a-16b-win-over -card-issuers

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