Debit card battle winners? Not you and me

Upside down $20 bill

When the Federal Reserve reversed course last week and doubled its proposed cap on debit card swipe fees from 12 cents to 24 cents, retail America accused it of caving in to greedy big banks.

Why should you care?

Two reasons: Merchant fees are ultimately passed on to you in the cost of goods and services, and the move could endanger more small community banks, thereby reducing the cost-containing effects of competition.

When Congress passed the Dodd-Frank financial reform legislation last year, it required the Fed to reign in the interchange (or swipe) fees that banks charge merchants on each debit card transaction.

Banks, you see, had been charging an average of 44 cents per swipe, a tidy profit on a transaction the Fed independently determined to cost banks roughly 4 cents to process.

Last December, the Fed announced in its proposed rule that 12 cents seemed about right. But last week, it changed its mind and bumped it to 24 cents in its final version.

To further appease the bigs, the Fed agreed to delay implementation of the new cap from July 21 to Oct. 1, effectively granting the banks an additional 2 1/2 months to plunder $1.5 billion more, according to estimates by the Nilson Report.

Merchant and consumer groups were outraged.

Sure, 24 cents is a whole lot better than 44 cents. But it's twice as much as the Fed initially thought fair and still six times as much as actual processing costs.

The big banks, which made out like bandits on the sudden reset, still grumbled about losing their free-market right to charge whatever they want to what they consider federal price-fixing.

But even the American Bankers Association couldn't help but express concern for the impact the cap could have on smaller banks that are less able to absorb the hit to their income stream.

The fear is that, even though smaller banks are exempt from the cap, the cap is now set too low for the little guys to compete at all -- another victory for the bigs. And as competition declines, fees tend to go up.

Bottom line: Expect the new swipe fee cap to have a negative impact on your wallet long-term as both banks and merchants continue to pretend that there are no savings to pass along to us consumers.

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