Wednesday, 9 March 2011

Debit Fees Challenged. Reprieve for Visa, Mastercard and Banks?

Senator Jon Tester (D-MT) plans to introduce a bill this week asking the Federal Reserve to delay implementation of new limits on debit card fees for two years, which could benefit banks and card processors like Visa (V) and MasterCard (MA).
The limits, part of the Durbin amendment to the Dodd-Frank financial regulation bill, are meant to give merchants more clout. But the banking industry and the card processors have argued that the limits on fees would hinder their ability to recoup costs associated with debit cards and end up hurting consumers. Under rules proposed by the Fed last year, fees would drop to 12 cents per transaction from an average of 44 cents.
The Tester bill is a blessing and a curse, says MF Global research analyst Jaret Seiberg, because it may simply delay the inevitable. Opponents have been lobbying for Congress to force the Fed to raise the fees banks can charge, or otherwise soften the rules. But the opponents received another god piece of news: Comptroller of the Currency John Wash, a Treasury department official who oversees the banking system, said the rules threaten the “safety and soundness” of the banking system.
With opposition mounting, Visa and MasterCard, as well as banks that issue the cards, could benefit. Seiberg thinks that the legislative process is now working in favor of the rule’s opponents.
“Our view is that the most likely outcome is that the Federal Reserve sweetens the pot by adding additional costs to its calculation. We have previously discussed our view that the most likely targets are the issuer-paid network fee and a charge for fraud costs… In short, there is even more room for improvement here than it appeared even a few weeks ago. Whether the Fed uses this cover to act will be up the governors and Chairman Bernanke and whether they see making changes as politically preferable to keeping the proposal as is.”


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