Federal Reserve allows higher debit card fees

From FT:

The US Federal Reserve set a higher than expected cap on debit card transaction fees, lifting the shares of electronic payments companies Visa and MasterCard.

The Fed’s board voted 4-1 on Wednesday to set so-called interchange fees at 21 cents per transaction, above the 12 cents limit the regulator had proposed in December.

The final rules, which were mandated by last year’s landmark Dodd-Frank financial services reform legislation, were considered a victory for banks and card payments companies that had lobbied unsuccessfully to delay the Fed’s implementation.

“The final rule is positive for both MasterCard and Visa as it helps to eliminate a large part of the overhang and uncertainty on both stocks,” Keefe, Bruyette & Woods analysts wrote in a note to clients.

Visa rose $11.29, or 15 per cent, to $86.57 a share, while MasterCard climbed $31.47, or 11 per cent, to $309.70. The KBW Bank Index rose 2.4 per cent.

A 12 cent cap would have reduced debit fees by more than 70 per cent, according to estimates. In addition to the 21 cent cap, the Fed’s new rules would allow banks to charge an additional 0.05 per cent of each transaction’s value. If the Fed found banks’ fraud-prevention systemsadequate, banks could add another penny. These additional charges would bring the fees on the average debit card transaction – $38 – to as much as 24 cents.

The Fed also banned banks from agreeing to route customers’ debit-card transactions exclusively through any one payments network.

Jon Tester, a US senator from Montana, had sought to postpone the Fed’s actions by six months. But his measure was voted down earlier this month.

Retailers have argued that the fees have hurt small businesses, while the banks had countered that such a cap would benefit large companies such as WalMart at the expense of community lenders.

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