WASHINGTON — Responding to an outcry from financial institutions, federal regulators on Wednesday significantly increased a new limit on fees that large banks can charge to merchants for processing debit card purchases, and they delayed the implementation of the cap until October.
The Federal Reserve voted 4-1 to set the limit for the fees, often called “swipe fees,” at 21 cents per transaction, an increase from the 12-cent fee it proposed in December. That fee would have gone into effect next month for large banks with more than $10 billion in assets.
In addition, the Fed on Wednesday allowed debit card issuers to add a fee of 0.05 percent of each purchase to cover a portion of fraud losses. That would add 2 cents to a $40 purchase. And debit card issuers could add a 1-cent-per-transaction fee if they undertook tougher fraud prevention policies and procedures.
The Fed said the new fee for an average transaction would be 24 cents. That’s still a big decrease from the current average swipe fee of 44 cents.
Small banks and credit unions are exempt from the cap, although they worry that merchants no longer will accept their cards if they continue to charge higher fees. The Fed’s initial proposal to cap fees at 12 cents per transaction infuriated banks, along with Visa and MasterCard, which run the networks that process the payments.
Fed Chairman Ben S. Bernanke said the higher fee took into account many of their concerns.
“I think this is the best available solution,” he said.
Fed Gov. Elizabeth Duke was the only member of the Fed’s Board of Governors to oppose the increase; she cited concerns about its impact on small financial institutions.
Retailers were not happy with the higher fee.
The Retail Industry Leaders Association, which represents more than 200 retail chains, manufacturers and suppliers, accused the Fed of “ceding to the wishes of the big banks and credit card companies” at the expense of consumers and merchants.
And despite the increase in the cap, financial institutions were not pleased.
“We continue to be concerned about the impact on consumers and small financial institutions from this price-fixing policy,” said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents banks, credit unions and payment card networks such as MasterCard and Visa.
Under the financial reform law enacted last year, the Fed was required to study debit card fees and cap them at a rate that is “reasonable and proportional” to the costs. The provision was championed by Sen. Richard Durbin, D-Ill., who had pushed for years to limit debit card processing fees after complaints from merchants that they were being gouged as consumers increasingly used debit cards to make purchases.
Banks fought back vigorously, arguing that the cap set by the Fed didn’t take into account fraud losses and other costs. The issue has led to a major battle in Washington between financial institutions and merchants. The rule exempts small banks and credit unions, but those institutions have been concerned that merchants would stop accepting their debit cards if forced to continue paying higher fees.
This month, the Senate narrowly rejected a measure that would have delayed implementation of the new fees for six months so the Fed could study the impact more.