Every time a consumer uses a debit card, the card issuer and the bank that issued the card get paid a fee of around 1%-2%, most of which goes to the bank. Last year card issuers and banks posted about $50 billion in revenues from these fees. Those few pennies add up fast. Visa, Inc. (NYSE: V) and Mastercard Inc. (NYSE: MA) dominate the issuer side of the debit card business and the 10 largest US banks like Bank of America Corp. (NYSE:
BAC) and J.P. Morgan Chase & Co. (NYSE: JPM) take home about 80% of the $50 billion in revenues.
The financial reform bill now being negotiated by both Houses of the US Congress includes in the definition of interchange fees the debit-card fees that are passed along to the card networks and banks. The concerns among investors when this definition was promulgated in early May caused the Visa and Mastercard shares to fall on the assumption that the limits would be set so low as to damage profitability.
The latest revision to the financial reform bill, announced yesterday, does not give the Federal Reserve the power to regulate card network fees. Thus, Visa and Mastercard can set the amount of their own fees, which they count as revenue. The only thing the Federal Reserve is empowered to do is ensure that the card networks are not trying to avoid the interchange fee regulation.
In that regard, the Fed would be able to set debit-card fees based on the cost of handling the transactions. Banks with less than $10 billion in assets are exempted from the Fed’s authority to set limits.
One noticeable omission from all this wheeling and dealing is consumers. Debit-card users will pay the fees, no matter which agency or network or bank sets those fees. Consumers who don’t have bank accounts, for example, and who use reloadable pre-paid debit cards are likely to pay more because the cards are exempt from the fee limits.
The whole negotiation process surrounding the financial reform bill has revolved around the competing interests of card networks, banks, and businesses, with scarcely any serious attention paid to consumer interests. In other words, business as usual on the Hill.
