Card Issuers Cheering Fed’s Debit Fee Decision

Amid accusations that it had been too hard on banks and was squelching economic recovery by slowing lending, The Federal Reserve made a significant concession to the financial industry today, setting a $.22 cent limit on debit card fees lenders charge to retailers, down from earlier talks of a $.05-.07 cent limit. The average fee currently paid by retailers is $.44 cents per transaction. Debit Card fees, which retailers pay banks in order to accept clients’ debit and credit card transactions, are a major source of revenue for financial companies. The Fed expects banking revenues will fall close to 40% due to the new cap. A Goldman-Sachs (NYSE:GS) poll said estimates among financial companies were expecting a fee limit of $.16-$.18, so by that margin the Fed’s move still looks lenient. The new rules will go into effect this October.

Stocks of credit card companies Visa (NYSE:V), MasterCard (NYSE:MA), and eBay’s (NASDAQ:EBAY) electronic payment service PayPal all soared this afternoon following the Fed’s decision. Visa finished the day up 15%, with MasterCard also up 11%, and eBay too up 6.5% by the closing bell. The financial sector (NYSE:XLF) also took kindly to the news, finishing the day up over 2%, led by out-performers JP Morgan (NYSE:JPM) up 2.3%, Bank of America (NYSE:BAC) up 2.96%, and Citigroup (NYSE:C) up 3.36%.

According to MarketWatch, “The Fed said that to justify the increased fees banks receive as part of the final rule they considered costs associated with network connectivity, hardware, software and labor used for electronic debit transactions. Banks could receive an additional 1 cent per transaction fee if they adopt fraud prevention policies and procedures. That penny is included in the estimate of 24 cents that banks could receive on a $38 transaction… Bank issuers with less than $10 billion are exempted from the rules.”

The Fed says its not sure if the fee limits will be helpful to consumers.

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