Fed Interchange Fee Decision Shocks Retailers, But Consumers Will Pay the Price

A U.S. Federal Reserve decision Wednesday to cap debit card transaction fees at a higher level than expected angered retailers - but it may end up costing consumers much more. Instead of lowering the "interchange fee" cap from the current $0.44 per transaction to the $0.12 proposed in the Dodd-Frank financial reform legislation, the Fed voted to set the cap at $0.21. Additional fees allowed by the rules would result in a charge of $0.24 for the average debit card transaction of $38. Although retailers will now pay less, they are peeved the Fed did not stick with the much lower cap, which would have saved them twice as much. Retailers had argued that the high interchange fees have hurt smaller businesses, forcing them to raise prices for customers. But many, including one of the primary proponents of financial reform, Rep. Barney Frank, D-MA, doubt that retailers will now put any of the near-50% reduction in the cap toward customer savings. "I think they were fighting to raise their revenue," Frank told The Wall Street Journal . Indeed, consumers stand to lose as a result of the Fed's decision. Few merchants are likely to lower prices, and banks may well raise customer fees to recoup some of their lost profits on debit transactions. "I don't think the retailers would have spent millions of dollars lobbying for this law if they intended to pass along every single nickel of savings to consumers," Greg McBride, senior financial analyst for Bankrate Inc. (NYSE: RATE ), told the Orlando Sentinel . " This was an issue of where the cash would flow - to the banks or the merchants. Ultimately, I'm afraid, the consumer is going to get stuck footing the bill." Click here to continue reading...