December 16, 2010, 4:11 PM

Federal Reserve proposes a reduction in debit card interchange fees

The new fees would cap the fees at 12 cents per transaction, representing a big saving for e-retailers.

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The Federal Reserve today proposed limiting interchange fees for debit cards to 12 cents per transactiona change that could mean big savings for online retailers.

While the Fed says average debit card interchange fees run 44 cents per transaction, it's likely much higher for online purchases. Visa's basic e-commerce debit interchange rate is 1.6% plus 15 cents. When applied to the average online order, which is $132 according to a recent report by Forrester Research Inc. and, that would produce an interchange fee of $2.26, or $2.14 above the Fed's proposed maximum. While the average order paid with a debit card is likely lower than $132, the reduction in interchange, a fee merchants pay through the banks that handle their transactions, would be substantial.

And, while credit cards remain the preferred method of payment for online shoppers, debit cards are used for 28% of online purchases, according to a survey last year of 3,294 consumers by Javelin Strategy & Research.  Moreover, 68% of online merchants accept debit cards for purchases, according to a survey of 60 merchants conducted over the summer by the research group.

The National Retail Federation, a trade group, welcomed the Fed proposal.

“Any reduction in debit card swipe fees at all, large or small, is a benefit for consumers because retailers are highly competitive and will share that savings with their customers,” says Mallory Duncan, the group’s senior vice president and general counsel. “The combination of reducing rates and allowing retailers to offer discounts will go a long way toward stopping the current scheme where big banks take a bite out of consumers’ wallets every time they use a debit card.”

The Fed will accept comments on the proposal until Feb. 22, after which it will make a decision on whether to go forward with the proposal. The new rule would take effect on June 21. The Fed’s action would implement requirements of the Dodd-Frank Wall Street Reform Act of 2010, which required the Federal Reserve to institute “reasonable” interchange fees for debit cards.

Interchange is only part of the fee merchants pay for accepting a credit or debit card. Payment processors add on their own fees that can amount to 1-2% of the value of the order for smaller online retailers. Big retailers get volume discounts and their total merchant fee can be in the range of 2%. Smaller merchants typically pay a total fee of 3-5%.

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