|Bank's Secret Plans - Pre-Paid Debit Cards|
Mark DeCambre & Josh Kosman - New York Post
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December 21, 2010
Some big banks are cooking up a secret plan to alleviate some of the pain the Federal Reserve inflicted yesterday when it proposed to cut so-called swipe fees by as much as 89 percent, The Post has learned.
They are weighing the roll out of pre-paid debit cards, sources said, as they are not affected by the Fed proposal.
Banks have to do something: they rang up $15 billion from swipe, or interchange, fees last year.
The steep proposed cut offered up by the Fed - to cut the swipe fee to 7 cents per transaction - is a big victory for huge retailers like Wal-Mart and Target and a stunning blow for major financial institutions like MasterCard and Visa, as well as JPMorgan Chase and Bank of America.
Shares of Visa fell as much as 16 percent shortly after the 2:30 p.m. Fed proposal was made public, while MasterCard plunged 14 percent in the same short period. Both stocks recovered somewhat with Visa closing down 12.7 percent, to $67.19. MasterCard shares finished at $223.49, down 10.3 percent.
An alternative Fed fee proposal would see swipe fees reduced by 81 percent, or 12 cents.
The average interchange fee right now is 63 cents per transaction, with the average transaction of $37.57 and fee of 1.67 percent.
The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the Fed study the current swipe-fee rate and determine a "reasonable and proportional" one.
The one hope for banks is that the Fed relents after hearing reaction during an expected 60-to-90 day public comment period. New rules are expected to take effect July 21.
Initially, most banks anticipated a reduction of no more than 80 percent and as of yesterday sources believed that the Fed might reduce fees by just 60 percent - a reduction that banks might have claimed a minor victory.
"The initial view is that it is negative [for financial institutions] all around," said Edward Mills, financial analyst at FBR Capital Markets in a note.
Sources told The Post that banks expect to find other ways to make up the loss of fees from interchange cuts and note that increasing the issuance of charge cards might be one way to do that because such pre-paid cards are exempt from new interchange fee rules.