Reform reading: Fed’s first webcast to focus on debit card fee

Introduction

The secretive Federal Reserve will take a big step forward with transparency on Thursday when it webcasts its first meeting. On the agenda: a Fed proposal to limit debit card fees, which was ordered by the Dodd-Frank financial reform law and has the potential to take a big bite out of U.S. bank profits.

Currently, debit card fees — also known as interchange fees — amount to roughly $2 for every $100 spent on a debit card. How lucrative are the fees for banks? Bank of America said in October that a limit on debit card fees could cut its annual revenue by about $2.3 billion.

The Dodd-Frank law specifically requires the Fed to ensure that banks charge a debit card fee that is “reasonable and proportional to the cost incurred by the issuer.” Banks argue those costs should include expenses for customer call centers, periodic statements and notices sent to customers, and other infrastructure to support the debit card business.

To help the Fed decide “reasonable” costs are incurred by banks, the American Bankers Association submitted an analysis of the Federal Energy Regulatory Commission’s experience in setting rates for natural gas production and how it uses a proxy group of companies to determine a reasonable return on equity.

Bank of America, which has 24 million debit cards used for $240 billion in purchases last year, told the Fed it processes an average of 180 debit card transactions each second. If the Fed sets the fee too low, banks “will be forced either to recover the revenue elsewhere or to limit the services they provide,” it said. Also, the bank said it must have a “fair profit margin” from debit cards so that it can continue to invest in innovation.

Consumer and retailer groups, however, have urged the Fed to set a modest fee for debit card use that reflects a bank’s costs for the payment mechanism.

Earlier this week, the Fed released a study showing that debit card use is growing by about 15 percent each year. To see who has lobbied the Fed on debit cards, click on this website.

Chairmen Ron and Ben

The Fed is bracing for much more scrutiny in 2011 now that Republicans have chosen Rep. Ron Paul to chair the House Financial Services subcommittee that oversees the central bank.

Paul is a longtime critic of the Fed, and author of the 2009 book “End the Fed,” which accused the institution of being corrupt and unconstitutional. The Texan has pushed for a wide-ranging audit of the Fed to reveal more of its actions to taxpayers.

Paul blamed the high unemployment rate on government intervention, telling The Atlantic in a recent and lengthy profile that he would do “the opposite” of what the government has been doing to revive the economy. “You would not increase spending, you would not increase taxes, you would not bail out anybody. You would have bankruptcy, liquidation of debt, and [you’d] wipe the books clean so everybody can go back to work.”

“I first ran for Congress in the 1970s because I was concerned about inflation and the dollar,” he said in a statement. “In the decades since, we have seen how expansion of the money supply by the Federal Reserve has eroded the value of our dollar. We also have seen how the Federal Reserve, in concert with Congress, has enabled the Treasury to incur almost unbelievable amounts of debt.”

As head of the subcommittee, Paul also said he plans to “hold regular hearings” with Fed officials, including Chairman Ben Bernanke.