(Bloomberg) — A Federal Reserve rule capping debit-card "swipe" fees set by Visa Inc. and MasterCard Inc. would be delayed at least six months under a plan introduced in the U.S. Senate. Wayzata-based TCF Financial has sued to block the swipe fee cap, alleging it's unconstitutional.
Senators began considering language today from Senators Jon Tester, a Montana Democrat, and Bob Corker, a Tennessee Republican, that would let federal regulators study the issue before determining whether to write new rules. The caps, mandated by the Dodd-Frank Act, are set to take effect July 21.
The Fed would get an additional six months if the study shows the current proposal would hurt consumers or fail to protect banks and credit unions with less than $10 billion in assets. In December, the central bank proposed capping the swipe fees, or interchange, at 12 cents a transaction, replacing a formula that averages 1.14 percent of the purchase price.
"We have people on both sides of the aisle that realize this policy is detrimental," Corker said on the Senate floor.
San Francisco-based Visa and No. 2 network MasterCard of Purchase, New York, had dropped more than 10 percent after the Fed proposed the caps in December amid investor concern that the rules might hurt their business model.
"The delay would give the networks more time to revamp their products and pricing to best compete in the new environment," Moshe Orenbuch, an analyst at Credit Suisse Group AG, wrote today in a note to clients.
MasterCard and Visa set interchange fees and pass the money to card-issuing banks. The caps would trim revenue by about $12 billion a year at the biggest U.S. lenders, including Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co.
"Since we cannot fully understand how the market will operate until interchange regulations are enacted, we direct the Fed to report the actual impact of the market on small issuers a year after their rules are implemented," Tester said.
The new proposal calls for the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and National Credit Union Administration to conduct a study that considers all fixed and incremental costs of debit-card transactions. If at least two study participants determine that the rules don't accurately reflect those costs or properly exempt smaller banks and credit unions, the Fed would be required to rewrite them.
David Skidmore, a Fed spokesman, didn't return phone and e- mail messages.
Groups representing the retail industry opposed the plan.
"This amendment, just like all the others written and circulated with the support of Visa, MasterCard and the big banks, is going nowhere," said Brian Dodge, spokesman for the Retail Industry Leaders Association, an Arlington, Virginia- based trade group whose members include Minneapolis-based Target Corp. and Wal-Mart Stores Inc. of Bentonville, Arkansas.
The new language would establish a process where the Fed would review the exemption for the small banks and credit unions every two years to gauge its effectiveness. If the smaller institutions aren't shielded from the rule, the Fed is required to make recommendations for legislative changes from Congress.
Tester had already revised his measure in search of the 60 votes he likely would need for a postponement. In May, he reduced the proposed delay to 15 months from two years. Senator Richard Durbin of Illinois, who pushed to include the caps in Dodd-Frank, has vowed to fight efforts to delay them.
"This so-called compromise is written by the banks, for the banks, and it has no end date, there is no effective date as to when the rule is issued," Durbin, the Senate's No. 2 Democrat, said yesterday in an interview. "There is a guarantee, the way they put it together, that the biggest banks on Wall Street are going to profit from this."
Senate Majority Leader Harry Reid, a Nevada Democrat, said today that while he remains opposed to the measure, he isn't pushing members of his party to stay on Durbin's side.
"I'm not lobbying anyone on anything," Reid said.
Democrats and Republicans who favor the amendment have been pushing fellow lawmakers, including those who voted with Durbin last year, to support Tester's amendment.
Senators Kay Hagan of North Carolina and Michael Bennet of Colorado, both Democrats who backed including the original provision in Dodd-Frank, contributed to the new language and support its passage.
"I wanted to pull Democrats and Republicans together to work on a moderate approach to solve this and have bipartisan compromise that's going to move this ball forward," Hagan said today in a telephone interview.