State governments are joining banks in the protest over lower processing fees. By Laura Kennedy, Associate Editor June 10, 2010 Thought the fight over debit card fees was more or less settled when the Senate voted on the issue? Think again. Retailers hoping they were about to get lower payment processing fees are in for another skirmish as negotiations between the House and Senate begin on a final version of the financial regulatory reform bill.Banks were caught napping by the Senate move but are fighting back hard. The amendment -- introduced by Sen. Dick Durbin (D-IL) about a week before the broader overhaul passed in the Senate -- would give the Federal Reserve power to set interchange fees on debit card transactions. Interchange fees are the fees paid by merchants to card companies for processing shoppers’ purchases made with debit or credit cards. Banks say the charges are simply the cost of doing business to process card payments, but retailers say the fees that banks and card issuers set are too high. Right now, fees on debit card transactions average about 1%, but they’re likely to come down if the Fed gets control. Sponsored Content Opponents of the Senate language have been making progress, and some states have now jumped into the fray. Many state governments issue debit cards to distribute unemployment, food stamps and other benefits, an option that saves each state hundreds of thousands of dollars per year because they don’t have to print checks and mail them. States fear that lower interchange fees would lead them to pay more for the cards, which could force them to stop using them. States are also questioning part of the bill that would allow retailers to offer discounts, free gift wrapping or other perks to customers who pay with cash. The bill would let merchants set minimums on credit -- but not debit -- purchases. Right now, merchants’ contracts with card issuers allow the latter to fine retailers thousands of dollars for giving preferential treatment to customers who use cash. States worry that giving retailers the new freedoms would hinder shoppers from using their government benefits on small purchases -- such as food stamps to buy milk, for example. States say that, despite efforts to limit the minimums to credit transactions, cashiers might not be able to tell the difference between a credit card and a state issued debit card. Advertisement The heavy lobbying evens the odds on what once seemed a slam dunk and guarantees a fierce debate. Retailers insist that lowering fees would lower prices for consumers, since it would shave off some costs for the merchants. In reality, analysts say, shoppers would most likely see the difference at discount retailers, where price competition is paramount. Other retailers would be tempted to pocket the difference. And banks will continue to demand that lawmakers tweak how the Fed determines the interchange fees. They want the law to require the Fed to take account of more of banks’ overhead costs for payment system infrastructure, fraud protections and the like. Right now, the bill explicitly says that only the “incremental cost” incurred by the issuer for an individual transaction can be considered. Small banks and credit unions are particularly concerned about the prospect of lower fees. Although they would be exempt from the rules, small banks say they would have to lower their fees anyway to ensure that merchants continue to accept their cards, and small banks say they need the higher interchange rates to stay afloat. Plus banks fear that new rulemaking powers for debit cards would open the door to similar action on credit cards. Interchange fees are, on average, up to a percentage point lower for debit cards than for credit cards because debit cards require fewer protections against fraud and loss of repayment, since in theory the funds are coming from a checking account and aren’t a loan.