by Marian Wang, ProPublica, April 29, 2011, 11:58 a.m.April 28, 2011

Controversy over the Fed’s proposed debit card regulations has largely focused on the proposed cap on interchange fees—the fees banks receive from merchants for processing debit transactions. That provision has
sparked an all-out lobbying war between merchants who think interchange fees are too high and banks who accuse the government of attempting to fix prices. Even the small banks and credit unions that are exempt from the proposed cap seem convinced that their exemption won’t work.

But the interchange cap is only half of the story. The other part—which has gotten far less attention—is that some of the proposed debit card rules could increase competition in a market dominated by Visa and, to a lesser extent, Mastercard. According to the Federal Reserve, this is likely to “promote competition among networks and place downward pressure on interchange fees.” Banks have said that adding networks will be costly and time-consuming. In a comment letter to the Fed, the American Bankers Association asked for such a requirement to be postponed until at least October 2013.

Lower interchange fees would cost the big banks but would mean savings for big-box stores and small businesses alike. As we’ve noted, there’s no requirement that merchants will pass these savings on to the consumer, but Adam Levitin of Georgetown Law points out that in competitive retail sectors, consumers’ price-sensitivity would likely bring down the cost of goods.

The other likely beneficiaries from these provisions are companies you’ve probably never heard of: Star, NYCE, Pulse, ACCEL/Exchange, Shazam, and others. These smaller networks process debit transactions, and years ago many of them had self-imposed fee caps. Over time, these smaller companies have been edged out by Visa and Mastercard, which have struck exclusivity agreements with many banks. About 40 to 50 percent of the U.S. debit card market is currently under these exclusive arrangements, according to American Banker.