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* Consumer Federation of America an unlikely ally of banks
* Federal Reserve proposed cutting debit-fees cap 75 pct
* CFA concerned over impact on poorest bank customers
By Maria Aspan and Dave Clarke
NEW YORK/WASHINGTON, Feb 23 (Reuters) - The Consumer Federation of America became an unlikely ally of the U.S. banking industry this week, though only up to a point, as the prominent consumer advocacy umbrella group urged regulators to reconsider their sharp caps on debit-card processing fees.
Banks and retailers this week waged a furious war of words over Federal Reserve proposals on so-called "interchange" fees, which merchants pay banks and credit-card networks every time a customer buys something with a debit card.
The Fed in December proposed capping those fees at roughly 12 cents per transaction -- a 75 percent drop -- and solicited comments on its proposals through Tuesday.
The Consumer Federation "strongly endorses the intent of the statute" regulating debit interchange fees, Legislative Director Travis Plunkett said in a letter filed on Tuesday. He added that the current system of fees can be particularly harmful to poor consumers.
But the group also raised concerns about the potential impact of the Fed's proposals on consumers. Some banks are trying to offset their expected lost revenues by adding new fees to checking accounts, and bankers have warned that the poorest consumers may no longer be able to afford traditional bank accounts as a result.
"We recommend that the Federal Reserve consider broadening its pricing standard to include compensation for additional, legitimate incremental expenses," Plunkett said in the letter, adding that such additional expenses could include costs for fraud prevention and for fixing billing errors.
"If such compensation does not occur, these institutions could increase debit-card and other related banking charges on their least desirable and most financially vulnerable consumers: low-to moderate-income (LMI) accountholders," he wrote.
The Consumer Federation also urged the Fed to "pay close attention" to how the proposals would affect small banks and credit unions. Last week, Fed Chairman Ben Bernanke and Federal Deposit Insurance Corp Chairman Sheila Bair said the Fed's December proposal could inadvertently hurt small banks and consumers. [ID:nN17133315]
The finalized proposals will be unveiled in April, and banks will have to implement them by July. (Reporting by Maria Aspan and Dave Clarke; Editing by Gary Hill)