June 8, 2011 / 6:52 PM / 8 years ago

UPDATE 3-Delay of debit fee cap fails in U.S. Senate

* Cap seen costing banking sector $12 bln annually

* Vote followed intense lobbying fight

* Bank and card network company shares fall

* Banks’ hopes to soften cap now focused on Fed (Adds analyst comments, background, edits)

By Dave Clarke and Joe Rauch

WASHINGTON/CHARLOTTE, N.C., June 8 (Reuters) - Banks and card network companies suffered a major defeat on Wednesday, when the Senate narrowly voted down a measure that would have delayed a multi-billion-dollar debit fee crackdown.

The vote was a test of whether the financial industry can sell Congress on rolling back or at least slowing down elements of last year’s Dodd-Frank financial oversight law.

“This is bad for the banks. It just goes to show they can’t win any political battles right now,” said Paul Miller, bank analyst with FBR Capital Markets.

Banks of all sizes and retailers have been engaged in a fierce lobbying fight over a provision in Dodd-Frank that requires the Federal Reserve to set a cap on the fees banks can charge merchants when a customer uses a debit card.

Oliver Wyman, a management consultancy, estimates the Fed rule could cost banks about $12 billion annually.

The Senate measure would have delayed the fee cap for up to a year while its impact was studied. It attracted 54 votes in the 100-seat chamber, but Senate rules required 60 votes.

The debit fee cap has pitted big banks such as Bank of America (BAC.N) against big retailers such as Wal-Mart (WMT.N). Banks and retailers have said consumers will be collateral damage if their side does not prevail.

Senator Richard Durbin, who authored the fee cap, reminded senators before the vote of the billions of dollars in taxpayer funds used to help banks at the height of the financial crisis. “They’re back. They’re looking for the second installment on their payments from businesses and consumers across America.”

Some Democratic lawmakers, including Jon Tester who sponsored the delay measure and Representative Barney Frank, have supported the delay because they said the Fed’s strict cap was too harsh and could harm small banks. [ID:nN08243437]

Bank of America shares closed down 1 percent, JPMorgan (JPM.N) closed down 0.8 percent and Citigroup (C.N) closed down 2 percent after the vote.

Card network companies also took a hit, with Visa (V.N) losing 3.9 percent and MasterCard (MA.N) down 1.5 percent.

The proposed debit fee cuts are not designed to have a direct impact on Visa and MasterCard, but investors worry that a cut in the fees banks earn will translate into a cut in the fees they are willing to pay the networks.

FOCUS MOVES TO FED

The battleground now focuses on the Fed, which is working on a final rule that could be released this month. Under the law, the cap is scheduled to go into effect on July 21.

“It is within the Fed’s power to mitigate the disastrous consequences that are sure to come from this policy initiative. We urge the Fed to take all necessary action to do so,” the American Bankers Association said in a statement.

The banking industry has reason to hope the Fed might ease its proposal capping the fees at about 12 cents per transaction — a 75 percent cut.

Fed Chairman Ben Bernanke has said publicly he has concerns about the workability of the proposal because it may not shield community banks as intended.

The Fed also has flexibility to allow banks to include fraud prevention costs in their transaction fees.

Some analysts have said they see the Fed raising the cap to about 20 cents per transaction.

Evan Staples, an analyst at Nuveen Investments, which owns Visa and MasterCard shares, said his firm’s fundamental outlook on those stocks didn’t change because of the Senate defeat.

“We’re one step closer to clarity, which is helpful. There’s no reason for the Fed to delay now given we have congressional clarity,” said Staples. (Reporting by Dave Clarke and Tom Ferraro in Washington, with additional reporting by Joe Rauch in Charlotte and Maria Aspan in New York, Editing by Tim Dobbyn)

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