The Federal Reserve split the difference in the debate over debit card transaction fees this week, setting a flexible interchange fee cap much higher than the hard limit retailers requested, although still significantly lower than current charges. The Fed's ruling sets a base maximum rate of 21 cents per transaction, plus up to 0.05 percent of each transaction's value to help cover qualifying fraud prevention expenses.

According to news reports in American Banker and the Wall Street Journal, most merchants typically pay about 44 cents to banks and merchant service companies every time a customer swipes a debit card. Although the Durbin Amendment to the Dodd-Frank Act required regulators to set a reasonable limit on merchant fees, lawmakers left the task of setting the actual fee up to the Federal Reserve. Banks fought the amendment, even backing failed attempts to delay the new rules.

Retailers lobbied hard throughout the spring to hold the new rate to the Fed's original proposal: a fixed 12 cents per transaction. Advocates of lower fees suggested that retailers would use their savings to lower prices, ultimately stretching consumers' dollars. Lawmakers and Wall Street analysts expressed skepticism that chopping the debit card fee would do much to lower prices on store shelves. Senator Barney Frank told The Wall Street Journal that he believed retail lobbyists fought hard to preserve their margins, with little intention to pass savings on to consumers.

Meanwhile, banks sent signals that lower transaction service fees would reduce subsidies for loss-leader consumer services, like free checking accounts and debit card rewards programs. Rewards credit cards generate merchant fees as high as 4 percent of each transaction, spinning off cash that pays for miles, points, and rebates. With debit card fees topping out at about 27 cents for a $100 purchase, banks must now figure out how to balance their books without alienating customers. The new rate caps take effect October 1, 2011.