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updated 12/16/2010 4:47:26 PM ET 2010-12-16T21:47:26

The Federal Reserve on Thursday proposed a 12-cent cap on the fees banks would be allowed to charge merchants for debit card transactions, a limit that could sharply cut into the revenue of the banks that issue debit cards.

Capping debit interchange fees, sometimes called swipe fees, would help merchants by replacing the current system, in which they generally pay between 1 percent and 2 percent of the dollar value of each transaction.

The proposal also would require that merchants have a choice of unrelated networks to process transactions, like Visa Inc. and MasterCard Inc., which could limit revenue for those companies. Bank stocks were largely unaffected by the news, but shares of Visa and MasterCard both fell sharply following the announcement.

Fed staff members said consumers would not likely see a swipe fee cap translate into lower prices, except in some highly competitive markets. It may, however, result in banks cutting back on debit card reward programs or searching for other ways to offset the impact of lower fees.

The proposal is being made to enact a provision of the financial regulatory overhaul bill that became law in July. The provision requires that interchange fees be "reasonable and proportional" to banks' costs for processing transactions.

To address that standard, the proposal contains two alternatives, both capped at 12 cents, that take into account a bank's costs to authorize, clear and settle electronic transactions. Limiting the size of the fees would give banks incentives for keeping their costs low, the Fed staff said in outlining the plan.

The law doesn't apply to interchange fees for credit cards.

The National Retail Federation was among merchant groups that praised the proposal, saying fee limits "would result in lower costs for merchants and could lead to discounts for their customers." Consumer groups generally maintain that shoppers would benefit through lower costs as well.

The American Bankers Association had a vastly different take, charging that the cap would "essentially relieve retailers of paying their fair share for a card payments system that offers them tremendous benefits."

Visa declined to comment until it had a chance to fully consider the proposal, which is 163 pages long. Visa shares plunged $9.75, or 12.7 percent, to $67.19. The stock had dropped after the proposal was included in the financial overhaul but had recovered some of its losses in recent months as the company suggested it would not be as hard hit as initially expected.

MasterCard did not immediately respond to requests for comment. MasterCard shares plunged $25.73, or 10.3 percent, to $223.49.

The Federal Reserve will accept comments on the proposed rule through Feb. 22. The proposal must be finalized by April 21, and would take effect three months later.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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