The Senate’s passage of a sweeping financial reform bill included a last minute amendment to limit fees charged by Visa and MasterCard to retailers for debit card transactions, known as the “interchange” rate. (This bill did not address credit card interchange rates. Also American Express and Discover Card are not covered by the bill, which now must be reconciled with a similar house bill). MasterCard and Visa lobbied hard to prevent this move, while the nation’s largest retailers including Home Depot and Wal Mart lobbied hard for a cap. According to the New York Times:

Last year businesses paid Visa and MasterCard $19.71 billion on debit card transactions, according to The Nilson Report, a trade magazine that is regarded as the best source of data on the industry. Visa and MasterCard in turn passed about 80 percent of the money, roughly $15.8 billion, to the banks that issued the cards.

The legislation directs the Fed to cap those fees at a level that is “reasonable and proportional” to the cost of processing transactions. The Nilson Report estimated that last year, fees averaged 1.63 percent of the transaction amount.

A second set of provisions applies to both credit and debit card transactions. Visa and MasterCard impose an all-or-nothing requirement on businesses, requiring them to accept cards even on small transactions, and prohibiting businesses from offering discounts based on the method of payment. The amendment strikes those rules.

The fees for debit card transactions set by Visa and MasterCard vary based on complicated formulas that include the type of card, the type of retailer, and the amount of the transaction. Most of this fee goes to the bank issuing the debit card.  Issuing banks’ interchange fees are taken from the amount collected by the merchants when they submit debit transactions for payment through their bank.

What does potential change this mean for consumers? It could mean lower prices, because many retailers pass along the cost of interchange to consumers. But odds are retailers won’t pass on any savings.

Merchants would also be able to refuse card payments for small transactions and offer customers discounts for paying by cash or check.

Visa and MasterCard are arguing that the law will hurt consumers, because the the decrease in the money Visa and MasterCard makes from the fees would reduce the pool of money they have for funding cash rewards programs. We haven’t yet seen any analysis that this would indeed be the case.