Visa Inc and MasterCard Inc are making a last-ditch effort to blunt proposed cuts to debit card processing fees, after the Federal Reserve took a machete to the multi-billion-dollar industry late last year.

The debit card industry is looking to both Congress and the Fed itself for relief, but industry experts say the effort is likely too little, too late.

Visa and MasterCard, the world's two largest transaction processing networks, will try to reassure investor doubts about the impact of the proposed limits on interchange fees as they report quarterly earnings this week.

When the Fed proposed the cuts on December 16 -- which would shave about $13 billion off $23 billion in annual interchange fee revenue, according to CardHub.com -- shareholders in Visa and MasterCard lost more than 10 percent of their investment.

The shares have not yet fully recovered.

Any time the card industry is surprised by a legislative move, that's shocking. With all the money spent on lobbying, there should be no surprises, said Philip Philliou, a partner at the payments consulting firm Philliou Selwanes and a former executive at MasterCard and American Express Co.

Visa and MasterCard spent almost $8 million combined in 2010 on lobbying, excluding donations to candidates made by their political action committees, according to OpenSecrets.org.

Last year's sweeping Dodd-Frank financial reform law called for debit card fees that are reasonable and proportionate to the issuers' costs.

Since Dodd-Frank was passed in July, lobbyists for banks, Visa and MasterCard have drafted letters to the Fed and pitched their own studies to show the proposed cuts are way too harsh. Last week they made the rounds on Capitol Hill with lawmakers.

But some industry members are less than optimistic about their odds for success. It's not all that likely that we'll see a seismic shift, said one person involved in the payment industry's lobbying efforts. The banks and networks finally have their act together in terms of coordinating ... but it's still an uphill battle.

ENOUGH ALLIES?

Merchants pay banks and payment networks so-called interchange fees every time a customer buys something with a debit or credit card.

The Fed proposed capping those fees at 12 cents per debit transaction -- a 75 percent cut from the 2009 average of 44 cents per transaction.

Bank of America Corp, the largest U.S. bank, told investors last month that it alone would lose some $1 billion of its revenue as a result.

The proposed debit fee cuts are not designed to have a direct impact on Visa and MasterCard, which pass most of the interchange fees along to their partner banks.

But banks pay Visa and MasterCard for processing the transactions, and investors are worried that a cut in the fees that banks earn will translate into a cut in the fees they are willing to pay the networks.

The proposed rules could also eliminate the networks' ability to sign exclusive debit card processing contracts with banks, which could also cut into their revenue.

Congress is seen as a possible source of easing the cuts, through an amendment, repeal or delay in implementation, people familiar with the lobbying effort told Reuters.

The industry has found some allies, even among Democrats.

Democratic Representative Barney Frank told Reuters last week that those proposed rules should be amended, arguing the Fed proposal does not allow financial firms to cover their costs, ultimately harming consumers.

Representative Spencer Bachus, the new Republican chairman of the House Financial Services Committee, has tentatively scheduled a hearing on February 17 to discuss the Fed's proposals.

The Republican-controlled House could be amenable to easing the proposed cuts, but the card industry would have to convince enough Senate Democrats that the Fed's strict interpretation would be harmful. Senator Richard Durbin of Illinois, who wrote the debit card provision of the Dodd-Frank law is a member of the Democratic leadership.

In the Senate, I don't think there's anybody who feels as strongly about this as Durbin does. He's going to lie down in the road to keep this from changing and I don't think there's anyone else who feels strongly enough about it to run him over, the person involved with the lobbying effort said.

Industry members also doubt that the Fed will revise its proposed rules enough to satisfy the banks and networks. The proposed rules do not cover costs for preventing fraud on debit transactions, and the Fed is still formulating its proposals to address that.

But the regulator estimated that banks spend about 1.8 cents per transaction on fraud -- and not all of those costs were specifically related to debit cards instead of the linked bank account.

Oliver Ireland, a lawyer at Morrison and Foerster in Washington who does work for the payments industry, said 1.8 cents would be a significant increase per transaction considering how low the proposed rules are.

But while it's a significant percentage of the total, I think that way understates the actual fraud prevention costs, he said.

Comments on the Fed's rules are due on February 22, and the Fed is required by the law to put out a final rule on the fees by April 21. It would become effective in July.

Visa is due to report earnings for its fiscal first quarter on Wednesday after the market closes, followed by MasterCard's fourth-quarter results on Thursday morning.

Visa is expected on average to earn $1.21 per share for quarter, up from $1.02 per share a year earlier, according to Thomson Reuters I/B/E/S.

MasterCard is expected to earn $3.04 per share, up from $2.24 per share a year earlier.

(Reporting by Maria Aspan; additional reporting by Dave Clarke and Kevin Drawbaugh in Washington; Editing by Tim Dobbyn)