Banks Enlist Proxies To Fight Durbin Amendment’s Curb On Debit Card Fees

Recognizing that “credit card companies” and “Wall Street banks” may not have the most sympathetic political image these days, the payment card industry has enlisted small financial institutions as proxies to undercut support for Senator Dick Durbin’s (D.-IL) amendment giving the Federal Reserve the power to scrutinize fees imposed on merchants accepting debit cards.

Durbin’s amendment was incorporated into the Senate version of the pending financial reform package by a surprisingly large, bipartisan 64-33 vote last month – thus the vociferous opposition campaign as House and Senate conferees got to work to reconcile the Senate’s version with a House bill that has no provision addressing interchange fees.  The conferees are expected to continue debating the potential curb on fees this week.

Durbin’s amendment requires the Federal Reserve to establish rules requiring that debit card “interchange fees” are “reasonable and proportional” to the costs incurred by an issuer or payment network “with respect to” a transaction.  The Federal Reserve’s rules are to set such levels taking into consideration the fact that the debit cards are an electronic replacement for checks, which clear at par, and the incremental costs of a card transaction.  In contrast, debit card interchange fees currently can amount to 1 percent or more of a card transaction.  Merchants would like these fees reduced to reflect no more than actual processing costs, to ensure, for example, that merchants are not forced to pay for the costs associated with airline frequent flyer points awarded when a customer swipes a “rewards” debit card. 

In response to concerns raised by community banks and credit unions during the drafting of the amendment, Durbin’s amendment expressly carved out from the sections coverage fees paid to card issuers that have assets of $10 billion or less.  According to Senator Durbin, the result is that only 85 financial institutions are covered by the debit interchange fee provision, including just the three largest of America’s over seven thousand credit unions.

 Nevertheless, credit unions and community banks have been at the forefront of the card industry’s efforts to ensure that the Durbin amendment is not included in the final financial reform legislation that emerges from the House-Senate conference process.  As the Washington Post put it, “credit unions and community banks say that [the exemption] isn’t enough in this case, arguing that they will be indirectly affected by any government efforts to curtail the lucrative fees. And they have not been shy in letting lawmakers know,” with a credit union trade association staffer announcing, “[w]e’re really trying to ramp up the noise this week.”

This lobbying and public relations “noise” includes advertisements claiming that the Durbin amendment reflects an effort by merchants to pass on “their” costs of handling debit cards to consumers—and merchants won’t lower prices to reflect their lower cost of card acceptance. The community bankers have gone a step further, claiming the Durbin amendment to be an effort by large retailers to injure small banks, notwithstanding the $10 billion asset exemption.  According to an association spokesperson quoted at a press conference:  “We are under attack by mega retailers so that they can pocket more money. This is about the big getting bigger at the expense of the small.”

Merchants and the public should know within the next few weeks how this Washington drama-by-proxy to protect the fees received by America’s largest debit card issuers turns out.  The true nature of the lobbyists’ “noise” was confirmed by the events across the Atlantic:  on May 28, the European Commission’s Competition Directorate published a notice of a binding commitment by Visa to set debit card interchange fees within several EU countries and crossing intra-Europe boundaries at 0.20 percent for the next four years.   This amount, 80 percent less than paid to Visa debit card issuers by U.S. merchants, reflects a standard developed by several European central banks to ensure that merchants do not pay interchange fees that are greater than the transactional benefits of card acceptance.

There is no evidence that use of this standard, and the reduction in interchange fees it entails, threatens the use of plastic in Europe.