New Interchange Provisions: A Good Deal for Merchants, a Bad Deal for Everyone Else
A provision within the sweeping Dodd-Frank financial regulatory reform law passed by Congress and signed by the president last year is going to mean big changes for debit card payments – and ultimately for consumers.
This provision is called the Durbin amendment and is named after its sponsor, Sen. Richard Durbin (D-Ill.). The amendment requires the Federal Reserve to set the prices for interchange fees. That’s what banks charge merchants or other businesses when customers use debit cards for payments.
The Durbin amendment puts the government in the role of setting prices for debit card use. The implications of the Durbin amendment are clear. It’s going to hurt banks large and small. And it’s going to hurt our customers and our communities.
Here’s how. Under the Federal Reserve’s proposed rule to implement the Durbin amendment, the interchange fees that debit card issuers can charge retailers would be capped at between 7 and 12 cents per transaction. That compares to what the Federal Reserve calculates as the current average fee of 44 cents per transaction. This equates to less than 1 1/2 cents per dollar spent in a debit card transaction.
There is an “exemption” to the rules for smaller banks – those with less than $10 billion in assets. But that exemption isn’t worth the paper it’s written on because the marketplace will do what it always does – drive business to the lowest cost option. Naturally, all retailers will want as many of their customers as possible to use only debit cards issued by price-controlled banks. Unlike their smaller competitors, big-box retailers have the money and resources to devote to steering consumers toward this lower cost option and it is simply unrealistic to think that they will not do so. When they do, smaller banks will suffer if consumers move their checking accounts to price-controlled institutions, or sever their relationships with other banks entirely.
Sen. Claire McCaskill (D-Mo.), in a letter to Federal Reserve Chairman Ben Bernanke, said consumers “value the convenience and security of debit cards, but issuers may cease to offer debit cards if regulations require them to operate card programs at a loss. At the same time, there is no guarantee that retailers will pass savings from lower interchange fees on to the consumer.”
The senator has it exactly right.
The banking industry strongly opposed passage of the Durbin amendment last year. Congress did not take the time to study the issue, and interchange and debit card payments had nothing to do with financial reform.
There’s still time for the Fed to rethink its rule and for Congress to act before a significant portion of our nation’s payments system is permanently changed for the worse.
The American Bankers Association estimates that banks and other debit card issuers stand to lose 70 percent of their debit card interchange revenue. This revenue makes it possible for banks to provide debit cards for our customers, as well as offer benefits such as free checking and other no- or low-cost services. And what do retailers say about how consumers will benefit? “We are going to give you free gift wrapping.”