Financial Services Committee to Hear Testimony on Debit Card Fees Feb. 17

Rep. Spencer Bachus (R-AL), new chair of the House Financial Services Committee, has announced several upcoming hearings for February. He has scheduled a hearing on the Federal Reserve's proposed rule for debit card interchange on Thursday, February 17. At this writing, specific panelists have not been named, but many expect representatives from the Federal Reserve to appear in order to explain the proposed rule.

Rep. Shelley Caputo will chair hearing

The Federal Reserve issued its draft rules on December 16, 2010. The major headline was the proposed cap of 12 cents per transaction for debit card interchange. This cap represents a near 80 percent reduction in current debit card interchange rates. Comments to the proposed rule to Federal Reserve are due February 22. By law, the Federal Reserve must finalize the rule by April 22.

Small issuers universally decried the proposed cap even though the law exempts any financial institution lower than 10 billion in assets from the cap. These issuers are concerned merchants will steer consumers to debit cards with the lowest interchange rate.

After the December 16 release of the proposed rule, news reports began to appear detailing how large and small financial institutions plan to address this significant loss of interchange revenue. The Wall Street Journal ran an article on January 5 titled, "At Banks, New Fees Replacing Old Levies." Many other articles detailed how free checking accounts may soon go away for many consumers.

No doubt many in Congress are the hearing the chorus that having the government set debit card interchange may not benefit consumers in the end. The February 17 hearing in the House Financial Services Committee should be the first step in building that record.

Financial Services Committee to Hear Testimony on Debit Card Fees Feb. 17

Vanishing Act

Could the most common form of U.S. consumer payment outside of cash vanish from stores?

Doubtful. But a December report by consulting house Oliver Wyman says that nearly $12 billion in debit interchange revenue could pull a Houdini if the Fed's debit fee rules are enacted as drafted. With some 40 billion debit card transactions performed annually that $12 billion represents a drop from about $ .44 a transaction to at most $ .12 according to the report.



Oliver Wyman Report on Debit Cards

 Before you start doing the sack dance over a prone and prostrate banking industry, think about this. That $12 billion helped a lot of banks subsidize consumer services. Like free checking. As banks scramble to replace this lost debit card revenue with more fees on consumers, expect free checking to vanish along with other banking services normally taken for granted.

Not only that, but the "viability" of some smaller institutions could be under the gun, according to a press release announcing the report. Another potential vanishing act.

Nor do large banks get a hall pass on this one. An active consumer debit card will deliver about $87 a year for these institutions, according to the consultants, who figure that number could get shaved to $24 when the law goes into effect.

I don't know many businesses large or small that could see their revenue per customer drop that much and still stay in that business.

There is little doubt. If enacted as proposed, the Fed's regulations could have "massive and far-reaching consequences" for retail banks, says report author Tony Hayes. More importantly, those effects could be felt by the very consumers the law was written to protect.

And what about the consumer who believes that Congress can actually write laws-without adverse effects-to protect him? He could be the biggest vanishing act of all.

Vanishing Act

Welcome to Durbin Central

On July 22, 2010 President Obama signed into law the  Dodd-Frank Wall Street Reform and Consumer Protection Act, calling it a “crack down on abusive practices.” With the stroke of a pen the President ushered what some are calling the most sweeping regulatory change in the financial industry since the passage of Depression-era banking legislation in the 1930s.

Remarkable for its breadth as well as its scope, Dodd-Frank ambitiously seeks to impose federal price caps on certain bank fees. It does this through its so-called Durbin amendment, which directs the Federal Reserve to determine “reasonable and proportional” interchange fees. These are fees that banks can charge for authorizing debit transactions on cards they issue.

This website is dedicated to assessing the issues, challenges and consequences that will be involved in the implementation of the Durbin amendment. We invite visitors to the site to comment on the blog posts, download any information and analysis they may require, and to check back frequently for information on any new developments in the law’s implementation. For while the debate over Dodd-Frank and Durbin made good public theater, whether it makes good public policy remains to be seen.

Already, one financial analysis says that the Durbin fee caps could result in as much as a 5% hit to the share price of both Bank of America and J.P. Morgan, two of the largest debit-card issuing banks affected by the law. What is the ripple effect of a 5% price drop for two pillars of a financial industry still recovering from 2008, as well as to a fragile economy as a whole? We simply don’t know yet.

Those of us who have been around awhile know that there are unintended consequences to any law, no matter how well-intentioned. Already a number of groups, from credit unions to state governments are concerned about the law’s implementation. Among those concerns:

·        Consumer fears that their account fees will rise as banks try to make up for the lost revenue

·        Banks may become more selective about debit cards and tie big annual fees to them

·        Government agencies whose own debit card programs are subsidized by interchange fees fear having to shift more of the program costs to their consumers and to already strapped taxpayers

For retail merchants who have long sought a cap on interchange fees the Durbin amendment may prove to be a Pyrrhic victory. While they hate interchange fees, the law may push consumers back into traditional forms of tender like cash and checks—which are much more expensive for them than simple PIN debit transactions.

Congress has set April 21, 2011 as the implementation date for the new law. The next three months will be filled with uncertainty as merchants, banks, processors and consumers try to come to grips with the implementation of the new law and its effects. We welcome you to come back here often, check our material and share your thoughts.

Welcome to Durbin Central

“Proposed Fed Interchange Rules: The Good, the Bad, and the Ugly”

December 21, 2010
1:00 PM ET

Overview

• Section 1075 of Dodd-Frank Act (Durbin Amendment) amends the
EFT Act
– Interchange fee for any “electronic debit transaction” must be
“reasonable and proportional” to cost incurred by issuer
• FRB required to prescribe regulations establishing standard
• Statute requires final rules by April 21, 2011 (fraud
adjustment rules unlikely)
– Prohibits network exclusivity and routing restrictions
• Statute requires final rules by July 21, 2011
– FRB voted on December 16th to issue proposal to implement
requirements
– Comments due by February 22, 2011

Key Definitions

• Issuer – Any person that issues a debit card
• Interchange transaction fee – Any fee established, charged or
received by payment card network and paid by merchant or acquirer 
to compensate issuer
• Network fee – Fee charged by payment card network for electronic
debit transaction, other than an interchange transaction fee
• Payment card network – Covers both credit and debit card networks
• Debit card – Any card, payment code or device used to debit an
account through a payment card network (includes consumer and
business accounts)


(Click here for complete printable .pdf)

“Proposed Fed Interchange Rules: The Good, the Bad, and the Ugly”

Fed Vice Chair Yellen's Memo Regarding Debit Interchange Fees

ACTION REQUESTED

Approval of the attached Federal Register notice requesting comment on a proposed new rule that (1) establishes standards for determining whether an interchange fee received or charged by an issuer with respect to a debit card transaction is reasonable and proportional to the issuer’s cost incurred with respect to the transaction and (2) prohibits issuers and networks from restricting the number of networks over which a debit card transaction may be routed or inhibiting the ability of a merchant to direct the routing of a debit card transaction.

BACKGROUND

New section 920 of the Electronic Fund Transfer Act (“EFTA Section 920”), added by Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, directs the Board to issue rules relating to debit card interchange fees, network exclusivity, and transaction routing. EFTA Section 920 was enacted to address merchant concerns regarding the level of interchange fees and network routing rules and exclusivity arrangements. The provisions of EFTA Section 920 are discussed in more detail below.

Payment card networks set a variety of fees paid by different parties in the network in order to process transactions through the card network. Interchange fees are set by payment card networks and are paid by merchant acquirers to card issuers. Merchant acquirers include the interchange fees in the merchant discount fees they charge to merchants. Although current interchange fees are not tied directly to issuer costs, issuers assert that interchange fees are used to cover the costs associated with their debit card programs, including fraud-prevention measures. In recent years, merchants have objected to what they believe are excessively high interchange fees. Payment card networks also charge other fees, including switch fees, to both issuers and merchant acquirers, which allow the networks to cover their costs and earn a return on investment.

Payment card networks also establish rules that issuers, acquirers, and merchants must follow in order to participate in the network. Among other things, network rules generally permit issuers or networks to determine how a particular transaction will be routed. In addition, the two major networks that carry signature debit card transactions (Visa and MasterCard) have established or purchased affiliated PIN-debit networks (Interlink and Maestro, respectively). Financial incentives from the two major networks have led some issuers to issue debit cards that can carry transactions over only one of these networks or its affiliates. Merchants have raised concerns about the competitive consequences of various network rules and exclusivity arrangements.

In order to inform this proposed rulemaking, staff distributed surveys to debit card issuers, payment card networks, and merchant acquirers in September. The surveys requested information about issuers’ costs of processing transactions, current and historical interchange fees, other network fees, the incidence of and loss from fraud, fraud-prevention activities and their associated costs, and network exclusivity arrangements and transaction routing restrictions. Staff analyzed the survey responses, and key results are discussed throughout this memorandum. In addition, staff has held a number of meetings with payment card networks, issuers, merchant acquirers/processors, merchants, and consumer representatives to better understand the debit card industry and has reviewed written submissions provided by interested parties.

PROPOSAL

The proposal has two main components: (1) rules establishing the interchange fee standards and a request for comment on standards for fraud-prevention adjustments to those fees and (2) rules prohibiting network exclusivity and routing restrictions.


(Click here for the complete printable.pdf)

Fed Vice Chair Yellen's Memo Regarding Debit Interchange Fees