Upcoming Budget Battle Versus Durbin Interchange Amendment

March typically is an important month on Capitol Hill. Varying constituent groups from all over the country fly in to Washington for meetings with senators, representatives and their staff. Committee agendas are prioritized. Bill introductions increase dramatically. Work on the next fiscal year’s budget begins in earnest.

The prospects of a government shutdown loom over this current Congress. The question is how much energy and time will Members have to tackle important, non-budgetary issues such as the Durbin interchange amendment. We should have a clearer answer in the coming weeks.

The House Financial Institutions and Consumer Credit Subcommittee will conduct a hearing Wednesday on the effects of the Dodd-Frank Act on small financial institutions and small business. As you may recall, this Subcommittee dedicated an entire hearing on the Federal Reserve’s proposed rule on the Durbin interchange amendment on February 17. Hearing details are scant at this writing, but one must assume more time will be devoted to the interchange issue.

On the Senate side, Sens. Kay Hagan (NC) and Michael Bennet (CO) wrote Federal Reserve Chairman Ben Bernanke to urge him “…to create a meaningful and workable small issuer exemption from the interchange requirements.” They cited Bernanke’s own testimony before the Senate Banking Committee recently that the small issuer exemption may not be workable in the marketplace. A consensus is emerging among all Durbin interchange amendment players (with the exception of the merchants) that, at a minimum, the small issuer exemption needs fixing.

The good news is momentum has not waned on Capitol Hill to understand the impact of the Fed’s proposed rule on interchange. Let us hope to avoid the bad news of a possible government shutdown short-circuiting this important policy work.

Upcoming Budget Battle Versus Durbin Interchange Amendment

Interchange, Durbin and Small Institutions

The Durbin Interchange Amendment exempts thousands of smaller banks and credit unions from the interchange fee caps proposed by the Federal Reserve on December 16. Put this in the unintended consequence file. While seemingly well intentioned, in effect the law would create an unsustainable two-tiered fee approach that would end up further disadvantaging these institutions, rather than helping them.

Last week's House hearing showed that that if there is one thing large and small institutions have in common it's dissatisfaction with this provision. It's hard to fathom why the drafters of Durbin couldn't foresee that a system where the larger banks, which contribute the volume that makes our electronic payments system work and which would be subject to Durbin's administrative pricing, would continue supporting a system where their competitors were given a ten stroke handicap.

It's also worth noting that the legislation seems to turn standard merchant agreements on their heads by opening the door for retailers to offer lower pricing to customers whose large bank-issued cards are subject to the government's administrative pricing. Or higher pricing to customers whose cards were issued by their credit union. Conceivably, the largest merchants who worked the hardest for Durbin and stand to profit the most by it could encourage customers to avoid using their credit union or community bank-issued cards altogether because they're more expensive for the retailer.

Will we also see retailers turn away those cards issued by smaller institutions because they carry higher interchange fees? It is possible that some retailers would do this. We all know the dirty little secret that some retailers for years steered customers away from signature debit to another form of tender. That other retailers set a floor limit on small, low margin purchases. That some retailers won't accept electronic payment on sale items. That's with the strict card acceptance policies in their merchant agreements. What will happen if the proposed Fed rules are finalized in their present form? Who knows?

One thing seems certain. With scores of credit unions and community banks in virtually every Congressional district, Congress will continue the dialog begun at last week's House hearing on this subject. The Fed is teeing up Congress' ball on this issue. But it might be time to take a mulligan and tee it up again.

Interchange, Durbin and Small Institutions

Possible Next Steps on Durbin Interchange Amendment

 

The dust is settling after yesterday’s hearings in both the House and Senate on the Federal Reserve Board’s (FRB) proposed rule to curb debit card interchange pricing and network routing.

A bipartisan consensus emerged that can be summarized as follows:

• Nine months is not sufficient time for the FRB to propose and finalize a rule this complex and with this many stakeholders
• Objective observers, including FRB Chairman Ben Bernanke, and FRB Governor Sarah Raskin can provide no assurance that merchants will pass along interchange savings to consumers
• The $10 billion or less exemption from interchange limits for small cap issuers may be unworkable and may not only harm consumer payment choices, but small financial institutions as well

A majority of members from both sides of the aisle, who serve on the House Financial Institutions and Consumer Credit Subcommittee, expressed a “stop and study” concept during Thursday’s, at times, pointed questioning of FRB Governor Sarah Raskin. In each case, her reply was that any decision to delay implementation of the Durbin Amendment lies with the Congress and not the Fed.

Raskin is certainly correct here. Comment letters on the FRB’s proposed rule are due February 22. Under Dodd-Frank, the FRB must publish the final rule by April 22 and the implementation date is July 21. This timeline would give Congress about five months to pass an implementation delay bill and send it to President Obama. In the legislative process, five months is not a great amount of time, especially given the Senate’s deliberative nature and likely strong opposition to such action from Sen. Durbin.

Moreover, will Congress consider an implementation delay bill as a stand-alone piece of legislation or part of a larger Dodd-Frank “corrections” package?  This question will likely be answered in the coming weeks. Given yesterday’s events, it is safe to assume momentum is on the side of those wanting to “stop and study” the effects of the Durbin amendment but significant hurdles to such action remain.

Possible Next Steps on Durbin Interchange Amendment

Sen. Durbin Fires Back on Debit Fees Interchange Debate

Never let it be said that Illinois politicians don't know a good fight when they see one. Sen. Dick Durbin (D-IL), the sponsor of the so-called Durbin Interchange Amendment contained in the Dodd Frank Act, came out swinging against the banking industry recently in his best UFC impersonation.

In a February 14 bare-knuckles letter to the American Bankers Association, The Senate minority whip, called the banking industry's public comments about the Durbin Interchange Amendment "misleading" and "distorting," and accused the industry of "using scare tactics" when opposing his long sought bill.

Sen.Dick Durbin (D-IL)

Sen. Durbin also accused bankers of making "misleading claims" about debit card fraud costs, presumably to justify their case against capping interchange.

In fact, Sen. Durbin countered the industry's accusation that the amendment amounts to price controls by accusing Visa and MasterCard of "price fixing," presumably without the imprimatur of Congress that the price caps contained in Durbin have.

He also defended himself against the jab that Durbin will harm consumers. Consumer groups widely support the bill, according to Sen. Durbin.

I appreciate the fact that Sen. Durbin took the time to write. And I hope that our friends over at the ABA take the time to read his lengthy letter.

But when you cut through all of it, you have to admit that telling a company it can only charge no more than 12 cents for a service does kind of sound like you're putting  lid on the price of that service, no matter how much you justify it.

And when publicly traded companies include in their 10-Q reports to the SEC that they're concerned Durbin will cost millions of dollars in revenue and that it may have a material effect on operations down the road, I don't think you can call that scare tactics. I don't think the SEC scares easily. And I don't think public companies scribble anything into a public filing that comes into their heads, like it was the essay portion of the SATs.

Sen. Durbin can rightly claim that consumer groups have lined up behind his bill. But even he would have to admit that these groups rarely if ever--okay, never--advocate a pro-banking or pro-industry position. So I think you have to discount that support.

The fact is that there is still a good deal of opposition to this bill and it grows every day. No amount of purple prose splashed up on Capitol Hill will change that right now.

Let's hope we get a calmer, more rational look at the facts over on the House side in the February 17 hearing.

Sen. Durbin Fires Back on Debit Fees Interchange Debate

Another Front Opens in the Battle Over Interchange Fees

On February 9, 2011 the U.S. House Committee on Oversight and Government Reform chaired by Darrell Issa (R,CA) issued a preliminary staff report titled “Assessing Regulatory Impediments to Job Creation.”



Darrell Issa (R-CA) chairs the House
Committee on Oversight and
Government Reform



Included in this cross industry examination of rules that may negatively impact job creation is an analysis of the hundreds of rules necessary to implement the Dodd-Frank Wall Street Reform Act and its Durbin interchange amendment.  According to the study, the top two most problematic rules affecting the financial services sector were the Federal Reserve Board’s (FRB) debit card interchange fees and routing (Durbin iinterchante amendment) and the creation of the Consumer Financial Protection Bureau (CFPB).  Look for Chairman Issa to tie this to President Obama’s January 18, 2011 Executive Order titled “Improving Regulation and Regulatory Review” designed to remove regulatory barriers that stifle economic growth. 

You can expect Chairman Issa to hold hearings on the findings of this preliminary report to “ensure that the processes used to implement these rules are transparent, that the agencies have provided adequate opportunity for stake holder participation, and that the agencies have taken all reasonable steps to minimize the cost of compliance for America’s job creators.”

The above criteria could add to the Durbin Interchange amendment controversy, since the House held no hearings on the Amendment. 

Any such hearing will be unrelated to the upcoming February 17^th Hearing “Understanding the Federal Reserve’s Proposed Rule on Interchange Fees: Implications and Consequences of the Durbin Amendment.”

Another Front Opens in the Battle Over Interchange Fees

Witness List Emerges for Durbin Interchange Amendment Hearing

Details are beginning to emerge on who will be appearing before the House Financial Institutions and Consumer Credit Subcommittee's February 17 hearing on the Durbin Interchange Amendment regulating debit card swipe fees.

According various news reports, the tentative witness list includes Federal Reserve Governor Sarah Raskin, Visa General Counsel Joshua Floum, 7-Eleven Vice President and Treasurer David Seltzer and Commerce Bank Chief Executive David Kemper. The subcommittee will post the final witness list soon.

Representative Kenny Marchant (R-TX) raised concerns over the Federal Reserve Board's proposed rule on interchange to Chairman Ben Bernanke when he appeared before the House Budget Committee on Wednesday. Marchant also is the second ranking member of the House Financial Institutions subcommittee. Marchant asked Bernanke if the FRB had the authority to delay the implementation of the Durbin Amendment (the final rules are due by April 22 and implementation begins July 21).

EFTA will have a complete recap of the Feb. 17 hearing in next week's posting.

Witness List Emerges for Durbin Interchange Amendment Hearing

Push Grows to Change Proposed Fed Rules on Durbin Interchange Amendment

While industry groups begin to put the finishing touches on their response to the Fed’s NPRM onthe implementation of the Durbin Interchange Amendment (due February 22), Republicans and Democrats alike continue to question the wisdom and effect of a 12 cent cap on debit card interchange rates.

According to Bloomberg News, HFSC Ranking Member Barney Frank (D,MA) recently offered to work with Republicans on the committee who seek to change the Fed’s proposed debit card rate cap. 

It seems that momentum is building for some kind of bipartisan action along these lines in the House.  The House may well use the February 17^th hearing on Debit Card Interchange Fees as a means by which to seek a legislative “fix” to the Fed’s proposed cap.

One way to gauge the potential effectiveness of this effort will be to see the as yet unannounced witness list and to hear the questions members on both sides of the aisle will ask those testifying.

While the Senate took the lead on the interchange rate debate in the 111^th Congress, it is apparent that the House will be doing so in the 112^th.

Push Grows to Change Proposed Fed Rules on Durbin Interchange Amendment

Protection Money

Boston Consulting Group released a report yesterday  that shows that Washington’s regulatory fervor of the last two years will cost the electronic payments industry $25 billion a year.

There are three takeaways from this according to BCG:

1. Lower income consumers, the ones these regulations were theoretically designed to protect, are the ones most likely to be hurt by the unintended consequences of these regulations
2. Free checking is about to join account-opening toasters and Christmas Clubs in the banking landfill
3. Banks will be driven at a faster pace to the greener pastures of mobile banking (until the regulators tail them there)

BCG claims that the $25 billion represents nearly 30% of what U.S. card issuers collect in card transaction fees. This haircut (scalping, really) comes in three swift passes:

The update of Regulation E requiring cardholders’ permission to charge overdraft fees

The disclosures on rates and fees in the CARD Act

The Durbin Interchange Amendment which for the first time institutes price controls on debit card transaction fees.

I don’t know one banker, one card issuer or payment processor who doesn’t want this industry to be secure, safe and convenient for consumers. But when government regulation destroys a third of an industry segment’s revenue, we’ve entered uncharted waters.

The American author and screenwriter Raymond Chandler once said that the problem with revision is that you more often than not end up destroying that which was good without having any noticeable effect on that which was bad.

It appears that’s what happened in the first go-around of this regulatory push. The motivation to innovate, a wide portfolio of products and a vibrant industry segment have been damaged without any indication of a positive outcome for consumers.

Since the damage has already been done, might be time to look at that revision.

Protection Money

More on the HFSC Hearing on Debit Card Interchange Fees

The House Financial Services Committee recently released a 20-page report detailing its legislative and oversight priorities for the 112th Congress. Chairman Spencer Bachus (R-AL) has been quite public about reviewing many aspects of the Dodd-Frank Act. Page nine of the report is pretty specific about the majority's intention with respect to debit card interchange fees:

The Committee will examine general issues involving the setting of interchange fees. In particular, the Committee will evaluate the Federal Reserve‘s rulemaking under Section 1075 of the Dodd-Frank Act and its effect on merchants, banks, credit unions, consumers, and the payment processing networks. Section 1075 requires the Federal Reserve to establish, by July 2011, a price cap for debit card interchange fees, mandating that the fee be ―reasonable and proportional‖ to the cost incurred by the issuing bank.

As we know, the Financial Institutions and Consumer Credit Subcommittee will first address the Fed's proposed rule on February 17. We should have more details on the hearing next week.

More on the HFSC Hearing on Debit Card Interchange Fees

Pricing Apples and Oranges

There are some questionable assumptions in the Federal Reserve’s proposed debit card fee rules. These assumptions underlie the Fed’s calculation of what constitutes “reasonable” debit card interchange fees. These rules are the outgrowth of the Durbin Interchange Amendment.

For one thing, the Fed rules tend to group various types of card transactions under the rubric “debit cards.” Products like signature debit and PIN debit operate differently and carry different amounts of risk for the issuing bank. That risk is priced differently and carries different costs for card-accepting retailers.

Second, the rules seem to assume that paying by check is the benchmark form of payment against which debit cards should be measured in terms of cost for retailers. By that standard, the rules assume, debit card interchange fees are too high. But this is comparing apples to oranges.

Checks are a notoriously insecure form of payment. With the exception of electronic check conversion or perhaps negative files, check acceptance technology is pretty much unchanged from the 19th century. On the other hand, financial institutions and card companies have invested tens of millions of dollars to make their card products safer and easier to use. These benefits have given consumers the confidence and desire to use these products. With that has come the “ticket lift.” Ticket lift is the propensity of consumers to buy more when paying with plastic than with cash. Retailers have to admit card-driven ticket lift exists, or else they wouldn’t have accepted the cards for payment in the first place.

However, compensating the financial service industry for these investments in research, development and security was not factored into the Fed’s calculations. Neither were the offsetting benefits in more customers, bigger purchases, faster “throughput” (which cuts labor costs) and less check fraud to the retailers who accept the cards. Had these benefits been properly factored in, perhaps the Fed would have concluded that retailers are paying too little in interchange.

The Fed’s response would probably be that these are soft benefits and are too difficult to quantify. However, when you undertake to restructure a billion-dollar industry you owe it to all the parties to do what it takes to get it right.

In the Fed’s defense Congress handed it a short fuse. But that’s all the more reason to use the comment period to go back, rethink its interchange price controls and get it right this time.

Pricing Apples and Oranges

End of Durbin Interchange Amendment? Not So Fast!

It was bound to happen. In fact, many predicted it when the balance of power in the U.S. House of Representatives switched from Democrats to Republicans on election day. It was a second look at the Durbin Interchange Amendment. As written here on January 27, House Financial Services Committee (HFSC) Chairman Spencer Bacchus (R,AL) announced a hearing on debit card fees to be held February 17.

Could this be the beginning of the end for the Durbin Amendment? Not so fast.

Many members of Congress have expressed concern over the impact of proposed Federal Reserve Board rules to implement the Durbin Amendment. Among those expressing concern is ranking Democrat and former chair of HFSC Barney Frank (D, MA).

Concerns seem to focus on the unintended consequences of implementing the legislation/regulation and the effects it will have on consumer choice, consumer fees, and access to debit products and perks that consumers have come to expect.

The timing of the hearing is interesting coming 5 days before final comments are due on the Fed’s Proposed Rules to implement the Durbin Amendment and approximately two months before the rule is to be finalized on April 22.

While enough votes may well exist in the House to overturn Durbin, the Senate is another matter entirely. At this writing it is highly unlikely that Senate Majority Leader Harry Reid (D-NV) would risk the ire of Senator Durbin (D-IL) by scheduling a hearing on this amendment, let alone a vote.

In the meantime, the regulatory process continues and the clock is ticking.

End of Durbin Interchange Amendment? Not So Fast!