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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.
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.
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