Does the CUNA Meeting Provide Insights on the Future of the Durbin Interchange Amendment?

The big news this week on delaying the Federal Reserve's proposed rule on debit card interchange happened in Washington, but not at the usual venue.

The House Financial Institutions and Consumer Credit Subcommittee essentially held its second hearing on the Fed's proposed rule on Wednesday. The hearing centered on the effects of the Dodd-Frank Act on small financial institutions and businesses. The first panel comprised of small financial institutions (chiefly credit unions and community banks) voiced concerns with the potential, damaging effects of the Durbin interchange amendment. [They additionally voiced concerns with the Consumer Financial Protection Bureau even though Dodd-Frank exempts institutions with less than $10 billion in assets from the CFPB's authority.]

Sen. Jon Tester says Senate
 may revisit Durbin

The real news was generated off Capitol Hill at the Credit Union National Association's (CUNA) annual government affairs meeting. House Speaker John Boehner, CFPB overseer Elizabeth Warren and House Financial Service Committee Chairman Spencer Bachus highlighted a "who's who" roster of important Washington decision-makers.

Two Senate Banking Committee members (Jon Tester of Montana and Mike Crapo of Idaho) assured the CUNA audience the Senate would revisit the Durbin amendment is some capacity given the questions raised by the small issuer exemption. [Please note Sen. Crapo voted for the Durbin amendment last year while Sen. Tester did not.] Speculation arose that Sen. Tester would soon introduce a bill. And, on the House side, Rep. Shelley Moore Capito, chair of the FI Subcommittee, would be the lead sponsor.

Despite this positive news from the CUNA conference, we unfortunately have yet to have a bill formally introduced in the House or Senate. The good news is Congress is building a hearing record on the debit card interchange issue so swift action could occur once a bill is dropped in the hopper. The key question is whether any proposed bill will simply delay the effective date or will Congress be compelled to "fix" the Durbin amendment in some way. Given the nature of the nature of the legislative process, the latter may be a real possibility.

As always, please stay tuned.

Does the CUNA Meeting Provide Insights on the Future of the Durbin Interchange Amendment?

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