Durbin Channels His Inner Captain Renault

The calendar turned October 1 last Saturday. The sun rose in the east. Taxes were paid. Birds began migrating southward. But, to those paying attention to Bank of America’s announcement of a $5 monthly charge for debit card usage, you would have thought Armageddon was upon us.

The Durbin interchange rules on debit cards began October 1. The Federal Reserve Board delayed the implementation (July 22 was the date spelled out in Dodd-Frank) because the government price setting isn’t an easy thing to do apparently. Prior to passage of the Durbin Amendment to Dodd-Frank, the Fed determined issuers were receiving an average of 44 cents on a debit card transaction. Given the narrow parameters the Durbin Amendment, the Fed proposed a cap of 12 cents in December. After receiving an avalanche of comment letters, the Fed took more than six months to issue a final rule revising the cap to 23 cents with a proposed one cent fraud adjustment.

Financial institutions were already facing profitability headwinds due to the CARD Act (2009) and revised overdraft protection regulations. The Durbin amendment caused many financial institutions to reevaluate the “free checking” model that has existed for many years. A theme is at work here. Government regulation equals costs to consumers.

Channeling his inner Captain Renault, Durbin voiced great surprise that Bank of America would actually seek to recover costs associated with government pricing setting for interchange.

President Obama joined the party by suggesting the Consumer Financial Protection Bureau take a look at the fees. Rep. Brad Miller (D-NC) introduced legislation (H.R. 3077) requiring financial institutions to honor a request by consumers to close their checking or savings account within 48 hours and prohibit any fees associated with the request.

Expect the Miller legislation to be the first of many salvos from Congress in reaction to Durbin Amendment re-pricing. And, if the President is informally calling upon the Consumer Financial Protection Bureau to investigate these new charges, one need not go very far on a limb to believe the CFPB will do just that. We are under one week of the Durbin debit interchange regime and the water is already very choppy. 

Durbin Channels His Inner Captain Renault

A Bridge Too Far

In the end, reaching 60 votes to delay the implementation of the Durbin Amendment debit card interchange rules that had passed overwhelmingly in 2010 was always a stretch.  In this political climate, getting a majority of Senators to agree on much of anything is a daunting task.

It is somewhat heartening to know that 54 members of the “world’s greatest deliberative body” saw fit to fix one of the biggest debacles created by the Dodd-Frank Wall Street Reform Act.  I can readily understand Democratic opposition to the Tester Amendment that sought to delay the rules.  They are often seduced by a populist “help the little guy” argument no matter how disingenuous; though 17 of them didn’t fall for it this time and they are to be commended. 

It is harder to understand the motivation of the 12 Republicans that voted with Durbin on this issue.  One positive here is that this number is down from the 17 Republicans who initially voted to intervene in this marketplace last July.  I suppose I can understand the votes from Senators in a state where a retail giant like Home Depot is headquartered.  After all they are among the biggest winners in this fight.  Contrary to Senator Durbin’s plaintive pleas for the “mom and pop” shops, it is the big box retailers who will enjoy the largesse of this Congressional giveaway, or should I say takeaway.  In fact, it was the CFO of Home Depot who in a recent call with shareholders said that Durbin implementation will mean $35M to their bottom line annually.  But wait, I thought that any savings was to be passed on to consumers.  Is it savings after the $35M?

Freshman Senator John Boozman (R, AK) was a profile in political courage by resisting pressure from a rather large retailer headquartered in Bentonville, AK and voting for the Tester Amendment.  After the vote he said that he couldn’t vote for something that allowed government pricing. 

Republicans purport to be the party of free markets and less government.  In this case, Senator Barbara Mikulski (D, MD), not usually known as a big free market advocate and 17 of her Democratic colleagues were just that.  And Senator Lindsey Graham (R, SC) and 11 of his Republican colleagues were not.  At least I know who to thank when my free checking account goes away.

Republicans can point to a number of achievements.  Unfortunately their latest achievement is defeating the Tester Amendment.

A Bridge Too Far

Pen Meet Paper: Interchange Delay Bills Finally Introduced

Ending weeks of speculation, Sen. Jon Tester (D-MT) and Rep. Shelley Moore Capito (R-WV) introduced legislation (S. 575/H.R. 1081) to halt the implementation of the Durbin interchange amendment as proposed by the Federal Reserve Board. S. 575 was referred to the Senate Banking Committee and H.R. 1081 was referred to the House Financial Services Committee. At this writing, 13 Senators have co-sponsored the Tester bill and 43 Representatives have co-sponsored the Capito bill.

S. 575/H.R. 1081 propose to do the following:

-- Require more banking agencies (FDIC, OCC and NCUA) to join the Federal Reserve in studying the Durbin Amendment effects

-- Halt implementation of the Fed's final rule (schedule to be July 21) while the study would take place (the Senate bill proposed a two year study while the House bill calls for a one year study)

-- Make "null and void" any final Fed rule implementing the Durbin Amendment if a sufficient number of regulators deem it did not adequately assess the costs associated with debit card transactions, the effects on consumers and the smaller issuer exemption

In the normal legislative process, the Senate Banking Committee and House Financial Services Committee would hold additional hearings and then schedule a mark up session (amend the bills and vote them to full Chamber). No one can be sure at this time how "normal" this legislative process will be. Speculation already exists that Sen. Tester may bypass the Banking Committee and offer his bill as an amendment to a budget bill.

The one thing we do know is that S.575/H.R. 1081 are not halting the Federal Reserve's statutory deadline (April 22) to issue its final rule implementing the Durbin Amendment. Congress is in recess the week of March 21, but we hope to have the Committee schedules for the week of March 28 posted here by next Friday.

Pen Meet Paper: Interchange Delay Bills Finally Introduced

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

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