It’s not the Little Big Horn but It Could Be Big, Nevertheless

Sioux Fall, South Dakota is about a thousand miles from the U.S. Capitol, but a battle is shaping up there today which could affect implementation of the Durbin Interchange Amendment and the Federal Reserve’s proposed rules governing debit card interchange fees.

Today the government and TCF National Bank are all lawyered up in Judge Lawrence Piersol’s courtroom debating whether Congress has the right to impose price caps on banks that issue debit cards. TCF says the law is unconstitutional. The government says TCF’s claim has no merit.

At stake is the more than $16 billion that banks collect each year, according to the Fed, in what merchants call “swipe fees.”  Swipe fees is term that could have only been coined for the retail industry by a modern day Don Draper. It is a term that denotes a brief, fleeting, ephemeral action (the swipe), as delicate as gossamer—but which costs merchants 16 billion large every year (the fees). Sixteen billion is how deeply in debt the state of California was in 2008. Sixteen billion is what Southwestern Bell paid for AT&T in 2005. It’s what Microsoft earned in 2010.

Swipe fees understates the value of card acceptance and overstates the burden to merchants, skewing the argument and manipulating public opinion. As such it is positively brilliant.

Meanwhile back at the Capitol, Congress is considering delaying the implementation of the Durbin Amendment. While the Fed lawyers are busy in Judge Piersol’s courtroom, Fed analysts continue to comb through 11,000 comment letters received in response to the agency’s proposed Durbin rules.

Smart money says there’ll be a delay in implementing the Durbin rules. TCF’s Battle of Sioux Falls? A toss-up. But I wouldn’t put $16 billion on the outcome of either battle.

It’s not the Little Big Horn but It Could Be Big, Nevertheless

Fed May Hold Fate on “Delay Durbin” Bills

Congress is back in business (session, i.e.) next week, but the committee schedules are a bit slow getting published. At this writing, the House Financial Services Subcommittee on Oversight and Investigations will conduct a hearing on March 30 to explore the budget implications of Dodd-Frank. I would expect the interchange issue to be raised in some capacity.

The Senate Banking Committee has scheduled a hearing on March 29 relating to housing, but another hearing for next week could be announced today or Monday.

Sen. Jon Tester’s legislation to delay the Durbin Amendment (S. 575) picked up two co-sponsors recently. Sen. Max Baucus (D-MT), chair of the Finance Committee, and Sen. Daniel Akaka (D-HI), member of the Banking Committee, added their names in support of S. 575. More than 10 House members agreed this week to co-sponsor Rep. Shelley Moore Capito’s (R-WV) “delay Durbin” bill (H.R. 1081). Total House co-sponsors currently stand at 42.

The Federal Reserve may be unintended decider on the legislative momentum for the Tester and Capito bills. The Fed’s final rule on implementing the Durbin Amendment is due April 22. If the final rule fails to address concerns with the small issuer exemption and resolve how fraud prevention may impact interchange rates, we should expect Tester/Capito proponents to swing into action.

Fed Chairman Ben Bernanke said this week he wants to address legitimate concerns with the small issuer exemption in the final rule. Since the Fed defended its proposed rule in February by telling Congress that it was merely following language in Dodd-Frank (Section 1075), it would appear inconsistent that the Fed get “creative” in the final rule. We will find out in about a month.

Meantime, Tester/Capito proponents may be in a “wait and see” approach until the final rule gets published.

Fed May Hold Fate on “Delay Durbin” Bills

Latest Legal Maneuver Surrounding the Durbin Interchange Amendment

The stage appears set for the April 4, 2011 hearing in Sioux Falls, South Dakota on a request by TCF National Bank for a preliminary injunction against the Justice Department. TCF is challenging the constitutionality of the Durbin Interchange Amendment of the Dodd-Frank Act.

In a press release that crossed the wires yesterday TCF states that its review of Justice's recent motion to dismiss shows that the Department is not contesting the bank's allegation that Durbin amounts to legalized price fixing. Instead, Justice is claiming that the constitutional protection against what the bank calls "arbitrary price controls" applies only to utilities. Justice is making the case, says TCF, that other industries, in this case, banking, do not enjoy the same constitutional protections.

So far Minnesota is the state furthest out in front of the Durbin Interchange Amendment issue. In addition to the Minnesota-based TCF, The Minnesota Free Market Institute has warned that the real uproar against the law will occur when consumers realize the negative impact that Durbin may have. Previous posts here have detailed actions that other large banks are taking to offset anticipated loss of revenue due to Durbin.

The April 4 hearing on the TCF motion will come several weeks ahead of the Federal Reserve's anticipated release of the final Durbin implementation rules.

Latest Legal Maneuver Surrounding the Durbin Interchange Amendment

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

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