Durbin Pulls a “Kinsley”



Commentator Michael Kinsley



Illinois Sen. Dick Durbin

What is a “Kinsley?” Attributed to journalist and commentator Michael Kinsley, it occurs when a politician commits a gaffe by speaking the truth. Sen. Durbin addressed a Nashville business forum this week and pulled a Kinsley. According to several news reports, Durbin told the audience the purpose of his interchange amendment was to make retailers more profitable. He also was quoted as saying, “That’s what’s behind this.” Make retailers more profitable? The Home Depot Chief Financial Officer must have blushed when reading that comment. Didn’t Durbin repeatedly take to the Senate Floor the last two years saying the purpose behind the government setting interchange pricing was to give “consumers” relief?



The October 1 effective date for the cap on interchange rates on debit cards is quickly approaching. This blog will resume following all developments closely on market and political trends. This will include any more “Kinsleys” from Sen. Durbin.

Durbin Pulls a “Kinsley”

No News Is...No News

Hard news on debit card interchange was hard to come by this week as Congress finished its first week of recess and the Federal Reserve's April 21 deadline for issuing a final rule came and went like a passing stranger in a crowd.

April 21 was to be the critical day in the life (or death) of the Durbin Amendment.  "Delay Durbin" proponents, Sen. Durbin himself and the courts considering the TCF lawsuit all are awaiting a final rule before calculating next moves. We all know Chairman Bernanke told Congress weeks ago the Fed would not meet the Dodd-Frank April 21 deadline, but no one (including

Bernanke?) has any firm guess on when exactly the Fed will issue the final rule. Bernanke conducts his first ever "press conference" next week. Stay tuned here to see if he is asked about the final rule's timing and if he actually "makes news" here.

No News Is...No News

Tester and Frank Drive News of the Week

Frustration defined is watching the U.S. Senate trying to pass bill on the Floor. The Senate's attention this week was dedicated to the small business bill (S. 493) and government shutdown/budget talks. Sen. Jon Tester's amendment (#267) to delay implementation of the interchange debit card rules remains pending to the small business bill, but no agreement has been reached to call it up for a vote at this writing.

Sen. Tester took both to the Senate Floor and the media airwaves to tout his effort to delay and study the debit card rules. On CNBC's Squawkbox, Tester expressed confidence that he will have 60 votes in support of his amendment when called on the Floor. Sen. Richard Durbin also spoke on the Floor and with CNBC against any effort to delay implementation of his amendment.

On the House side, Rep. Barney Frank, former chair of the House Financial Services Committee, and one of the namesakes of the sweeping Dodd-Frank Wall Street Reform Act, made news by supporting legislation that would delay implementation of the Durbin Amendment. The House bill (H.R. 1081) gained more bipartisan co-sponsors this week (current total is 71). Frank's support for delay makes it a near certainty the House can pass a bill with a strong, bipartisan majority.

This takes brings us back to the Senate.. The Senate Floor schedule for next week has not been announced and it is unclear how a possible government shut down will affect Floor activity. We do know both the House and Senate are scheduled for a two week recess (Apr. 18-29). Again, a government shutdown could call into question that schedule as well.

The legislative process, above all else, requires patience sprinkled with some humor.

Tester and Frank Drive News of the Week

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

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

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

House to Senate: You Go First

Rep. Spencer Bachus, chair of the House Financial Services Committee, made the most significant news this week on the "Delay Durbin" front. He told a group of international bankers that the House would wait for the Senate to act on legislation delaying the Federal Reserve's interchange proposed rule on debit cards. Chairman Bachus took this position despite his Committee having two hearings in the last month on this issue and hearing broad, bipartisan support for a delay and study approach.

So, what is happening on the Senate side? News reports this week suggest a bill introduction to delay Durbin is eminent. These reports also identified Sens. Jon Tester (D-MT), Tom Carper (D-DE) and Bob Corker (R-TN) as the lead sponsors. The good news here is all three Senators are members of the Banking Committee which would first consider any legislation affecting the Durbin Amendment from Dodd-Frank. Expect a bill to be dropped the week of March 14.

Two interesting organizations jumped into the Durbin discussion this week as well. The Officer of the Comptroller of the Currency (OCC) wrote the Federal Reserve to voice strong concerns with the proposed rule's inflexibility for companies to recover identifiable costs associated with running a debit card program. The National Association for the Advancement of Colored People (NAACP) wrote House Speaker John Boehner (R-OH) this week urging the House to move swiftly on legislation to delay the implementation of the Durbin Amendment because study has not taken place on the potential impact to the unbanked and "risker" consumers.

Please visit my blog next week as I hope to finally report on actual legislation and its contents.

House to Senate: You Go First

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!