Though the Durbin Amendment is hardly dead in the water, opposition has mounted since the Federal Reserve delayed announcing the regulations. Democratic senator Jon Tester of Montana introduced a bill to delay interchange regulation by two years, while on the other side of the aisle and in the other legislative chamber, Representative Shelley Moore Capito of West Virginia sponsored a similar version with a one-year delay. Banks from JPMorgan Chase and Bank of America to 50-employee credit unions loudly and frequently voice their displeasure.
In the face of growing resistance, coalitions of merchants, retailers and consumer groups closed ranks around Dick Durbin of Illinois, the second most powerful Democrat in the Senate and the amendment’s sponsor, strongest advocate.
Interchange fee regulation was dealt another blow on Thursday, as Chairman of the Federal Reserve Ben Bernanke and FDIC Chairwoman Sheila Bair testified before the Senate Banking Committee. Though swipe fees shared a full slate with mortgage servicing and too-big-to-fail policy, both experts voiced concerns about the Durbin Amendment.
Durbin takes on the Visa/MasterCard Duopoly
Swipe fees, say card networks and banks, cover the cost of fraud prevention, checking accounts and administrative expenses. However, the fees are set by only two networks, Visa and MasterCard. Because the networks can deny service to individual merchants with little consequence, and because merchants’ sales would suffer greatly if they did not process the cards, the two giants are able to set fees high above the competitive price. One manifestation of monopoly pricing is that interchange fees for large merchants like Target, which have significant bargaining power, are lower than those for small boutiques, which have virtually none.
The Durbin Amendment addresses the duopoly in two ways: introducing competition and setting a price ceiling. The Federal Reserve is mulling two proposals: one would require that merchants can choose between at least two networks per debit card, and the other would require two networks per verification method (for example, signing and PIN). Theoretically, by introducing competition, swipe fees would be driven down to the most efficient price. The Fed will also cap interchange fees at 12 cents, down from the average of 44.
Recognizing that small banks and community lenders face higher fraud prevention costs, and that 12 cents per transaction would not be able to cover the costs of a debit program, the Durbin Amendment carves out an exemption for institutions with less than $10 billion in assets. These banks and credit unions would not be subject to the 12-cent cap.
Can Two-Tier Pricing Survive in the Wild Markets?
The billion-dollar question, though, is whether the exemption will truly protect small institutions. Tester’s bill, in addition to delaying swipe fee regulation, would mandate the study of a fee cap on small banks. Credit unions, most of which would be nominally exempt, have unequivocally opposed the fee cap. A joint letter from the Credit Union National Association and Independent Community Bankers of America said,
“Our institutions…issue debit and credit cards as a service to their local customers, and they continue to do so fairly and honestly, often with better rates and terms than can be found at larger institutions. The key that makes this possible is the existing interchange system, which allows community banks and credit unions to compete directly with the largest banks in the debit and credit card marketplace.”
On Thursday, Bernanke and Bair have once again concurred with that assessment.
“We’re still not sure whether [the exemption] would work,” said Bernanke. “There are market forces that would work against the exemption…it could result in some smaller banks being less profitable or even failing.”
Bair was no less blunt: “I do think this is going to reduce revenues at a number of smaller banks, and they will have to pass that on to customers in terms of higher fees, primarily for transaction accounts…Is that the result Congress wanted? You need to determine that, but I think that is what’s going to happen.”