The payments industry was caught on the hop by an amendment to an appropriations bill that would require credit card payments at government agencies to be given the lowest available market interchange fees. The surprise move has seen consumer groups pushing for further reform. Charles Davis reports.
No sooner had the ink dried on landmark financial reform legislation that includes provisions to regulate interchange fees paid by retailers and their customers each year, than Senator Dick Durbin, who spearheaded the interchange effort, mounted another legislative effort that raises the bar even higher.
Durbin, an Illinois Democrat, caught the payments industry by surprise when he added an amendment to an appropriations bill that would require credit card payments accepted at government agencies to be given the lowest available market interchange rates.
Lowest unit rates traditionally have been the sole province of the nation’s largest retailers and supermarket chains, which have the clout to demand preferred rates. While the amendment only covers a small slice of the credit payments market, it is widely viewed as a shot across the bow, a portent of things to come.
Durbin’s success in inserting a measure into the regulatory reform legislation enacted over fierce lobbying requiring the Federal Reserve Board to regulate debit card interchange fees has the National Retail Federation (NRF), congressional Democrats and consumer groups poised to push for broader reform.
‘The fight isn’t over’
“This is a dramatic first step in the fight to control rising credit and debit card fees and has tremendous potential for savings, but we know the fight isn’t over,” said NRF president and CEO Matt Shay.
“Big banks lobbied hard to keep this legislation from becoming law and we fully expect them to put pressure on the Federal Reserve as it drafts the regulations intended to result in the ‘reasonable’ debit card fees sought by Congress.”
The newly enacted financial reform bill includes an amendment sponsored by Senator Durbin that requires the Federal Reserve to set regulations resulting in “reasonable and proportional” swipe fees for debit cards.
The Fed would be required to consider banks’ actual costs for processing the transactions and the fact that paper checks drawn on the same accounts are paid at face value. The amendment would also bar the card industry from interfering with merchants who offer a discount or other benefit to customers who pay by cash, cheque or debit card rather than credit cards, and would allow merchants to set minimum purchase amounts of up to $10 for credit cards.
The fate of the Durbin interchange fee provision is still unclear, however, as Republican committee members will doubtlessly try to strip it from the appropriations bill. The bill was quickly approved by the Senate Appropriations Committee’s financial services subcommittee, which Durbin chairs, but that in no way guarantees its passage.
The provision was added to the broader fiscal year 2011 appropriations bill, which the parent committee began discussing in early August. Congress is expected to bundle multiple spending bills into one massive piece of legislation that will likely be addressed next year.
During the subcommittee’s discussion of the interchange amendment, Senator Susan Collins, a Republican from Maine, voiced concerns about the provision and payments industry lobbyists expressed hopes that she will offer an amendment to strike out the interchange provision or replace it with a study instead.
Durbin made it clear the Democratic majority is still intent on increasing regulation of interchange rates, including for credit cards.
“We did not touch the credit card interchange fee in the regulatory reform bill,” Durbin said in announcing the amendment.
“What this bill does is take the same determination and apply it to credit card purchases for taxpayers across the country,” he added, estimating the bill could save the government $25m to $30m a year.
Payments executives have not thrown in the towel on interchange, however, and vowed to continue to work to convince Congress that it made a critical mistake in adopting the debit interchange provision in the regulatory reform bill.
In a hearing of the House Small Business Committee on 29 July, Robert Oeler, president and CEO of Dollar Bank in Pittsburgh, said the provision will “wreak havoc on our bank’s ability to offer reasonably priced products both to consumers and to small businesses in my community, as the costs of offering debit cards will not disappear”.
Interchange fees are essential to help offset the cost of operating checking accounts, Oeler added.
“Without this income, it becomes very different for many banks to continue to offer low- and no-cost current accounts for our customers,” he said.
Banks large and small argued the fees were crucial to fund the global infrastructure of plastic transactions. Ron Celaschi, vice-president of lending at the Clearview Federal Credit Union in Moon, testified that the credit union already takes a $1m loss each year on debit transactions – and that trimming revenues would force him to impose more fees on his customers.
Retailers, meanwhile, have long argued the rising swipe fees were capricious and put them at the mercy of Visa and MasterCard.
Jerry Buss, who owns 55 Pizza Hut franchises in Western Pennsylvania, and Chris Newton, of the Texas Petroleum Marketers and Convenience Store Association, testified that retailers would pass the savings of lower fees on to the consumer.
Newton said that in the extremely price-sensitive gas market, retailers would use any opportunity they have to trim prices.
Buss said savings also could be used to reinvest in the businesses.
“If I could just save the projected fee increase for this year, I would have 20% of equity of a new restaurant, or I could buy a new fryer for menu additions, or remodel an older building,” Buss said.
“In any event, that money would pass through the economy with multiple effects.”
For now, the retailers’ arguments are finding their way to lawmakers’ ears.