When $12 billion is at stake, the fight turns ugly fast.
Efforts by the Federal Reserve to change swipe fees on debit cards as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has been met with loud cries and gnashing of teeth on both sides of the issue.
The banking and retail industries — both with powerful lobbying groups in Washington, D.C. representing the likes of Wall Street and Walmart — bitterly argue the merits of lowering debit card interchange by more than 70 percent. The opposing sides each say businesses will suffer if the other prevails.
“Everybody is screaming at each other,” said Lindsey Pinkham, Connecticut Bankers Association senior vice president and secretary. “The retailers are screaming at us. We are screaming at the retailers.”
Just when the retail industry was heading for a decisive victory by mid-year, the banking industry landed important backing in March.
A pair of bills introduced into the U.S. Senate and U.S. House of Representatives would delay swipe fee reform until the Fed can study its impact further.
The bills — particularly the Senate version calling for a two-year delay — obtained bipartisan support and appear to be rising out of the legislative quagmire to face floor votes.
“I don’t think that everybody had an opportunity to think about potential unintended consequences,” said Sen. Jon Tester, D-MT, the author of the bill. “Without the services these banks provide, we’d have a hard time creating jobs and strengthening the economy.”
Whenever a customer uses a debit or credit card, the business pays a fee to the bank called interchange to process the transaction.
In Connecticut, the average interchange per debit card transaction is 44 cents. That number rises to 56 cents for debit transactions that require signatures and drops to 23 cents for those using just PIN numbers.
In the Dodd-Frank legislation, Sen. Dick Durbin, D-IL, added an amendment calling for the Fed to review and lower the interchange on debit cards. The Durbin amendment doesn’t impact credit card interchange.
“Congress is asking the banking regulators to effectively establish price control,” said Bill Crawford, incoming CEO of Rockville Bank. “The right way to handle these things is to let the market find the right price.”
In December, the Fed came out with a preliminary finding capping all debit interchange at 12 cents. The Fed is reviewing comments by various stakeholders, and the new rules would take effect July 21.
“We know the banks are pulling out all the stops to get it delayed,” said Tim Phelan, president of the Connecticut Retail Merchants Association. “We certainly are getting squeezed by interchange fees.”
Interchange is one of the top expenses for Connecticut retailers, up there with staffing and facility costs, Phelan said. Shops, restaurants, any business that accepts debit or credit cards take a hit on interchange.
But banks argue retailers benefit from the debit and credit processing infrastructure that banks set up. Debit cards — an alternative to cash without the same risks of accumulated debt posed by credit cards — is the No. 1 form of payment in the United States, accounting for 35 percent of all pay transactions.
The cost of maintaining this system is far more than 12 cents per debit transaction, especially when factoring in fraud and security costs, Pinkham said.
Rockville Bank’s costs for fraudulent debit card transactions in February were more than $6,700. Fraud is very hard for banks and retailers to prevent, said outgoing Rockville CEO Bill McGurk, and costs can escalate quickly.
If the Fed imposes the 12 cents per transaction rule, the amount the banks collect won’t cover the costs of running the debit system. That will leave them to seek those lost funds from somewhere else, such as added fees for customers, McGurk said.
“If you can’t cover your costs to provide a service, what business would keep providing that service?” Crawford said.
The Durbin amendment exempts all banks and credit unions with less than $10 billion in assets from the interchange changes. That includes Rockville Bank with its $1.7 billion in assets.
However, this exemption may not play out in practice. Fed Chairman Ben Bernanke testified before the Senate Banking Committee that establishing a two-tiered debit interchange system might not be feasible.
Despite its apparent exemption, Rockville Bank opposes the interchange change. In addition to generally opposing government price control, Rockville believes it will have to adjust its interchange downward eventually if the big banks are forced to reduce first.
“When they adjust a fee substantially downward, every community bank is going to have to follow to remain competitive,” Crawford said.
Concerns such as these are why Tester introduced his bill to delay interchange reform for two years so the impacts could be studied.
Tester knows he faces an uphill battle to get the legislation passed. The Durbin amendment passed with the support of 64 senators; and Tester said he’ll need the support of 24 of those to get his legislation through a potential filibuster.
But Tester’s bill already received support from Republicans and Democrats, including the sponsorship of Sen. Ben Nelson, D-NE, who voted in favor of the Durbin amendment.
“There is a little bit of buyers’ remorse as I talk to senators in the hallways,” Tester said.
If Tester’s bill passes, two years is a long time for retailers to wait and interchange costs to accrue, Phelan said.
The issue has already been studied, and this latest legislative maneuvering is just a way to buy banks more time to repeal swipe fee reform, he said.
“We don’t understand why we have to have a delay,” Phelan said.
