Banks, Retailers to Face Off Over Fed’s Debit-Card Rule

From: WSJ


WASHINGTON—Financial firms, at a Capitol Hill hearing Thursday, will urge lawmakers to block the Federal Reserve from moving forward on a plan to limit the debit-card processing fees banks charge retailers, the latest move in their persistent battle against the nation’s merchants.

Retailers, meanwhile, are poised to vigorously defend the legislation as a much-needed intervention in a flawed pricing system.

Banks, credit unions and card issuers say the Fed’s proposal, which stems from an amendment in the Dodd-Frank financial-regulatory overhaul, would kill jobs and hurt consumers. They argue that the amendment, advanced by Sen. Richard Durbin (D., Ill.), was rushed through Congress without sufficient debate and are calling on lawmakers to study the issue before allowing new regulation, set to go into effect in July.

The Fed proposal would cap the debit-card transaction fees, also called swipe fees or interchange fees, at 12 cents per transaction, a significant drop from the current 44-cent-per-transaction average that would eat into banks’ debit-card fee profits.

The Fed “is devoting substantial resources to understanding and addressing these issues within the parameters established by the statute,” said Fed Gov. Sarah Bloom Raskin, according to a copy of her testimony for the hearing reviewed by Dow Jones Newswires. “We welcome input from the public and from members of the committee in this effort.”

Retailers say that because there is no price competition, banks charge merchants inflated fees, according to written testimony from Doug Kantor, who represents a coalition of retailers. Mr. Kantor is also set to testify at Thursday’s House Financial Services subcommittee hearing at 10 a.m. Eastern time.

“The increases in the rates set by Visa, MasterCard and their banks, along with increased card usage, has led to a huge increase in fees paid by merchants,” he says in his testimony. “And these fees hit small businesses the hardest.”

Banking industry groups warn that the cap will likely spur banks to charge consumers for checking account, online banking and bill-payment services that have traditionally been free. An Independent Community Bankers of America survey found that 93% of its members would charge their customers for services that are currently offered free because of the new law and Fed rule.

“These changes are so fundamental and far-reaching that the extent of the consequences cannot be fully determined today,” said Visa Inc. General Counsel Joshua Floum in his prepared testimony. “As a result, we believe it is critical for Congress to suspend implementation of the Durbin amendment and the [Federal Reserve Board’s] related regulatory proposal and request an impact study of the unintended consequences on participants in debit transactions, particularly consumers, small businesses, community banks, credit unions and other financial institutions.”

Mr. Floum argues that the Fed’s proposal goes against President Obama’s call for innovation because it favors government price controls and would lead to less investment in technology that could improve debit-card programs. He added that the proposal would force about $12 billion a year from debit-card issuers to retailers.

Another witness, David Kemper, the head of Kansas City, Mo.-based Commerce Bank, says the Fed’s plan would deal a blow to smaller firms, despite the Durbin amendment including exemptions for small banks.

“The exemption for small banks added to the Durbin amendment will ultimately be ineffective,” he said, predicting that credit unions and community banks would lose market share and revenue under the Fed’s proposal. “The American Bankers Association and the Consumer Bankers Association, and the thousands of banking institutions we represent, respectfully request that the Congress take immediate action to stop the proposed Federal Reserve interchange rule from being implemented.”

Allied Credit Union President and Chief Executive Frank Michael says the rule would force credit unions to reduce dividends, recover fees from members or refrain from offering checking account services. The Fed’s proposed 12-cent cap would require credit unions to charge consumers an annual fee as high as $55 per debit card and possibly another fee as high as 35 cents per transaction, he says.

“We urge Congress to stop, study and start over,” Mr. Michael’s testimony said.

However, 7-Eleven Vice President and Treasurer David Seltzer describes the Durbin amendment as a significant compromise given that it doesn’t address credit-card interchange fees.

He says interchange fees are the fastest-growing expense for 7-Eleven. Over the past eight years, 7-Eleven’s credit and debit fees have quadrupled from a little less than $40 million in 2002 to $177 million per year in 2010, Mr. Seltzer will tell lawmakers.

“We ask that you ensure that the Federal Reserve can complete its work to provide some common sense to debit fees for businesses, large and small, and most importantly their customers across the nation,” he said.

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