Bernanke Says Debit ‘Swipe’ Rules May Cause Bank Failures

From: Bloomberg

Federal Reserve Chairman Ben S. Bernanke said lawmakers should have “reason to be concerned” that an exemption for smaller lenders from U.S. caps on debit- card “swipe” fees won’t work and may cause banks to fail.

“I can’t say with certainty, but I think there is good reason to be concerned about it,” Bernanke said in response to a question at a Senate Banking Committee hearing today in Washington. If the exemption doesn’t work, “it’s going to affect the revenues of the small issuers, and it could result in some smaller banks being less profitable or even failing,” he said.

The Dodd-Frank Act requires the Fed to cap debit-card swipe fees charged to merchants, while exempting card issuers with assets of less than $10 billion. The central bank has proposed capping the fees at 12 cents a transaction, replacing a formula that averages 1.14 percent of the purchase price.

Community banks and credit unions have said the exemption won’t work and may make their cards less competitive, as they will be more expensive for merchants to accept than cards issued by larger banks. The exempt banks oppose the Fed’s plan along with the biggest lenders, including Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM), which could lose more than $12 billion in annual revenue if the caps take effect.

Lawmakers in the House and Senate have introduced legislation to delay the rule. Senator Jon Tester, a Montana Democrat, has proposed postponing the rule for two years and requiring a study.

‘Misinformation Campaign’

Senator Richard Durbin, the Illinois Democrat who pushed for the caps to be included in Dodd-Frank, said Bernanke’s statements help fuel a “misinformation campaign” by the banks and payment networks led by Visa Inc. (V) and MasterCard Inc. (MA), based in Purchase, New York.

“I find your statements troubling because I have seen no factual evidence supporting the argument that the small issuer exemption will not work effectively, only speculative statements that have been largely promoted by the banking industry and major card networks,” Durbin wrote in a letter today to Bernanke.

MasterCard and San Francisco-based Visa, which set interchange rates and pass the money to card-issuing banks, plunged more than 10 percent on Dec. 16 after the Fed released its proposal amid investor concern that the caps would damage their business model. Both have rebounded since then, with MasterCard gaining 26 percent and Visa climbing 19 percent.

‘Extraordinary Volume’

The Fed missed an April 21 deadline to complete the fee caps as it fielded an “extraordinary volume” of comment letters on its initial proposal, Bernanke said in a March letter to lawmakers. The Fed now has all of the information it needs, Bernanke said. The caps are set to take effect July 21.

“We have plenty of information,” Bernanke said. “We’ve received 11,000 comments and we’ve done an enormous amount of surveying of the industry.”

Retailers, which are fighting efforts to postpone the rule, said Bernanke’s comments proved that the delays are unnecessary.

“Chairman Bernanke’s comments confirm that Congress shouldn’t insert politics or prejudge the thorough fact-based process the Federal Reserve has conducted,” Doug Kantor, a lawyer for the Merchant Payments Coalition, said today in a statement.

The Fed hasn’t announced when the final proposal will be released.

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