An Amendment To Delay the Durbin Amendment Comes Up Short

Defenders of the debit card interchange status quo saw their last, best hope to delay draconian Federal Reserve regulations from taking effect go down to defeat Wednesday afternoon. An amendment in the U.S. Senate that would have delayed the Fed’s rules died on a 54-45 vote, six shy of the 60 it needed. Barring any last-minute legislative surprises, nothing now stands in the way of the Fed issuing its final rules to implement the so-called Durbin Amendment by July 21 as required by last year’s Dodd-Frank financial-reform law.

As has been the case since the current interchange debate began in Congress 13 months ago, the vote about the amendment from U.S. Sen. Jon Tester, D-Mont., to delay the Durbin Amendment for further study divided retailers from banks and the payment card networks. Retailers could see their debit card interchange expenses, or “swipe fees,” cut by 70% or more under the Fed’s preliminary rules that call for 7- to 12-cent transaction caps on cards from big issuers.

“This is a landmark victory for American consumers that will give them the break from skyrocketing swipe fees that they have been seeking for years,” Matthew Shay, president and chief executive of the Washington, D.C.-based National Retail Federation, said in a statement. “With the economy still trying to gain momentum and consumers facing skyrocketing costs for necessities like food and fuel, this badly needed reform will help ensure our nation’s economic recovery. It will prevent more than a billion dollars a month from being pocketed by big banks and, in turn, allow retailers to hold down prices for consumers.”

But a spokesperson for the Electronic Payments Coalition, a Washington lobbying group of banks and networks, said in an e-mailed statement that, “It is stunning that the Senate chose to ignore every major banking regulator who warned that this rule could harm community banks and credit unions, and possibly even result in bank failures at a time when our country can least afford it. Giant retailers may have protected their $12 billion windfall at the expense of small businesses and debit card holders across America.”

Pro-interchange forces have emphasized in the hot interchange debate that various regulators have questioned the Durbin Amendment’s potential impacts, with Federal Reserve chairman Ben Bernanke at one point even saying the loss of debit revenues might cause some small banks to fail. The EPC spokesperson added that, “we will not give up the effort to protect debit card holders from the effects of this ill-conceived legislation,” but didn’t give any specifics.

No. 2 payment card network MasterCard Inc. said in a statement that the “Senate missed an opportunity to address the unintended consequences of the Durbin Amendment. MasterCard calls on the Federal Reserve to carefully consider the thousands of submitted comments raising concerns for the unintended consequences of the proposed debit interchange price control.” MasterCard also said it looks “to the Federal Reserve to continue its careful review of the proposed debit interchange cap to a level that actually considers all the costs associated with facilitating debit transactions.”

Sponsored by Senate Majority Whip Richard Durbin, D-Ill., the Durbin Amendment calls for the Fed to draft rules setting debit interchange at “reasonable and proportional” levels for issuers with more than $10 billion in assets. The measure allows the Fed to consider only certain expenses, including a possible allowance for fraud control. It also would ban exclusive network agreements among card issuers and networks, and would give merchants more transaction-routing freedom. Durbin’s amendment attracted surprising bi-partisan support last year, but second-guessing has abounded ever since December, when the Fed came out with its draft regulations.

The Durbin Amendment could affect Visa Inc. more than any other network because of Visa's leading position in debit cards and its many exclusive network agreements in which issuers offer cards only with the Visa brand for signature debit and the Visa-owned Interlink brand for PIN-debit. But Visa chairman and chief executive Joseph Saunders said Visa would adjust. “Based on the environment we have been managing since last summer, we anticipate the long-term impact of the Dodd-Frank debit provisions on Visa will be manageable,” Saunders said in a statement. “We have spent the past year preparing for all potential outcomes, and we have plans in place to evolve our U.S. debit strategy. Once we have reviewed the final rules, we will offer incremental direction on our plans.”

Durbin Amendment opponents say the measure would force banks to raise other fees to compensate for lost interchange, and small banks have expressed fears that market forces eventually would pull down their interchange revenues even though the law exempts them. Tester originally called for a two-year delay in implementing the Fed’s rules but compromised in order to add supporters in the face of staunch opposition by Durbin and his pro-retailer allies. His final proposal called for a six-month study, and if that study found community banks would be harmed, or if certain other conditions were met, the Fed would get another six months to re-write the rule. Durbin, the Senate’s No. 2 Democrat, was able to require that Tester’s amendment get 60 votes in order to be attached to another measure up for a Senate vote.

The Fed was supposed to have issued its final rule by April 21 but is still working on it because it was buried under 11,000 comments to its initial proposal. The central bank said in late March that it would have its regulations in place by the July 21 implementation date set by Dodd-Frank.