Consumer Groups, Banks Battle to Influence Fed’s Debit Rules

Recent meetings between Federal Reserve staff members, consumer groups, and payments executives show just how divergent the views are as the Fed prepares the first-ever regulations on U.S. payment card interchange. Consumer groups are pushing for “at-par” debit card interchange—essentially, no interchange. A big regional bank, however, said the Fed “will threaten the future of the payment system in the U.S.” if it doesn’t take the appropriate costs of offering debit cards into account.

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The Fed is devising debit card interchange regulations and related rules as a mandate of the Dodd-Frank financial-reform bill that President Obama signed into law in July. The law gives the Fed until April to develop its plans, though staff members plan to float preliminary proposals next month. In an attempt to keep the process open, the Fed is posting on its Web site summaries of the meetings its staff has with banks, payment networks, consumer groups, and other interested parties as they attempt to influence the impending rules.

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In a brief report, the Fed said staff members met Oct. 13 with officials from Public Citizen, U.S. Public Interest Research Group, Consumer Action, and the National Consumers League. “Representatives of the consumer groups expressed a preference for par clearance of debit transactions (or de minimis interchange fees),” the report says. Par clearance would mean that a debit card transaction, like a check, would impose zero up-front acceptance costs on the merchant. (In the upcoming December issue of Digital Transactions News’ sister publication, Digital Transactions magazine, the National Retail Federation, a strong proponent of interchange regulation, argues that debit cards are plastic checks and the Fed thus should set debit interchange at par or close to it.)

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The groups also discussed issuers’ practices of steering cardholders to use signature debit cards (which carry higher interchange than PIN-debit cards), the cost to consumers of recovering fraud losses, and the ability of lower interchange to spur cost controls.

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At the opposite end of the spectrum, two executives from Kansas City, Mo.-based Commerce Bank N.A. told the staffers Oct. 27 that the Dodd-Frank law as written with its “reasonable and proportional” language might prevent the Fed from considering all the relevant issuer costs that go into debit card transactions. That language applies only to issuers with $10 billion or more in assets, or only about 1% of banks and credit unions. Commerce Bank has $18.6 billion in total assets, according to its Sept. 30 call report.

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“We fear the Fed is instructed to set interchange at a rate that covers only a fraction of the costs of our debit card program, including only the costs of authorization, clearing, settlement, and perhaps some fraud-prevention cost,” a Commerce Bank presentation says. “The cost of running a debit card portfolio is far greater than these basic transaction costs … we ask that interchange be set taking appropriate costs and a return on capital into account.”

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Commerce Bank said its potential hit could be $44 million, or 18% of 2009 pre-tax income. Besides saying that the law could threaten the payment system, Commerce Bank said failure to take into account issuers’ costs would “further damage the fragile profitability of the entire banking system” and “place Commerce Bank and peer banks at an extreme competitive disadvantage.”

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The Dodd-Frank law also requires debit cards to access at least two unaffiliated PIN-based networks and gives merchants more transaction-routing choices. But Commerce Bank, a Visa issuer, said that provision could cause it to reissue its entire card base without reimbursement and “force us to do business with a network that we have avoided for business reasons.” The presentation didn’t identify that network. And more merchant routing choices don’t address the data-security concerns “that may have limited the success” of some networks, the bank said.

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MasterCard Inc. executives met with Fed staff on Oct. 4, though the staff’s summary of the presentation MasterCard gave offers few clues about the network’s stands regarding the law’s numerous card provisions. MasterCard did say that debit card innovations benefit consumers, and its executives addressed network affiliations, transaction routing, and the law’s provisions about prepaid cards. MasterCard, which lags far behind Visa Inc. in U.S. debit, said its U.S. issuers have 9 million cards with PIN-debit capabilities outstanding, cards good at 2 million acceptance locations.