Durbin Hits a Snag As a Delay Proposal Emerges in the Senate

The Durbin Amendment, which passed into law within weeks of its introduction in Congress last summer and seemed poised to go into effect in July, hit a stumbling block on Tuesday with the introduction of a bill in the U.S. Senate to delay rulemaking by two years.

The legislation, called the Debit Interchange Fee Study Act, was introduced by Sen. Jon Tester, D-Mont., who has been a vocal critic of the Durbin Amendment and the rules being worked out by the Federal Reserve to implement it. Tester’s bill, which drew immediate fire from retailer trade groups, proposes further study of the amendment’s restrictions on debit card fee income and routing arrangements, along with the two-year delay.

The movement to put off Durbin’s effective date has been picking up steam lately as banks have complained about the law’s possible impact. A similar bill, calling for a one-year delay, could emerge from the House of Representatives, sources say.

Tester's bill, if passed, could save debit card issuers as much as $30 billion in interchange income, estimates Eric Grover, principal at Intrepid Ventures, Carson Valley, Nev. “That's not chump change,” he says. The key, he adds, will be to maneuver the legislation through the Senate, which remains dominated by Democrats who could favor the Durbin Amendment. Tester “has got to get 60 votes [to close off debate] and he's got to get something to attach [the bill] to,” Grover says, pointing out that standalone interchange legislation has historically failed in Congress.

Merchant groups, which stand to benefit from the Durbin Amendment’s ultra-low caps on debit card interchange, were quick to comdemn Tester’s bill, which came in response to banking-industry complaints that the law had never been adequately vetted by Congress. “The banks and card companies claim they want to study swipe fee reform but the truth is they want to kill it,” Mallory Duncan, senior vice president and general counsel for the National Retail Federation, said in a statement. “Congress has already conducted more than half a dozen hearings on this issue, and the [General Accounting Office] and Federal Reserve have done studies of their own. The time for study is over. The time to reduce these fees and take bankers’ hands out of consumers’ pockets has come.”

Duncan added that the bill, if passed into law, will prevent retailers from passing on to consumers the savings they expect to reap from lower debit interchange and from wider transaction-routing choices, another provision of the Durbin Amendment. “Merchants are ready to pass lower swipe fees along to consumers in the form of discounts and other benefits as soon as reform goes into effect in July, but we can’t do that if Congress lets bankers stand in the way,” he said. Meanwhile, the amendment’s author, Sen. Richard Durbin, D-Ill., in a statement called Tester’s bill a “bailout for Visa and MasterCard and their big-bank allies.” The legislation, he said, comes at the expense of small businesses and consumers.

But Tester said his bill is intended to give Congress more time to consider the possible effects of the amendment. Some banking-industry players have said the consequences could include higher consumer fees, fewer rewards, and even bank layoffs. “The stakes are simply too high to move forward with this rule without a closer look at the impact on consumers, credit unions, community banks, and the small businesses and jobs they sustain,\” Tester said, as quoted by Dow Jones Newswires. \”That is why we need to make sure we stop and study these proposed rules before implementing anything.\”

A bipartisan group cosponsored Tester’s legislation, including Sens. Bob Corker, R., Tenn., Jon Kyl, R., Ariz., Ben Nelson, D., Neb., Tom Carper, D., Del., Pat Roberts, R., Kan., Chris Coons D., Del., Mike Lee R., Utah, and Pat Toomey, R., Penn.

The Fed in December published proposed rules to implement Durbin’s restrictions, including, under one scenario, a 12-cent cap on interchange and a requirement that debit cards carry logos for at least one PIN-debit network logo and one unaffiliated signature-debit network. The Fed proposal has drawn criticism from banks but also from merchant groups, which argue its price caps aren’t low enough.

In recent court filings, Wayzata-Minn.-based TCF Financial Corp. said the Durbin Amendment’s most severe scenario could force it lay off more than 2,000 employees. TCF, which has issued 800,000 Visa debit cards but has no credit card portfolio, is suing the Fed on the grounds that the amendment’s restrictions are unconstitutional.

The amendment, which is part of the Dodd-Frank Act signed into law last July, called on the Fed to have final rules ready in April for a July effective date. The law applies only to financial institutions with $10 billion or more in assets, but many credit unions and community banks have argued they will be affected by it, as well.