Durbin, Welch Urge Fed To Adopt Debit Caps That Look More Like the EU Proposal

Two powerful lawmakers on Friday wrote to the chairman of the Federal Reserve Board urging the central bank to scrap its debit card interchange caps and instead adopt limits in line with the more draconian regime proposed this week by the European Commission.

In their letter to Fed Board chairman Ben Bernanke, Sen. Richard Durbin, D-Ill. and Rep. Peter Welch, D-Vt. “urge the Board to incorporate the Commission’s analysis and recommendations…into the Board’s standards for assessing the reasonableness of debit interchange fees charged within the United States.”

The European Commission on Wednesday proposed that cross-border Visa and MasterCard debit card interchange rates be capped at 0.2% of the transaction, and that credit card transactions have a rate ceiling of 0.3%. The proposal, which does not apply to three-party networks like American Express Co., would apply initially only to cross-border transactions. Transactions within a country would be covered within two years. To be enacted, the proposal must win the approval of the European Parliament and a majority of the 28 EU member states.

The Durbin/Welch letter uses the occasion of the Commission proposal to chastise the Fed for setting a ceiling on debit rates that is “unreasonably high” when in June 2011 it released its final rule implementing the Durbin Amendment to the 2010 Dodd-Frank Act. The Fed’s rate cap, 21 cents plus 0.05%, hurts small-ticket vendors in particular, the lawmakers say, because it is significantly higher than the pre-Durbin small-ticket rates those merchants had been paying. “We urge the Board to adjust its regulations to reflect the Commission’s proposal, particularly as applied to small dollar transactions,” the letter says.

Indeed, Durbin and Welch note that the Commission’s 0.2% cap “aligns” with a 7-cent so-called safe-harbor ceiling the Fed originally proposed in December 2010, before issuing its final regulation. On what the Fed found to be the average debit ticket, $38.03, the 0.2% rate produces a fee of 7.6 cents.

Besides expressing a preference for the European Commission’s rate regime over the Fed’s final interchange limits, the letter accuses U.S. regulators in general of being “slow to act” and of having “fallen behind the global curve” when it comes to interchange regulation.

The letter also urges the Fed to follow the Commission’s example in standing up to the “financial industry.” “We are quite familiar with the aggressive lobbying and scare tactics employed by the financial industry when it comes to interchange,” the two lawmakers say. “But we are encouraged by the strength that the European Commission has demonstrated in the face of this industry pressure.”

Both lawmakers have a long history of paying close attention to what was once the recondite world of card interchange. Before introducing the amendment that now bears his name, Durbin had co-sponsored legislation to regulate credit card rates. That bill ultimately failed to pass. Welch had backed a law that would have amended the Truth in Lending Act to, among other things, prohibit higher interchange on rewards cards and strike down network rules preventing merchants from steering customers to one card over another. Notably, the Commission proposal bans merchant surcharges on regulated transactions.

As assistant majority leader in the Senate, Durbin in particular will be a difficult voice to ignore.

Spokespersons for Visa Inc. and MasterCard Inc. were not immediately available for comment.