Sharp Comments Flow into Fed in Wake of Interchange Proposals

The comments are flowing in to the Federal Reserve Board in the wake of the board’s controversial proposals to set a 12-cent cap on debit card interchange, ban exclusive network agreements on debit cards, and give merchants more freedom to direct the routing of debit transactions. To a large degree, the 35 comments posted to date on the Fed’s Web site reflect the run-up to the initial proposals the board revealed two weeks ago, with merchants strongly endorsing lower interchange and financial interests fiercely opposed (Digital Transactions News, Dec. 16).

“We have really felt the squeeze from the banking industry and feel that the debit card charges are excessive compared to the fair cost of processing debit cards,” said veterinarian Alan Cords of the Gentle Care Animal Hospital in Fort Lauderdale, Fla. “Please uphold your proposed limit on debit card interchange fees to [12 cents] per transaction or less if it meets but does not exceed the cost of processing the transaction. Please also uphold your proposal to stop the restriction of routing.”

Bill Hardee, general manager of The Warehouse Saloon & Billiards in Austin, Texas, wrote that, “As a small business owner, I am very supportive of your proposed effort to limit the usury swipe fees that credit card processors extract from businesses.” Hardee said Visa and MasterCard “are currently out of control with regards to sucking the merchant dry with fees and ‘other charges.’” (The bank card networks set rates for interchange, a transaction fee paid to card issuers by merchant acquirers, which invariably pass the expense on to their merchant clients.)

The proposed regulations arise from the so-called Durbin Amendment in the Dodd-Frank Wall Street Reform and Consumer Protection Act that President Obama signed July 21.

Steve Bartlett, president and chief executive of The Financial Services Roundtable, a Washington, D.C.-based group of large banks, insurers, and other financial companies, said he was “shocked and dismayed” at the Fed’s plans. “The Board’s proposal falls substantially short of capturing the costs associated with providing the debit service and, although the statute is very limiting, it by no means reflects the discretion accorded to the Board in establishing the proposed guidelines,” Bartlett wrote. He added that “debit cards are a lifeline for the American consumer” and “any proposal that caps debit interchange fees will increase the cost of debit cards for consumers and potentially curtail debit card use.”

Regulated interchange would apply only to the 131 banks and credit unions with more than $10 billion in assets, about 1% of all financial institutions. But John Annalaro, chief executive of the new Northwest Credit Union Association formed by the merger of the Washington Credit Union League and Credit Union Association of Oregon, said that “while the proposal is aimed at institutions over $10 billion in assets, the application of the action is likely to apply to all financial-services providers, regardless of size.”

Politicians also are weighing in. U.S. Sen. Claire McCaskill, D-Mo., a Durbin Amendment opponent, said she is “worried that the language in the Dodd-Frank Act is too narrow and that rules based on those instructions will not allow debit card issuers to recoup the full costs of offering cards to consumers.”

In a joint letter, two Republican House members, Spencer Bachus of Alabama and Jeb Hensarling of Texas, said the Dodd-Frank law’s nine-month deadline (from enactment) for the Fed to issue final rules is too short given the “myriad perspectives of all affected parties. Ultimately, hastily written rules may end up doing more harm than good to consumers and have negative effects on competition in the marketplace.” The two noted that the House Financial Services Committee held only one hearing over the past two years on the general subject of interchange and none about transaction routing. They urged to the Fed “to proceed in a cautious and deliberate manner.”

Meanwhile, the Durbin amendment’s chief sponsor, U.S. Sen. Richard Durbin, D-Ill., last week sent a letter to Elizabeth Warren, Obama’s advisor overseeing the creation of the Consumer Financial Protection Bureau, urging her to be aware of “big banks and card network giants” that might try to circumvent the new regulations by pushing consumers toward high-cost prepaid cards. “These products are often loaded with deceptive and abusive fees, and are frequently marketed to appeal to younger Americans who may not be wise to their dangers,” Durbin said.

Durbin did say that prepaid cards are not “inevitably harmful. If properly regulated, these cards show great potential for helping unbanked Americans who might otherwise rely on check-cashing operations. There are companies offering prepaid debit cards today that provide their customers with fair and transparent terms. The key is to strike the right regulatory balance…”

Durbin is a co-sponsor of a bill introduced just before Christmas by U.S. Sen. Robert Menendez, D-N.J., that would curb certain prepaid card fees and require greater disclosures by card providers.