June 20, 2011
WASHINGTON – The Federal Reserve Board should exercise its authority and make revisions to the proposed rule on debit card interchange to minimize harm posed to consumers, community lenders and the U.S. payments system, the American Bankers Association urged in a letter to Federal Reserve Chairman Ben Bernanke today.
In the letter, ABA President and CEO Frank Keating predicted that failing to make revisions to the rule will have dire consequences, including higher consumer costs for banking products, reductions in bank capital leading to reduced lending capacity, increased failures of community banks and many low-and-moderate-income customers being driven out of the banking system.
“This will result in irreversible harm to local communities and the banks that serve them,” Keating said.
The letter comes after the Tester-Corker amendment to delay implementation of the rule received 54 votes in the Senate on June 8.
“While short of the 60-vote procedural threshold reserved for many controversial issues,
it is clear that a majority of the world’s greatest deliberative body has sent a very strong message of concern over the approach taken by the Board in this rule,” Keating said.
Keating asked the Board to consider the cost of maintaining the debit interchange system, noting that the Board’s “narrow interpretation of the statutory language fails to consider a broad range of costs necessary to carry out individual transactions.”
“Such an interpretation excludes, among other elements, an appropriate allocation of fixed and overhead costs, as well as such elements as fraud losses, network fees applicable to individual transactions, and an appropriate allocation of customer service costs,” he said. “We strongly believe that such costs need to be included in any cost calculation under existing law.”
While the Board has acknowledged fraud prevention costs are specifically permitted to be included in any debit card interchange pricing plan under the statute, the proposal did not include any such adjustments.
“It is imperative that adequate allowances for fraud prevention costs be included in any determination of allowable debit costs under the rule – to both compensate institutions for such costs and incentivize investments in efforts that protect consumers, enhance security, and maintain market confidence in the payments system,” Keating said.
ABA’s letter also encouraged the Board to take action to minimize the harm incurred by community banks.
“A primary driver for harm has been the Board’s narrow reading of allowable costs, which will create market incentives to drive business away from community banks to lower-cost debit card providers,” Keating said. “Reducing such incentives through the expansion of allowable industry costs would greatly mitigate the potential harm to community banks and is clearly consistent with the statutory intent of the provisions.”
Keating also urged the Board to recognize the hardships of implementation and compliance associated with this complex rule, and to extend any compliance deadlines accordingly.
“The rule proposed by the board will have enormous impact on the existing payments system infrastructure which, if done in haste, could have sizeable negative impacts for individuals, consumers and our broader economy,” he said. “We urge the Board to use its existing authority to provide banks and payment networks with a reasonable chance to meet their obligations under the law. That period should be no less than the three-month window envisioned by the statute as enacted.”
For a full copy of Keating’s letter, please click here.
The American Bankers Association represents banks of all sizes and charters and is the voice for the nation’s $13 trillion banking industry and its two million employees. The majority of ABA’s members are banks with less than $165 million in assets. Learn more at aba.com.