Cite Reservations Expressed by Chairmen Bernanke and Bair
February 22, 2011 – An unprecedented coalition of every major U.S. bank and credit union trade association today strongly urged the Federal Reserve to fundamentally revise its proposed rule on debit card interchange fees. The associations joined together to submit a comprehensive comment letter to the Fed detailing serious flaws in the proposed rule, which is designed to implement the Interchange Amendment to the Dodd-Frank financial regulatory reform legislation. If adopted, the rule would impose government price controls on fees, reducing current market levels by up to 80 percent. While the proposed rule will benefit the nation’s largest retailers with billions of dollars annually in windfall profits, these costs will come at tremendous expense to consumers, community banks and credit unions.
The Federal Reserve’s proposed rule imposes a fixed cap on interchange fees that it admits will prevent banks and credit unions from recovering even the basic costs of providing debit card services. In their letter, the trade associations urge the Federal Reserve to revise its rules and allow issuers to receive fees that, as specified by the Interchange Amendment, are reasonable and proportional to the issuers’ actual costs with respect to debit card transactions. The trade associations have asked the Federal Reserve to follow its mandate from Congress to carefully consider the impact of any price regulation on consumers, financial institutions and the U.S. payments system as a whole.
At a hearing held by the Senate Banking Committee last Thursday, both Sheila Bair, Chairman of the Federal Deposit Insurance Corporation (FDIC), and Ben Bernanke, Chairman of the Federal Reserve Board, expressed serious reservations about the rule.
“The full policy ramifications – who’s paying for what, who’s going to pay more and who’s going to pay less under this – is something that maybe wasn’t dealt with as thoroughly as it might have been,” said Bair.
The rule will have a particularly harmful impact on the nation’s smallest financial institutions despite a so-called “exemption” for credit unions and banks with less than $10 billion in assets.
“We are not certain how effective that exemption will be,” said Bernanke at the recent Senate hearing. “It is possible that merchants will reject more expensive cards from smaller institutions because networks will not be willing to differentiate the interchange fee for issuers of different sizes. It is possible that the exemption will not be effective in the marketplace.”
Importantly, every single trade association representing smaller issuers believes that such an exemption is unlikely to work.
Debit cards provide an inexpensive, convenient and effective payment mechanism for consumers who do not qualify for credit cards and often act as an entry point into the banking system for lower income Americans. Debit cards also provide fraud protection to both consumers and merchants, and lower merchants’ processing costs. The debit card system’s efficiency and dependability have helped make debit cards the primary payment choice for millions of Americans and thousands of merchants who are rapidly beginning to reject the use of paper checks. During 2009 alone, debit cards constituted 35 percent of all non-cash transactions, compared to only 20 percent for credit cards and 22 percent for checks. The infrastructure for debit cards, which has been developed at a great cost by banks and credit unions, functions effectively and efficiently, all supported by interchange fees.
The Federal Reserve’s proposed rule compounds the problem of the Interchange Amendment by reading it in a narrow and unreasonable manner, imposing a one-size-fits-all cap on interchange fees. As the Federal Reserve has recently acknowledged in its brief filed in the TCF National Bank v. Bernanke case, a cap is not required by the statute. The proposed rule would force banks and credit unions to take a loss on each and every debit card transaction, thus raising serious concerns about unreasonable government confiscation under the U.S. Constitution and causing hardship to thousands of small banks and credit unions that rely on interchange fees for a substantial portion of revenue.
Through higher fees to own and use debit cards, fewer benefits and less convenience, America’s consumers will foot the bill for giant retailers – the primary beneficiary of this rule for which they lobbied for nearly a decade. With 81 percent of all debit transactions going through only 1.5 percent of the largest retailers, it is estimated that big-box stores will enjoy a $12 billion annual windfall should this rule be implemented as proposed.
A copy of the associations’ comment letter is available here.
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