Choppy Waters Ahead for Interchange

October 1 marked the one-year anniversary of the Durbin Amendment’s limitation on the amount large financial institutions ($10 billion or greater in assets) can collect in interchange (24 cents) for debit card transactions. Government agencies and industry typically wait several years for an important regulation to sort itself out in the marketplace. But, there’s nothing typical about the Durbin Amendment and one really needs a scorecard to understand who’s on first and what’s on second.

This week, retailers and merchants argued in DC federal court that the Federal Reserve Board’s final rule implementing the Durbin Amendment completely missed Congressional intent. The Durbin Amendment instructed the FRB to set debit interchange rates at par with the cost of clearing an electronic check and that it be “reasonable and proportional” to cost of processing the transaction. The FRB initially proposed to the set the rate at seven cents. But, after a public comment period, the Board settled on 21 cents with an ad valorem and fraud adjustment (effectively 24 cents). Thus, the merchants and retailers want the Board to start anew. In the past, courts have been reluctant to take this type of action under the Administrative Procedures Act. It is difficult to predict when the court will issue a ruling. And, expect the losing party to appeal.

Meantime, in New York, retailers and merchants are throwing cold water on a $7.5 billion proposed settlement with Visa and MasterCard on credit card interchange. The proposed settlement was agreed to in July and must be blessed by a judge before taking effect. Even Senator Durbin took the Senate Floor to suggest the proposed settlement was a grand give-away to the Visa, MasterCard and the banks. The proposed settlement would allow merchants to “surcharge” customers using credit cards as well as temporarily reducing interchange rates. Durbin, the American Bankers Association and the Retail Industry Leaders Association all traded letters to excoriate one another. It’s getting both nasty and personal.

Back in Washington, retailers are boasting in the press that Congress is ready to take on credit card interchange reform. The financial services community isn’t so sure given the bruising battle over the original Durbin Amendment in 2010 and the effort to repeal it in 2011 (unsuccessful obviously). Will Congress ever touch credit card interchange? Check back with me after the November elections.

As long as Dick Durbin remains a US Senator and as long as debit and credit card interchange rates remain above zero, the financial services industry needs to be vigilant on Capitol Hill and the media about the value of  electronic funds transfer (safe, secure and fast). And, EFT networks require investments to maintain and grow. 

A Warning Against Durbin “Fatigue”

We hear it all the time at financial services meetings and conferences these days. “This is a Durbin-free meeting.” Or, “…We are all suffering from Durbin fatigue.” I have invoked these words from time to time.

It is true the financial services sector has been quite topsy-turvy since the debit card interchange amendment (aka The Durbin Amendment) was adopted during the Senate’s consideration of financial reform in 2010. The following is a brief timeline of events:

·       July 2010 – President Obama signed into law Dodd-Frank which included the Durbin interchange amendment

·       December 2010 – The Federal Reserve issued a proposed rule to implement the Durbin Amendment and sets the cap on interchange at 12 cents for issuers at $10 billion in assets or above

·       June 2011 – The Senate defeated an amendment by Sen. Jon Tester (D-MT) which sought to delay implementation of the Durbin Amendment

·       July 2011 – The Fed issued the final rule essentially doubling the interchange cap to 24 cents with an October 1 effective date

·       November 2011 – Merchants sued the Fed to overturn the final rule alleging a disregard of Congressional intent

On April 1, part two the Durbin Amendment took effect. Debit card issuers are required to offer routing across two unaffiliated networks, regardless of the authentication method. Financial institutions will also start shortly reporting first quarter financial results, so we’ll get a better snap shot of lost revenues associated with the Durbin Amendment. Banks have already reported fourth quarter results from 2011 and some estimates are a combined loss of interchange revenue of about $2.2 billion for those with more than $10 billion in assets.

Meantime, reports and press releases are flying around asking merchants where the savings are for consumers. I probably shouldn’t even start a discussion of Bank of America’s plan to charge its customers a $5 monthly fee for debit card usage.

Adding more fuel to the fire, the National Association of Convenience Stores (NACS) issued a report this week detailing how credit card interchange fees are hurting consumers at the gas pump. So, let’s get this straight. The retailers rallied Senate support to pass the Durbin Amendment. The retailers turn around and sue the Fed to overturn the Durbin Amendment. Now, the retailers are using high gas prices to rally support for limiting credit card interchange rates. What does it all mean?

I’m here to say that no one in the financial services industry can afford to suffer Durbin fatigue. The NACS study demonstrates the retail community’s unrelenting desire to end interchange as the industry knows it. And, if you sit around believing Congress will never touch credit card interchange, you do so at your peril.