On the last day of the 111th Congress, Senator Dick Durbin (D-Il) strongly defended the interchange fee reform provisions of Dodd-Frank Section 1075 against a growing chorus of concern and some criticism. Describing the current interchange system as a price-fixing scheme, the senator, who authored Section 1075, said that he is ``hunkered down and ready for the fight that is coming.’’ (Cong. Record, Dec. 22, 2010, S10995-10997).
Recently, Rep. Spencer Bachus (R-AL), incoming Chair of the Financial Services Committee, asked the Fed to proceed cautiously with the regulations under Section 1075 to allow Congress the opportunity to conduct its own review of the intent and impact of the changes. And thirteen US Senators, including leading members of the Banking Committee, have expressed concern with the consequences of replacing a market-based system for debit card acceptances with a government-controlled system pursuant to Section 1075.
According to Sen. Durbin, a Fed study revealed that it costs financial institutions between 7 and 12 cents to process a debit card transaction. But the Fed reported that large institutions and card networks charge merchants, retailers, charities, universities, and others an average debit interchange fee of 44 cents. The Fed has confirmed that consumers and retailers are being overcharged for each purchase made with a debit card. Merchants and their customers are being charged more than three times what the transactions cost.
The draft regulations under Section 1075 propose to cap the interchange fees at the largest financial institutions at 12 cents per transaction, give or take some conditions such as the prevention of fraud, which Dodd-Frank built into the law. With the 12-cent cap, the senator estimates a saving for businesses and consumers of about $10 billion in the first year.
Senator Durbin said that the interchange provisions rein in abusive fees by saying that if the large financial institutions are to let credit card networks fix fees on their behalf, the Federal Reserve should regulate those fees. The statute says that any debit interchange fee that is set by a card network and passed along to a large financial institution must be regulated by the Fed to ensure that the fee is reasonable and proportional to the actual cost of processing the transaction. That is the intent of Section 1075, explained the senator.
If a bank wants to charge its own fees to reflect the costs it bears, so be it since the Durbin Amendment does not regulate that so long as those fees are transparent and competitive. The result of Amendment, said the senator, is to squeeze the fat out of the interchange system. Banks will still be able to use interchange to pay for necessary
processing costs, but they won’t be able to use this interchange scheme to take excessive fees out of the pockets of merchants and their customers.
Section 1075 also says that if a financial institution takes steps to effectively reduce fraud in debit transactions it can get an increase in its interchange rate. The statute thus incentivizes financial institutions to reduce the amount of fraud that takes place. Section 1075 also says that credit card networks cannot require that their debit cards all use exclusively one debit network. Moreover, the Durbin provision states that card networks can no longer penalize merchants who try to offer certain discounts to consumers, like discounts for using debit instead of credit. This is a clear pro-consumer provision, emphasized the senator.
Responding to criticism that Section 1075 will hurt small banks and credit unions, Sen. Durbin pointed out that the provision ``bends over backward’’ to protect these small institutions. Nothing in Section 1075 enables merchants to discriminate against
cards issued by small banks and credit unions. Merchants are still required by contract to accept all cards regardless of the issuer. Further, Section 1075 exempts banks
with less than $10 billion in assets from interchange fee regulation. According to the senator, these small banks can continue to receive the same high interchange fees that they do today and they will actually receive higher fee rates than their larger competitors.