Friday, February 25, 2011

In Letter to Fed, Senate Banking Committee Democrats Question Dodd-Frank Interchange Fee Provisions

In a letter to the Fed, Senators Kay Hagan (D-NC) and Michael Bennet (D-CO) expressed concern that proposed regulations implementing the interchange fee provisions of Section 1075 of the Dodd-Frank Act might prevent small issuers from benefitting from the exemption set forth in the Act. They also asked the Board to adequately account for fraud prevention costs, which all issuers typically absorb, when determining the final rule. Section 1075 requires that the Fed issue by April 21, 2011 three final rules on interchange fees regarding a reasonable and proportional debit fee structure, fees for fraud prevention on debit transactions, and debit transaction network fees. There is a statutory exemption for small issuers under $10 billion in assets from the new debit fee rules.

The Senators noted that in recent congressional testimony both Fed Chair Ben Bernanke and FDIC Chair Shelia Bair similarly expressed concern about the efficacy of the interchange fee exemption. Chairman Bernanke said that it is possible that because merchants will reject more expensive cards from smaller institutions or because networks will not be willing to differentiate the interchange fee for issuers of different sizes the exemption may not be effective in the marketplace, which would mean that, in practice, community banks would not be exempt from the lower interchange fee.

The Senators noted that interchange fees offset the costs associated with debit transactions and enable smaller institutions to provide their customers with lower cost access to their checking accounts. If the Dodd-Frank limits on fees ultimately affects smaller institutions, feared the Senators, consumers may lose access to free checking or other important services that have become common in today’s marketplace.

While the Senators supported the Durbin Amendment to Dodd-Frank (codified as Sec. 1075) that created interchange reform, their support was conditioned on the understanding that the Act specifically exempted smaller institutions from its limits on interchange fees. They urged the Fed to work aggressively to ensure that the small issuer exemption is fully realized in the final rules. The Fed must create a practical and effective small issuer exemption that takes into account the interests of all stakeholders before the rules pertaining to Section 1075 are implemented.