Article

Durbin Amendment final rule increases swipe-fee cap

The NRA and others have expressed disappointment with the last minute interchange cap fee increase, accusing the Fed of succumbing to the banks' and card issuers' demands.

July 10, 2011 by Kim Williams — Reporter, NetWorld Alliance

The U.S. Federal Reserve last Wednesday issued its final ruling on debit card interchange fees, a component of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Durbin Amendment. Reactions from both retailers and card issuers have been mixed, but one thing can be agreed upon: the Fed has managed to upset both parties.

Slated to take effect on July 21, the original proposal limited banks with more than $10 billion in assets to a 12-cent fee cap charged to merchants per debit card transaction. The Fed's final rule applies an interchange fee cap of 21 cents per transaction, along with five basis points to be multiplied by the value of the transaction. Issuers can also receive an additional 1-cent per transaction toward the costs of fraud prevention.

“Instructed by Congress to regulate debit interchange, the Fed eventually crafted a final proposal that leaves all stakeholders feeling like they didn’t win, which — in the Fed’s assessment — probably represents the most ‘fair’ compromise possible to this heated and lengthy controversy,” said Sam M. Ditzion, CEO of Boston-based ATM industry advisory firm Tremont Capital Group. “The new structure is highly technical and only time will tell who — if anyone — actually ‘wins’ and who loses under the new system.”

The National Restaurant Association expressed disappointment with the last minute interchange cap fee increase, accusing the Fed of succumbing to the banks' and card issuers' demands. The date for implementation also changed from July 21 to Oct. 1.

“The Federal Reserve appears to have caved to lobbying by the big banks and debit-card companies and ignored the spirit of last year’s Durbin Amendment, which was aimed at fixing a broken U.S. debit-fee market and bringing fairness to merchants and consumers who have no control over rising swipe fees,” said Scott DeFife, executive vice president of Policy and Government Affairs for the NRA.

After years of complaints from the National Restaurant Association – a leading member of the Merchants Payments Coalition – and other merchant groups about uncontrollable and rising interchange fees for their members, Congress passed the Durbin Amendment in 2010 to give the Federal Reserve the power to regulate interchange fees for debit cards. The Durbin Amendment was included in the Dodd-Frank financial services reform bill Congress passed last year.

“We are disappointed that the final fee cap rose as much as it did from the Fed’s proposed rule,” DeFife said. “While the Fed’s rule acknowledges that the card companies’ practices have resulted in a broken market, and while the new cap will ensure that card companies cannot continue to arbitrarily increase debit interchange rates, this rule will not provide businesses and consumers with the savings they deserve under the law.”

By capping fees, the regulation will provide many restaurants with some financial relief; however, the relief is not nearly as significant as what the NRA and its allies in the merchant community had hoped.

Mallory Duncan, senior vice president and general counsel for the National Retail Federation, said that bearing in mind that debit card payment is a substitute for checks and checks pass at face value, the Fed was charged with balancing that against the actual costs for authorization, collection and settlement. Therefore, the Feds should have come up with a reasonable and proportional solution as indicated in the original proposal of a 7-cent to 12-cent cap on interchange fees, which still struck the NRF as high because, Duncan said, the cost was calculated at 4 cents.

"That's a 75 to 200 percent overage for the banks. That struck us as not quite keeping with the statute but not wildly outside of it," Duncan said. "Then when the final rule came out, it was several hundred percent over. There were no new laws or legal interpretation that came out in the meantime; they simply crammed extra money into it for the benefit of the banks and to the detriment of consumers and merchants."

Passing on the savings?

The Fed's final rule also prohibits issuers and networks from restricting the number of networks over which a debit card transaction can be processed.

Under the old system, the highest priced network would get the most transactions; however, the Dodd-Frank will now allow merchant payment processing systems to pick the cheaper network for conducting debit-based payments, said Henry Helgeson, co-CEO of Merchant Warehouse. (Read also, Swipe-fee reform to change PIN debit transactions.)

“When you swipe a debit card, people have the option of using their PIN or using it as a credit card. What the banks would do would pick the most expensive (transaction processor) because that was the most profitable for them,” Helgeson said. “Now what this bill does, is says every debit card has to have at least two (partner processors) so the merchant can pick which network they want. And, of course, they will pick the lowest one.”

In theory, this would introduce competition by giving merchants a choice in networks, thus providing a savings to the merchant that would be passed on to the customer.

"I think it was clear from the discussions during the Q&A after the final rule was delivered that the Fed was skeptical that merchants would pass along any savings to their customers. There has just been little to no evidence of that and I think, in their remarks, they made that clear," said Kurt Helwig, president and CEO of the Electronic Funds Transfer Association.

Helwig said he keeps going back to a quote from Home Depot's chief financial officer during a conference call in regard to the retailer’s fourth quarter profits. The company estimated that the Fed's interchange proposal could translate into an additional $35 million per year profit. 

"I thought all the savings were going to be passed on to the consumer? That statement tells me that wasn't going to be the case, as many people suspected all along. So, this cap cuts it in half, and that means $17 million to his bottom line. That's not a bad place to be. I know a lot of companies who would be happy to go to their board of directors and investors with that," Helwig said.

In April, New York-based JPMorgan Chase cited the Durbin Amendment in a letter to its customers as the reason it could no longer issue debit rewards cards. Similar to the Credit Card Act of 2009 and the overdraft protection laws that led to, among other things, the reducing of credit, Helwig proposes that this Amendment, while well-intentioned, will also further marginalize the underbanked consumer.

"So, if there's no savings from the merchants because they aren't passing it along to the consumer, and the issuers are going to look for ways to recover the lost revenue, then it seems to me the consumer is getting squeezed," Helwig said.

Additional reporting by Valerie Killifer.