Debit Card Swipe Fee Rules Get Pummeled by Banks
Business + Economy

Debit Card Swipe Fee Rules Get Pummeled by Banks

Getty Images

While  the public is focused on the high-profile debate over spending cuts and the debt ceiling, one of the year’s  fiercest  lobbying battles is raging on Capitol Hill with huge economic implications for consumers and industry.

It’s a fight between two politically powerful economic interests, the banking and retail industries, in which billions of dollars worth of  debit card fees now going to financial institutions are at stake. The outcome could affect the prices consumers pay at the retail checkout counter or the charges they face at their local bank branch.  

“It is one of the most active lobbying efforts I have ever seen,” observed Senate Majority Whip Richard Durbin, D-Ill., who touched off the major legislative  dustup with an amendment – designed to force cuts in the debit card fees –that was  attached to last year’s landmark Dodd-Frank banking reform legislation.

As the champion of the retailers, Durbin in recent weeks has regularly  held the floor of the Senate  in an effort to rebut the arguments of the banking industry and prevent its allies  from gutting his amendment before it takes effect in late July. Meanwhile, the two sides are spending millions of dollars on lobbying, TV advertising, travel and networking in a bruising battle to prevail on Capitol Hill.

Durbin, the Senate’s No. 2 Democrat and leading liberal, is facing off against a relatively unknown  conservative  Democratic freshman senator, Jon Tester of Montana. Tester is pushing  a bill strongly supported by the banking industry to delay the amendment's effective date for two years pending further study.

“People think we’re delaying this to kill it. They’re absolutely, unequivocally wrong and I’ve told them that,” Tester told The Fiscal Times. “I’m not saying the debit process is perfect. But if we do a study, we’ll be able to find out what’s going on the debit card issue and try to figure out how to fix it.”

Such contentions, however, are dismissed by retail industry lobbyists. “The big banks claim they want a study, but the truth is that they want to kill reform,” declared Mallory Duncan, general counsel for the National Retail Federation, the largest  organization representing retail stores, businesses and chain restaurants.

As a showdown approaches, both sides have increased their lobbying firepower.  Five former members of Congress – notably former House Majority Leader Richard Gephardt, D-Mo.,-– have registered to lobby on the issue on behalf of the banks as well as MasterCard and Visa, the dominant electronic networks over which debit card transactions are processed.

Retail Swipe Fees--Who Ultimately Pays?

Retailers pay so-called “interchange” or “swipe” fees to a financial institution each time a customer uses a debit card for a purchase--not exactly small change, since debit card use has increased nearly fivefold over the past decade.  According to the Federal Reserve, debit card fees yielded more than $16 billion in revenue for financial industry in 2009.

Swipe fees currently average about 44 cents per transaction. Proposed regulations issued by the Fed late last year, following passage of the Durbin amendment, would slice those fees paid to financial institutions by about 70 percent.  A proposed 12-cent cap on each transaction would translate into a $12 billion annual savings for the retail industry, which has vowed to use those savings to reduce  prices for consumers. But this pledge has been met with expressions of incredulity and derision by the banking industry, which is currently running a TV ad in the Washington, D.C. market  mocking the move as a “$12 billion pay day” to “giant retailers”—not to mention a $12 billion loss for the banking industry.

The debate is heating up and becoming nasty:  Jamie Dimon, the shoot-from-the-hip CEO of JP Morgan Chase, one of the nation’s largest banks, last month called the Durbin amendment “downright idiotic.”

Durbin fired back with a letter pointedly noting Chase’s $17.4 billion in profits last year and Dimon’s own $20.8 million compensation package in 2010. “There is no need for you to threaten your customers with higher fees when you and your bank are already making money hand-over-fist,” Durbin told Dimon. Durbin was referring to recent letter from Chase to its debit card customers, saying that the bank would do away with a debit cards rewards program on July 19 -- two days before the regulations mandated by the Durbin amendment are slated to take effect.

Small as well as large financial institutions are warning that consumers could face future limits on debit card usage – along with higher ATM fees and an end to free checking accounts -- if a large chunk of the revenue now generated by debit cards disappears under the new law.

“I think it’s very safe to say that our bankers are keeping all options on the table,” said Jason Kratovil, a vice president of the Independent Community Bankers Associations, which represents about 5,000 of the country’s smaller financial institutions.

Durbin’s amendment was drafted to exempt financial institutions with assets of less than $10 billion from the proposed 12-cent cap on debit card fees. This leaves just 100 of the largest banks and a handful of credit unions covered by the amendment’s language. Included are three large banks – Chase, Bank of America and Wells Fargo – that currently account for 50 percent of all debit card transactions, according to the California-based Nilson Report.

The smaller institutions have nonetheless become a central part of the debate, as they have charged that the exemption contained in the Durbin’s amendment – involving a two-tiered electronic network for debit card transactions – is not workable. While Durbin has repeatedly disputed the banks’ contentions, they received a renewed boost late last week from Federal Reserve Chairman Ben Bernanke at a Senate Banking Committee hearing.

“It’s going to affect the revenues of the small [debit card] issuers and it could result in some smaller banks being less profitable or even failing,” Bernanke said of the Durbin amendment. He added, “There are market forces that would work against the exemption.” 

Kratovil told The Fiscal Times: “Where I think Sen. Durbin’s arguments break down is his assumption that two-tiers automatically means 12 cents for big banks and market-based rates for small banks. You’ve got the big banks being asked to grossly subsidize their smaller competitors, all 14,000 them. Do you really think they’re going to do that willingly for a long time? No?”

Such arguments have given the banking forces some momentum in recent months, even though the Durbin amendment passed the Senate a year ago by a nearly 2-1 margin. Tester believes he now has a Senate majority --“55-57 votes, somewhere in that neck of the woods” ready to support a delay in the debit card fee cut. But it still leaves him short of the 60 vote super-majority needed to cut off a potential filibuster or a “must pass” legislative vehicle on which to tack it on.

Meanwhile, Durbin appears both confident that he can head off a potential delay and ready to use any procedural tools at his disposal. “I urge my colleagues not to fall for this game the banks and card companies are playing,” he declared in a recent floor speech.

Related Links:
Financial Pacs Invest in Influential Freshmen (TFT) 
Financial Reform Reneges on Too Big to Fail (TFT) 
Banks' Swipe Fight (New York Post)