MIAMI BEACH, Fla. — If certain conspiracy theories have any merit, the Federal Reserve Board might be heeding signals from Capitol Hill as it takes more time to finalize debit interchange rules, one payment industry analyst said.
Legal experts said it remains unclear whether legislative efforts to effect a two-year delay in implementing the regulations will succeed, but there are plenty of theories about why the Fed in April postponed issuing the final version to go into effect in July.
The Fed only wanted to "get it right" when Fed Chairman Ben Bernanke in March told Congress the board needed more time to review public comments, a payments industry law expert and partner with Robins, Kaplan, Miller & Ciresi LLC in Minneapolis, K. Craig Wildfang, said in a presentation at Card Forum & Expo here last week. The conference is sponsored by SourceMedia Inc., which publishes American Banker.
"I don't think the Fed is thinking seriously of any dramatic change in the rule that's proposed," he said.
But Katherine Robinson, an antitrust law expert and counsel with O'Melveny & Myers LLP in San Francisco, said public comments on the proposed rule have "raised many questions" and seem to suggest that "the Fed realizes [debit interchange regulation] is a bigger issue than we thought from the beginning."
Adam Frisch, senior analyst with Morgan Stanley, said that according to "some pretty interesting conspiracy theories out there," the Fed asked for a delay in issuing final rules to heed signals from politicians about whether it should make substantive changes.
Opinion was mixed about TCF Financial Corp.'s chances of succeeding in its lawsuit that seeks to block implementation of the Durbin amendment on the basis of its denying the bank its constitutional right to recoup the costs of providing debit services. Whether or not TCF prevails, Frisch predicted that once the Fed's rules are implemented, many large banks will initiate their own lawsuits against the federal government.
"Banks and networks are going to come out and say that the Fed is setting prices for a competing network, the biggest payment network, at a level that's below cost," he said. The Fed operates one of the nation's two automated clearing house networks, which enable banks to clear transactions at relatively low cost through a system that competes with the card networks.
"At some point, banks could say to merchants that debit transactions will require a fee to clear, or that settlement dates might get pushed out, or that merchants may have to pay more now" to get other debit services, he said. "This is a very, very delicate ecosystem that has taken years and years to build, and when [regulators] go in and take out one piece, everything gets redefined."
Wildfang said that it is "incongruous" to assume that opening up competition among banks in the debit market would force interchange to go down, and that "cash and checks have always been cheaper than cards" for merchants to accept, which could play a role in rebalancing the debit market.
But checks and cash are not necessarily less expensive for merchants to accept, Robinson said. "Checks clear at par, but merchants actually pay third parties to do the fraud services … and the costs are not so transparent."
Also debatable is whether merchants will pocket the savings from lower debit fees or pass them on to consumers. "There is no empirical evidence that merchants have passed those savings on to consumers in Australia," whose central bank mandated debit and credit interchange rate cuts several years ago, Robinson said, adding "there is evidence that banks increased [consumer] fees. There are always two sides to this."
