Congress Won't Halt Debit Rules

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WASHINGTON-A bruising lobbying effort waged by credit unions and banks failed last week to convince Congress to delay enactment of the Durbin amendment that will result in major cuts in debit fees over the coming months.

A majority of the Senate-which added the debit amendment to last year's Wall Street reform bill-voted for the delay, but the effort did not attract the 60 votes necessary under Senate rules. The vote was 54-to-45 in favor of the delay.

Last week's action clears the way for the Federal Reserve, which issued a draft rule in December, to pass a final rule, expected as early as its June 20 board meeting, in time for a July 21 implementation date set out in the Wall Street bill. The Fed's original proposal would cut the fees on debit transactions from the current 44 cents average to around 12 cents, but most observers expect a final Fed rule to make much smaller cuts.

The credit union lobby, which teamed with the banks and credit card companies in the initiative, immediately turned its focus to trying to help shape a final rule being drafted by the Fed and to developing a two-tiered system that will assess the lower fees mandated for card issuers over $10 billion and all other issuers that are exempt from the rule.

"The two-tiered system is on its way to implementation," CUNA President Bill Cheney said after last week's Senate vote. Cheney said CUNA has been working with Visa, which has pledged to implement a two-tiered system, and plans to work with MasterCard, which has been waiting to see what the Senate does before committing to a two-tiered system, to ensure that a system setting the Fed's mandated fees for card issuers over $10 billion is separated from fees the card networks collect for those under $10 billion. He was optimistic that Senators who voted against delaying the rule were legitimate in pledging to work to see that the two-tiered system works. "We're going to hold the senators to their word to making a two-tiered system work," he added.

The credit union lobby was also holding out hope that the courts, where the Fed's rulemaking is currently being challenged by Minnesota's TCF Bank, could also provide some relief. NAFCU President Fred Becker said he expects legal challenges even after the Fed approves a final rule.

Either way, a congressional effort to delay the rule is dead, both credit union leaders agreed. "Credit unions will have to come up with a Plan B to mitigate the consequences," said NAFCU's Becker.

The fight over the debit rule broke out into one of the biggest lobbying battles in recent years on Capitol Hill, pitting credit unions and banks against their traditional business partners, the nation's merchants, who will gain from the debit fee cuts. The merchants, in convincing Congress to approve the debit rule last year assert that debit fees-which have soared to more than $20 billion a year-are unfair because they are set by the credit union and bank-controlled credit card networks Visa and MasterCard on a take-it or leave-it basis. They say they will pass on any savings in debit fees to customers-a position that had unanimous support from consumer groups, who lobbied on their behalf.

The credit unions and banks say they are receiving fair payment for the convenience of a timely payments method that they and their card networks developed and that merchants have adequate options to participating in the card networks. The credit unions and banks also insisted that the exemption for smaller institutions from the debit cuts will not work because it will give the biggest issuers who are required to lower their fees a competitive advantage, thus forcing them to lower their fees as well.

A massive and expensive battle surrounded last week's vote, with the Electronic Payments Coalition, backed by credit unions, banks, Visa and MasterCard, and their counterparts at the Merchants Payments Coalition, spending millions of dollars on ads throughout the country touting their positions leading up to last week's vote.

During last week's Senate debate, Illinois Democrat Richard Durbin, the sponsor of the debit rule that bears his name, insisted the battle over debit fees is a fight pitting Main Street merchants against Wall Streets banks-which earn the vast majority of debit fees. In fact, Durbin said just three banks-JP Morgan Chase, Wells Fargo and Bank of America-earn half of all debit fees. He said the largest banks were "fighting viciously" to block the Fed rule because they have the most to lose.

A Republican colleague, Michael Enzi of Wyoming, agreed, saying as a small retailer in his home state he was never able to negotiate debit fees with banks and now it is time the banks are compelled to sit down and talk with the millions of merchants who accept their debit cards. "Banks and credit unions must come to the table with merchants to come to some middle ground," said Enzi.

But Montana Democrat Jon Tester, who led the effort to delay the rule, denied the Wall Street versus Main Street battle, saying small rural lenders, like credit unions and community banks, will lose significant income, even though they are specifically exempt from the debit cuts under the Durbin amendment. Tester said credit unions and banks will be forced to lower their fees in order to have their cards compete with the lowing-charging debit cards issued by the big banks.

"The Main Street banks and the credit unions-the small guys who had nothing to do with the financial crisis-can't survive on a 75% cut in that revenue," said Tester. "These are the banks in Montana. These are the folks I want to make sure have a fair shake."

Tennessee Republican Corker, who co-sponsored the delay effort with Tester, said the Durbin amendment represented an effort to "punish" the Wall Street banks for their actions related to the financial crisis. Corker noted even if the regulators change the parameters of the debit fee cuts the supporters will still get what they want-a regulated debit card market. He urged his colleagues to vote for a one-year delay in designing a new rule and an unlimited time period afterward for implementing it.

North Carolina Democrat Kay Hagan supported the delay because she said it will give regulators time to develop a more effective exemption for the smaller institutions, those under the $10 billion threshold in the Durbin amendment.

At the center of the debate is the Fed's proposal, issued in December for public comment, to cut rates on debit fees to as little as 12 cents per transaction, from the current 44 cents average. While credit unions and banks insist the Fed's proposal would be below their costs, none has disclosed their costs publicly. But a recent study by NCUA shows that it costs credit unions over $1 billion in assets an average of just two cents per debit transaction for which they earn 45 cents. The NCUA study also shows big profit margins for credit unions all the way down to $50 million in assets.

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