Fed Questions Viability Of Two-Tiered Interchange System
WASHINGTON – Federal Reserve Chairman Ben Bernanke expressed doubt this morning on the workability of exemptions for credit unions and small banks from the debit interchange price controls required under the Dodd-Frank Financial Reform Act.
Bernanke raised concerns about how the exemption for institutions under $10 billion will be enacted, noting that the market is likely to drive more transactions to lower-priced debit cards mandated for the institutions over $10 billion. “We are not certain how effective that exemption will be,” said the Fed Chairman during testimony before the Senate Banking Committee. “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, it is possible that the exemption will not be effective in the marketplace.”
Credit unions and community banks have argued that the exemption will force merchants to discriminate against their higher-fee cards, which will force the smaller institutions to charge the same, lower fee as large banks. Bernanke acknowledged that possibility this morning, saying "it's possible merchant will reject cards from smaller banks."
Proposed rules unveiled by the Fed in December would limit fees for the biggest banks to seven to 12 cents per transaction, a 73% percent drop from the current 44-cent average.
The stakes are huge for credit unions which earned an estimated $2.6 billion last year–well more than half of all their net income–from debit card interchange. Interchange for credit unions from debit transactions now exceeds by far all revenues earned on credit card transactions.
Bernanke’s comments came the same time as the House Financial Services Committee was holding a hearing on implementation of the debit card provision, known as the Durbin amendment because it was sponsored by Illinois Sen. Richard Durbin. A credit union representative, Frank Michael, president of Allied CU of Stockton, Calif., was scheduled to testify, along with Sarah Raskin, one of the Fed’s seven Governors, and representatives from the banks, Visa and the merchants groups.