Until the Federal Reserve Board is finished writing the rules governing interchange rates, it's hard to know what the ultimate impact of the so-called Durbin amendment will be on banks.

Nonetheless, of all the measures included in the sweeping financial reform legislation, this is the most ill-conceived.

Seemingly out of nowhere, Sen. Richard Durbin, an Illinois Democrat, included an amendment that would reduce the swipe fees merchants pay banks for debit card transactions. All too happy to kick banks when they were down, his Senate and House colleagues eagerly signed on-but not before exempting banks with less than $10 billion of assets, as well as government-issued and prepaid cards, from the new rules.

The legislation leaves it up to the Fed to determine a rate structure for debit purchases, but Congress dictated what expenses could be factored into the calculation, leaving the Fed little leeway.

It never should have come to this. The impact of the interchange amendment could be so seismic that, at the very least, Congress should have commissioned a study first.

Banks stand to lose billions of dollars in fee income if and when the new rates are put in place. Even those with less than $10 billion of assets could lose because some merchants could simply decide not to accept their cards if they have to pay higher interchange fees on them.

You have to wonder, too, if merchants behind the legislation aren't biting off their nose to spite their face. A report from Mercator Advisory Group predicts that a net effect of the legislation could be a migration toward alternate payment types, such as PayPal. That could mean less income for merchant processors, which might then pass on more of the cost of maintaining expensive systems to the merchants.

Moreover, if customers of smaller banks are forced to pay higher fees at the point of sale, they might just opt to use cash or checks instead, and numerous studies have shown that consumers spend more when paying with plastic. Finally, in an era when funds can be transferred electronically in an instant, counting cash and processing checks isn't all that efficient.

But it's consumers who could wind up taking the biggest hit. Lawmakers and merchants have been selling this as a pro-consumer measure, but if banks' fees from interchange go down and costs per transaction go up, then many banks will have little choice but to raise fees on deposit accounts. Already some large banks have said they are doing away with free checking in response to new overdraft rules and you can bet that, once interchange rules go into effect, more will follow.

Consider, too, the technological hurdles. It's one thing for a card reader to distinguish between debit and credit transactions, but isn't it quite another for it to compute the rate based on the asset size of the issuer? It seems to me that a major tech upgrade would be needed that someone-banks, card networks, merchants-would have to pay for, and it's reasonable to expect that those costs would eventually be passed on to the consumer.

Are these worst-case scenarios? Perhaps, but they are not out of the question, which is reason enough for regulators to take a step back and look at the ramifications of reduced interchange fees before taking action. Critics of regulatory reform might say that many of its provisions don't go far enough in reining in banks or protecting consumers. As is, this is one that goes way too far.


Alan Kline


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