Kahr Stirs the Pot, Brings ICBA to a Boil

By arguing that the Durbin interchange amendment's exemption for small banks can only help them, Andrew Kahr's recent column riled lobbyists and bankers who have been pressing Congress to repeal or weaken the rule.

The most succinct reaction came by e-mail from Camden Fine, the president and chief executive of the Independent Community Bankers of America. He used one word to describe Kahr's piece, and it wasn't "poppycock."

Fine later elaborated: "Community banks will be hammered and driven out of the debit card business if the interchange proposed rules go unchanged. And consumers will be the big losers."

Kahr was not taking a normative policy position on the Durbin rule; the famously unsentimental consultant has made a career out of discovering ways to make money in the face of regulation.

But that didn't stop the Merchants Payments Coalition from quickly putting out a press release that used quotes from his article as ammunition against a possible rollback of Durbin.

"Today's piece reinforces a message that has long been circulating about the big banks' scare tactics," the merchant group said. "Mr. Kahr refutes banking industry claims that merchants will reject small-bank debit cards, that networks will not support two-tier interchange systems, and that small banks will be hurt by debit card discounting."

Nearly all of the comments that readers posted to BankThink took ICBA's side. They generally reiterated the arguments made on AmericanBanker.com by Fine ["Debit Exemption for Small Banks Won't Work," Feb. 22] and Visa chief executive officer Joseph W. Saunders ["Proposed Debit Rules Would Harm All," Feb. 1].

"dbwilkinson" started the thread by saying, "The exemption is meaningless to the small banks. Our rates have to be competitive with the big banks, so reducing this fee income (which covers our operational and fraud costs) will have a huge negative impact on us and other small banks. Inevitably we will have to make this up by charging our customers for services that were free in the past. So the merchants will increase their profits, and the consumers will pay more for their checking accounts. This is just another unintended consequence of regulations written by folks who don't understand the business of banking."

A response to Kahr from "hileman1" was similar: "The exemption will not insulate smaller banks from adjusting fees to compete with larger banks. Fee income at smaller banks will need to be offset in some form by additional fees on other products and services. Regulatory and compliance burdens will not be less going forward which will make it difficult to make up the shortfall on the expense side."

"jlhalldc" saw a basic flaw in the two-tiered system: "As much as Congress would like to, it can't overturn the law of economics. Two separate prices for the same product is not sustainable."

Yet another commenter simply quoted Rep. Ed Royce, R. Calif.: " 'To ensure that small institutions are truly exempt, to ensure that fraud costs are truly accounted for, we have got to slow the process, study the issue and get this right in legislation. … If we fail to do that, then the debit network is going to be weaker and small institutions are going to be at a disadvantage.' "

"j.doe" was the first reader (and, as of Friday afternoon, one of only two) to agree with Kahr. "So far, this story seems to make sense," this person wrote.

Seeking to engage the earlier commenters, the lone Kahr supporter asked hileman1: "If different interchange rates are transparent to the acct holder and tolerated by the merchant (as the above article contends), why would small banks need a 'competitive' interchange rate? What's to compete over? Also, why would small banks give up a competitive ADVANTAGE over large banks (interchange revenue invisible to consumers allows lower fees elsewhere that the consumer will notice)?"

And to the commenter who criticized two-tiered pricing, j.doe wrote: "doesn't different pricing for the same product happen all the time, for instance with volume pricing?"

If you want to respond to these questions, or have another point to make on this contentious and important topic, join the conversation by clicking here.