Community banks and credit unions have raised valid concerns that the Durbin amendment is harmful to their ability to provide important services to their customers and members.
The amendment would give the Federal Reserve authority to set prices for debit interchange, which is the small fee banks receive to help offset the risk and cost of services they provide. Doing so could potentially make it unprofitable for these banks to continue providing debit cards, which consumers use to responsibly manage their finances.
However, a potentially more damaging and unreported consequence of the amendment would be the chilling effect it would have on the prepaid cards used by the U.S. Treasury Department and many state treasurers to efficiently and conveniently disburse government assistance to an estimated 7 million Americans.
In their zeal to pay less while continuing to receive all the benefits associated with credit, debit and prepaid card acceptance, the Big Box merchants driving the price-fixing agenda would hamstring the ability of the federal government and all 50 states to do away with their costly check-writing functions in favor of electronic payments.
That's because debit interchange on prepaid cards effectively allows the government to save taxpayers money by putting disbursements from unemployment insurance and child support to social security and disability payments onto prepaid cards instead of checks with no cost, or a very low cost. A government-imposed price cap on debit and prepaid interchange would force government agencies to either seek the lost revenue from taxpayers or drastically curtail these cost-saving programs that are also much more convenient for recipients.
These programs can save the government money. Instead of having responsibility for the printing, mailing, customer service, fraud and tracking of millions of checks, a prepaid card program now allows the government to delegate those tasks to financial institutions, which assume these responsibilities on behalf of the public sector.
A year ago the Treasury announced an all-electronic payment strategy. By transitioning from paper checks to direct deposit and prepaid debit cards, the agency said taxpayers would save "hundreds of millions of dollars." Already, the Treasury's Direct Express prepaid debit MasterCard program disburses benefits to more than 1 million opt-in Social Security and Supplemental Security Income recipients. A 2009 survey found more than 95% of recipients are satisfied with the card, citing safety, convenience and access to their funds as the primary drivers. In the era of paper checks, too many recipients relied on costly check-cashing services.
Tasked with providing a meaningful and secure beneficiary service while also controlling costs to develop such a system, federal and state agencies responsible for disbursing government assistance have recognized the intrinsic value prepaid card programs have over paper checks.
With prepaid debit cards, branded MasterCard or Visa, and issued by traditional financial institutions, the public sector can now provide an enhanced level of service while dramatically reducing their own operational costs. That's because the financial institutions do this at no cost to the taxpayer and always at very low cost to zero cost to the consumer.
But unfortunately, the move from paper to plastic is threatened by the Durbin amendment. With a government-imposed cap on debit and prepaid interchange, it will simply be impossible for federal and state agencies to continue to offer assistance on prepaid cards with no or little cost.
At that point, federal and state agencies will have to make a decision: rely more heavily on taxpayers to fund prepaid card programs or return to check-based disbursements.
Neither option is ideal, but unfortunately, that's exactly the position the government will find itself in if merchants intent on capping debit and prepaid interchange are successful.
Hopefully before the financial regulatory reform bill makes its way to President Obama's desk reason will prevail and the amendment, so hastily added at the last minute, will be recognized as harmful to government programs and taxpayers, and will be stripped from the final bill.