The political effort to derail the Durbin amendment has been driven by a cynical and false argument that small banks that are exempt from the regulation, nonetheless, will ultimately be forced to receive the lower regulated rates.
By now the many reasons why that argument cannot withstand scrutiny are well known and given its shoddy underpinnings it is not surprising that the Tester amendment failed recently.
But, even after Tester's demise we see the anti-Durbin forces straining to contrive any argument they can come up with that the small banks somehow, some way, will be hurt by the Durbin amendment. Their desperation is so great that we are now at the point that if there is a natural disaster anywhere in this country the banks will say it was caused by the Durbin amendment and that it will almost certainly negate the small issuer exemption.
The latest silliness was on display last week in American Banker's June 16 piece entitled "Visa, MasterCard Let Merchants Vet Card Costs, Should Small Banks Worry?" The article discusses services that Visa and MasterCard agreed to make available to help effectuate the consent decree with the antitrust division that the two dominant networks agreed to enter into to avoid another protracted lawsuit concerning the credit card market. The article speculates that these services might be used to target small bank debit cards after Durbin goes into effect.
By way of background, these services will supposedly enable merchants to send an electronic message out to Visa and MasterCard to determine whether a Visa or MasterCard credit card is a rewards card or is subject to some other credit card interchange classification that merchants might want to steer cardholders away from. Merchants that use these services will have to send out a message to the networks to confirm the credit card type and then complete the transaction with a second message to authorize the transaction, a cumbersome process that will cause unnecessary delays at the point-of-sale.
Acquirers and possibly even Visa and MasterCard may charge merchants for access to the card type information. And, significantly, because the consent decree concerns only credit cards, these services almost certainly will not apply to debit cards.
Given that these services are about credit cards, one might wonder what they have to do with Durbin or the small issuer exemption. And the answer to that question is simple: absolutely nothing.
Let's start with the argument that these services may be extended to debit. Indeed, the suggestion that such an extension is possible raises the obvious question as to why Visa and MasterCard would provide information to merchants that they are not required to do under the consent decree or any side agreement related to it. That is not how they operate and any suggestion to the contrary is groundless.
Having said that, let us assume that against all odds these services will be extended to debit cards. Even under that counterfactual they pose no threat to the small issuer exemption. And that is because these services will be virtually useless to merchants. In fact, given the way they are structured it is unlikely that merchants will have an economic rationale to utilize them. Merchants likely will not inefficiently send out two messages from the point-of-sale &mdash and make consumers cool their heels in the meantime — to find out card type information that should have been given to them with greater transparency in the first place. They also are unlikely to invest in technical changes to their systems that may be needed to use these services and then pay acquirer and possibly network fees for them.
Those costs, combined with the customer service issues associated with these products will render them a non-starter for the vast majority of merchants. As such, they are no threat to any issuer, credit or debit, large or small, and that is why Visa and MasterCard agreed to make them available in the first place.
The latest attempt to resurrect the viability of the small issuer exemption should bring us back to the core reasons why the banks arguments are demonstrably false. As everyone in the industry knows, merchants are required to accept all debit cards, regardless of the issuer, under the "honor all cards" rules that are in place at all of the debit networks.
And as is well known, most (if not all) of the debit networks intend to set two sets of rates, a higher rate for exempt banks and lower rates for covered issuers. Small issuers can choose the networks that they will connect to after Durbin goes into effect and thereby protect their interchange revenues going forward.
And, last but not least, why would a merchant reject a debit card from a small bank when the result of doing so almost certainly would be either a lost sale or a more expensive credit card transaction? After all, virtually no consumers carry two debit cards. The anti-Durbin propagandists don't have an answer to that question because there is none.
Against the backdrop of reports that the Board of Governors of the Federal Reserve will soon vote on the final regulations, the recent American Banker story on the topic, if anything, highlights the desperation that is setting in among the anti-Durbin forces. One can only hope that this silliness will end once the final regulations are implemented and the viability of the small issuer exemption is readily apparent.
Jeffrey I. Shinder is the managing partner in the New York office of Constantine Cannon LLP. He is lead counsel for the Merchants Payments Coalition before the Federal Reserve on the Durbin Amendment.