Payments-industry players are vowing to begin lobbying members of Congress in hopes of blocking further progress of an interchange-regulation amendment to the financial-reform bill the Senate passed on May 13 that they believe would have devastating consequences.
The Senate voted 64 to 33 to approve the amendment Sen. Richard Durbin, D-Ill., proposed that would require the Federal Reserve to establish debit card interchange rates that are “reasonable and proportional” to their costs to issuers (
Durbin specified the rules would apply only to financial institutions with $10 billion or more in assets, exempting some 99% of smaller financial institutions, including credit unions. But smaller institutions oppose the amendment, saying it would put them at a disadvantage versus larger banks. “Durbin’s amendment means...unregulated community bank cards would become the most expensive cards for merchants to accept,” the Independent Community Bankers of America said in a statement.
The amendment’s passage clears the way for lawmakers to add the bill to the Restoring American Financial Stability Act, which many observers expect the Senate to pass next week. The bill then would move to the House, where payments-industry players hope further discussion will lead to removal of the interchange amendment.
“Thursday’s vote is another step in a lengthy legislative process,” Visa Inc. said in a statement. “We’re hopeful that when the issue is fully reviewed by members of Congress during the next phase of negotiations, they will conclude the amendment harms consumers, credit unions and community banks and should be eliminated from the bill.”
The American Bankers Association said it is “very troubled” by the development, noting the issue never was discussed in a formal Senate hearing. The amendment “completely upends the existing payment system, and retailers who benefit greatly from the system will pay almost nothing for the costs of maintaining and improving it.”
The National Retail Federation cheered the amendment’s passage and in a statement dubbed debit transactions “plastic checks” whose existing interchange rates average about 1% of the purchase, costing merchants about $10 billion annually. “This hurts retailers and merchants of all sizes, including doctors’ offices, restaurants and florists, and it causes all of our customers to pay more,” the organization noted in a statement. The federation represents the majority of U.S. retailers.
Stock market analysts are closely watching the legislation’s progress for its potential effects on banks’ and card networks’ revenues.
A Washington, D.C.-based analyst with the stock equity firm of Keefe, Bruyette & Woods, New York, speculated in a report there is a good chance the interchange-regulation amendment, which does not exist in the House version of the bill, will not survive the two bills’ reconciliation and final vote. House Financial Services Committee Chairman Barney Frank, D-Mass., has opposed interchange legislation in the past, analyst Brian Gardner noted. “We think it is likely that Mr. Frank will try and remove the Durbin language,” he said, noting “we are in a new era in DC politics concerning financial services,” so there is no certainty of the final outcome.
Although the amendment does not directly attack credit card interchange, the development is “a very bad precedent for future (interchange-regulation) discussions,” contends Sanjay Sakhrani, another Keefe, Bruyette analyst. One goal of the amendment is to “even out” the disparity between signature and PIN-debit rates, which might be cut by 25% to 50% if the existing amendment becomes law, the firm speculates.
“There is an issue for Visa and MasterCard in the event that, if interchange is lowered, it could cause large issuing banks to somewhat pull back on their investment in promoting the usage of cards, ... and that could indirectly affect profits for Visa and MasterCard,” Rod Bourgeois, an equity analyst with Sanford C. Bernstein of New York, tells PaymentsSource.
Indeed, debit transactions have grown at “fairly robust levels” over the past few years, surpassing credit in both volume and number of transactions, with Visa’s debit growth considerably outpacing MasterCard’s, notes Scott Strumello, an associate with Auriemma Consulting Group. “In that regard, Visa stands to lose more than MasterCard if there is pressure on earnings from debit transactions,” he says.
Industry players across the board reacted angrily to the amendment.
“This amendment is a wolf in sheep’s clothing, masquerading as a ‘consumer benefit’ when it’s really a sweetheart deal for retailers who will pocket the difference as their customers pay more,” the Electronic Payments Coalition, which represents the nation’s largest banks and payment networks, said in a statement. The amendment ultimately will cause the average person to pay more, “unless someone stands up for consumers and strips this amendment from the bill in conference.”
MasterCard Worldwide said the amendment “attempts to regulate the operation of debit card networks by shifting costs from big-box merchants to consumers.”
