WASHINGTON — The banking industry is mounting an assault on multiple fronts to weaken, stall or repeal the restrictions on debit interchange fees championed by Sen. Dick Durbin in the Dodd-Frank Act before the policy goes into effect this summer.
Although they face an uphill battle, bank lobbyists continue to argue that the provision, which requires that the fees merchants pay banks for using the card networks be reasonable and proportional, is draconian.
While they failed to keep the provision out of the regulatory reform bill last year, the lobbyists are hoping a new Congress could revisit the issue. They are also simultaneously pressing the Federal Reserve Board to soften its December proposal, which suggested capping fees at 12 cents, which would slash debit interchange profits.
"The banks are running a campaign to kill it," said Ed Mierzwinski, the consumer program director for the U.S. Public Interest Research Group. "They are lobbying everybody. I've seen a lot of surprising members criticizing the rule. But I think again, Sen. Durbin is strongly in favor of his provision."
Durbin, who remains in the majority in the Senate as the second-most senior Democrat, has shown no signs of backing down. In an impassioned speech on the Senate floor last month, just before lawmakers adjourned for the year, he pledged to counter the industry's effort to roll back his interchange fee limit.
"At this point, I am hunkered down and ready for the fight that is coming," Durbin said. "The biggest banks and credit card companies are going to do their best to influence the Federal Reserve to raise this interchange fee as high as possible, but we know what the reasonable costs are. We know these credit card companies and the big banks have been overcharging for years."
Durbin also has added ammunition after Visa Inc. announced it would offer a two-tiered interchange rate schedule for large and small banks.
Under the law, small banks are exempted from the Fed's regulation. But the banking industry has argued that in order to compete with large institutions, they will effectively have to follow the central bank's guidelines.
Durbin said the Visa announcement proves that is not true.
"Visa's recent announcement confirms what I have consistently argued: that small banks and credit unions will not be hurt by this regulation and will in fact see benefits from it," Durbin wrote in a letter this month to banking and credit union groups in his home state of Illinois. "As the Federal Reserve moves toward final implementation of the new interchange law in July, I urge you to share with your Illinois members information about the benefits of interchange reform for small issuers."
But lawmakers from both sides of the political aisle are raising concerns about the Durbin amendment and the Fed plan. House Financial Services Committee Chairman Spencer Bachus; Rep. Barney Frank, the panel's lead Democrat; and more than a dozen senators, including Claire McCaskill and Tom Carper, have all voiced objections. Frank told Bloomberg News on Thursday he would consider working with Republicans on a fix to the issue.
Sen. Tim Johnson, who is expected to chair the Senate Banking Committee, also voted against adding the Durbin amendment to the Dodd-Frank bill.
In an interview Thursday, Rep. Randy Neugebauer, R-Tex., said that he is concerned that the interchange provision forces the government to artificially establish price controls.
"We gave unprecedented power to the Fed to set prices," he said. "I mean this is America, markets are supposed to set the prices. So I'm very concerned that the Fed has either over-interpreted or the legislation was too prescriptive and we are hearing that in many cases already that if this moves forward it has real consequences for the consumers of financial products."
It remains unclear if legislation can move, but many in the industry are hoping it will. In the meantime, they are also pushing the Fed to back down.
"We think Congress needs to revisit it," said Ken Clayton, a senior vice president and head of card policy at the American Bankers Association. "We think it really is a problem. But in the meantime the Fed really needs to go back to the drawing board and put together a more workable solution based on the authority it's granted."
Specifically, Clayton says the Fed's proposal does not allow banks to account for fraud costs in determining their interchange rates. He said it was encouraging that some Fed officials said when the proposal came out that they would listen carefully to industry feedback.
"It's unclear to us where the Fed is going to go," Clayton said. "We strongly urge them to revisit the way they've approached this rule, because the end result will be a dramatic reduction in revenue that we use to make loans at lower costs."
He and other industry representatives say the Fed has more leeway than it lets on.
"The fact that they have no fraud element in their proposal and agitated that they'll get to it at a later time makes no sense," Clayton said. "You can't take out what is a significant part of the cost structure of interchange — that is, the need to fight fraud, prevent it and deal with losses. … In addition to that, what's reasonable? What's proportional? All of these things are definable by the Fed."
Neugebauer, the chair of the House Financial Services oversight subcommittee, said he, too, questions whether the Fed has more flexibility.
"What we are trying to do now is get a handle on how the Fed came to its conclusion and do they have the flexibility to address this or do they need some additional flexibility?" Neugebauer said.
Oliver Ireland, a partner with Morrison & Foerster LLP, said he was surprised the Fed was so rigid with its interpretation of the statute. That the central bank acknowledged it did not know how its plan would affect consumers says something about its logic, he said.
"I don't know how people are going to respond to this," Ireland, a former Fed lawyer, said. "If they don't charge the cardholder the entire amount, then what do they do? They charge people who don't use debit cards for the debit card transactions … so the solution is to trade it for people who use cash and checks to cross subsidize on the bank side? What kind of regulatory wisdom is that? This is quite frankly the worst thing I've ever seen. And I've been looking at regulatory developments since 1974."
But Ireland was dour on the prospects for successfully lobbying the Hill to repeal or ameliorate the Durbin debit provision. Merchants groups won a major coup with strong bipartisan support for the passage of the Durbin provision in the Senate and could seek to add interchange fee restrictions to credit cards should Congress reopen the issue.
"Broadly speaking, the results for the banking industry on the Hill recently haven't been very good. So, if you are going to think about that route, you might not get what you want," Ireland said. "That's pretty simple. In fact you might get something worse than where you started out."
Banks are also pressing a third area of attack: the courts. TCF Financial Corp. filed a lawsuit on Oct. 15 contesting the Durbin amendment on grounds it is unconstitutional. The first hearing on the case is scheduled for April, but the court's ruling could affect the fate of interchange fees if the court rules in TCF's favor.
"People are going to explore every option. I think they are going to explore litigation, Hill options and try to get the Fed to change its mind," Ireland said.
The head of TCF said Thursday that he believed growing public opposition to the Durbin amendment would help the bank's case. (See
Richard Hunt, the president and chief executive of the Consumer Bankers Association, said the courts could ultimately play a major role in deciding the fate of interchange fee regulations.
"I believe at the end of the day this will all be settled in the courts, and that could be years from now," Hunt said.
In the meantime, he said his group is focusing on trying to convince members of Congress that the provision could be harmful to consumers.
He pointed to a prediction by Jamie Dimon, the CEO of JPMorgan Chase & Co., on an earnings call last week that the interchange regulation could wind up pushing 5% of bank customers out of the banking system.
"We are continuing to talk to members of Congress about the effects this will have on consumers," Hunt said. "It's a mathematical certainty consumers are the big losers of this process. I think the Jamie Dimon comment on Friday has sent shock waves that will draw attention to the fact that we are drawing people away from the banking industry, which is the last thing we need to be doing in this economy."
Jason Kratovil, a lobbyist for the Independent Community Bankers of America, said his group will also press the case.
"The message that our bankers are screaming is that this absolutely cannot continue forward," he said. "This cannot stand. They see this as so detrimental to one of the most fundamental products that roughly 98% of them provide to their customers. They just tell me, we have to do something to nip this thing, whether it is repeal, delay it, whatever, everything has to stop."
For their part, retailers said they have no plans to let that happen.
"The Congress has told the banks in no uncertain terms that they are doing something wrong by charging these fees, and the banks' response to that is, 'If we can't do this, we are going to do something else that's wrong for consumers that harms consumers,'" said Craig Shearman, the vice president of government affairs for the National Retail Federation. "To say that cracking down on interchange fees is going to lead to higher consumer fees and shouldn't be done is like saying we shouldn't crack down on robbing liquor stores because we'll go rob gas stations instead. It's just a totally unacceptable response."
