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One of the arguments made against the Durbin restriction on interchange is that it will hurt community banks. Poppycock. Since Durbin explicitly excludes banks with assets under $10 billion from the restriction on interchange, it takes a hyperactive imagination to see how these banks could be hurt by it. Lobbyists have the requisite inventiveness.
March 3 -
The industry's campaign to alter or repeal a Dodd-Frank provision limiting interchange fees on debit cards has gained unexpected momentum.
February 25
"No dogs, bare feet or community bank debit cards allowed"?
The banking industry's campaign to delay or weaken forthcoming regulatory caps on interchange fees has conjured images of grocers and department stores shunning customers who attempt to pay for purchases with debit cards from their local bank.
But the so-called steering tactics many small-bank executives have suggested retailers will try, including pestering their customers to pay a different way and flat-out rejecting their debit cards, would likely be ineffective if merchants even try them, payments experts said.
"The risk of merchant steering is seriously exaggerated," said Aaron McPherson, a practice director with IDC Financial Insights in Framingham, Mass. "It's just a political tactic to try to extract concessions from the Fed."
The Federal Reserve Board in December proposed capping the fees that banks earn on debit card purchases to 12 cents per transaction; the current average is 44 cents. The caps, which stem from the Durbin amendment to the Dodd-Frank Act, exempt financial institutions that have assets of less than $10 billion.
The American Bankers Association, Independent Community Bankers of America, National Association of Federal Credit Unions and other groups have argued that the exemption for small institutions will be ineffective, in part because the Durbin amendment also gives merchants greater ability to offer discounts and other promotions to customers to use cheaper payment methods. The argument goes that if small banks' debit cards carry higher interchange rates than those of large banks, merchants will push the use of larger banks' cards.
"It is naive to believe that the Wal-Marts of the world won't drive business to the lowest-cost alternative," said Ken Clayton, a senior vice president and general counsel for card policy at the ABA.
But McPherson and other payments experts said they doubt that merchants will engage in the practices that Clayton and other industry officials have suggested. For starters, many of the practices would violate the card acceptance rules of Visa Inc. and MasterCard Inc., which prohibit merchants from adding extra fees for using certain issuers' cards or refusing outright to accept cards because of the issuer.
Even if merchants attempted to do these things, skeptics argue, the effects would likely be negligible because of customer backlash they would face.
"They're giving merchants entirely too much credit," McPherson said. "They're just not that sophisticated."
Opponents of the Durbin amendment say retailers might tack on surcharges to purchases customers make with small banks' debit cards and keep a list of small banks at their registers that cashiers can refer to when running transactions.
John Buckley, the president and chief executive of the $115 million-asset Gerber Federal Credit Union in Fremont, Mich., said he wouldn't put it past his local Wal-Mart to enter joint marketing agreements with large banks and keep a stack of applications to apply for accounts at those banks to encourage customers to migrate away from small institutions' cards.
"I definitely think it would be possible and would again hurt the small issuer," Buckley said. "If my member goes up to the local Wal-Mart and has $200 of groceries on a Saturday and is told that their Gerber card … is no longer good, they're not going to leave those groceries. They're going to make arrangements the next time to have some means of payment that will satisfy the local store."
Wal-Mart Stores Inc. did not respond to inquiries.
Ed Lawrence, a director at Auriemma Consulting Group in New York, said he does see the potential for small issuers to be affected by the interchange caps. With large banks' interchange fees expected to drop by as much as 85% under the Fed's proposal, it is likely that rates for small issuers will also face some pressure, he said.
Fed Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair raised concerns about the effectiveness of the small-issuer exemption in recent hearings on Capitol Hill, helping give more weight to opponents' arguments. However, Lawrence said he doubts merchants can effectively execute the steering tactics that banks so fear. Such tactics would rely on actions by the cashier that could disrupt sales.
"The highest turnover position at a merchant is probably the cash register operator," Lawrence said. "They're the least trained."
"It's just going to be a very, very difficult thing to manage and maintain and make sure there's a good customer experience at the point of sale," he added.
In a Feb. 22 letter to the Fed, Macy's Inc. dismissed banks' speculation about how merchants might discriminate against small issuers' cards.
"We are well aware that our customers expect quick and efficient experiences at the point of sale, and often will abandon a purchase if their initial method of tender is rejected," wrote Dennis Broderick, Macy's general counsel. "Retailers would risk alienating customers and losing business by refusing to accept or discouraging the use of some or all smaller issuers' debit cards."
Mallory Duncan, a senior vice president and general counsel for the National Retail Federation, said none of the arguments he has heard for how merchants might steer are credible because of Visa's and MasterCard's "honor all cards" rule. The rule states that if a merchant accepts one debit card from a particular payment network, such as Visa, it has to accept all cards branded with that payment network. "Reject one and ultimately risk the loss of your ability to accept any Visa [debit] products," Duncan said.
However, banking executives say protections such as the honor-all-cards rule have been weakened by language in the Durbin amendment requiring payment networks to allow merchants to offer discounts, rebates and other incentives to customers for paying with cheaper forms of payment. Language in the amendment states that merchants may not discriminate based on a card's issuer, but bank executives say that caveat will be ineffective because it lacks enforcement tools.
They also note that requiring consumers to spend a certain amount to pay with a credit or debit card is common among smaller merchants despite Visa and MasterCard rules that have long prohibited the practice. (The Durbin amendment lets merchants set a minimum of up to $10 for credit card transactions.)
"The Consumer Financial Protection Bureau isn't going to hire a whole bunch of people to go around and do audits on all retailers," said Anthony Davis, a managing director with Stifel, Nicolaus & Co. Inc. who follows midcap banks.
"I just don't think it's reasonable to expect that merchants in their own self-interest are simply going to give up that margin," Davis said. "I think the local Wal-Mart manager is going to have a list of banks … on the terminal that his employees can look at."
Steering already happens to some extent. Some merchants have set up their card-swipe machines to automatically prompt consumers to enter their personal identification number instead of sign a receipt to complete a transaction. (PIN debit transactions are less expensive for merchants because they carry lower interchange rates.)
Banks have cited such practices as evidence that Durbin will create a new wave of steering. McPherson said this argument is flawed. While merchants have access to point of sale systems that let them conduct PIN transactions, many have not purchased the technology, he said. Thirty to forty percent of merchants are equipped with PIN pads, according to various industry estimates.
