New Interchange Bill May Turn the Tide in Banking Industry's Favor

WASHINGTON — Banks appeared to be gaining the upper hand in their battle against retailers to delay pending interchange fee caps, but the fight was far from over.

Sens. Jon Tester, D-Mont., and Bob Corker, R-Tenn., unveiled revised language on Tuesday that would shorten the proposed delay to one year but give the Federal Reserve Board more power to raise its proposed 12-cent cap.

The new language was designed to help the two lawmakers win the necessary 60 votes to ensure passage of their bill, with a final Senate vote expected as early as Wednesday.

Observers said the banking industry's efforts were building momentum, though retailers were still working hard to oppose the bill.

"There seems to be confidence that this will compel the Fed to go back to the drawing board and come back with a standard for reasonable and proportional debit fees … that will allow the industry and particularly small bankers to remain in the debit card space," said Charles Gabriel, managing director at Capital Alpha Partners LLC. "This is a seemingly successful implementation of a plan that the community bankers and card industry have had for some time."

The Tester-Corker bill would modify a section of the Dodd-Frank Act, authored by Sen. Richard Durbin, D-Ill., that requires the central bank to ensure debit swipe fees are "reasonable and proportional" with the cost of processing a payment.

The Fed issued a proposal in December that would institute a 12 cent cap per transaction. A final rule is expected before July 21, when it is supposed to go into effect.

Although the proposal theoretically exempts institutions with less than $10 billion of assets from the cap, the industry and regulators have argued that two-tiered pricing is hard to achieve, and small banks will effectively be covered under the limit as well. Fed Chairman Ben Bernanke has warned the Durbin provision could even cause some small banks to fail.

Tester initially sought a two-year delay while forcing regulators to study the issue, eventually dropping it to 15 months.

But under the new language, Tester and Corker were seeking only a one year delay, while giving the Fed more leeway to raise the proposed cap. Under the Durbin provision, the Fed can only consider costs directly tied to processing a payment when setting a fee cap. The Tester-Corker language, however, would require consideration of "fixed and incremental" costs associated with the transaction, allowing the cap to be higher.

The Durbin provision, Corker said, "would be like saying to a pizza company … that the only thing they can charge for is the dough.

"They couldn't charge for anything else that went into the cost of the product that was being sold," he said.

The new bill, which the two senators are trying to add to broader economic-development legislation, would suspend the Fed's pending rulemaking.

It would require the central bank, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency to produce a study with six months of enactment on the impact of regulating debit fees. Regulators would have to determine the effectiveness of the exemption for small banks, as well as examine if the rules will adversely affect debit card consumers.

If the Fed and at least one other agency determine the exemption doesn't work, consumers will be harmed, or that fixed and incremental costs are not properly accounted for, the central bank would have to rewrite the proposal within 6 months. If regulators do not make any such determination, the rule would move forward as is.

The Fed would also have to review if the exemption for small issuers is working two years after implementation, and report to Congress on recommendations if it is harming banks.

In a floor speech Tuesday, Tester said while "everybody thought" the exemption for small banks would work, regulators claimed otherwise.

"The amendment I'm going to offer, which is a bipartisan amendment, will help so we don't further consolidate the financial industry," he said.

Later, Tester added, "At the end of this entire process, there is still a regulated market for debit interchange fees. That's what the Senate voted for last year loudly and clearly."

But champions of the fee cap, including Durbin, said the language offered by Corker and Tester was not sufficient.

"Some members have called it a compromise. It's not a compromise," Durbin said. "A compromise suggests both sides came together and agreed on something. There has not been any input from the retailers, small businesses and consumers across America. The only compromise is among the big banks and the bigger banks."

Still, the new plan may potentially bring Tester and the banking industry to the 60-vote threshold.

"This really is a play to cement the support of the community bankers and thus woo several key influential swing votes belonging to Senators who support them, including" Sens. Michael Crapo, R-Idaho, Michael Bennet , D-Colo., and Kay Hagan, D-N.C. "among others," said Gabriel. "This proposal is really designed to secure their support. It is hoped that each of them might bring a handful of additional fence-sitting supporters."

Lawmakers and industry observers have said the vote could be very contentious, with members uneasy about having to choose between merchants and community banks.

"If whatever has gone on behind the scenes has proven successful, there is a pretty good chance that we're going to be over 60 without too much drama," said an industry lobbyist, who spoke on the condition of anonymity.

Ken Clayton, senior vice president and chief counsel for the American Bankers Association, said Tester is very close to victory.

"There's never been a question that there is a majority in the Senate that would like to revisit" the interchange issue, but "it's just a question of whether they can get to the 60 votes they would need for a supermajority," he said.

Still, a road to victory for banks is not clear-cut. Some lawmakers are still thought to be sitting on the fence, and Durbin holds the powerful position as the Senate's majority whip.

"We give Tester credit for trying to focus his amendment on small banks and on finding a way for merchants to be able to declare victory by having the banks accept the concept of Federal Reserve regulation of debit interchange," Jaret Seiberg, an analyst with MF Global Inc.'s Washington Research Group, said in a research note Tuesday morning. "Yet we still see the odds as only 40% of passage of changes to the Durbin amendment, though our bias is now that the odds will improve rather than get worse."

But merchants groups are hoping banks overplayed their hand in calling for a widening of the factors the Fed can consider in limiting fees.

"It may be worse than just repealing the Durbin amendment. … This is a gift to the banks," said Douglas Kantor, a counsel to the Merchants Payments Coalition. "If they want to spend money indiscriminately … they're going to implement a legal requirement that the Fed must include that in the cost of debit interchange.

"If senators believe this is watering down of Tester, they may act one way. If they actually read it and understand that it's a giveaway to the banks, it will lose him support and at the end of the day they will be in worse shape than before."

In a press release, Sandy Kennedy, the president of the Retail Industry Leaders Association, agreed.

"While proponents try to cast this amendment as a 'compromise,' it is just the opposite," Kennedy said. "The Tester/Corker Amendment is a remarkable giveaway to big banks and credit card companies at the expense of merchants and consumers, pure and simple."