WASHINGTON — Acting Comptroller of the Currency John Walsh warned Tuesday that a Federal Reserve Board proposal to limit debit interchange fees could hurt banks of all sizes.
In a comment letter sent to the Fed, Walsh raised several concerns about the plan, which was required by the Dodd-Frank Act, suggesting the central bank had gone too far.
"We believe the proposal takes an unnecessarily narrow approach to recovery of costs that would be allowable under the law and that are recognized and indisputably part of conducting a debit card business," wrote Walsh. "This has long-term safety and soundness consequences — for banks of all sizes — that are not compelled by the statute."
Under Dodd-Frank, the Fed is required to ensure debit interchange fees are "reasonable and proportional." The Fed issued a proposal in December to limit such fees to 12 cents, arguing that would cover all of an institution's costs for setting up and using a debit system.
But Walsh — echoing bank arguments — said that the Fed went too far in its plan, arguing the central bank had flexibility to consider alternative methods to allow debit card issuers an ability to recover certain costs from a debit card business.
"The statute directs the Board to set 'standards for assessing' whether a fee is reasonable and proportional to the cost incurred by the issuer with respect to the transaction; it does not say that the Board should set the allowable fee," wrote Walsh.
The OCC said the Fed could also consider "non-authorization, clearance and settlement costs that are specific to a particular electronic debit transaction."
Walsh also warned about the hit banks would take to fee revenue as a result of the plan.
The Fed's proposal offered two options that involve setting specific fees per transaction. Under one option, there would be an issuer-specific interchange fee with a safe harbor initially set at 7 cents per transaction and a cap set at 12 cents per transaction. A second option would place a 12 cent cap on transactions applicable to all covered issuers.
The Fed has estimated that setting such specific fee caps would result in a 70% reduction of interchange revenue, according to the OCC.
"The impact of a revenue reduction of this magnitude has not been studied, but it is clear that it will change how financial institutions, both large and small, will do business, with obvious negative impacts on their ability to recover their costs of operation and unpredictable collateral consequences for their customers," wrote Walsh.
The OCC urged the Fed to give further consideration to the costs that should be taken into account in calculating the allowable rate.
Lastly, the agency expressed concern about adoption of an alternative that would allow issuers to recover costs for major technological innovations.
Doing so, the OCC argued would "make the board the gatekeeper for determining which innovations are significant enough to be eligible for the adjustment. Moreover, adopting the second alternative could discourage issuers from engaging in incremental improvements to existing fraud prevention technologies."
There has been growing momentum by lawmakers, bankers, community banks, and credit unions to slow down the process and consider the rule further before the Fed is required to implement the new rule in April. Sen. Jon Tester, D-Mont., is widely expected to introduce a bill soon that would delay implementation of the Fed rule for two years. But Sen. Dick Durbin, the author of the interchange provision in the Dodd-Frank bill, has said he will oppose any such attempt.
The OCC is the third bank regulator to raise concerns with the plan. Fed Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair have expressed reservations over the rule and its potential impact on small banks.
While banks with less than $10 billion of assets are ostensibly exempted from the pending rule, regulators have suggested that smaller banks may still be hurt.
"It may not be the case that, in practice, they are exempt, but I don't know for sure," Bernanke said. "Of course, one way to address it is, if Congress wants to, would be to require the networks to differentiate."
Bair has echoed a similar sentiment saying adoption of a two-tiered system would ensure community banks are truly exempt.
Community banks have raised concerns about the provision since the start, arguing that, if large banks must limit their fees, merchants may refuse to accept debit cards issued by smaller institutions if they do not follow suit. Both Bernanke and Bair acknowledged such a situation is possible unless the card networks agree to a two-tiered rate system that prevents merchants from taking such action.
