President Obama recently began an effort to remove business regulations that impede growth and innovation. Before it is too late, he should reverse one regulation in particular that has not yet become final.
When the 111th Congress passed the Dodd-Frank financial reform bill, the legislation threatened to recast the U.S. debit marketplace. Now, the Federal Reserve's proposed rules for implementing the debit provisions of the law go too far. They create significant unintended consequences that will harm consumers and the economy, and they pose a direct threat to financial institutions of all sizes, even if those institutions were supposedly exempt from the regulation.
Even Rep. Barney Frank, D-Mass., is concerned. He never included debit interchange as part of his original draft legislation and is not convinced the consumer would ever see a benefit from the rules. Fortunately, he appears willing to work with those who are similarly concerned to make changes to avoid the significant unintended consequences.
Meanwhile, our industry has had no choice but to begin working diligently to address these unprecedented changes. At this point, given the extremely near-term implementation mandated by the statute, the most prudent course for the industry is to fight for the best possible outcome while preparing for the worst. Unfortunately, both paths are necessary, and the challenge is made more significant given the lack of clarity regarding the outcome.
To remain consistent with the statute Visa must prepare to do its part in accommodating the amendment's proposed infrastructure that enables a price-controlled rate for banks with assets of more than $10 billion and a market-based rate for smaller financial institutions. As we have consistently explained to the Federal Reserve and Congress, the system changes required to accomplish this are complex and expensive and will probably require changes throughout the payments marketplace, from the point of sale to even the smallest issuer.
This will take time to accomplish, certainly more than the three months contemplated by the law. Moreover, it gives no guarantee that small financial institutions will escape the impact of the interchange price caps on their larger competitors.
Visa is strongly opposed to the debit provisions, and we are working with the entire industry to help Congress and the Federal Reserve better understand their unintended consequences. The risks are clear and extraordinary.
To begin with, price fixing is bad public policy, with many bad outcomes that are difficult to predict. In this case, large banks will see the business case for their popular debit programs change dramatically. In fact, the lead authors of the bill — Sen. Chris Dodd, D-Conn., and Rep. Frank — have each suggested that the Federal Reserve is overreaching. And Frank says that the proposed rates are too low to cover the true costs of running debit programs.
Second, community banks and credit unions are not truly protected from the law, as was suggested last summer when the bill was passed.
To its credit, Congress recognized the importance of interchange revenue to smaller institutions and agreed to 'carve out' certain products, as well as institutions with less than $10 billion of assets. However, a contradictory "routing and exclusivity" requirement was added giving retailers — instead of cardholders — the ability to route transactions as they see fit. Though smaller institutions are theoretically exempt from the fee rules, market forces created by the law will drive volume toward lower rates, negating any benefit intended by the exemption.
Third, consumers will pay more and get less, despite the law's stated intent. The economics are simple. With a significant drop in revenue, banks will be unable to continue debit programs in their current form. Banks of all sizes have already started to acknowledge that they may be forced to raise consumer fees or reduce services offered as a result of this and other recent financial regulation. Even the Federal Reserve observes that consumers may face higher fees as a result of their proposals.
Any legislative action with an impact of this magnitude deserves serious deliberation. However, Congress never had the opportunity to deliberate; there were no hearings, no debate and no studies related to the debit provisions. We hope that, once members of Congress understand the true impact of the proposals, they will reexamine the law. At a minimum, implementation should be delayed so Congress can hear both sides in this debate. Also, joint federal agencies should do an objective assessment of the effects before the proposals are adopted. This is simple common sense. It is the way good laws are made.
Having spent my entire career working with financial institutions of all sizes, I can say that there are often issues on which large and small financial institutions disagree. But the industry is nearly unanimous in its concern over the debit provisions of Dodd-Frank, and with just cause.
Whatever the law's original intent, the proposed rules are likely to cause unintended outcomes that would be counterproductive for almost everyone concerned — consumers and large and small financial institutions alike.
