Push to Delay Interchange Cap Gaining Steam in Congress, But Is It Enough?

WASHINGTON — Just a month ago, most analysts dismissed the banking industry's chances of persuading Congress to delay, alter or repeal a Dodd-Frank provision limiting interchange fees on debit cards.

But the industry's campaign has gained unexpected traction after two top regulators testified recently that the provision will hurt community banks without providing much benefit to consumers.

Questions remain, however, over whether that has given enough of a boost to get something passed through Congress.

"There is no question that momentum is building within the House and Senate Banking committees and it is likely you are going to see some legislation introduced to try to address some of these issues," said Joe Engelhard, a senior vice president with Capital Alpha Partners. "There is more of a recognition now in the key committees that there are some problems with the current language. Still, we don't really know where that is going to go."

So far, the industry's best chance is likely a delay in implementation of the provision. Under Dodd-Frank, the Federal Reserve Board is required by April to finalize a rule implementing the interchange cap.

But lawmakers on both sides of the aisle have sounded open to delaying the rule so its impact could be studied. Members in both chambers may move as soon as this week to introduce bills that would delay the provision for two years to study the issue, according to sources.

Sen. Jon Tester, D-Mont., is widely rumored to be considering such legislation, but a spokeswoman would not discuss the issue.

Similarly, Rep. Shelley Moore Capito, the chairman of the Financial Services Committee's financial institutions subcommittee, is expected to take a lead in pursuing such a bill.

But bankers still face a potentially insurmountable obstacle in the Senate: Sen. Richard Durbin, who authored the provision in Dodd-Frank after fighting for years for some kind of interchange limits. The Illinois Democrat has repeatedly vowed to fight any attempt to readdress the issue in legislation.

"We expect the Fed to issue its final rules regarding the new interchange law in April," a Durbin spokesman said last week. "The law is clear and will ensure that small businesses and consumers are treated fairly by the big banks and card giants. Legislative attempts to change the law are nothing more than attempts by the losing team to replay last season's game."

Although the banking industry always opposed the Durbin provision, its most effective argument since its passage has been about what kind of impact it will have on small banks. In theory, banks with less than $10 billion of assets are exempted from the measure, which requires the Fed to set a cap on debit interchange rates (the central bank proposed a 12-cent limit in December).

In practice, however, the banking industry has argued that small banks would be forced to lower their interchange fees or face potential rejection of their cards by retailers. That argument got a huge boost earlier this month after Fed Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair said the provision could have such an impact.

But bankers are rapidly running out of time to delay the provision before its April deadline. Although rulemaking deadlines can easily slip, Fed Gov. Sarah Boom Raskin said Feb. 17 that the central bank's hands were tied unless Congress acted first.

"By April 21, we would need to have final rules in place," she said.

Industry observers said that is a short deadline to expect lawmakers to act.

"There is a narrow time frame for floor time and a whole lot of questions," said Mark Oesterle, a counsel with Reed Smith and former chief counsel to Sen. Richard Shelby, the Banking Committee's top Republican. "You have to address all these things quickly with a provision that can garner significant bipartisan support, including from members from both sides of the aisle who were on the other side of the issue previously."

Banks are also facing off against retailers that helped persuade the Senate to vote 64 to 33 last year to include the Durbin provision in the regulatory reform bill.

To win, banks would have to convince at least a few senators that previously voted for the Durbin amendment to change their mind.

"The basic point is that even if all the Republicans and all of the replacements for members who are no longer in the Senate, vote with the banks, that still isn't enough," said Jaret Seiberg, an analyst with MF Global Inc.'s Washington Research Group. "You need to get Democrats who voted for Durbin to vote for a delay in order to get something enacted into law."

While Seiberg said he gives the industry a 25% chance of success, the testimony from Bernanke and Bair and new bipartisan support for a delay, he said, "means they are in the ballgame."

But just passing a narrow bill directed at this issue may prove tricky. Any legislation that reopens Dodd-Frank is likely to become a magnet for rewriting other controversial provisions, including the creation of the Consumer Financial Protection Bureau and new derivatives regulations. Banks, too, do not really want just a delay in the interchange provision, but would much prefer for it to be scrapped altogether.

"In order to be successful, it would probably require putting together a discreet package, getting bipartisan support and avoiding a larger debate on all of Dodd-Frank," Oesterle said. "It is probably one of those votes that will be up in the air up until the very end. It will be very close, because there are strong constituencies on both sides of this issue."

Consumer advocates who have backed the merchants say the bankers' criticisms are exaggerated and their effort to delay is really a dressed-up strategy to eventually gut it. "They want to kill the Durbin amendment, not modify it," said Ed Mierzwinski, the consumer program director with the U.S. Public Interest Research Group. "What will Congress do? I honestly don't know."

Banking lobbyists say they are more optimistic now than they were previously, but acknowledge they have a tough challenge ahead. "I think you are going to see movement to delay implementation," said Richard Hunt, president and chief executive of the Consumer Bankers Association. "It's uphill — there's no question."

But some analysts said they remain dubious that a change in law is attainable.

"It's a real long shot," said Doug Elliott, a fellow at the Brookings Institution. "It's hard enough to get something through Congress. Changing something that was just done the previous year is a lot harder. … It's not out of the question, but I would be surprised if it were delayed two years. There could be something done around the edges as a compromise."