Durbin Continues to Set the Record Straight on Interchange Fees
Banking Groups Continue Pattern of Misleading Statements, Scare Tactics on Effects of New Law
[WASHINGTON, D.C.] – Assistant Senate Majority Leader Dick Durbin (D-IL) sent a letter to the American Bankers Association today, a week after it penned a letter to its membership and to members of Congress which continued the banking industry’s practice of misleading, distorting, and using scare tactics when discussing the new interchange law. The Durbin-authored law directed the Federal Reserve to establish standards to ensure that debit interchange fees are “reasonable and proportional” to the real cost of processing a debit card transaction. This law was created by a bipartisan amendment Durbin included in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Final regulations will be released in April.
“Your February 8 letter reiterating your opposition to reform of the debit interchange fee system makes a number of claims that are off base,” Durbin wrote. “You say that ‘The Durbin amendment…directs the Federal Reserve to set price controls on debit card interchange transactions.’ This is incorrect. You say that my amendment will provide ‘no real benefit to the consumer.’ However, my amendment was supported by consumer groups and millions of individual consumers who signed petitions in support of swipe fee reform. And you say that the Fed’s proposed rule ‘will cause severe harm’ to community banks despite the exemption for small banks and credit unions. Neutral observers disagree. After years of considering the issue, Congress has now recognized that interchange reform is necessary and has passed a reform law that should be given time to work.”
Durbin’s letter also responded to misleading claims made by the banking industry about fraud costs in the debit system, rising consumer fees, and Congressional oversight.
Durbin’s letter also comes days before a Congressional panel is set to hold a hearing on the interchange law. Thursday’s hearing before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit will mark the eighth Congressional hearing on interchange fees in recent years.
More information about Durbin’s interchange law can be found here. A copy of today’s letter can be found below and is attached.
February 14, 2011
The American Bankers Association
1120 Connecticut Avenue, NW
Washington, DC 20036
To the American Bankers Association:
Your February 8 letter reiterating your opposition to reform of the debit interchange fee system makes a number of claims that are off base. I will respond to those claims below.
1. You say that “The Durbin amendment…directs the Federal Reserve to set price controls on debit card interchange transactions.” This is incorrect. The amendment directs the Fed to place reasonable constraints on the interchange price-fixing that your member banks currently permit Visa and MasterCard to perform on their behalf.
For years card networks like Visa have fixed the interchange fee rates that each issuing bank receives when one of their debit cards is swiped. As Visa admitted in a November 8, 2010, letter to the Fed, “issuers do not in practice set interchange transaction fees; rather, these fees are set by networks.” In other words, each bank that issues Visa cards receives exactly the same network-established fee no matter how efficiently or inefficiently that bank processes transactions or prevents fraud.
It’s easy to see why banks and card networks set up this interchange scheme. It is lucrative for the banks, who receive tens of billions per year in high fees that are not tempered by competitive market forces. It benefits card networks, because they are paid each time a card is swiped and high interchange means banks will issue more cards. But the system is unfair to consumers, who pay tens of billions per year in fees passed on to them in the form of higher retail prices. And it is unfair to merchants, who cannot negotiate interchange fees and who can no longer refuse to accept the dominant card networks.
Many merchants argue that interchange fees should be prohibited in the debit system as they are in the checking system. My amendment conceded that a network should be allowed to set an interchange rate that uniformly compensates issuers for the minimum costs necessary to authorize, clear and settle a debit transaction over that network’s wires. But issuers should be incentivized to manage other costs of operating a debit card system efficiently. The old unregulated system encouraged networks to set rates at levels that subsidize inefficiency and that massively overcompensate banks at the expense of merchants and their customers. The new law corrects these incentives through reasonable regulation.
2. You say that my amendment will provide “no real benefit to the consumer.” However, my amendment was supported by consumer groups and millions of individual consumers who signed petitions in support of swipe fee reform. Transparency, competition and choice are good for consumers, and the current interchange system is designed specifically to avoid those features. Other nations that have regulated interchange fees have seen significant consumer benefits, and the same will be true here. Note also that the Fed met last October 13 with consumer groups, and according to the Fed’s public summary of that meeting the groups said they would prefer that debit interchange fees be either de minimis or zero.
3. You say that the Fed’s proposed rule “will cause severe harm” to community banks despite the exemption for small banks and credit unions. Neutral observers disagree. On February 4, an article in the American Banker titled “Durbin Amendment Winners and Losers” said that “[d]espite fear that has run rampant through under-$10-billion banks, we think they are winners” under the Durbin Amendment. A January 7 American Banker article titled “Visa Plans Two-Tiered Interchange Rates After Fed Rules” said the following about Visa’s announcement that it would implement different interchange rate schedules for large and small banks: “[a]nalysts say the move will put community banks and credit unions at an advantage over larger institutions.”
You also argue in your letter that “marketplace pressures will force all banks to conform to the artificially lower government mandated rate restrictions to which large banks will be subject.” But of course banks do not set their own interchange rates-- networks set them, and networks have a clear financial incentive to keep interchange rates high for small banks.
The argument that merchants will discriminate against small bank debit cards that carry higher interchange fees is flawed for three reasons: (1) merchants are subject to severe contractual penalties if they refuse to honor all cards within a network; (2) merchants do not want to lose sales by telling customers to put their debit cards away; and (3) if merchants wanted to discriminate against cards that carry higher interchange fees, they could always easily do so by discriminating against rewards cards or corporate cards- but they do not.
4. You claim that the “vast amount” of fraud and fraud prevention costs are borne by the banking system. This statement is misleading. As the Fed pointed out in its draft rule, fraud rates are far lower for PIN debit than for signature debit transactions, but banks urge their customers to pay with signature debit since networks give higher interchange rates for signature than for PIN. (See the April 21, 2010, American Banker article “Counterintuitive Pitch for Higher-Fee Debit Category” on JP Morgan Chase’s efforts to urge cardholders to stop using PIN.) When fraud occurs on signature debit transactions, the Fed reports that 45 percent of those fraud losses are charged back to merchants.
In contrast to the current system in which all banks receive the same interchange fee rate regardless of how much fraud they allow and in which networks give banks higher interchange for fraud-prone signature debit than for PIN, my amendment will incentivize banks to reduce fraud by allowing higher interchange for those banks that take successful fraud prevention steps.
5. You argue that if the Federal Reserve’s rule is not stopped, banks may raise other fees. Even a quick glance at past headlines reveals that banks were raising consumer fees years before Dodd-Frank was enacted last July. I would note the November 12, 2008, Wall Street Journal article “Banks Boost Customer Fees to Record Highs”; the May 28, 2009, USA Today article “Banks Find Ways To Boost Fees; Checking Accounts Latest Target”; and the November 19, 2009, SmartMoney article “Checking Account Fees Are Making a Comeback.” Banks may have changed their justifications over the years for why they raise consumer fees -- from the financial crisis to loan losses to overdraft regulations to interchange reform-- but they have consistently increased consumer fees as far as the market will allow. Reasonable regulation is needed to ensure competitive markets for the fees banks take from consumers as well as for the fees they take from merchants.
6. You claim that there were no Congressional hearings or informed consideration of this interchange reform proposal. Actually, interchange fees have been the focus of two GAO reports and at least seven hearings in the past five years, including hearings before (1) the House Committee on Energy and Commerce, Subcommittee on Commerce, Trade and Consumer Protection, February 15, 2006; (2) the Senate Judiciary Committee, July 19, 2006; (3) the House Judiciary Committee Antitrust Task Force, July 19, 2007; (4) the House Judiciary Committee Antitrust Task Force, May 15, 2008; (5) the House Financial Services Committee, October 8, 2009; (6) the House Judiciary Committee, April 28, 2010; and (7) the Senate Appropriations Committee, Subcommittee on Financial Services and General Government, June 16, 2010.
7. You urge Congress to move immediately to stop the Fed from implementing the interchange rule that Congress directed them to implement. While it seems strange that you are urging this action before the Fed has even crafted its final rule, I am aware that your association has always fiercely opposed interchange reform efforts dating back to the Durbin-Bond reform legislation of 2008. However, after years of considering the issue, Congress has now recognized that interchange reform is necessary and has passed a reform law that should be given time to work. I will vigorously oppose efforts to block the implementation of this needed reform.
Thank you for the opportunity to set the record straight on these issues.
Sincerely,
Richard J. Durbin
United States Senator