June 21, 2010
The compromise exempts federal, state and local government program debit and prepaid cards from interchange regulation, provided that after a two-year grace period the prepaid cardholding beneficiaries are not charged any overdraft fees or fees for the first monthly in-network ATM withdrawal.
The compromise provides that the Fed cannot regulate network fees (i.e., the fees that Visa and MasterCard charge and that accrue to themselves) except to ensure that the fees are not used to circumvent interchange fee regulation. These changes are a different way of accomplishing the same goal of protecting consumers from loopholes which would allow banks to raise fees to cover any loss in interchange revenue.
The compromise exempts these cards from interchange regulation, provided that after a two-year grace period the issuing bank must not charge cardholders any overdraft fees or fees for the first monthly in-network ATM withdrawal. The compromise is an attempt to protect the unbanked from being driven to payday lenders and other non-bank entities for their financial needs. It further ensures that fees won’t be charged on those who can least afford them.
The compromise provides that the Fed can adjust the interchange fee rate received by a particular card-issuing bank if the bank demonstrates that the adjustment is reasonably necessary to cover fraud prevention costs incurred by the bank. In order to qualify for this adjustment, the bank would have to comply with standards established by the Fed that would demonstrate that the bank is taking effective steps to reduce fraud, and the bank would also have to show that the adjustment it seeks is limited to those reasonably necessary fraud prevention costs. This compromise provides competition where there is currently none. Banks will be incentivized to efficiently and effectively prevent fraud while competing to provide the best protection for the lowest cost. These changes will make the market more efficient and allow for savings to be passed on to consumers.
This provision has been removed from the amendment. In its place, the compromise includes a provision directing the Fed to issue rules preventing card networks from requiring that their debit cards can only be used on one debit card network (thereby ensuring that merchants will have the choice of at least two networks upon which to run debit transactions). This provision also provides additional competition to a previously non-competitive part of the market. It allows merchants to choose the debit network with the lowest cost – the opposite of the current system where merchants are forced to use a specific network with fixed prices.
The compromise further clarifies that the discount must be offered to all prospective buyers and disclosed clearly and conspicuously to the extent required by federal and applicable state law, though a network would not be permitted to penalize a merchant for a discount that is provided in compliance with federal and state law. This change simply clarifies the language in the Senate bill which allowed merchants the ability to offer discounts for one form of payment over another.
The compromise provides that such a minimum may not exceed $10, with authority given to the Fed to increase that dollar amount. The compromise also limits the ability to set maximums for payment by credit card to the Federal government and colleges and universities. The compromise further clarifies the Senate language and establishes that a minimum payment not exceed $10 – matching laws currently on the books in a number of states.
The compromise amendment contains a rule of construction affirmatively stating that nothing shall be construed to authorize any person to discriminate between debit cards or between credit cards on the basis of the issuer who issued the card. This language further clarifies the Senate passed language regarding non-discrimination between card issuers.
The compromise provides that regulatory authority under the amendment shall remain with the Fed.
The compromise makes clear that nothing in the amendment shall apply to these nutrition assistance programs.
Durbin worked closely on these changes with House and Senate conferees including: Chairmen Dodd and Frank, Rep. Meeks, Rep. Maloney, Rep. Gutierrez and Rep. Welch.
Durbin, Key House Conferees Reach Agreement on Interchange Fees
[WASHINGTON, D.C.] – Assistant Senate
Majority Leader Dick Durbin (D-IL) today announced that an agreement
has been reached with key conferees on the Wall Street reform bill
regarding his amendment regulating interchange fees. The agreement
makes minor, clarifying changes to the language which passed the Senate
64-33, and responds to concerns raised by state governments regarding
their use of prepaid and debit cards distribution of government
benefits.
“I’m pleased that we were able to
reach an agreement which makes modifications which strengthen consumer
protections and bring competition to a market where there is none,”
Durbin said. "We addressed specific concerns of states serving the
unemployed and firms serving the unbanked. This was a good faith effort
with House conferees to face legitimate issues and resolve them fairly
without surrendering our goals of bringing fairness to interchange fees
and common sense regulation to the credit card industry. I applaud the
leadership of Chairmen Frank and Dodd in reaching this milestone
agreement."
Under the agreement, the new
language will be offered by the House to the Senate during the
conference negotiations on the Wall Street reform package as early as
tomorrow. It is expected to be debated and eventually accepted by the
conference committee, subject to ratification by the Committee
Chairmen, and become the final language regarding interchange fees. The
conference committee hopes to finish its work on the bill this week and
the House and Senate are expected to pass the final legislation before
July 4th.
Summary of the modifications to the Durbin interchange amendment:
- Government administered cards
The
Senate-passed amendment would regulate the interchange fees associated
with debit or prepaid cards issued by large banks on behalf of
government-administered payment programs (e.g., unemployment insurance,
TANF, child support).
The compromise exempts federal, state and local government program debit and prepaid cards from interchange regulation, provided that after a two-year grace period the prepaid cardholding beneficiaries are not charged any overdraft fees or fees for the first monthly in-network ATM withdrawal.
- Definition of “interchange transaction fee”
The
Senate-passed amendment defined “interchange transaction fee” to
include debit card fees that are established by a payment card network
(e.g., Visa and MasterCard) and that accrue to either the card-issuing
bank or to the network itself.
The compromise provides that the Fed cannot regulate network fees (i.e., the fees that Visa and MasterCard charge and that accrue to themselves) except to ensure that the fees are not used to circumvent interchange fee regulation. These changes are a different way of accomplishing the same goal of protecting consumers from loopholes which would allow banks to raise fees to cover any loss in interchange revenue.
- Reloadable prepaid cards
The
Senate-passed amendment would regulate the interchange fees associated
with reloadable prepaid debit cards, which are in common use by
consumers who lack bank accounts.
The compromise exempts these cards from interchange regulation, provided that after a two-year grace period the issuing bank must not charge cardholders any overdraft fees or fees for the first monthly in-network ATM withdrawal. The compromise is an attempt to protect the unbanked from being driven to payday lenders and other non-bank entities for their financial needs. It further ensures that fees won’t be charged on those who can least afford them.
- Fraud prevention costs
The
Senate-passed amendment did not permit consideration of fraud
prevention costs in the calculation of reasonable and proportional
interchange rates.
The compromise provides that the Fed can adjust the interchange fee rate received by a particular card-issuing bank if the bank demonstrates that the adjustment is reasonably necessary to cover fraud prevention costs incurred by the bank. In order to qualify for this adjustment, the bank would have to comply with standards established by the Fed that would demonstrate that the bank is taking effective steps to reduce fraud, and the bank would also have to show that the adjustment it seeks is limited to those reasonably necessary fraud prevention costs. This compromise provides competition where there is currently none. Banks will be incentivized to efficiently and effectively prevent fraud while competing to provide the best protection for the lowest cost. These changes will make the market more efficient and allow for savings to be passed on to consumers.
- Discounting between card networks
The
Senate-passed amendment provided that card networks could no longer
prevent merchants from offering customers a discount to use one card
network vs. another (e.g., a discount to use Visa vs. MasterCard), and
that this discount would apply in both the credit card and debit card
contexts.
This provision has been removed from the amendment. In its place, the compromise includes a provision directing the Fed to issue rules preventing card networks from requiring that their debit cards can only be used on one debit card network (thereby ensuring that merchants will have the choice of at least two networks upon which to run debit transactions). This provision also provides additional competition to a previously non-competitive part of the market. It allows merchants to choose the debit network with the lowest cost – the opposite of the current system where merchants are forced to use a specific network with fixed prices.
- Discounting between forms of payment
The
Senate-passed amendment provided that card networks cannot prevent
merchants from offering a discount for one form of payment vs. another
(cash vs. check vs. credit vs. debit). The compromise clarifies that
these discounts cannot be offered if the discounts differentiate
between card issuers or card networks.
The compromise further clarifies that the discount must be offered to all prospective buyers and disclosed clearly and conspicuously to the extent required by federal and applicable state law, though a network would not be permitted to penalize a merchant for a discount that is provided in compliance with federal and state law. This change simply clarifies the language in the Senate bill which allowed merchants the ability to offer discounts for one form of payment over another.
- Setting of maximum/minimum transaction thresholds for use of a credit card
The
Senate-passed amendment provided that card networks could not prevent
merchants from setting a minimum or maximum dollar amount for payment
by credit card.
The compromise provides that such a minimum may not exceed $10, with authority given to the Fed to increase that dollar amount. The compromise also limits the ability to set maximums for payment by credit card to the Federal government and colleges and universities. The compromise further clarifies the Senate language and establishes that a minimum payment not exceed $10 – matching laws currently on the books in a number of states.
- Non-discrimination between cards issued by different banks
The
Senate-passed amendment did not change the existing prohibition in the
operating rules of Visa and MasterCard against card issuer
discrimination.
The compromise amendment contains a rule of construction affirmatively stating that nothing shall be construed to authorize any person to discriminate between debit cards or between credit cards on the basis of the issuer who issued the card. This language further clarifies the Senate passed language regarding non-discrimination between card issuers.
- Authority of the Federal Reserve Board vs. the Consumer Financial Protection Agency/Bureau
The
Senate-passed amendment provided for regulatory authority under the
amendment to migrate to the Consumer Financial Protection Agency/Bureau
after the CFPA/B is established.
The compromise provides that regulatory authority under the amendment shall remain with the Fed.
- Non-applicability to USDA nutrition assistance program EBT cards
The
Senate-passed amendment was silent on the applicability of the
amendment to USDA’s nutrition assistance programs in which interchange
fees are not charged for electronic benefit transfer (EBT) transactions.
The compromise makes clear that nothing in the amendment shall apply to these nutrition assistance programs.
Durbin worked closely on these changes with House and Senate conferees including: Chairmen Dodd and Frank, Rep. Meeks, Rep. Maloney, Rep. Gutierrez and Rep. Welch.