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Durbin defends debit card interchange reform

By Leslie McFadden ·
Monday, June 14, 2010
Posted: 12 pm ET

On Friday, Assistant Senate Majority Leader Dick Durbin, D-Ill., fired off a letter to the CEOs of the Independent Community Bankers of America, or ICBA, and the Credit Union Nation Association, or CUNA, countering their arguments against reform of interchange fees for debit card transactions. According to the Senator's website, his amendment, which the Senate included in its financial reform bill, would "direct the Fed to issue rules to ensure that debit interchange fees are reasonable and proportional to the processing costs incurred."

Debit card interchange fees average 1 percent of the transaction amount and cost merchants at least $10 billion per year, according to the National Retail Federation.

The amendment exempts debit card issuers with assets of less than $10 billion. In an interview with me last week, CUNA CEO Dan Mica contended that the "carve-out" for small issuers could result in merchant discrimination toward lower-fee cards issued by larger banks, or a reduced interchange fee for smaller issuers. He also said customers of credit unions and other modest-sized institutions could face new fees as their issuers try to make up for the revenue loss.

"These assertions are untrue," Sen. Durbin wrote in the letter. A copy of it was posted to his website.

"First, the idea that Visa and MasterCard will drive small banks away from offering debit cards by voluntarily and unilaterally reducing debit interchange rates for small financial institutions -- even though such action would be contrary to their own economic interests and negatively affect a multi-billion dollar annual revenue stream -- is absurd. Even corporate spite has some boundaries, and sacrificing revenues seems inconsistent with the profit-driven actions that Visa and MasterCard have taken to date.

"To the second point, my amendment does not allow discrimination by merchants against issuers of debit cards. As is the case today, under my amendment a merchant who accepts Visa debit cards from large banks would be required to accept Visa debit cards from small banks and credit unions as well. They would also be prohibited from offering discounts for large bank cards and not providing the same discount for small bank cards from the same network."

You can read the rest of the letter on the senator's website.

Which argument -- for or against interchange fee reform -- do you believe?

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Jeff Schroth
June 14, 2010 at 3:29 pm

Sen. Durbin's argument is a red herring of the first order and seems to demonstrate an odd lack of understanding about how the marketplace actually works out here in the real world.

Nonetheless, a core element of this recent defense does illuminate the argument so many consumers and financial institutions have been making since his hastily-prepared amendment surfaced:

There is no requirement in the current provision that retailers must pass on their savings in the form of lower prices (an idea that was proposed but, surprise surprise, was quashed by the retailers. Since retailers have no less an "economic interest" in their revenue stream than financial institutions, it is clearly absurd to pretend and predict as he has (right along side the retailers) that retailers are likely to "pass on" to their customers any portion of these government-mandated reductions in their cost of doing business - costs, we must keep in mind, that they incur for participating in a payment system that benefits them greatly, and in which they _voluntarily_ participate.

Anyone interested in an analysis of the potential impact on consumers from the Durbin amendment should read a recent report by a highly regarded consultant firm that specializes in payment systems.

"The Durbin Amendment attempts to address incredibly complex and controversial issues in about a thousand words. Political leanings aside, a hastily drafted and implemented law brings untenable systemic risks along with potentially unintended outcomes."

Yes, THAT'S what we need right now - more untenable systemic risks!