Debit card interchange reform is at stake as Congress begins to merge two financial reform bills into a final version.
The amendment to the Senate bill, the Restoring American Financial Stability Act of 2010, would allow the Federal Reserve to set "reasonable and proportional" interchange fees for debit cards issued by financial institutions with assets of over $10 billion. It would also allow retailers to offer a discount to customers who use a less expensive form of payment, such as cash, and set a minimum purchase amount for using payment cards. Currently, merchant agreements with card networks such as Visa and MasterCard prevent retailers from setting such limits.
Interchange fees, which are charged to merchants each time a debit or credit card is swiped to process the payment, average 1 percent of the transaction amount for debit cards and cost merchants at least $10 billion per year, according to the National Retail Federation.
The cost of the fee is included in the price of goods and services customers buy, so even those who pay with cash or checks pay for the convenience of plastic. Yet regulating these fees would not help consumers, a trade association for credit unions argues.
"The retailers are saying 'Well, this will save consumers a lot of money,' but the fact of the matter is there was an amendment in the process to say that any money saved should go to the consumers, and that amendment was opposed and defeated by the retailers," says Dan Mica, CEO of the Credit Union National Association. There is no requirement in the current provision that retailers must pass on their savings in the form of lower prices.
Savings were not passed on to consumers in Australia, he points out, where government stepped in in 2003 to regulate interchange fees. Research completed by economists in the London office of CRA International found that the Reserve Bank of Australia's reductions in interchange fees increased annual fees and reduced card benefits for consumers.
He also says the exemption could actually penalize both smaller institutions and the customers that use their debit cards.
How smaller institutions could suffer
"Under this senate amendment they would allow the networks -- American Express, Visa, MasterCard -- to, with this so-called carve out, to allow credit unions to get more of a fee," Mica says. If merchants can pay less in interchange for a card issued by a large bank, which would be covered by the amendment, retailers could ask customers to use another card, he explains. The provision, as currently written, doesn't prevent such discrimination.
Alternatively, the card networks could simply lower the interchange fees paid to smaller institutions -- there is no requirement to give smaller issuers a higher debit interchange fee.
In other words, smaller institutions who issue debit cards could lose big on interchange revenue, and the customers with those cards may suffer as a result.
How consumers would suffer
Because the amendment doesn't take into account operational costs such as fraud in setting debit interchange rates, lower interchange fees may not cover the costs of running a debit card program.
To make up for the revenue loss, Mica says credit unions would have to install annual fees, potentially a per-transaction fee on debit cards and even eliminate rewards programs at some institutions. Some credit unions may even have to shutter their debit card programs.
"Credit unions have for a hundred years been the lowest charger of fees in the entire financial services industry and now we're going to charge fees that we don't want to have to charge," he says.
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