Delaying debit-card fee reform not good
By John Bodnovich, Executive Director
American Beverage Licensees
Last summer, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, which contained a provision known as the Durbin Amendment. American Beverage Licensees, of which the Montana Tavern Association is an affiliate member, strongly supported passage of this provision, as it would require that debit card swipe fees be “reasonable and proportion” to the actual cost to process the transaction.
In December 2010, the Federal Reserve issued a Proposed Rule that would set a maximum allowable amount of 12 cents per debit card transaction, regardless of the final sale amount.
The Federal Reserve found that the actual cost to financial institutions to process debit cards averaged four cents per transaction, yet for years Visa and MasterCard have been overcharging Main Street businesses in order to attract banks to issue their cards.
Now, as Montana tavern owners and their customers sit on the cusp of realizing a fairer debit card swipe fee system, and after nearly an entire year for comments and recommendations to be submitted by all parties involved, the Wall Street banks, credit unions, community banks and bankers of all stripes have set their sights on killing these reforms before they take effect on July 21, 2011.
Knowing full well that they don't have the votes to repeal these reforms, the bankers have found allies in Congress to delay these reforms under the guise of needing further study on the issue.
In March, Sens. Jon Tester, D-Mont., and Bob Corker, R-Tenn., introduced the Debit Interchange Fee Study Act of 2011 (S. 575), which would delay implementation of the effective dates in the Durbin Amendment by two years. The bill also would direct the Federal Reserve to withdraw the proposed rulemakings and conduct a joint study.
What the Senators don't mention is the fact in Washington-speak, “delay” means “derail,” and this legislation would effectively scrap debit card swipe fee reform.
Sen. Tester and the big banks have argued that the free market should manage things like debit card fees, and that this law, if implemented would hurt small community banks in Montana.
They make this argument despite the fact that the Durbin Amendment includes an exemption from the Federal Reserve's debit card rules for banks with less than $10 billion.
The banks also claim that there cannot be different prices for the same product – debit cards – and therefore the exemption will not work. They make that claim in spite of the fact that the networks maintain hundreds of separate interchange prices. The problem is what they failed to disclose – that debit swipe fees are not a competitive market. Banks all charge the same schedule of fees today.
Most people typically refer to competitors agreeing to charge the same prices as price-fixing and that is what happens today. The only form of competition today is between the two major card networks – Visa and MasterCard. Those two networks compete to raise, not lower, fees.
In fact, the Durbin Amendment may prove to be advantageous for smaller banks, as many outside the beltway community banks and credit unions are starting to recognize that they will be helped by the Fed's rule.
As one economic expert, Adam Levitin, put it, “What I think this all means, then, is that the Durbin Amendment might actually be a real boon to small banks and credit unions, as it will start to level the playing field in the card space relative to the handful of megabanks that dominate consumer finance.”
The bottom line is that debit reform is just about the fees charged by the largest 100 or so banks in America.
The many other thousands of exempted banks and credit unions will be able to protect their swipe fee revenues and may for the first time have an opportunity to take away market share from the mega banks.
I urge the hard-working members of the Montana Tavern Association to contact Sen. Tester and ask him to stand up for Montana's Main Street business and that consumer won't stand for any delay of these reforms.