Arizona’s Jon Kyl is one of nine U.S. senators who have introduced legislation to delay forced reduction of “interchange fees” banks charge merchants to process debit cards.
Banking and credit union officials say the caps likely will lead to consumers being charged fees for each debit-card transaction or annual levies for checking accounts they currently hold free of charge.
The Debit Interchange Fee Study Act (S.575) was introduced March 15. It would delay implementation of caps on the fees by two years and call for a one-year study of the effects caps on fees will have on financial institutions, merchants and consumers.
Kyl joins primary sponsor Sen. Jon Tester, D-Mont., and a bipartisan group that includes Sens. Bob Corker, R-Tenn.; Ben Nelson, D-Neb.; Tom Carper, D-Del.; Pat Roberts, R-Kan.; Chris Coons, D-Del.; Mike Lee, R-Utah, and Pat Toomey, R-Pa. in introducing S.575.
The bill would delay implementation of what was a late amendment to the Dodd-Frank Wall Street Reform and Financial Protection Act, which became law last summer. Called the Durbin Amendment after its sponsor, U.S. Sen. Dick Durbin, D-Ill., it requires the Federal Reserve Board to set forth rules by April 21 to implement the caps by July.
The amendment calls for reductions in fees banks and credit unions charge merchants, called interchange fees, to process transactions on their debit cards.
Currently those fees are approximately 44 cents per transaction. The Durbin Amendment calls for card issuers to charge no more than 12 cents per transaction.
The issue has bankers and merchants on opposite sides — and Washington has been hearing from Arizona-based representatives of each.
Card issuers, including banks and credit unions, say they need the extra cents per transaction to pay for investigating fraud and for maintaining an expensive infrastructure that enables consumers to use debit cards at thousands of locations nationwide.
They say that if the fees are capped, merchants won’t pass on the savings to their customers and will keep the extra money instead, while the financial institutions, to make up the difference, will have to resort to annual checking-account charges and per-transaction fees every time a consumer uses a debit card.
Many merchants and consumer-protection groups favor the interchange fee caps. On the same day S.575 was introduced, U.S. Public Interest Research Groups and Public Citizen issued a statement opposing the delay, saying that Dodd-Frank “provides numerous reforms to financial industry practices beneficial to consumers, depositors, investors and taxpayers.”
“American consumers and retailers shouldn’t pay unnecessary tributes to major firms such as Visa, MasterCard and bank affiliates,” Public Citizen spokesman Bart Naylor told the Arizona Capitol Times.
And the nonprofit consumer-interest group American Antitrust Institute wrote members of Congress on March 14 outlining its backing of the law as “a sound, competitive solution to the debit interchange fee problem.”
Arizona grocers and representatives of Arizona restaurants, hotels and convenience markets wrote the Federal Reserve Board in February encouraging governors to continue on schedule to write rules implementing the law.
In a letter to Federal Reserve Board Chairman Ben Bernanke, several major Arizona retailers, including Bashas’ and Pro’s Ranch Markets grocery stores, the Arizona Restaurant and Hospitality Association, the Arizona Food Marketing Alliance, the Arizona Petroleum Marketing Association and Viad Corp. joined colleagues from across the nation hoping that Washington will leave the Dodd-Frank Act alone.
“The proposed debit card interchange fee and routing reforms are a positive first step toward creating competition and certainty in the debit card market,” the retailers wrote.
“We are confident the final debit card reforms the Federal Reserve will issue this April will take us one step closer to fair and transparent debit card fees, and will provide much-needed certainty as we plan ahead, budget, and make hiring decisions.”
The merchants also told Bernanke that before Dodd-Frank, the card issuers “have centrally set interchange fees for over a decade, and have increased those fees with complete disregard to the impact on merchants and consumers. As with other costs, we expected these fees to decrease with technology improvements, but that has not been the case.”
While merchants see the reduced fees as an opportunity to lower their costs, Paul Hickman, president and CEO of the Arizona Bankers Association, said that maintaining a network in which virtually every retail outlet in Arizona accepts debit cards can’t be done if fees are reduced.
Hickman said free checking will be the “first to go” if the Federal Reserve and Congress don’t delay implementation of the interchange fee caps.
“Fraud prevention is another thing that this revenue is used for. Banks eat the cost of investigation when someone steals your card and uses it,” Hickman said.
But merchants say the law as it is means more competition, lower prices and ultimately more benefit to consumers.
Marilyn Atkinson, whose Atkinson’s Indian Trading Post has been selling Native American art and crafts to tourists and residents in Old Town Scottsdale since 1954, said the new law means quite a bit to merchants like herself.
“The fees that banks charge do get a little pricey. In order to cover those fees, you have to increase the cost of the product,” Atkinson said. “A lot of times, when they make offers — free mileage, cash-back points — that’s paid for by the merchants.”
Like Hickman, Austin DeBey, vice president for government affairs for the Arizona Credit Union League, which represents the state’s credit unions, was in Washington lobbying for eliminating the proposed fee caps. He said the current system works well.
“And it’s even more convenient for a merchant, better than a check,” DeBey said. “If a check bounces, the financial institution would send it back to the merchant to collect and incur costs. With a debit card, merchants are protected and the financial institution bears the cost.”
Hickman added, “We don’t think that the federal government should be involved in the private market, which is what this does.”
The marketplace is what has enabled banks to recover the many costs associated with providing cards, he said.
“It’s not cheap technology to develop and deploy and it’s not cheap technology to maintain,” Hickman said. “What motivates it is the profit motive. And the profit isn’t exorbitant.”
Jason Scott, vice president of the Valley-based TruWest credit union, said he, too, was on Capitol Hill in early March to lobby for delaying the caps.
Scott said TruWest charges an interchange fee of 42 cents per transaction, approximately the industry average of 1.5 percent. It costs his credit union about 25 cents per debit-card transaction for processing, fraud prevention/investigation and labor. That doesn’t include any overhead or the initial cost of issuing the card, he said.
Scott said the new law will mean an institution with a fee and costs similar to TruWest’s will go from earning a net 17 cents per transaction to losing a net 13 cents per transaction.
Scott said that the free marketplace is the only way that the United States will join many other developed countries that use “chip cards,” containing a computer chip that frustrates fraud far better than the magnetic-stripe data system used in the U.S.
Hickman said the fee caps were passed without hearings or debate.
“Do this in the light of day, not under the cover of darkness,” Hickman said. “This is what makes Americans cynical about politics.”
Scott agreed. “This (law) was sold as a pro-consumer thing, but the consumer is going to foot the bill,” he said. “We don’t want to stop the whole bill, just this one piece.”
Atkinson, the trading post owner, said financial institutions always figure out a way to get money out of merchants one way or another. “The banks never give up, do they?” she asked.