The Truth About How the Interchange Legislation Hurts You

We all want lower fees and fair treatment. We are also highly suspicious of financial institutions and are happy when the government wants to crack down on them. But, the Durbin amendment is a case where you, the consumer, needs to pay attention and review the whole picture. This isn’t about Big Bad Banks. This amendment is so flawed it could hurt you and change the way everyone does business. It’s up to your to take action now. Be informed and tell your legislators your view.  

Now to the information:

On its surface, the provision seems simple and even pro-consumer. It directs the Federal Reserve to regulate the fees that financial institutions (banks and credit unions) charge merchants when consumers pay for a purchase with a debit card. These fees are set by the financial instituion that issued the card. Typically the fee is 1 – 2 % of the purchase amount. (These fees are usually lower than credit card transaction fees. That’s why small merchants [and Walmart] prefer debit over credit.)

However, some consumer advocates and merchants had argued that the debit card fees were too high and were driving merchant costs upward. This led to the proposal of the Durbin bill which directed the Federal Reserve to place a cap on those fees by proposing rules that would reduce the average fee by about 70%, from $0.44 per transaction to no more than about $0.12 per transaction.

Financial institutions and some bank regulators argue that the Fed used an exceptionally narrow definition, and appears to have excluded the significant costs of dealing with fraudulent transactions.

Both sides recognized that smaller card issuers would suffer disproportional loss. Therefore, an exemption was created. Financial institutions with less than $10 billion in assets would be exempt from Durbin. But regulators, including Fed Reserve Chair Ben Bernanke quickly saw problems with the exemption.

If smaller card issuers were allowed to continue to with high interchange fees, merchants might begin refusing to accept their cards. This would force exempt institutions to charge lower fees. In the long run this could be a death sentence for small banks and credit unions, causing consolidation in the industry and less consumer choice.

Which leads us to the problems for consumers:

The assumptions by the bill sponsors are that card issuers would eat the cost difference of reduced debit card interchange fees. They also assume merchants would pass on the reduced fees  in the form of lower prices to consumers. And, consumers would continue to use debit cards at the same, or increased rate.

The reality is that card issuers, faced with continued debit card processing costs and reduced fees would be forced to look for ways to make up the loss and impose other consumer fees. Additionally, consumers may change the way they do business.

One option is a stored-value card. These are cards issued by merchants or financial institutions. Consumers “load” the cards with cash before they use them. Depending on the card, it may be restricted to use at only one or a limited number of merchants. These cards are less convenient for consumers and usually offer fewer protections against fraud or loss—making them less attractive.

Or, consumers may turn to credit only cards. This is what we used before the invention of the debit card. Consequently more people might find that they are unable to qualify for credit. And, sadly, the use of credit could dangerously increase personal debt.

 Subsequently, consumers might just bag the card idea and start using (gasp!) cash. For merchants this equals reduced spending.

A key value of debit cards is that they allow consumers to spend their own money rather than borrowing it from the card issuer.

By increasing the cost of debit cards to consumers, the Durbin amendment would make it harder for consumers to manage their own finances and drive them back to credit cards or to stored-value cards. While at one time checks were an alternative, increased fees on their use combined with merchants’ reluctance to accept checks make it unlikely that consumers would move back to them.

And here’s what you can do:

Senator Jon Tester (D-MT) and Rep. Shelley Moore Capito (R-WV) recently introduced S.575 the Debit Interchange Fee Study Act and H.R. 1081 the Consumers Payment System Protection Act respectively in both chambers of Congress. 

Both bills would delay implementation of the Federal Reserve’s debit interchange rule and study its implications before proceeding.

Please contact your Senators and Representatives TODAY and urge them to support S.575/HR 1081 and thank those who have already signed on as an original co-sponsor. 

Once you enter your zip code in the space provided, you will see one or two letters depending on your Senators’/Representatives cosponsorship status.





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