Friday, May 20, 2011
On May 18, 2011, Sen. Jon Tester, D-Mont., amended the Debit Interchange Fee Study Act (S 575) to shorten the proposed study period in the bill from two years to 15 months. The bill was introduced in the Senate March 15, 2011, and referred to the Committee on Banking, Housing and Urban Affairs.
Tester said he is amending the bill to incorporate feedback and capture the 60 votes needed for passage. The pending legislation proposes delaying implementation of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 until completion of the study.
The Durbin Amendment, scheduled to go into effect in July, gives the government the power to limit debit interchange fees charged by banks to pay for transmission costs and fraud protection. Tester said he believes the amendment needs more study to determine its impact on small businesses and rural America.
In remarks on the Senate floor introducing his amendment, the Montana senator claimed 15 months is the "bare minimum to get this study right." He said the period breaks down to six months for agencies to conduct a study, six months for the Federal Reserve to rewrite the rules from the study results and three months to implement the final rules.
"For me, stopping and studying the unintended consequences of government price-fixing has everything to do with access to capital for small businesses and consumers in rural America," he said. "On the surface, the plan might make sense. But peel back the layers, and you'll see why a whole bunch of folks – on both sides of the aisle – have raised a flag.
"I'm not asking to repeal these rules – or even change them. All I'm asking for is that we take a closer look – so that we truly understand all impacts, intended and unintended. Make no mistake, the big banks are going to do fine no matter what. That is why I opposed bailing them out."
Tester indicated the Durbin Amendment will negatively affect almost all the banks and credit unions in his state. "They will feel the pinch," he said. "And they will lose because the government is going to set a price for doing business that does not cover their costs." He added that the new interchange rates under the amendment "will not be enough for the little guys to compete in the marketplace."
He then asked how big-box retailers would likely react if the government set the price of T-shirts below what it costs to make, ship and market them. "You can bet retailers would be up in arms about the government setting prices – and telling them how to run their business," he said.
Capping rates in an effort to create a competitive marketplace makes no sense, Tester added. "When you slant the playing field against small banks, they can't compete with big banks," he said. "And if they go under, the businesses and consumers that rely on them are left hanging. That … is why a populist farmer from rural America is on the side of common sense in this debate."
Tester pointed out that Federal Reserve Chairman Ben Bernanke had testified just a week previously that capping interchange rates "could result in some smaller banks being less profitable or even failing." Tester said more failing banks means more bank consolidation, which would not be a good outcome for consumers.
Tester believes losses banks suffer with reduced interchange revenue will force the financial institutions to charge higher fees for other services. "Rural America – especially in this fragile economy – can't afford that," he said.
The senator also informed his colleagues that Bernanke testified he's not sure the small issuer exemption in the Durbin Amendment will work because market forces would work against the exemption. Tester added that all of the regulators of small state and national financial institutions have raised doubts about whether the small issuer exemption will work.
"No one has been able to explain to me why studying this issue to make sure that these rules do what they are intended to is a bad idea," Tester said. "If this rule goes into effect, the consumers and businesses who rely on community banks and credit unions will pay the price. And we can bet that many retailers won't be eager to pass the few pennies they save … down to you."
The Electronic Payments Coalition, an advocacy group comprising credit unions, banks, and payment card networks, issued a statement in support of Tester's effort. The release notes credit card fraud losses are paid by the banks, not cardholders. Fraud protection and data security costs are included in the interchange fees retailers pay to issuers. Capping those fees would deprive issuers of the financing they need to develop defenses that protect networks and data security, according to the EPC.
"If the current rule goes into effect, retailers will pass on the costs of fraud protection and data security to consumers," EPC spokeswoman Trish Wexler said. "If a breach does occur, retailers will get off scot free, even if they are responsible for the loss. This is just another example of why we need to slow this rule down and get it right before it is too late."
For more on the Debit Interchange Fee Study Act, see The Green Sheet's Legislative Roundup at www.greensheet.com/legislation.php .
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