Mr. President, earlier today, I voted against the interchange fee amendment (S. Amdt. 392) offered by the junior Senator from Montana and I would like to explain why. Before I do that, I would like to acknowledge two important points about Senator Tester. First, I appreciate the fact that he made significant changes to his amendment in an attempt to reach a middle ground on this issue. And the concern he has for small community banks and credit unions is beyond question. Having said that, I did not reach the same conclusion he reached that we should delay the regulatory process with regard to interchange fees.
Most of the concern raised has been expressed against the Federal Reserve’s December 2010 draft interchange fee rule-making. It was a draft proposal. Let me repeat that: it was a draft proposal. The Federal Reserve received 11,000 comments on the draft rule-making. The final rule-making, due any day and scheduled to take effect in July, will reflect those comments and suggestions. We need to let the regulatory process work. If the final rule doesn’t work as Congress intended, we have a number of options to fix it, up to and including a Congressional Resolution of Disapproval. If the Senate had approved the Tester amendment, it may have been “fixing” a problem that doesn’t exist.
The Federal Reserve’s rule-making was required by a provision contained in the Wall Street reform bill Congress passed last year. The senior Senator from Illinois was the author of that provision. He modified it to exempt smaller banks and credit unions with assets under $10 billion. Now we are being told the exemption is unworkable. Again, we haven’t seen the final rule yet but I don’t agree with the premise.
Andrew Kahr is a leading financial services expert. He was the founder and chief executive officer of First Deposit Corp, which later became Providian. He recently laid out the following arguments, which I find cogent, on the American Banker Website:
One argument is that the clearing networks, of which there are only four that matter, will not support the “two-tier” interchange system… Ridiculous. Visa is the largest of the networks. It’s already announced that it will implement Durbin. (Maybe this is an object lesson as to why Visa remains No. 1.)
For the small banks, MasterCard is the only other significant player. If MasterCard finds it politic not to add one more wrinkle to a skein of interchange levels that is already of Byzantine complexity, then let the small banks gravitate to Visa in order to benefit from Durbin.
A second argument of the big-bank lobbyists is that merchants will reject the debit cards of small banks if these carry a 1 percent interchange cost, versus 0.3 percent for the large banks. Really? Then why don’t these merchants reject all credit cards, with interchange of 2 percent or more, if the customer could instead use a debit card? When is the last time a merchant politely asked you whether you could pay with a debit card instead of a credit card?
Mr. Kahr concludes that if interchange fee revenue for the big banks drops but stays the same for the small banks and credit unions, the small banks will reap a competitive advantage. They will be able to impose lower fees, pay more interest, and give greater rewards to depositors. As he put it, “anything that reduces revenue for big banks but not for small ones should help the latter compete more effectively against the former.”
Here’s why I supported Senator Durbin’s amendment to the Wall Street reform bill to regulate these fees in the first place. Banks do not compete with each other on the fees that merchants pay them for debit card use. Instead, Visa and MasterCard fix fee rates on behalf of all banks. There is no naturally-occurring market force that keeps interchange fees at reasonable levels. The Visa and MasterCard duopoly is so dominant that merchants cannot refuse to accept their cards. Consequently, Visa and MasterCard don’t lower interchange fees – they raise them, to entice banks to issue more of their cards. Retail merchants have no leverage to stop this escalation. As a result, the U.S. has the highest debit interchange fees in the world, averaging 1.14 percent of each transaction and amounting to over $16 billion per year. These fees affect merchants, universities, charities, government agencies, and everyone else who accepts debit cards as payment. The fees end up getting passed on to consumers in the form of higher retail prices for everything from groceries to gas to textbooks.
The Durbin provision stipulated that fees set by Visa and MasterCard on behalf of big issuing banks must be reasonable and proportional to costs incurred by the issuer that are “specific to a particular electronic debit transaction.” Some argue this is too narrow. The problem with the Tester amendment, well-intentioned as it may have been, is that it was too broad. It directed the Federal Reserve to let Visa and MasterCard set fee rates to “all fixed and incremental costs associated with debit card transactions and program operations.” The term “program operations” wasn’t further defined and could have created a potentially enormous loophole. Rates could actually go higher under this standard.
Mr. President, I appreciate the hard work the junior senator from Montana put into his amendment. If the Federal Reserve’s final rule truly presents problems for community banks and credit unions, I will join him in the effort to fix it. For the time being, I think we should let the regulatory process proceed and that’s why I opposed the amendment. We helped out the banks; now it’s time to help out consumers and America’s small businesses.
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