Credit unions are hoping for relief from the courts and an improved rule from the Federal Reserve following the Senate defeat of an amendment that would have delayed the Federal Reserve’s rule regulating debit interchange fees by up to a year.
On June 8, an amendment sponsored by Sen. Jon Tester (D-Mont.) and Sen. Bob Corker (R-Tenn.) received 54 votes, six short of the 60 needed to pass under Senate rules. There were 45 senators who opposed the amendment.
The vote capped a year-long battle between financial institutions and retailers over the fees that retailers pay every time someone swipes their debit card. The financial overhaul bill passed last year contained an amendment sponsored by Senate Majority Whip Dick Durbin (D-Ill.) that mandated that the Fed write a rule on interchange fees. Durbin’s amendment passed last year 64-36.
With the hope for a legislative remedy thwarted, credit unions and banks are looking to the courts for relief.
TCF Bank is challenging the legality of Fed’s rule and its lawsuit is pending in federal court. Both CUNA and NAFCU have joined friend-of-the-court briefs on behalf of the Minnesota-based bank.
TCF Financial Corp. Chairman/CEO William Cooper has said the Durbin Amendment is a $15 billion-a-year "raid on the banking business."
The lawsuit hasn’t gone to trial yet, but so far a federal judge has rejected both the bank’s request to stop the Fed’s implementation of the amendment and has rejected the government’s request to dismiss the lawsuit.
The Fed’s rule is supposed to take effect on July 21. It issued a draft rule in December and was supposed to issue a final rule in May but that has been delayed.
According to the proposed rule, the allowable costs for interchange would be limited to no more than the issuer's allowable costs divided by the number of electronic debit transactions on which the issuer received or charged an interchange transaction fee in the calendar year. Or the issuer could receive debit interchange capped at 12 cents per transaction.
Tester said during the Senate debate that that the Fed rules didn’t contain enough protections for small issuers, such as community banks and credit unions with assets of $10 billion or less. He predicted that some of those institutions could be less profitable or maybe even fail. He cited concerns about the inadequate protection raised by Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair.
Durbin countered that the protections for small issuers were adequate and that the Corker-Tester amendment would mainly help the big banks.
"The biggest banks make the biggest money in this process. Far and away," he said.
NAFCU President/CEO Fred Becker praised the "valiant fight" by the banks and credit unions in lobbying on the issue and said that it proved how hard it is to get anything passed in the Senate, where 60 votes are needed for almost every bill.
Though Becker conceded that the short-term options for delaying the rule may be limited, he said NAFCU would work with lawmakers to ensure that they keep their promise to monitor the implementation to see if the new rule will hurt small debit card issuers.
CUNA President/CEO Bill Cheney said the vote is "going to create a train wreck that will affect every consumer with a debit card."
The Corker-Tester amendment would have mandated financial regulators, including the Fed and the NCUA, to perform a six-month study to consider the costs to financial institutions of the new rules, whether the rules will adversely affect consumers, and whether the small issuer exemption is feasible. If any regulator found problems in one of those areas, the Fed would have had to rewrite the rule within six months.
In their attempt to persuade lawmakers to pass the amendment, credit unions and banks worked together.
CUNA, NAFCU and the Independent Community Bankers of America wrote lawmakers just before the vote and said that if the amendment fails "the millions of consumers served by the nation’s community banks and credit unions would be directly harmed and would end up paying more for their banking services."
The Electronic Payments Coalition ran an extensive advertising campaign, which was matched by similar efforts by the retailers. These ads have appeared both in the Washington, D.C. area and in the home states of key senators.
National Retail Federation Senior Vice President for Government Affairs David French praised the efforts of the financial services lobbyists but said at the end the retailers had an easier case to make.
"It’s harder to get senators to change a law, which is what the banks wanted to do, than to get them to keep the status quo," he said in an interview. "Ultimately, we made the case about transparency. When consumers swipe their debit cards they pay extra because of hidden fees and it is hard to justify that."
While the retailers won the fight, Durbin noted during a Senate floor speech that the real winners were the lobbyists on both sides of the issue.
"A friend of mine who is a lobbyist downtown in Washington said, 'Durbin, praise the Lord. Come up with some more ideas. This is a full employment amendment. Everybody who is a lobbyist in Washington is working on this amendment. We just love you to pieces,’" Durbin said.