Debit Cap Arrives: Interchange Cap Was a Long Time Comin’
It’s an arcane subject that is of concern mainly to financial institutions and retailers and one that rarely generates headlines. Last year, however, everything changed.
While credit unions and banks were fending off parts of the financial overhaul bill that they felt would add to their regulatory burden, they saw the issue of debit interchange fees thrust into the spotlight.
On May 13, 2010, Senate Majority Whip Richard Durbin (D-Ill.) was able to persuade his colleagues in that chamber to pass by a vote of 64-33 an amendment that mandated the Federal Reserve establish interchange fee standards and a fee cap. Though there had been hearings on interchange fees, there wasn’t one specifically on the Durbin amendment.
In an attempt to win the support of the small card issuers, Durbin included a provision that exempted financial institutions with assets of $10 billion or less. But that didn’t work out.
CUNA and NAFCU and their counterparts in the banking industry opposed the amendment. However, some lobbyists and Durbin allies said that CUNA and the Illinois Credit Union League had originally agreed to back the amendment then changed their mind.
CUNA Executive Vice President John Magill said that’s not an accurate description of what happened.
“CUNA from beginning to end tried to ensure that the amendment wouldn’t affect credit unions in a negative way. But we were rebuffed at every turn in trying to include costs and insure the exception would work. It was a simple as that, which is why we opposed the amendment,” he said.
The House hadn’t passed a similar amendment when it passed its version of the financial overhaul legislation in December 2009. However, when the House and Senate versions were reconciled, Senate conferees insisted that the interchange language remain in the final bill.
In a letter to then-CUNA President Dan Mica and Independent Community Bankers of America President Cam Fine, Durbin accused them of mischaracterizing the provisions of his amendment and urged them to “to accurately represent to your members what my amendment does, and to clarify any misimpressions of what it does not do.”
CUNA and NAFCU and the banks tried in vain to lobby the conferees to remove the Durbin amendment.
The Dodd-Frank Act was signed into law by President Obama in July 2010 and in December, the Fed issued a proposed rule that limited allowable costs for interchange 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.
However, the banks and credit unions worked with their congressional allies to try to delay implementation of the Fed rule, which was supposed to take effect on July 22, 2011.
Sen. Jon Tester (D-Mont.) and Sen. Bob Corker (R-Tenn.) sponsored a bill to postpone implementation of the Fed rule and have the NCUA and other regulators conduct a study to consider the fixed and incremental costs to financial institutions, whether the rules would adversely affect consumers and whether the small-issuer exemption was feasible.
Federal Reserve Chairman Ben Bernanke, then-FDIC Chairman Sheila Bair and NCUA Chairman Debbie Matz all expressed concerns about the enforceability of the small-issuer exemption. And CUNA and NAFCU maintained that merchants would discriminate against smaller issuers.
On June 8, the Tester-Corker amendment received 54 votes, six short of the 60 needed to pass under Senate rules. There were 45 senators who opposed the amendment.
On June 29, the Fed issued its final rule that capped interchange fees at 21 cents a transaction, up from the original proposal of 12 cents, with a 1 cent fee for fraud prevention and a five basis point allowance for fraud costs.