Article

No clear winners in wake of Durbin Amendment final rule

Both sides claim the consumer will bear the burden.

July 5, 2011 by Kim Williams — Reporter, NetWorld Alliance

The U.S. Federal Reserve last Wednesday issued its final ruling on debit card interchange fees, a component of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Durbin Amendment. Reactions from both retailers and card issuers have been mixed, but one thing can be agreed upon: the Fed has managed to upset both parties.

Slated to take effect on July 21, the original proposal limited banks with more than $10 billion in assets to a 12-cent fee cap charged to merchants per debit card transaction. The Fed's final rule applies an interchange fee cap of 21 cents per transaction, along with five basis points to be multiplied by the value of the transaction. Issuers can also receive an additional 1-cent per transaction toward the costs of fraud prevention.

“Instructed by Congress to regulate debit interchange, the Fed eventually crafted a final proposal that leaves all stakeholders feeling like they didn’t win, which — in the Fed’s assessment — probably represents the most ‘fair’ compromise possible to this heated and lengthy controversy,” said Sam M. Ditzion, CEO of Boston-based ATM industry advisory firm Tremont Capital Group. “The new structure is highly technical and only time will tell who — if anyone — actually ‘wins’ and who loses under the new system.”

The retail community expressed frustration with the last minute interchange cap fee increase, accusing the Fed of succumbing to the banks' and card issuers' demands. The date for implementation also changed from July 21 to Oct. 1.

"The Fed seems to have abdicated its responsibility to follow the law. Fortunately, Mr. Durbin's law was sufficiently tightly written that they couldn't completely kick over the traces, so there is some relief. There will be less of a benefit for retailers and their customers than there would have been under the original proposal, which was more in keeping with the legislative language," said Mallory Duncan, senior vice president and general counsel for the National Retail Federation.

Duncan also said that bearing in mind that debit card payment is a substitute for checks and checks pass at face value, the Fed was charged with balancing that against the actual costs for authorization, collection and settlement and coming up with something that is reasonable and proportional in light of those considerations.

So when the Fed came up with the original proposal of 7 to 12 cents, the number still struck the NRF as high because, according to Duncan, the cost was calculated at 4 cents.

"That's a 75 to 200 percent overage for the banks. That struck us as not quite keeping with the statute but not wildly outside of it," Duncan said. "Then when the final rule came out, it was several hundred percent over. There were no new laws or legal interpretation that came out in the meantime; they simply crammed extra money into it for the benefit of the banks and to the detriment of consumers and merchants."

Both sides point to the burden the consumer will bear, claiming that on one hand, a higher cap fee means less savings retailers can pass on to customers, and on the other hand, fewer reward programs from issuers to compensate for the costs associated with implementing fraud policies.

Passing on the savings?

The Fed's final rule prohibits issuers and networks from restricting the number of networks over which a debit card transaction can be processed. In theory, this would introduce competition by giving merchants a choice in networks, thus providing a savings to the merchant that would be passed on to the customer.

"I think it was clear from the discussions during the Q&A after the final rule was delivered that the Fed was skeptical that merchants would pass along any savings to their customers. There has just been little to no evidence of that and I think, in their remarks, they made that clear," said Kurt Helwig, president and CEO of the Electronic Funds Transfer Association.

Helwig said he keeps going back to the quote from Home Depot's chief financial officer during a conference call regarding the retailer’s fourth quarter profits in which it was estimated that the Fed's interchange proposal could translate into an additional $35 million per year profit. 

"I thought all the savings were going to be passed on to the consumer? That statement tells me that wasn't going to be the case, as many people suspected all along. So, this cap cuts it in half, and that means $17 million to his bottom line. That's not a bad place to be. I know a lot of companies who would be happy to go to their board of directors and investors with that," Helwig said.

In April, New York-based JPMorgan Chase cited the Durbin Amendment in a letter to its customers as the reason it could no longer issue debit rewards cards. Similar to the Credit Card Act of 2009 and the overdraft protection laws that led to, among other things, the reducing of credit, Helwig proposes that this Amendment, while well-intentioned, will also further marginalize the underbanked consumer.

"So, if there's no savings from the merchants because they aren't passing it along to the consumer, and the issuers are going to look for ways to recover the lost revenue, then it seems to me the consumer is getting squeezed," Helwig said.

Going forward

The EFTA, as a member organization, asked early on that the industry be given 90 to 120 days to implement whatever changes were going to be necessitated by the rules. Helwig said the organization, and its members, were concerned that there wouldn't be enough time to make the technical and operational changes required to accommodate the new rules.

"I was very pleased to see the date change in the final rule. I think that's only fair," Helwig said. "The Fed made it clear during the Q&A portion that they felt like they were put in a tough spot by Congress and felt as if their hands were tied in many respects, and I think they're just relieved that it's over."

Helwig said he is equally certain that a number of lawsuits will ensue from both sides following the rule, especially after implementation.

Additionally, both sides questioned how the rules will be monitored and enforced, especially with regard to the exemption for financial institutions with assets of $10 billion or less. While the big issues were the most widely discussed, several questions remain going forward.

“The Fed’s revisions to its initial thoughts on rate structure, fraud costs, network exclusivity and the effective date were clearly an attempt to address some of the most controversial aspects of the original proposal,” Ditzion said.