Last updateTue, 19 Jun 2018 9pm

Retailers have a lot at stake in Interchange Reform legislation


As if retailers needed any more fallout from the 2008 economic crisis, the National Retail Federation (NRF) reported that recent proposed legislation would delay implementation of the credit/debit card swipe fee reform act. The reform, known as the Durbin Agreement, was introduced in 2010 by Assistant Senate Majority Leader Dick Durbin (D-IL) as part of the Wall Street Reform Act. The main goal of the agreement is to place legal restrictions on the fees banks charge merchants on debit card processing fees. According to Brad Cohen, a U.S. Department of Justice attorney, congress passed the regulations to resolve accusations of price fixing by Visa and MasterCard. He said debit card interchange fees have gone up 234 percent from 1998 to 2006.

In 2009 $1.21 trillion in debit card purchases were made through the Visa and MasterCard networks, according to the Nielsen Report. According to Durbin’s website, interchange fees are supposedly charged by Visa and MasterCard in order to cover the cost of processing a credit or debit card transaction. These fees continue to rise even though processing costs have decreased. Of the nearly $50 billion in interchange fees charged by credit and debit card networks in 2008 – coming out of the bottom lines of small businesses, charities and government balance sheets – 80 percent went to just ten large banks.

This is a big money issue. Dick Durbin sums it up like this:

“I’m pleased that the Department of Justice has recognized what we have long argued – that Visa and MasterCard have created a system that lines their pockets by excluding competition and nickel and diming consumers,” Durbin said. “Earlier this year [2010] we changed the way credit card companies treat consumers and small business owners when it comes to debit cards and this settlement makes some of the same changes to the credit card market. Under this settlement, merchants will now be given more choices as to how they process card transactions and can pass those benefits on to consumers in the form of lower prices.”

With the new regulations to be implemented on July 21, 2011, big banks continue efforts to stall the reform. On March 15th proposed legislation by Senator Jon Tester (D-MT) could do just that.

Tester, along with 16 co-sponsors, introduced the Debit Interchange Fee Study Act 2011. If passed, this legislation would postpone the implementation of the reform by at least two years in order to study it first. The proposed bill was promptly referred to the Senate Banking, Housing and Urban Affairs committee where it currently awaits approval.

It is also rumored that members of the House Financial Services Committee will propose a bill requiring an additional one-year delay to even start the study, resulting in a three year moratorium on any reductions of interchange fees.

But what’s really at stake? A proposed reduction by the Federal Reserve to change debit card swipe fees from 1% to 2% of each transaction to a flat fee of no more than 12 cents per transaction, would cut bank revenue on these transactions by at least 70% for large banks that operate under the fees set by the card companies.

One additional element to this concoction of ‘consumer friendly’ legislation is that banks under 10 billion in assets are exempt from this amendment. This happened after merchants convinced law makers to allow the government to set fees at a ‘reasonable’ rate. The Federal Reserve was slated to announce the parameters of this so-called reasonable rate in April, but delayed the announcement due to receiving more than 11,000 comments (half of which came from credit unions) being made against the legislation. Believing that merchants would refuse to accept the higher fee cards from smaller banks, thereby forcing smaller banks to offer the more competitive 12 cent cap, the National Association of Federal Credit Unions is pushing to repeal the Durbin amendment.

For so many independent jewelers the outcome of this legislation will have a big impact on their business. Jewelers of America encourages you to contact your local representatives and voice your vote in this matter. Go to their website at www.jewelers.org and click on the Legislative Action Center link on the left side of the page to find a direct link to your congressional representatives.

In the meantime, the NRF filed comments with the Fed in February arguing that the 12-cent cap doesn’t go far enough. Retailing Today noted that the NRF told officials debit cards are merely plastic checks and should be honored at or close to face value since paper checks that draw on the same accounts are not subject to swipe fees. Banks’ own filings with the Fed claim only 4 cents as the cost of processing a debit transaction.

“The banks and card companies claim they want to study swipe fee reform, but the truth is they want to kill it,” NRF SVP and general counsel Mallory Duncan said. “Congress has already conducted more than half a dozen hearings on this issue, and the GAO and Federal Reserve have done studies of their own. The time for study is over. The time to reduce these fees and take bankers’ hands out of consumers’ pockets has come.”

Below is a summation of the Durbin Agreement from Dick Durbin’s website at www.durbin.senate.gov:

The Durbin amendment would bring reasonable regulation to the $20 billion per year debit interchange fee system. Interchange fees are received by the card-issuing bank in a debit card transaction. However, Visa and MasterCard, which control 80% of the debit market, set the debit interchange fee rates that apply to all banks within their networks. Every bank gets the same interchange fee rate, regardless of how efficiently a bank conducts debit transactions. Visa and MasterCard do not allow banks to compete with one another or negotiate with merchants over interchange rates, and there is no constraint on Visa and MasterCard’s ability to fix the rates at unreasonable levels. This system is effectively an unregulated $20 billion per year transfer of wealth from merchants and their customers to card-issuing banks.

The original bill, called the Durbin Agreement, placed legal restrictions on debit card fees offering retailers a reprieve from the financial burden placed on them by big banks every time their customers paid with a plastic card.

According to Dick Durbin’s senate page:

The Durbin amendment directs the Fed to issue rules to ensure that debit interchange fees are reasonable and proportional to the processing costs incurred. These fees are far higher than the actual cost of processing debit transactions.

The Durbin amendment also allows sellers to offer discounts for customers to use competing card networks and for customers to pay by cash, check or debit card. The amendment would also allow sellers to choose to decline credit cards for small dollar purchases.

The amendment will require that for transactions involving debit cards issued by banks with assets over $10 billion, any interchange fee charged on the transaction must be reasonable and proportional to the cost incurred in processing the transaction. Visa and MasterCard currently charge debit interchange fees of around 1-2% of the transaction amount. These fees are far higher than the actual cost of processing debit transactions, and they mean that small businesses and merchants always get shortchanged when they accept a debit card for a sale.

The amendment will permit card-issuing banks to receive debit interchange fee adjustments to cover reasonably necessary fraud prevention costs. However, as opposed to the current interchange system where banks receive a guaranteed level of interchange revenue no matter how effectively they deal with fraud, the amendment will require banks to demonstrate that they have met fraud-prevention standards and taken effective steps to reduce fraud in order to receive an issuer-specific interchange adjustment that will cover their necessary costs.