In the ongoing war against the Dodd-Frank Act, merchants have won a battle against banks.
The House Financial Services Committee has announced that the Financial CHOICE Act, a Republican plan to repeal or replace much of the Dodd-Frank Act, will be voted on in the House of Representatives on June 5. As the legislation goes to a floor vote, a controversial repeal of the so-called Durbin amendment, limitation on debit-card transaction fees, will not be included.
The late stage revision is, in large part, an admission that the controversial rule, and its equally controversial repeal, could erode support and fracture Republican voting blocs.
The Dodd-Frank rule was named for its proponent, Sen. Richard Durbin (D-Ill.), It, by empowering the Federal Reserve to do so, set caps on swipe and interchange fees for debit card transactions.
When consumers use a credit or debit card, the merchant’s bank pays the customer’s bank an “interchange fee” for purchases that use a card network, such as Visa and MasterCard. Debit card interchange fees are established by payment card networks for each electronic debit transaction. To accept certain cards, a retailer must transact with a bank that has access to card networks. The merchant and the bank negotiate the fee that the merchant pays for the privilege of accepting cards; the card networks are not involved in these negotiations.
The Durbin rule established standards for assessing whether debit card interchange fees received by debit card issuers “are reasonable and proportional” to the costs incurred by issuers for electronic debit transactions.
The issue of capping interchange fees has long pitted banks against retailers, convenience stores, and restaurants. The former sees the added revenue as necessary funding for improving payment systems and their security;
“Merchants have complained that the interchange fees they pay are set at levels that are far higher than the banks’ costs for processing these transactions,” a summary of the Financial CHOICE Act, authored by Republicans, said prior to carving out the related repeal. “Merchants claim that if fees were set at competitive rates, consumers would benefit from lower prices. The banking industry counters that consumers do not benefit from lower interchange fees, both because merchants do not pass savings on to consumers in the form of lower prices and because bank profits from interchange fees subsidize the costs other financial products and services that consumers rely upon.”
“The Durbin Amendment is based on the false premise that interchange fees are the result of a monopoly that requires government intervention,” the summary added. “Rather than permit market participants to negotiate interchange fees, it instead directs the Federal Reserve to cap interchange fees for debit cards at a level that is ‘reasonable and proportional to the cost incurred by the issuer with respect to the transaction.’”
This mandate, Hensarling and his team said, is unworkable because the terms “reasonable and proportional” are vague, and the mandate “is unnecessary because there is no monopoly, given the many card networks that exist alongside and compete with Visa and MasterCard.”
“The mandate is also misguided because it inserts Congress and federal agencies between private parties engaged in a dispute over the contractual amounts that should be paid for services,” they wrote.
In March 2014, researchers at the Federal Reserve and the Office of Financial Research issued a report on “Bank Profitability and Debit Card Interchange Regulation: Bank Responses to the Durbin Amendment.” The report found that subsequent to implementation of the Durbin Amendment, interchange revenue had dropped and banks were only able to recoup 30 percent of lost revenue from higher fees on deposit accounts.
At the time it was originally drafted, the Financial CHOICE Act summary document says it would “repeal the Durbin amendment, and thereby bring an end to a misguided government experiment in price-fixing that has done consumers more harm than good.”
“It is time for Congress to get out of the business of rationing consumer access to the mainstream banking system,” it said
The ?Retail Industry Leaders Association, a trade association, says that the Dodd-Frank rule “stopped large banks and card networks from charging merchants exorbitant fees on debit card transactions.” It saluted the effort to strip its repeal from the Financial CHOICE Act.
“Preservation of swipe fee reform is an important victory for retailers and consumers who would have faced higher fees from the country's largest banks with every swipe of a debit card,” Austen Jensen, vice president of Government affairs and financial services, said in a statement. "This victory should finally put to rest efforts to repeal the debit reforms that have saved retailers and their customers billions in hidden fees.”
The Electronic Payments Coalition promised to keep fighting for repeal of the Durbin amendment today and will continue to work with Congress to stop this failed policy.
“The House Financial Services Committee voted twice in back-to-back congresses to repeal the Durbin Amendment because members know this is a crony handout that has generated unearned billions for the Big Box retailers and heartburn for their customers,” said Executive Director Molly Wilkinson. “The Durbin price controls hurt consumers, community banks and credit unions and even small merchants. This is a bad policy, and we, the Electronic Payments Coalition, are committed to repealing it.”
Since the policy took effect in 2011, “the special-interest Durbin amendment has allowed merchants to collect more than $42 billion they promised to pass along to their customers,” EPC says. “In that time, merchants have raised prices while banks and credit unions have lost revenue used to serve their customers and members.”