The legislation to delay the regulation that caps debit card interchange fees failed to win enough votes yesterday in the Senate. It received 54 votes which was six votes short of the 60 needed. Without a delay, the Federal Reserve should soon be releasing the final rule on capping the fees. It's scheduled to take effect on July 21st.
The amendment's main sponsor, Senator Jon Tester, had made several compromises in the last few months in an attempt to win votes. He originally set the delay to 2 years. This first went down to 15 months, and just recently it fell to 6 months. But that wasn't good enough. I think many Senators felt that delaying this regulation would look like they were on the side of the big banks. As mentioned in this Bloomberg article, there was a lot of political concerns about supporting the Tester amendment.
When you make a purchase with a debit card or credit card, the retailer pays an interchange fee of between 1% to 2% of the cost of the purchase. Most of that fee goes to the bank that issued the card, and many banks return some of that money to their customers in the form of rewards. This helps pay for the high interest rates offered by reward checking accounts. The cap on interchange fees could significantly reduce the rewards.
The cap on debit card interchange fees is based on the Durbin Amendment that was part of last year's financial reform. It requires the Federal Reserve to implement caps on debit card interchange fees. The Durbin Amendment exempts small institutions with less than $10 billion in assets. However, most credit unions and small banks believe that the Durbin Amendment will drastically lower their interchange revenue.
I think the $10 billion exemption contained in the Durbin Amendment made it hard for the Senators to support the delay. Durbin continued to maintain that delaying the regulation would mostly benefit the big banks. Both credit union and community bank groups were pushing hard for the delay, but their explanations about how the regulation would hurt small institutions were weak.
One of my contacts in the industry described two ways the Durbin Amendment would hurt small institutions. First, there was concern that VISA and MasterCard may not make it easy to identify debit card transactions as being from large or small institutions. VISA has indicated that they will be able to support the $10 billion limit so this might not be a significant issue.
The second concern is from another part of the Durbin Amendment that isn't as well known as the cap. It requires that merchants have a choice as to which network they run the debit card transaction on. Cost would likely be the main factor for merchants, and all networks would be forced to lower their prices which would significant reduce the interchange revenue for all institutions even the small ones. If you want more details about this issue, refer to this research paper on the interchange regulation's impacts to credit unions.
So the above reasons may be why the group that represents credit unions warns that the failure to pass the delay "is going to create a train wreck that will affect every consumer with a debit card."
I think it's going to take some time to know how much effect it will have. However, with the expectations set that it will have a significant impact, it seems likely that banks and credit unions will begin to make changes even before they see their interchange revenue fall.
