Federal Reserve's Proposal Leads to 'Horse-Race' Between Retailers and Banks

Banks and retailers clash over Fed's proposal to limit debit card swipe fees.

ByABC News
December 17, 2010, 7:30 PM

March 14, 2011 — -- As the deadline for the Federal Reserve to determine whether to cap debit card fees approaches, banks and retailers have engaged in an aggressive lobbying campaign that one consumer advocate has likened to a "horse race."

At issue is the Fed's proposal to cap fees on debit card usage -- or "interchange" fees -- from 7 cents to 12 cents for each transaction, compared with the existing average fee of 44 cents for each transaction in 2009. Congress gave the Fed authority over interchange fees through the Durbin Amendment in the Dodd Frank Act.

"There's a multimillion dollar lobbying campaign between banks and retailers, a horserace," said Ed Mierzwinski, director of the consumer program at the Public Interest Research Group. "I wish more people would drill down that for 20 years banks and credit card networks have run an interchange system that is anticompetitive and based on a duopoly."

Trish Wexler, a spokewomann for the Electronic Payments Coalition, which is against capping interchange fees, dismissed that a duopoly exists in the card networking business.

"If there is a question of competition, that is a question for the courts. It's a question the courts have dealt with and continue to deal with," said Wexler. The coalition has over 60 members, including credit unions, payment networks, Visa and MasterCard.

Linday Sherry, a spokeswoman for the consumer advocacy group Consumer Action, said she is watching the debate closely but is not sure if a victory from either side -- banks or retailers -- would benefit consumers.

"In some ways, we wonder why this was done under the pretext of helping consumers. Because it's not clear to us that consumers would be the winners under the Durbin Amendment," Sherry said. "It's really unclear. It's a merchant-bank issue."

The Fed accepted comments from the public and industry groups through Feb. 22 and will vote to approve the final proposal by April 21. Financial lobbying groups have decried the proposal, which was first introduced Dec. 16.

Who's Speaking for Consumers?

Sen. Dick Durbin, D-Ill., after whom the amendment is named, said reform is necessary for the sake of America's consumers, businesses and overall economy.

"There is nothing wrong with card-issuing banks receiving fees for debit transactions as long as the fees are transparent and set in a competitive market environment. But that is not the case with interchange fees," said Durbin, in a hearing before a House Financial Services Subcommittee Feb. 17. "For years, card networks like Visa have fixed the interchange fee rates that each issuing bank receives when one of their debit cards is swiped."

Mastercard and Visa cards are used in around 80 percent of debit and credit transactions, according to Durbin.

"In other words, each bank that issues Visa cards receives exactly the same network-established fee, no matter how efficiently or inefficiently that bank processes transactions or prevents fraud," said Durbin.

While merchants argue that lower interchange fees will lead to lower prices for their customers, banks say a cap will force them to charge higher fees for other services, such as fraud protection. Mierzwinski said there was no guarantee that retailers would pass on savings to consumers but said retailers had more competition in their marketplace than the card networks, dominated as they are by Visa and Mastercard, which could ultimately benefit consumers.