The Banks Wake up

 

Karen Epper Hoffman

_{Outmaneuvered and outgunned by merchants, banks lost a key interchange battle last year with the passage of the Durbin Amendment. But lately they’ve gone back on the offensive in an all-out push to delay—and maybe kill—the new law.}

_{The passage of new card interchange fee rules and caps was clearly a surprising blow that sent a still-battered banking industry reeling. But while the enactment of the Durbin Amendment last year may have been an unexpected gut-punch for banks, it also seems to have become their wake-up call.}

_{“The almost comatose banking industry has woken up,” says Eric Grover, principal for Intrepid Ventures, a Carson Valley, Calif. consultancy. “The big banks were AWOL over the Dodd-Frank [legislation] … They were battered and beholden to Washington. They did not want to speak up.”}

_{The Durbin Amendment was added to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 by Sen. Dick Durbin, D-Ill. It would effectively slash issuers’ debit card interchange fees by billions of dollars. Under Durbin, the Federal Reserve Board was required to write a rule setting “reasonable and proportional” interchange fees for debit cards.}

_{In December 2010, the Fed proposed an interchange cap of 7 cents to 12 cents on most debit card transactions—lowering interchange fees by about 80% from current levels, by industry estimates. Financial institutions with assets of less than $10 billion in assets are exempt.}

_{The passage of the Durbin Amendment and the subsequent proposal by the Fed caused a firestorm in the banking industry, which arguably is depending on interchange fee revenue now more than ever as market and regulatory pressure are forcing down banks’ income in retail products and lending.}

_{“Regulating interchange fees is price fixing and has no role in our free-market economy,” said Richard Hunt, president of the Consumer Bankers Association, in a prepared release on Dec. 15, the day the Fed proposed the new caps on debit interchange. “Presented as a pro-consumer provision to lower costs, the most likely result will be an increase in the cost of financial services for American consumers and the elimination of benefits and efficiencies valued by many debit card users.”}

_{‘A Certain Arrogance’}

_{But now, having lost the battle over Durbin last year, banks and their industry associations in the past few months have rallied their forces, launching an all-out lobbying crusade in effort to at least delay, if not nullify, the law, which is set to go into effect next month. Banks may have been outmaneuvered by the merchants in Congress last year, but they’re now determined to regain the legislative advantage they had enjoyed on interchange questions until 2010.}

_{As of mid-May, there were two bills working their way through Congress that would delay Fed rulemaking under the new amendment. There were also at least two lawsuits brought by banks that question the constitutionality of the Durbin legislation. And financial executives from institutions of every size were voicing their concerns about this legislation and its impact on American consumers as well as their operations.}

_{Case in point: The Fed received more than 11,000 comment letters in three months regarding its proposal on debit interchange. Indeed, the central bank was so inundated with letters it announced it would not be able to meet its original April 21 deadline for releasing the final version of its proposal. It did say rules would be in place by the July effective date called for by Durbin.}

_{In hindsight, it seems surprising that the financial industry did not mount more of a defensive campaign against the interchange legislation before it was passed. Both merchants’ and bankers’ groups have a slightly different take on why card-issuing companies weren’t initially more vocal in their opposition to the Durbin legislation. But ultimately, as both sides see it, it came down to the basic idea that banks didn’t see (or believe) it was really coming.}

_{“I think last year that there was a certain arrogance on the side of the banking industry. They thought that they had various committees all sewn up,” says J. Craig Shearman, spokesman for the Merchants Payments Coalition, a merchant trade group formed in 2005 to lobby Congress for interchange relief.}

_{Shearman maintains that banks—cocky from years of having successfully beaten back efforts by merchant groups to reduce interchange—had become complacent. “Up until now, the relationship between banks and merchants has been largely one-sided, it’s been ‘take it or leave it’ with interchange fees,” Shearman says.}

_{According to the National Association of Convenience Stores, its member-merchants paid $7.4 billion in card-acceptance fees last year, making it the second-largest industry expense after labor.}

_{“Retailers have to take cards,” Shearman adds. “We are hoping this [Durbin Amendment] will create a more level playing field where the retail industry will be seen as a partner.”}

_{‘Politically Tone Deaf’}

_{Bankers see their stunning reversal last year differently. From their perspective, the Durbin Amendment was a last-minute addition to more reasonable and well-thought-out legislation (the Dodd-Frank Act), which got tacked on at the eleventh hour without review or thorough consideration of its impact.}

_{Carl Bradbury, director of consumer card products for Commerce Bank, contends, “This happened in the dead of night without any review by a standing committee in Congress, glossing over the cost details. We were stunned. How can the government set prices between businesses?”}

_{Other bankers agree that they were blindsided, if not by the legislation’s passage, then by its magnitude. “Up until December, when the Fed came out with its proposal, everybody [in the banking industry] thought that we would prevail. Everyone was relying on it not really happening,” says a spokesman for TCF Financial Corp., Wayzata, Minn.}

_{TCF was one of the few banks last year actively reaching out to customers with its position on how setting debit interchange caps could affect them, and rallying them to contact their Congressmen, according to industry observer Grover. Nonetheless, even executives at TCF were surprised by how far the legislation and the subsequent Fed proposal went.}

_{“We all thought ‘it’s only going to be a 30% to 50% drop,’” the spokesman says. If the Fed’s proposed debit interchange cap stays at 12 cents, it will slash interchange fees by 80% or more by industry estimates.}

_{As Grover points out, the merchant industry had two other key factors working in its favor: a powerful and mature lobbying collective and timing.}

_{“The merchant lobby did a more effective job of making their case and bringing pressure to bear on politicians and framing the issue around cost structure,” Grover says. Convenience-store chain 7-Eleven, for example, ran a national petition by customers about card fees. “In contrast, the banking industry was not as engaged,” Grover says. While banking groups did reach out to Congressmen, Grover adds that initially there was “no attempt by the payments industry to get a message out to consumers.”}

_{Worse yet, Grover adds, Visa had announced substantial increases in interchange categories last year, while the legislation was in process. “It’s politically tone deaf to do something like that when the Senate majority whip [Durbin] has you in [his] crosshairs,” he adds.}

_{Aside from being “aggressive and politically more adept” in recent months, the merchant coalition also had good timing on its side. With the banking industry last year still reeling from the 2008 financial crisis, the attention of most banks was turned inward. Meanwhile, the ire and resentment that many politicians and consumers felt toward the financial industry, which they deemed responsible for the crash and subsequent recession, was still fresh. “Big banks were the bad guy,” Grover says.}

_{Backing off on Caps}

_{Black hat or no, banks have finally gotten their game face on. “Most parties were silent in the runup to this thing,” Grover says. “But what we’ve seen over the past three months is a full-throated effort by the banking and payments industry to have [the Durbin Amendment] modified, repealed, or delayed.”}

_{Rep. Shelley Moore Capito, R-W.Va., has presented one of two pieces of legislation in Congress that would delay Fed rulemaking to give lawmakers a chance to more fully study Durbin. Moore Capito’s bill would delay the interchange provision by one year and give banking regulators more discretion to change the final rule.}

_{But the bill that has commanded more attention and support from the banking lobby is the one put forth by Sen. Jon Tester, D-Mont., which would delay the rule by fully two years. Tester has said publicly that he has the 60 Senate votes necessary to get his bill passed, but he needs another bill to which it can be attached—an iffy proposition.. Although the Tester bill’s supporters say that nothing is guaranteed, they believe that the legislation has a much better chance of passing than it did just months ago.}

_{“The chances of this being delayed or repealed last year were modest, but now the momentum is with the banking industry,” Grover says.}

_{Sixty-four Senators voted in favor of the Durbin Amendment, which would mean that at least a few of those who voted for the legislation last year would need to shift their position to vote for its delay. That prospect might not be so far-fetched. Congressmen who backed banking reform have retired or left office or are now backing off somewhat from interchange caps.}

_{Sen. Chris Dodd, D-Conn., who helped craft the namesake bill to which Durbin was attached, retired earlier this year. Rep. Barney Frank, D-Mass., the other name on the Consumer Protection Act, has publicly expressed support for the delay. Grover estimates that there’s a “better than 50% chance at this point that Tester will get his votes.”}

_{According to Bradbury of Commerce Bank, delaying the debit-interchange caps does not kill them, but rather will give banks and merchants more time to hash out the issue. “Senator Tester’s bill is a compromise,” he says. “Discussion is better than setting a 12-cent limit.”}

_{‘Downright Idiotic’}

_{Making the case to Congressmen has not been left to banking lobbyists alone. High-profile bankers are making their case directly as well. In February, Commerce Bank chief executive David W. Kemper testified on behalf of the CBA and the American Bankers Association during a hearing of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit focused on the Durbin legislation. Kemper’s testimony not only underscored how the Durbin legislation, as bankers see it, undercuts their business, but also how it will impact bank customers.}

_{“The Durbin Amendment and the Federal Reserve’s proposed rule to implement it will cause great harm to consumers, and to financial institutions of all sizes and their ability to revitalize local economies,” Kemper stated in prepared testimony for the hearing. “It will have profound adverse consequences on consumers (particularly low-income Americans), the banking system (particularly the nation’s smaller banks and credit unions), and the United States payments system and economy as a whole.”}

_{Indeed, bankers have stepped up efforts to convey through political channels, legal channels, and the media the legislation’s potential negative impact on consumers as well as smaller and mid-sized banks that did not contribute to the financial crash. Bankers at JPMorgan Chase & Co., U.S. Bancorp, and Citigroup have all put out statements decrying the Durbin legislation.}

_{In what was perhaps the most inflammatory volley, Chase chief executive and chairman Jamie Dimon railed against the planned interchange caps as “counterproductive,” “price fixing at its worst,” and “downright idiotic” in a letter to shareholders.}

_{Dimon has also said publicly that the financial losses that interchange caps will bring upon banks will cause them to raise other fees, and potentially shut out less profitable customers from the banking system. In April, Sen. Durbin drafted an open letter to Dimon, rebutting most of his points. Other bankers agree with Dimon’s vision.}

_{“There is not one iota of doubt in my mind that this will have a negative impact on customers,” Bradbury says. He adds that the only means banks will have to recover costs and support infrastructure if interchange fees are slashed is by charging new fees and eliminating popular products.}

_{Whether that argument will ultimately be enough to delay—let alone repeal—the Durbin Amendment remains to be seen. What is clear is that issuers and their allies in the card networks and trade associations have shaken off the lethargy of 2010 and are on the offensive after what proved to be a very costly delay. And this time, they appear to have momentum on their side.}