Questions Arise in the Wake of Durbin’s Winning Amendment

Payments-industry partisans of all stripes got onto their soap boxes on Friday and Monday to praise or denounce U.S. Sen. Richard Durbin’s successful amendment that could pave the way for regulation of debit card interchange and acceptance terms. Merchant interests basked in the surprisingly large (64-33) victory they scored late on Thursday and banks and the bank card networks reeled from a rare Capitol Hill defeat. Others, however, wondered just how the Federal Reserve and the networks would carry out some of the amendment’s vaguely worded stipulations should they become law.

For now, however, merchants and the card industry are gearing up for a furious lobbying fight as the amendment, attached to the big financial-industry regulatory reform bill, moves through the legislative process. Still ahead is debate by the full Senate and reconciliation with the version the House of Representatives’ passed earlier and does not contain an interchange provision. Senate Majority Leader Harry Reid, D-Nev., hopes to have the Senate’s work done by Memorial Day. But House Financial Services Committee Chairman Barney Frank, D-Mass., indicated in the winter that he wasn’t interested in the interchange issue. A Durbin spokesperson did not respond to a Digital Transactions News e-mail Monday.

“We are going to work with members of Congress,” Shawn Miles, group head of Global Public Policy at MasterCard Inc., tells Digital Transactions News. “This [amendment] will result in harm to consumers, particularly in terms of debit accounts and causing consumers to pay more for debit accounts.”

Opponents noted that in Australia, merchants did not pass on savings to consumers when the central bank imposed a big cut in interchange. Senators opposed to Durbin’s amendment wondered, “If it’s not going to benefit consumers, why are we doing this?” Miles says.

Merchant groups are hailing the amendment as a ticket to lower acceptance costs and freedom from strict Visa and MasterCard anti-discrimination rules against cardholders. More than 200 trade groups, with the National Retail Federation at the forefront, urged its passage (Digital Transactions News, May 14). The measure would enable merchants to discount for other card brands or forms of payment, and to surcharge for card payments. The networks couldn’t prevent merchants from setting minimum or maximum amounts on card sales.

Regarding debit interchange, the amendment’s wording says, “The amount of any interchange transaction fee that an issuer or payment card network may charge with respect to an electronic debit transaction shall be reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction.” The Fed is charged with establishing standards for assessing what is reasonable and proportional.

The status quo might not change all that much if Durbin’s amendment survives to become law, according to Beth Robertson, director of payments research at Javelin Strategy & Research. What the Fed assesses as “reasonable and proportional” is subjective, she notes. “The outcome could possibly be that nothing that needs to be done,” she says. “Even though this amendment has been passed, it doesn’t necessarily mean doomsday for the issuers.” Debit and credit card issuers receive interchange under rates Visa and MasterCard set and charge to their merchant acquirers, who pass the expense on to their clients.

Another murky issue is the divide the amendment creates between big and small banks by exempting financial institutions with less than $10 billion in assets from interchange restrictions, which Durbin said includes 99% of all banks and credit unions. Durbin in a statement said his measure “would hold big banks accountable for how they operate” and would help merchants “by cleaning up Visa’s and MasterCard’s worst abuses.” Small banks, however, didn’t seem to appreciate the favor. In a statement, the Independent Community Bankers of America trade group said the proposal would give merchants an incentive not to accept cards from small banks because they would cost more to accept than those from big banks, whose plastic would carry lower interchange rates.

How to implement a two-tiered system is unclear. In one scenario, the networks might have to keep databases of bank identification numbers indicating which interchange rates would apply to each issuer as transactions come through. “That could create a lot of confusion in the market,” Robertson says. Add to that the discounts or surcharges merchants might roll out. “It’s just not practical … it would be very confusing,” she says. Miles says MasterCard hasn’t yet considered the operational implications of the amendment.

Durbin’s victory spooked investors in Visa and MasterCard, even though the networks do not receive interchange revenues. Share prices for both fell sharply Friday and the slide continued, though much less steeply, on Monday. In all, MasterCard’s shares are down 9.3% since Thursday and Visa’s are off 12.9% on heavy trading volumes. “There’s always been confusion on Wall Street regarding the issue of interchange,” a MasterCard spokesperson says. “We’re just seeing that playing out.”

If Durbin’s amendment survives, the Fed is supposed to have final rules out by next March that would take effect in June 2011.