Small Institutions to Durbin Amendment: Thanks But No Thanks

“Thanks, but no thanks,” was the message on Wednesday from representatives of small financial institutions who made it clear they oppose a Senate amendment that would empower the Federal Reserve to regulate debit card interchange.

The chief executives of two credit union trade groups and of a small-bank association voiced strong objections to the so-called Durbin amendment, even though the proposal would exempt institutions under $10 billion in assets. “We didn’t seek this amendment,” said Dan Mica, president and chief executive of the Credit Union National Association. “We didn’t even know what it would say until the day it passed.”

Mica and other panelists argued the amendment had been rushed through the Senate with little or no consideration. Sponsored by Sen. Richard Durbin, D-Ill., the amendment passed the Senate last month on a 64-33 vote as a last-minute addition to a financial-services reform bill that is now undergoing reconciliation with a reform bill passed in December by the House of Representatives that doesn’t address the interchange issue. “Let’s remove the amendment from the bill, have hearings, and let’s see if we can do this right and not rush it through,” Mica said during a 30-minute video press conference sponsored by the Electronic Payments Coalition, an organization formed by financial institutions and the card networks to combat efforts by merchants to curb interchange.

Mica was part of a panel that also included Camden R. Fine, president and chief executive of the Independent Community Bankers of America and Fred Becker, president and chief executive of the National Association of Federal Credit Unions. The EPC billed the press conference as a “first-ever joint appearance” by the three association chiefs, who appeared united in opposition to the Durbin amendment despite long-running quarrels over other matters.

Even as the trio were speaking, the Merchants Payments Coalition, an advocacy group formed by retailer trade associations to lobby for interchange regulation, announced a 30-second ad that will start running on Wednesday on cable TV to drum up consumer support for the Durbin amendment. The ad accuses “big banks” of supporting an interchange system that overcharges small businesses, hurting their ability to hire and reduce prices. Referring to the frenzied lobbying over the amendment, the ad’s voiceover says, “The same big banks we bailed out are spending millions and will say anything to protect their huge fees.” Banks earn an estimated $15 billion annually from debit card interchange fees.

In another salvo in the ongoing battle over the amendment, the MPC on Tuesday released a letter from 215 state and national retail organizations urging the House of Representatives to adopt the Durbin amendment. In addition to handing the Fed power to rein in those fees, the amendment would also allow merchants to set minimum transaction levels for card acceptance.

In their press conference, the three small-institution executives turned the tables on the merchants, accusing large, so-called big-box merchants of trying to exploit the interchange issue for their own gain. “This [amendment] is not going to benefit consumers, let’s be clear about that,” said Fine. “This is about big-box retailers wanting to pocket more money.” The panel argued merchants will not pass on interchange savings to consumers, citing the example of interchange regulation in Australia, where studies indicate merchants passed on little or nothing of the savings from a government-imposed interchange cap.

The panel was also troubled by the amendment’s exemption of smaller institutions. The amendment calls for Fed oversight of interchange only for transactions originating from debit cards issued by institutions with $10 million or more in assets. This will set up a two-tier system, the panel argued, with retailers favoring cards from big banks, since they will presumably have lower interchange costs. “It will be a discriminatory system that will have small banks on the outside looking in,” said Fine.

Meanwhile, the card networks, which set interchange rates, are apparently scratching their heads over how they would implement such a two-tier system. Visa Inc. chief financial officer Byron H. Pollitt Jr. said at an investor conference on Tuesday that Visa doesn’t know how it will distinguish between small- and large-issuer debit cards if this provision actually becomes law.

“I can say honestly today we do not know how we would implement that,” Pollitt said at the UBS Investment Bank Global Technology and Services Conference in New York. “I think in the attempt to provide an umbrella for smaller institutions, what did not happen was the debate on how this would actually take place technologically.”

A problem, Pollitt said, is that many small banks use the bank-identification numbers (BINs) of much larger issuers. “We today do not have the capacity to differentiate those BINs at the point of sale, and so from that standpoint we don’t know how to implement it yet,” he said. “If a second alternative was to simply issue new cards with specific BINs to the smaller institutions, we can say right off the bat that that would be very, very cost-prohibitive and so that’s not a path that makes sense either.”

While the amendment is aimed at the interchange debit card issuers receive, Visa and MasterCard themselves could suffer some collateral damage. That’s because language in it could be interpreted as affecting the fees the networks charge as opposed to interchange, which, while set by Visa and MasterCard, is paid by merchant acquirers to issuers. “Our management team is very confident that the language was unintentionally broad,” Pollitt said. He added that Visa is “hard at work” to have the language changed or, if it survives to become law, to assure that the Fed understands its implications.