Buried by Letters, the Fed Delays Issuing Its Debit Card Rules

Overwhelmed by the volume of comments it received, Federal Reserve Board Chairman Ben S. Bernanke on Tuesday said in letters to Congress the Fed would miss Congress’s April 21 deadline to have issued final debit card interchange and network regulations. Bernanke, however, said the Fed still plans to meet the July 21 deadlines for when the rules are supposed to take effect.

The ultimate impact of the delay is unclear. It might give banks, payment card networks, and other opponents of regulation more ammunition in their fight for longer delays or an outright scuttling of the controversial debit provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act’s so-called Durbin Amendment. Already a bill in the House of Representatives is calling for a one-year delay and a Senate bill calls for a two-year delay. But the National Retail Federation, a leading debit- regulation proponent, said in a statement that, “if they take a few extra weeks, we understand.” The NRF said it “welcomed  [Tuesday’s] commitment by Federal Reserve Chairman Ben Bernanke that the agency will complete final swipe-fee reform regulations in time for retailers to begin offering customers discounts and other benefits this summer as scheduled.”

The Electronic Payments Coalition, a lobbying group of card networks, banks, and others that oppose the Durbin Amendment, said the delay was appropriate. “Chairman Bernanke’s letter shows what a complex issue this is, and not easily solved in a rushed timeframe,” a spokesperson said in an e-mailed statement. “This should be a clear signal to Congress that they must give the Fed what they need: more time. Isn’t it only reasonable to delay the arbitrary deadline, and study for once the impact on consumers and smaller financial institutions?”

U.S. Sen. Richard Durbin, D-Ill., chief sponsor of the Durbin Amendment, issued a statement Monday saying, “Chairman Bernanke reiterated to me today that the Federal Reserve is working diligently to finalize its rules in a timely fashion and that new interchange regulations will take effect on July 21st, one year after Wall Street Reform was signed into law.”

Dodd-Frank gave the Fed nine months to issue final rules implementing the Durbin Amendment’s provisions calling for “reasonable and proportional” debit interchange and bans on network exclusivity agreements between payment networks and debit card issuers meant to give merchants more transaction-routing freedom, in theory enabling them to reduce their card-acceptance costs. The Fed issued preliminary rules in December that would cut debit card issuers’ average debit interchange revenues by 70% or more, but asked for further commentary on a number of questions.

In letters to the leadership of the House Financial Services Committee and the Senate Banking Committee, Bernanke said the Fed has received more than 11,000 comments, many of which were quite detailed. “We believe the information provided in these comments is important for assessing fully the effect of the proposed rule on the U.S. payments system and its users and providers,” he said. “This extraordinary volume of comments reflects the importance of debit cards as a method for consumers and others to access deposit accounts to make payments for purchases throughout the economy.” Bernanke noted that the number of debit card transactions grew from 8 billion in 2000 to nearly 38 billion in 2009.

“Because of the volume of comments and the complexity of the issues raised in those comments, we have concluded that we will be unable to meet the Act’s directive that the board issue final interchange fee standards by April 21,” Bernanke said. But he said the Fed would issue interchange rules some time before the mandated July 21 effective date, and he further committed to meeting the July 21 deadline for rules to implement Dodd-Frank’s network-exclusivity and transaction-routing provisions.

The delay means the implementation time will be squeezed into less than the three months originally provided by Dodd-Frank, raising questions as to whether networks and merchant acquirers can reprogram their systems quickly enough to carry out the Fed’s dictates. But the bigger question is whether more delays are over the horizon as banks and credit unions, the recipients of interchange, along with their network allies, regroup after suffering a huge political loss last year when the Democratic-controlled Congress included the Durbin Amendment in the final version of Dodd-Frank. Republicans now control the House, and even some Democrats have expressed reservations about the Durbin Amendment. But the Senate remains in Democratic hands, and Sen. Durbin, the assistant Senate majority leader, remains staunchly committed to his debit initiative. That means the prospects for any major delays or changes are questionable.

“The credit card companies, Wall Street banks, and their allies will no doubt continue to try to stop this reform from ever taking place, but I will do everything in my power to ensure that Main Street comes out ahead of Wall Street,” Durbin’s statement says.

The amendment exempts the interchange income of banks and credit unions with less than $10 billion in assets from interchange regulation, but many small financial institutions and trade groups have gone on record against the Durbin Amendment, fearing the spillover effects will hurt them.