Digital Transactions Authoritative, insightful and timely information for payments professionals
U.S. Sen. Richard Durbin on Tuesday said he is aware that new Visa and MasterCard interchange schedules will cause some merchants to pay much more in interchange when a consumer uses a debit card from a big bank to pay for small purchases. Durbin said the Federal Reserve Board should monitor the issue and possibly consider the income banks make from charging consumers for using debit cards as debit revenue subject to regulation.
Always outspoken, the Illinois Democrat and Senate Majority Whip made the comments during a morning press conference he called to further criticize the $5 monthly debit card usage fee Bank of America Corp. disclosed last week. Durbin launched a fiery attack on the fee on Friday. “At the end of the day, they’re trying to generate a windfall profit from this, which I think is inexcusable for them to do to their own customers,” he said at the press conference. Durbin, who wrote a strongly worded letter to BofA chief executive Brian T. Moynihan, is encouraging consumers to shop for better deals from community banks and credit unions.
Charlotte, N.C.-based BofA, the nation’s largest bank by deposits and biggest debit card issuer, plans to impose the fee on some checking account holders to compensate for lost debit card interchange revenues because of price controls in the so-called Durbin Amendment to the 2010 Dodd-Frank Act. Under Federal Reserve Board regulations to implement the amendment beginning last Saturday, banks with more than $10 billion in assets can collect no more than 21 cents plus 0.05% of the sale in interchange on a debit card transaction. The Fed is considering adding another penny for fraud control, which would bring average transaction revenue to about 24 cents. That amounts to a cut of about 45% over big bank’s previous income.
Most of the press conference involved bank fees and related consumer issues, but in response to a Digital Transactions News question, the senator acknowledged he is aware of the new issue involving small-ticket debit interchange. Digital Transactions News reported late last month that Visa and MasterCard debit interchange schedules effective Oct. 1 would turn the 21-cent-plus-0.05% cap into a single price at that same amount for transactions under $15. That change could raise interchange on debit card purchases for snacks and drinks from a vending machine or DVD rentals by more than 200%.
“On the regulated banks, that is banks over $10 billion in assets, we have noticed that what we thought would be a ceiling is now becoming a floor as well, with some retailers paying more in interchange fees up to the 24 cents or 21-cent level,” Durbin said. “The Federal Reserve has, I think, the right and the responsibility to take a look at this change. I think they ought to also take into account when a bank is going to charge customers, as Bank of America is, an additional $5 a month. I mean that is income to the bank based on the debit card. It goes through a different venue than the previous charges, but I think they ought to take that into account.”
The senator didn’t elaborate, but Dodd-Frank gives the Fed continuing authority to change its debit regulations. Durbin spent most of his time pillorying BofA’s debit card usage fee and trying to dissuade any other big banks considering such fees from following the leader, specifically mentioning JPMorgan Chase & Co. and Wells Fargo & Co. Several banks are testing such fees. In response to a reporter’s question, Durbin said the motive for debit card usage fees is to get consumers to use credit cards, whose interchange is higher than debit cards’ and unregulated. New consumer fees or more credit card transactions with their attendant higher interchange would largely negate any savings from reduced debit card interchange. Retail groups promise their members will pass their debit savings on to consumers, but many researchers doubt that will happen.
Durbin stopped short of saying he plans to introduce legislation that would regulate credit interchange, a position endorsed by merchant groups, but he said he’ll urge federal regulatory agencies to keep a close eye on the interchange issue. “We’re going to watch this as it develops,” he said. Durbin did not provide direct confirmation when asked about a press report saying he supports a proposal by U.S. Rep. Brad Miller, D-N.C., that would make it easier for consumers to switch checking account providers without disrupting pre-arranged direct deposits and bill payments, but he endorsed the concept. “I think that’s only reasonable,” he said.
Bank of America issued a statement strongly defending its $5 fee, noting that its earlier cancellation of debit card overdraft fees “resulted in the loss of billions of dollars in revenue. New regulations on debit card interchange fees, which provide no apparent benefit to consumers, will further reduce revenue by additional billions of dollars. Our new fee structure will restore a portion of that lost revenue through clear and transparent pricing.”
A spokesperson for the Electronic Payments Coalition, a pro-interchange lobbying group of banks and payment networks, issued a statement saying, “It is astounding that Senator Durbin, who created today’s chaos, is now trying to point the finger at everyone but himself for the widely predicted consumer harm from his amendment.”
Researcher Patricia Hewitt, director of the Debit Advisory Service at Mercator Advisory Group Inc., says many small banks and credit unions are likely to continue offering free checking should big banks impose debit card or checking account fees to compensate for interchange lost to the Durbin regulations. “We don’t know if the debit card fee itself is sustainable,” she says.
She adds, however, that the United States is transitioning into a new environment in which more banks will probably charge fees up front rather than offering “free” checking accounts and covering the costs with less-transparent charges such as debit card interchange. Such models are common in Canada and other countries, she says. “I think we can say that consumers are going to be paying more of these explicit fees connected to their checking account,” she says. “These services have been somewhat opaque to them in the past.”
nn
