Interchange Rules Close in as Senate Okays Debit Card Amendment

Interchange regulation is one step closer to reality after the U.S. Senate late on Thursday approved an amendment that would require the Federal Reserve to determine “reasonable and proportional” transaction fees for debit cards. Banks earn an estimated $15 billion annually from debit card interchange fees.

The Senate approved the amendment, sponsored by Sen. Dick Durbin, D-Ill., by a bipartisan vote of 64-33. It incorporated three amendments introduced by Durbin earlier this week, and co-sponsored by Sens. Patrick Leahy, D-Vt., and Mary Landrieu, D-La. The amendment now becomes part of a financial-services-reform bill that must be voted on by the full Senate.

Under the amendment, the Federal Reserve would be required to oversee the debit interchange fees set by card networks to ensure they are based on the cost of processing transactions. The Fed would not set interchange prices. Banks with under $10 billion in net assets would be exempt from the provision.

The amendment would also ban network penalties that prevent merchants from offering discounts to customers for using competing card networks and for paying by cash, check, or debit card. Sellers could also decline credit cards for small dollar purchases, in which interchange fees often exceed profits on the sale.

MasterCard Inc. issued a statement decrying passage of the amendment, saying it is designed to increase profits for large merchants at “considerable expense to consumers, community banks, and credit unions.”

“The Durbin amendment would give lobbyists for big retailers what they have been unable to achieve through other efforts—the ability to maintain all the benefits they receive from debit card acceptance while transferring the cost to consumers,” MasterCard said.

The Purchase, N.Y.–based payment network also said that MasterCard rules already “allow merchants to discount for cash, check, debit, and competing brands, but few merchants choose to use this option to reduce costs for consumers.”

Interchange opponents hailed the amendment as a victory for both merchants and consumers.

“Main Street America bailed out the biggest banks in this country not so long ago,” Mallory Duncan, senior vice president and general counsel of the National Retail Federation, said in a statement. “Passage of the Durbin amendment ensures that those same banks won’t repay our generosity by undermining the fairness and integrity of the checking and debit card system.”

The NRF, a retail industry trade group, is a member of the Merchants Payments Coalition, a group of retailers, supermarkets, drug stores, convenience stores, and other merchants fighting for regulation of interchange rates.

The NRF contends that 99% of banks and credit unions won’t be affected by the amendment since it applies only to financial institutions with $10 billion or more in assets. “But most consumers would still be protected because the majority of cards are issued by a handful of the nation’s largest banks,” the NRF said.

Supporters of interchange regulation this week increased pressure on lawmakers, with 206 national and state associations representing small businesses endorsing the Durbin amendment on Wednesday.

And the Merchants Payments Coalition also released a point-by-point rebuttal of what the group called “big banks’ arguments” for interchange under the headline “Opponents of Swipe Fee Reform Peddle Big Bank Bologna.” The MPC contends that smaller financial institutions would actually benefit from the amendment because they “will continue to receive more in interchange than the big banks, and can, therefore, offer their customers better rewards and service.”