By Christina P. O’Neill
When national banking trade associations and national credit union trade associations join a coalition opposing a pending law, and regulators offer concurring opinions, Washington may have a Ready-Fire-Aim problem.
As the April 21 deadline for drafting a final version of the Durbin Amendment drew near, it got plenty of review in the court of public opinion and in the court of law. Seven senators, 15 congressmen and three regulatory bodies weighed in with calls to delay the implementation of Durbin by at least a year.
Last October, TCF National Bank, headquartered in Wayzata, MN, filed a federal suit in Sioux City, SD against the Federal Reserve and the OCC, alleging that the amendment imposed an unfair burden on large banks by subjecting them to fee caps from which smaller banks were exempt. But small banks say the exemption won’t help them, as they’ll be forced to cut their fee income to stay competitive with their larger, fee-capped brethren.
On Feb. 22, nine national trade associations, among them the ABA, the ICBA, NAFCU and CUNA, issued a 72-page comment letter to the Federal Reserve outlining what they describe as serious flaws in the bill. On March 2, Fed Chair Benjamin Bernanke said it was questionable that the agency would be able to meet the April 21 deadline for a final draft of the Durbin amendment. On March 10, dozens of small-business owners went to Washington to advocate in favor of interchange fee caps. In the March issue of IB, the official magazine of the ICBA, Senate Banking Committee Chair Tim Johnson (D-SD), who didn’t support or vote for the Durbin amendment, expressed caution on its unintended consequences. And on March 16, the U.S. Senate and the House of Representatives introduced legislation to delay implementation of the amendment – the Senate’s version calling for a two-year delay and the House for a one-year delay.
The FDIC and the OCC called for dismissal of the suit on Feb. 18. On March 11, the members of the coalition, including the ICBA, filed an amicus brief in support of TCF’s suit. TCF has since responded, and was heard on April 4 (after this publication’s press deadline).
Whether or not we end up repealing the amendment or buying time to retool it, it behooves us to examine just what went into the making and potential unmaking of the Durbin amendment.
Imposing restrictions on an industry segment that has been functioning well. What’s the problem, and what’s the hurry? Debit cards have actually reduced costs by streamlining the payment process because they reduce the need for using checks.
The Federal Reserve has the ultimate decision on debit card regulation, and has had second thoughts about Durbin since mid-March.
Imposing price controls. The TCF suit challenges the formation of rules that would cap debit card interchange fee at an amount far below issuers’ costs. It asserts that such rules are confiscatory under the U.S. Constitution, which the suit says does not permit government to dictate a price that would preclude a company from earning back costs plus a reasonable rate of return. When the Constitution is invoked, it’s a sign of one or both of these things: Extreme opposition to a rule, or the extremity of the rule itself.
No oversight to see that savings are actually passed on to consumers. If the original intent of Durbin was to help the consumer, it got lost in the shuffle. What’s the use of confiscating financial institution profits if you’re not going to follow through on the original goal?
No oversight to see that risk-takers are compensated adequately for their risks. Cost-shifting without risk-shifting has drawn the unified opposition of financial institutions that seldom agree with each other on anything else. A proposal to the Fed to broaden its allowances for caps to take into consideration the cost of managing the debit product – most notably, the costs of fraud prevention – would be in order. This presents a golden opportunity for risk management professionals on both the bank and credit union side of the aisles to make a case that would influence
Failing to take into account the real costs of providing the service. The fee caps in Durbin would pay issuers’ transaction costs only, not the cost of developing and maintaining the debit card infrastructure. Allegations are that rulemakers surveyed only the largest institutions – and TCF wasn’t among them. The larger the financial institutions, the more millions of transactions it processes, over which to spread the maintenance cost. TCF’s exposition, in its complaint, of where its fee income comes from and where it goes is an example that should be studied by policymakers before they bring out the crowbars.
The banking industry believes that the statutory language of Durbin does not require the fee caps proposed by the Fed, which focus only on the transactional cost, and that the Fed currently has the authority to broaden the allowable costs to provide a reasonable profit on the maintenance costs of debit.
Stay tuned for the next act.
Christina P. O’Neill is editor of Banking New York.