Debit-Card Fee Limit Would Interfere With Benefit Payments, Nebraska Says

A U.S. Senate proposal to limit debit-card “swipe” fees could increase costs to taxpayers and harm citizens who receive benefits on prepaid cards, according to Nebraska Treasurer Shane Osborn.

Lowering the fees paid by merchants may discourage banks from issuing the cards that governments use to disburse money to senior citizens and needy families, Osborn wrote in a letter to lawmakers yesterday. The measure, part of the financial overhaul bill, directs the Federal Reserve to ensure that debit-card swipe fees, or interchange, are “reasonable and proportional” to the cost of processing transactions.

“A regulated debit interchange rate would decrease or eliminate the ability of financial institutions to offer these cost-effective programs to the public sector,” Osborn wrote. “Financial institutions issuing these cards may raise fees on cardholders or states to recoup lost revenue.”

The letter contains a passage almost identical to one on the website of Visa Inc., which opposes the legislation. In an e-mailed statement, company spokeswoman Denise Dunckel said Visa agrees with Nebraska “that the Durbin amendment has the potential to harm those who rely on prepaid cards for state disbursements like unemployment and child support.”

Visa, the world’s biggest payments network, and No. 2 MasterCard Inc., based in Purchase, New York, set interchange rates and pass that money along to card-issuing banks. The fees, averaging about 1 percent for debit and 2 percent for credit cards, generate more than $40 billion a year for U.S. lenders including Bank of America Corp. and Citigroup Inc.

Government Cards

The curb proposed by U.S. Senator Richard Durbin, the Illinois Democrat and majority whip, “undermines prepaid card programs, including government programs that provide aid to vulnerable citizens and saves hundreds of millions in taxpayer dollars,” Osborn, a Republican, wrote in the letter.

The U.S. government and most states use reloadable prepaid cards to disburse benefits for a variety of programs, including Social Security, food stamps, unemployment and Temporary Assistance to Needy Families. MasterCard estimates that governments save at least $500 million a year by using plastic instead of issuing paper checks.

“These programs are very rapidly migrating to cards because state budgets are quite constrained,” Laura Kelly, group executive of global prepaid for MasterCard, said in an interview last week. “It’s very easy to say that in the near term it’s over a half-a-billion dollars of impact to the United States taxpayer.”

Max Gleischman, a Durbin spokesman, didn’t comment.

Expanded Program

Last month, the U.S. Treasury Department announced a program that would increase its reliance on electronic payments, including direct deposit and prepaid debit cards.

The Treasury Department has said prepaid cards give 4 million Americans who don’t have bank accounts access to automated teller machines and protection against theft, fraud and lost or stolen checks.

Groups that support Durbin’s measure, including the National Retail Federation and the Merchants Payments Coalition, say their members are powerless to bargain with Visa and MasterCard, calling them a duopoly. The two networks accounted for 91 percent of global credit- and debit-card purchase transactions last year, according to the Nilson Report, an industry newsletter.

The proposal also would allow merchants to offer discounts for cash, checks or competing card brands, and set minimum or maximum purchase limits for consumers who want to buy with a credit cards.

Making Choices

While the limits are supposed to apply only to credit cards, “it is likely that merchants would fail to distinguish product types,” Osborn wrote. “It is troubling to imagine that a government benefits recipient attempting to purchase bread and milk could be denied use of their card.”

Obsborn said he discussed the issue last week at a meeting of state treasurers, and that the savings from the cards helped cut his budget almost 12 percent.

“The people that need this money most are going to have to use check-cashing agencies or pay more fees, and five, 10 dollars to these people is a lot of money,” Osborn said today in a telephone interview. “I see it as just making the problem worse and pushing it on to the people that can afford it the least.”

The amendment will become law if it survives a bipartisan panel of lawmakers assigned to merge the House and Senate versions of the overhaul legislation, and if President Barack Obama signs the resulting bill.

To contact the reporter on this story: Peter Eichenbaum in New York at peichenbaum@bloomberg.net

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