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Fed Power Over Debit-Card Fees Unites Banks Against Retailers

Debit card fees
American Express, MasterCard and Visa began a lobbying blitz to press lawmakers to kill an amendment in financial-overhaul legislation passed by the Senate that would allow the Federal Reserve to limit the fees charged to retailers when customers use debit cards. Photographer: Daniel Acker/Bloomberg

June 4 (Bloomberg) -- Large banks and small lenders, which have differed over issues ranging from a new consumer protection agency to a proposed bailout fund for failed firms, are allied on one front: They want debit-card fees left alone.

Banks and credit unions this week began a lobbying blitz to press U.S. lawmakers to kill an amendment in financial-overhaul legislation passed by the Senate that would allow the Federal Reserve to limit the fees charged to retailers when customers use debit cards.

Given that 64 senators backed the provision last month, and that retailers such as Minneapolis-based Target Corp. and Cincinnati-based Macy’s Inc. stand to gain from lower fees, opponents said it will be an uphill fight.

“There are very strong political forces on both sides,” said Jason Kratovil, vice president for congressional relations at the Independent Community Bankers of America in Washington.

The battle is being waged beyond the nation’s capital. The owners of bank branches and stores throughout the U.S. were asked by their trade associations to visit, call or write their congressional representatives during this week’s Memorial Day recess. Credit unions and banks paid for ads in local newspapers, and plan to air radio commercials next week.

The community banking association represents 5,000 lenders, while credit unions have 90 million members.

“We are going back and redoubling our efforts,” said Richard Hunt, president of the Consumer Bankers Association in Arlington, Virginia, which represents banks such as Citigroup Inc. and JPMorgan Chase & Co., as well as smaller banks.

Raising Costs

Under the amendment, the Federal Reserve could limit debit-card fees, which now average about 1 percent per transaction. While the amendment exempts banks and credit unions with less than $10 billion in assets, smaller lenders are concerned that merchants won’t take their cards if they carry higher fees than those of larger institutions.

Barbara Hagenbaugh, a Fed spokeswoman, declined to comment.

Retailers say the so-called interchange fees -- the amount charged by Visa Inc., Mastercard Inc. and other payment networks to process card transactions -- raise costs to customers and shouldn’t be levied on what is basically an electronic check. Retailers last year paid more than $10 billion annually in debit interchange fees, according to the National Retail Federation. The payment networks pass the fees along to the banks.

‘Price Controls’

Bankers say the legislation doesn’t allow the Fed to consider the costs of maintaining the system or insuring against fraud in deciding how much to allow them to charge for transactions, making it likely the rates will be reduced. Those fees also help pay for rewards programs, such as airline miles.

Denise Dunckel, a spokeswoman for San Francisco-based Visa, said the legislation would “in effect impose price controls, allowing merchants to dictate how consumers pay and shift their costs for accepting debit cards onto the back of consumers.”

The Credit Union National Association is undertaking its biggest lobbying effort since 1998, when the industry convinced Congress to allow credit unions to expand their memberships, said John Magill, senior vice president for legislative affairs.

Leaders of the Madison, Wisconsin-based association asked their members on a May 27 conference call to go to their lawmakers’ offices during this week’s recess. The group plans to have members visit Capitol Hill next week when Congress returns.

‘Completely Unacceptable’

“We’re going to send a loud signal that this is completely unacceptable,” Magill said.

Retailers are trying to ensure the provision survives negotiations over final legislation between the Senate and House, which in December passed its own version of the financial-oversight bill, the biggest overhaul of the regulatory system since the 1930s.

Mallory Duncan, senior vice president of the Washington-based National Retail Federation, said his members were also asked to urge lawmakers to keep the provision in the bill.

“If the credit unions and community banks are mobilizing, it’s because they’ve been misinformed,” said Duncan, who’s also chairman of the Merchants Payments Coalition representing trade groups for 2.7 million gas stations, drug stores, supermarkets and other retailers. “The small banks and the credit unions will make more money” because they’re exempt from lower fees.

The Senate’s 64-33 vote in favor of the amendment will make it difficult for House lawmakers to refuse to address the issue, said House Financial Services Committee Chairman Barney Frank.

‘In the Bill’

“A version of it will have to be in the bill,” the Massachusetts Democrat said in an interview.

Frank and Speaker Nancy Pelosi are facing pressure from some colleagues to agree to the Senate amendment.

“There would likely be substantial support for doing something on interchange among House Democrats,” said Terry Haines, a partner at McGuireWoods LLP and former chief counsel and staff director of the Financial Services Committee.

Senate Democratic Whip Richard Durbin, who sponsored the amendment, said he was talking to lawmakers who will be on the conference committee to keep the provision in.

“I’m working with conferees and reaching out to them,” said Durbin of Illinois.

To contact the reporter on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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