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Banks, Retailers Renew Fight Over Debit ‘Swipe’ Fees

Swipe Fee Battle in Round Two, Banks, Retailers Square Off
Shares of Visa Inc. and MasterCard Inc., which set the fees and pass the money to card-issuing banks, tumbled more than 10 percent after the proposed rules were made public on Dec. 16. Photographer: Daniel Acker/Bloomberg

Financial services lobbyists are counting on the Republican majority in the U.S. House to help them reopen the battle they lost to retailers over a proposed Federal Reserve rule that would cap debit-card “swipe” fees.

The House Financial Services Committee gave both sides a Capitol Hill forum today to address the Fed proposal, which would cap the so-called interchange fees charged to merchants at 12 cents per transaction.

“The idea that Chairman Ben Bernanke and the Fed would set prices in any industry is abhorrent to Republicans,” said Sam Geduldig, a former House Republican leadership aide who now is a financial services lobbyist for Clark, Lytle & Geduldig. “Because of that sentiment, we’ve gained a lot of traction on this issue with the new Republican majority and have a lot of momentum as we continue to push for legislative changes.”

Large banks stand to lose more than $12 billion in revenue if the proposal as written by the Fed becomes final. Shares of Visa Inc. and MasterCard Inc., which set the fees and pass the money to card-issuing banks, tumbled more than 10 percent after the proposed rules were made public on Dec. 16, amid investor concern that the caps will damage their business model.

Retail groups representing 7-Eleven Inc. and Home Depot Inc are pushing for the Fed to keep the proposal the same when it finalizes the rule under an April 21 deadline. The financial services groups speaking for firms including Visa and Citigroup Inc. are calling for a suspension of the rulemaking until a federal study can be conducted on its effects.

Fed Door Open

Fed officials today left the door open to revising the proposal. Fed Governor Sarah Bloom Raskin, in testimony prepared for the House hearing, said the rule “may result in significant market changes.” Citing the “novelty and unusual complexity” of the rulemaking, she said the central bank would “reserve judgment” on the final language until all the public comments were received.

At a separate hearing before the Senate Banking Committee, Fed Chairman Ben S. Bernanke said that the bank’s governors are uncertain that smaller lenders would be helped by an exemption in the rule for those with less than $10 billion in assets. Echoing the public comments of some of those lenders, Bernanke said “it is possible that the exemption will not be effective in the marketplace.”

The dispute is a result of last year’s Dodd-Frank regulatory overhaul, which contains the provision introduced by Senator Richard J. Durbin, an Illinois Democrat, instructing the Fed to cap the fees.

‘Shock the System’

Retailers who supported the Durbin amendment said that the reduction in fees will give them freedom to reduce costs for consumers.

“There is no doubt that competitive market forces will allow consumers to directly benefit from this reduction in debit card rates,” David Seltzer, vice president and treasurer of 7-Eleven said in his prepared testimony for the House hearing.

“I think this initiative by the Fed will serve to shock the system and break it down,” said James C. Miller, who was asked to study the matter by the Retail Industry Leaders Association, the industry’s largest trade group. “Prices will be lower because as the fees fall, the competition among merchants will lead to lower prices for consumers,” Miller, a former director of the Federal Trade Commission and of President Ronald Reagan’s Office of Management and Budget, said in an interview yesterday.

TV Ads

The issue divides two of Washington’s most powerful lobbying teams, those representing financial services and those who speak for retailers. Both sides have maintained public relations campaigns through online and newspaper advertisements aimed at legislators and consumers. The financial services side began advertising on television in the Washington area this month. In recent weeks trade organizations representing the largest banks, community banks, electronic payment systems and credit unions have mobilized members to contact the Fed and lawmakers through comment letters and office visits.

“Whether you’re talking about government price fixing, which is anathema in this country, or you’re talking about harm to consumers, there are enough problems with this that I would think both sides of the aisle would pause and want to reflect and consider,” Joshua R. Floum, Visa’s general counsel, said in an interview yesterday.

Pleas to Bernanke

Some of Wall Street’s top executives have gone directly to Bernanke, urging him to withdraw the central bank’s proposal.

The Federal Advisory Council, a group of 12 bankers who consult and advise the Fed, told Bernanke and his fellow governors in a Feb. 4 meeting that the proposal “misinterprets and misapplies” the Dodd-Frank provision, according to a summary posted on the Fed’s website this week. The meeting included Bank of New York Mellon Corp. Chief Executive Officer Robert Kelly and State Street Corp. CEO Joseph “Jay” Hooley.

Financial services firms said they believe their objections to the fee-cap are resonating with the new House majority.

“If the financial services industry asked members of Congress to support legislation allowing a regulatory agency to set prices on Slurpees or ceiling fans, solely because certain merchants owned a large share of the market, we would be laughed out of every Republican office on Capitol Hill,” Geduldig said. “But that’s exactly what the merchants have done.”

Request for Delay

Byron H. Pollitt, Visa’s chief financial officer, told an investor conference yesterday that the company is in talks with lawmakers to delay the proposal.

“Our objective on the Hill and in our discussions with congressmen and senators is to take a two-year time-out and let’s put this amendment through thoughtful committee hearings and discussions,” Pollitt said at the Goldman Sachs Group Inc. Technology and Internet Conference in San Francisco.

Yet changes are far from certain. In Congress, the interchange limits created unorthodox fault lines during the Dodd-Frank debate. Eighteen Republicans voted for the Durbin amendment in the Senate. Nine Democrats, including the new Senate Banking Committee chairman, Tim Johnson of South Dakota, voted against it.

The biggest ally for the merchant groups is the author of the provision -- Durbin -- who is the second-ranked Democrat in the Senate. In a letter to the American Bankers Association this week, Durbin said he would “vigorously oppose efforts to block the implementation of this needed reform.”

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