Changes to Debit-Fee Cap Backed by U.S. House’s Frank
U.S. Representative Barney Frank, one of the authors of the financial regulatory overhaul, said he is ready to work with the Republican majority to force changes in a Federal Reserve proposal to cap debit-card “swipe” fees.
The Fed’s proposed limits on so-called interchange fees may reduce annual revenue for U.S. banks by more than $12 billion. 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, based on investor concern that the caps will damage their business model.
The comments by Frank, a Massachusetts Democrat and former chairman of the House Financial Services Committee, are the strongest indication to date that there may be a bipartisan effort on legislative changes to the section of the Dodd-Frank law that instructs the Fed to set the limits.
“If they want to do something on it, I’ll work with them,” Frank said in an interview yesterday, referring to the Republicans who now control the committee.
Visa and MasterCard rose to their highest levels of the day after Frank’s comments were published. Visa, based in San Francisco, traded as high as $71.54 at 2:54 p.m. in New York Stock Exchange composite trading, climbing 6.6 percent from its lows of the day. MasterCard climbed as high as $238.84 on the news after falling as low as $228.03. Visa closed at $70.71 and MasterCard closed at $234.94.
The Fed proposed capping debit interchange fees charged to merchants at a flat 12 cents for each transaction, replacing a formula that averages about 1 percent of the purchase price. The rule on the cap must be completed by April 21 and in effect by July 21 to comply with the legislation. Credit-card interchange fees, which average about 2 percent, remain untouched.
Any move to change the rules would run headlong into the second-ranked Democrat in the Senate, Senator Richard Durbin of Illinois. Durbin, who wrote the interchange language included in Dodd-Frank, has been a vocal advocate of its defense, and had pushed to expand the rule to include credit cards.
“Legislative attempts to change the interchange law are premature and have no chance of ever passing Congress,” Max Gleischman, Durbin’s spokesman, said in an e-mail today. “The big banks and card companies hate it when they lose, so they are asking to play the game all over again. If some people want to repeal a law that gives billions of dollars per year of relief to small businesses and their customers in order to protect the bottom line of the nation’s biggest banks, that’s a debate we’re happy to have.”
“Correct, Replace or Repeal”
House Republicans have indicated they will push ahead anyway. Representative Spencer Bachus, the new Financial Services chairman, has said the panel’s agenda will “correct, replace or repeal the job killing provisions” included in Dodd- Frank, as well as focus on Fannie Mae and Freddie Mac, the two government-sponsored enterprises in federal conservatorship. The Alabama Republican filed a comment letter on the Fed’s proposed rules noting his “concerns about the implementation of these rules.”
In the letter, sent on Dec. 17 and co-signed by Representative Jeb Hensarling of Texas, the panel’s vice chairman and the chairman of the House Republican Conference, the lawmakers warned that “hastily written rules may end up doing more harm than good to consumers and have negative effects on competition in the marketplace.”
Other Republicans on the panel have also issued warnings about the proposal, likening it to government control of industry pricing.
“It’s very, very frustrating to me that we somehow embraced the federal government setting our prices in this country,” Representative Randy Neugebauer, the Texas Republican who leads the investigations subcommittee on the panel, said of the Fed proposal.
Frank, who left the interchange issue out of the initial House financial overhaul legislation, said he didn’t partake in the negotiations over the final language and he was “not convinced the consumer ever sees the benefit” from the rules.
Still, Frank said, regardless of what the House does, “they’ll have problems in the Senate.”
Bachus hasn’t scheduled hearings on the issue, and there have been no legislative proposals introduced in the House or Senate, leaving the shape of any changes up in the air.
“It was very rushed,” said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents payments networks and card issuers. “They need to slow this down and look at what it’s going to do.”
The interchange issue has created unorthodox battle lines in Congress, with some Republicans who side with large merchants voting for the rules, and Democrats, unconvinced by the argument, voting against.
“I don’t think there’s any legislative fix needed or wanted in the Congress on this,” said Doug Kantor, a partner with Steptoe & Johnson LLP who represents retail groups including the Merchants Payments Coalition. “It passed overwhelmingly with bipartisan support and if they bring up a legislative fix or change of any kind, it can only be one that gets better for merchants.”
Rather than a repeal of the provision, the most likely outcome is a delay in implementation, probably through a congressionally mandated study of the issue, Darrin Peller, a Barclays Capital Inc. analyst wrote today in a note to clients.
Six Senate Democrats signed comment letters in December expressing concern about the issue. Senator Evan Bayh, an Indiana Democrat and one of the signees, has since retired. Frank also filed a comment letter warning that the regulations “may have unintended consequences” for consumers.
Some banks likely will respond to the caps by phasing out debit-rewards programs, particularly those offering cash back, according to a report last month by Patricia Hewitt, an analyst with Mercator Advisory Group, a research firm based in Maynard, Massachusetts.
Lenders also may follow the lead of Charlotte, North Carolina-based Bank of America Corp., the biggest debit-card issuer, which said earlier this month that it will begin charging retail customers checking-account fees unless they maintain minimum balances, make regular deposits, use credit cards or take advantage of online services.
Debit interchange fees totaled $16.2 billion in 2009, according to a document outlining the Fed’s proposed rules.
“Consumers will really be hurt by the Durbin legislation and we have already seen evidence that they’re losing free checking and other benefits,” said Noah Hanft, general counsel for Purchase, New York-based MasterCard, in a telephone interview. “That harm to consumers is something that people who really understand the issue are coming to realize.”