How Russell Simmons Out-Lobbied Big Banks

It was surely the only time that lawmakers hammering out the financial regulation bill were lobbied by a man wearing a hoodie and New York Yankees baseball hat. That's how Russell Simmons showed up on Capitol Hill earlier this month to fight a proposal to cap the fees retailers pay banks to process debit-card payments.

Simmons, best known for his Phat Farm clothing line and Def Jam music label, is also the owner of UniRush, a Cincinnati company that sells a prepaid Visa (V) debit card called RushCard, with about 2.5 million users. Simmons has persuaded lawmakers to exempt his business from a measure that would shift more of the cost of debit-card processing from retailers to the banks.

When a consumer uses a debit card, the retailer's bank pays a 1percent to 2 percent "interchange fee" to the card holder's bank. The merchant ultimately shoulders that cost, and it adds up. Retailers estimate they pay nearly $20 billion a year to debit-card issuers such as Citigroup (C) and Bank of America (BAC). If the interchange fee is capped, Simmons says, he would be forced to charge his low-income customers more, allowing retailers like Wal-Mart Stores (WMT) and Best Buy (BBY) to profit the most.

Simmons' prime target, Richard J. Durbin of Illinois, the No. 2 Senate Democrat, has for years pushed to reduce interchange fees on behalf of retailers. Durbin won an amendment to the financial overhaul legislation that passed the Senate in May to cap the fees and let the Federal Reserve set the rates, instead of Visa and MasterCard (MA). Credit-card fees would not be affected. The end result means more profits for retailers and less for Simmons. Big card-issuing banks, unpopular with politicians after the $700 billion industry bailout, got nowhere in their effort to defeat the provision.

Enter Simmons, who used his star power to open doors in Washington. He railed against Durbin's provision on a Huffington Post blog and a Twitter feed read by about 364,000 people. He argued that prepaid debit cards are essential for low-income people who can't afford checking accounts or would be turned down for credit cards. His customers load money onto a RushCard, which is accepted anyplace that takes Visa. In an open letter to lawmakers, published on the Huffington Post site, he says he aims only to help the little guy: "I don't work for Visa or MasterCard and I don't give a damn about the profits of the big banks. Regulation is long overdue."

Unmentioned are the fees Simmons' company imposes for its card, including a $9.95 monthly charge, $3 for activation, $1 for every purchase if a PIN is used, $1 for online bill paying, and 50 cents to check your balance at an ATM. Direct deposits and online account management are free, as is a service that alerts customers when their balances are low. By comparison, check-cashing services can charge $50 to cash a $1,000 paycheck. Such fees have led some to ask whether Simmons is at least as interested in doing well as in doing good. Simmons is "marketing a product that is frankly exploitative of the poor and minorities," says Georgetown University law professor Adam Levitin, who specializes in banking issues. "He's no different than a bank."

That's not how lawmakers backing Simmons see it. "The poor, already struggling in the midst of the worst economic crisis since the Great Depression, cannot withstand this double-barreled assault on their benefits and dignity," says Representative Gregory Meeks (D-N.Y.). To make his case, Simmons focused on a handful of Congressional Black Caucus members, including Meeks and Maxine Waters (D-Calif.). Another prepaid-debit-card entrepreneur, Robert Johnson, the founder of Black Entertainment Television, also got involved, sending Waters a personal note urging her to oppose the Durbin amendment.

In the end, Durbin was won over: He announced on June 21 that he would exempt pre-funded debit products, including the RushCard, from the fee limits. "This will protect the fees on the most vulnerable, which is what I care about the most," Simmons said in a statement. The big banks haven't been as lucky: The legislation the Senate and House may vote on this month still targets their higher fees.

The bottom line: Invoking low-income consumers, Russell Simmons won an exemption from legislation that could have hurt his debit-card business.

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