The Brawl Over Debit-Card Fees

Thousands of credit union members visited Capitol Hill on Mar. 3 to warn that a Federal Reserve proposal limiting the swipe fees collected on debit-card purchases is anti-consumer. A cap on fees banks collect from merchants, they told lawmakers, will force card-issuing credit unions and banks to cancel reward programs, eliminate free checking, and impose annual fees.

A week later, about 170 small business owners flew into town with the opposite message. The Fed plan is pro-consumer, they said, because it will help lower retail prices while preventing card issuers from profiting at their expense—money that goes to fatten bankers' bonuses.

Framing brawls about money as essentially consumer issues is a time-honored tactic in Washington. However, the debit-card fee issue is primarily a conflict between big business and big banks. Up for grabs is $16 billion in annual revenues. That's the amount merchants collect—at an average of 44 cents per debit-card swipe—and turn over to banks. Retailers have been complaining for years about the hefty fees. The fight is reaching a crescendo as an April deadline nears for the Fed to decide what is a "reasonable" fee, as required under last year's Dodd-Frank financial regulation law. "This is a battle between the large retailers and the large banks," says Clifford Rossi, executive-in-residence at the University of Maryland's Center for Financial Policy, who has done financial industry-sponsored research on swipe fees. "The voice lost in the shuffle is the consumer's."

The central bank in December proposed capping the payment at 12 cents, causing the banks to scramble for a legislative fix. Fed Chairman Ben Bernanke said during a February congressional hearing that "it's certainly possible" the Fed plan could result in higher bank fees for consumers. The Fed chief said his hands were tied unless the law is changed.

The lobbying is getting personal. Retailers in early March released radio spots targeting one of the fee cap's most vocal opponents, Senator Jon Tester (D-Mont.), who is up for reelection next year. "Millions of dollars leave Montana's main street to line the pockets of fat cats on Wall Street," says the ad, paid for by the Montana retail and convenience store associations.

The prospect of choosing sides has given pause to even the most seasoned lawmakers, given the political clout both banks and retailers wield back home. Six-term Senator Carl Levin (D-Mich.) says he's reconsidering his vote for the fee cap, named for its author, Senator Dick Durbin (D-Ill.). "I voted for Durbin," says Levin, "but I promised some folks I'd review the matter and that's what I'm doing right now."

Prodded by the banks, a small group of senators from both parties is preparing a measure that would postpone the rule. House Republicans are also looking to delay the rule for two years while the government studies the potential economic effects.

Retailers such as Target (TGT), Wal-Mart (WMT), and Best Buy (BBY) have the most to gain under the Fed proposal. They say they will pass the savings to customers through reduced prices—a promise that would be difficult to verify. On a February earnings call, a Home Depot (HD) executive said the rule would save the company $35 million a year. A Bank of America (BAC) analyst on the call sent the comment to financial lobbyists to use in their campaign, says one lobbyist involved who requested anonymity to discuss industry strategy. (Home Depot told the Fed it would use the money to benefit consumers.)

Major banks such as Citigroup (C), JPMorgan Chase (JPM), and Bank of America are leading the opposition, says Durbin, but publicly keeping quiet. "There's a lot of money on the table," Durbin says. "The big banks and big credit-card companies are keeping as low a profile as humanly possible," using the small lenders "as their beards." Overall, the Fed rule could cause the banks to lose more than $12 billion in fee revenue. The card-issuer lobbying arm, the Electronic Payments Coalition, has pledged to spend $11 million to lobby Congress to change the plan. Even small banks, which Durbin's provision excluded, are upset. The exemption could hurt them if retailers hesitate to accept cards charging higher swipe fees.

In case they lose in Congress, JPMorgan, Bank of America, and other lenders are already moving to eliminate popular rewards programs and add new checking-account fees. Maybe that will provoke consumers to finally add their voice to the debate.

The bottom line: Major banks and large retailers both claim to be on the consumer's side as they lobby Congress over debit-card swipe fees.

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