WASHINGTON — Bankers and other financial executives continued their full-court press to delay pending restrictions on debit interchange fees, even as lawmakers prepared to move forward on plans to delay the new requirements.
Several bankers spoke directly with top Federal Reserve Board officials on Thursday, arguing that if they finalized their interchange rule, it would gut industry profits and hurt consumers.
"The consequences of this proposal will ultimately be borne by the consumers," said Andy Navarrete, senior vice president and chief counsel of national lending for Capital One Financial Corp., at a meeting of the Fed's Consumer Advisory Council. "I would urge the board to take the time necessary to study the impact of this proposal on consumers and payment systems as a whole, and smaller banks in particular. It's critical that we have a complete picture here before any proposal is finalized."
Fed Chairman Ben Bernanke, Gov. Dan Tarullo, Gov. Elizabeth Duke, and other Fed officials attended the meeting, but kept quiet on the debate over the Durbin amendment, which was enacted as part of Dodd-Frank last year and required the central bank to ensure debit interchange fees were "reasonable and proportional."
The Fed issued a proposal in December that would limit interchange fees on debit cards to 12 cents. Bankers have argued the cap is too low and ignores several costs of running a debit system, including fraud prevention.
Although the plan ostensibly applies only to institutions with more than $10 billion of assets, industry executives argue it would put smaller banks at a competitive disadvantage, forcing them to lower fees or potentially face reprisals from retailers.
Several lawmakers have expressed sympathy for bankers' concerns, and are hoping to pass a bill that would rework the rule or at least delay its implementation until the effect on small banks can be studied.
While House Financial Services Committee Chairman Spencer Bachus said earlier this week that he would wait to push a bill until the Senate acted, other lawmakers on the panel are pushing for action.
In an interview with American Banker, Rep. Randy Neugebauer, R-Texas, the chairman of the Financial Services' oversight subcommittee, said it was vital to take time to examine the issues more closely in order to minimize the impact on small and medium-sized banks.
"We ought to study it and get findings on what are all the costs involved in an interchange fee … if the bill is flawed after we get the analysis then I think what we need is some trigger for legislative fix to come back and review that," said Neugebauer. "For Republicans, we don't think the government should be setting prices for financial institutions or for any other business. We think that's a dangerous precedent."
Officials at the three banking agencies have also warned that community banks could be hurt by the plan. In response to a letter sent to the Fed this week by Acting Comptroller of the Currency John Walsh, Sen. Dick Durbin, who authored the interchange provision, wrote to the OCC saying Walsh did not know what he was talking about.
Walsh should "take steps to fully understand the interchange reform that Congress enacted and to represent that reform accurately in future public statements," Durbin wrote.
Durbin specifically criticized the argument made by Walsh that the Fed took an "unnecessarily narrow approach" in recovering costs that should be permitted under the law and are part of conducting a debit card business.
"You imply that Visa should be trusted to determine how much cost is borne by each of its member banks in conducting a debit card business and to set fee rates for those banks that appropriately cover those costs," wrote Durbin. "It is Congress' clear view that Visa cannot simply be trusted to set fees in a way that will serve the interests of all stakeholders in the debit card system."
The senator also took issue over Walsh's comment that limiting banks from recovering debit card costs through network interchange fees would have long-term safety and soundness consequences.
Although banks and credit unions are usually at odds with one another, the two sides have a common cause in the interchange issue. During the Fed meeting, Mike Long, executive vice president for UW Credit Union, warned that if the proposal was finalized, he would see an 87% decline in net income next year. To make up for the loss in revenue, the credit union would have to begin charging customers, on average, upwards of $60 to $70 per checking account holder.
"We can't just absorb that loss," said Long. "We're very concerned about it. It's obviously going to impact credit unions at a very dangerous time. I would caution the board that this $10 billion exemption is important to small institutions. We should take the time to figure out how we can make that possible as opposed to trying to get this done here in mid June."
But consumer groups and retailers argue the banks and credit unions are exaggerating their concerns in a bid to head off the restrictions.
"When I hear statements that folks have made today about interchange fees are going to mean we are going to have to start charging for a checking account; I can't believe that," said Kirsten Keefe, senior staff attorney for the Empire Justice Center, at the Fed meeting. "That the banks are making these threats. That's the only way then we can make up this fee for the interchange, and there's no discussion whether that kind of fee is appropriate."
Rather, she stressed that fees charged by institutions should be "reasonable and rationally related to the services provided."
"Maybe the answer is not how they can come up with new fees to continue to make those huge profits, but maybe we need to scale back a little bit and be more fair to consumers," Keefe said.
But Long defended his institution, which is a cooperative, and banks in general, saying it is not a matter of greed.
"I'm not one of the greedy bankers as it seems to imply by a lot of other people because I said we would impose fees on our customers," said Long. "There are only so many ways a financial institution can make money: either through fees or through the margin on the interest they charge for loans and the interest they pay for deposits."
Such differing points of view showcased much of what is at the heart of this debate over interchange fees, especially for smaller institutions, who argue that Dodd-Frank will overburden them.
"It comes into play at a time when our banking industry is truly under assault from the additional regulation that we have, the collateral damage we have had with our loans, with our consumers," said Betsy Flynn, CEO, president and chairman of Community Financial Services Bank in Benton, Ky.
Other concerns aired at the meeting on interchange included the impact it would have on those who might be kept out of the banking system because of higher fees.
James Gutierrez, CEO of Progreso Financiero of Mountain View, Calif., which provides small loans up to $1,000 to Latino families who do not have credit histories, said that it is difficult making the transition for those unbanked to be incorporated into the banking system, and higher fees would make that even more challenging.
"We're on the ground floor trying to bring in the unbanked into the banking system and helping people build credit history," said Gutierrez. "We are trying to change people's behavior from money in your mattress to money in your account … Anything that potentially would raise the cost of being banked … I think would be detrimental to trying to influence that change."
Navarrete argued that under the current system banks, merchants and consumers all benefit. Banks have profited from increased use of debit cards, which have become the fastest-growing market, consumers appreciate the convenience and safety of debit cards, and merchants benefit from instant settlement and faster transaction time.
"We've devolved into banks versus consumers," said Navarrete. "Let's remember that there are three parties to this debate, which are merchants, banks and consumers. Consumers seem to be perfectly happy with debit cards. Banks are very happy with the system that existed. It was merchants that drove this legislative outcome and were the ones who believed they were paying too much for the services they were receiving. So the question I would have everybody ask themselves, do you think merchants are paying a fair share of the cost of a system that benefits all three parties and our society as a whole tremendously?"