FOR IMMEDIATE RELEASE
Feb. 15, 2011
ABA Media Contact: Peter Garuccio
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ABA RESPONDS TO LETTER FROM SENATOR DURBIN
By Frank Keating, ABA President and CEO
“The American Bankers Association respects the position of Senator Durbin regarding the rules proposed by the Federal Reserve that seek to implement the interchange amendment that was made part of the Dodd-Frank Act.
“However, as we noted in our February 8 letter to members of Congress, the Fed’s proposal will have a negative impact on the entire banking industry, including community banks and the local markets they serve. This is what our members are telling ABA and it is our duty to relay this message to Congress.
“Senator Durbin takes issue with our assertion that his amendment has led directly to price controls. He argues instead that his amendment directs the Fed to place ‘reasonable constraints’ on how the card networks set interchange prices. This is a distinction without a difference. It is hard to see how setting absolute ‘caps’ on interchange pricing, which is what the Fed does in its proposal, can be viewed as anything but direct price controls. Whether labeled ‘controls’ or ‘constraints,’ the Durbin amendment requires the Fed to interfere in the interchange fee structure and impact the rate of return that debit card issuers should expect to receive. Restraints on pricing, whether they be deemed ‘reasonable’ or not, are price controls, plain and simple.
“The notion that retailers have no choice but to participate in the card payments system ignores a key leveraging tool that retailers do in fact have at their disposal: they can offer their customers discounts for any non-card transaction. Card network rules specifically allow retailers to steer customers to alternative payment methods, such as providing discounts for cash. In other words, retailers can allow their customers to decide whether they want to use a debit card and pay for the convenience of doing so. Some businesses, such as gas stations, have in fact instituted this practice. Not only do cash discounts give customers the choice, they put pressure on card networks to keep interchange rates low.
“Furthermore, the idea that there should be no interchange fees for accepting debit cards because there is no comparable fee for accepting checks is misguided. There are fundamental differences between the two payment methods and checks are not free. Retailers must pay for the handling, depositing and processing of checks, and they may pay a per check deposit fee. Checks may also be returned as unpaid due to insufficient funds or because they are counterfeit, leaving the retailer to suffer the loss.
“Senator Durbin points to the support for his amendment by consumer groups as evidence that the amendment will indeed be a benefit to consumers. The members of ABA serve consumers every day by providing basic banking services, such as checking accounts, at low prices. They have made it very clear that the Durbin amendment, and the Fed’s proposed rule, will directly limit their ability to continue doing so. It costs an average of $250 - $300 per year to maintain a basic consumer checking account and interchange revenue helps pay this cost. Government interference in this revenue stream means interference in the ability of banks to continue providing checking accounts at zero, or very low, cost to the consumer. The unfortunate result is that consumers will end up paying more for these services and millions who cannot afford to do so will be driven out of the system to check cashers and other non-bank entities that charge a premium for their services.
“The Fed’s proposal means a huge cost savings for all retailers when they accept debit cards issued by banks and other financial institutions that are subject to the government imposed price controls. Naturally, all retailers will want as many of their customers as possible to use only debit cards issued by price-controlled banks. Unlike their smaller competitors, big-box retailers have the money and resources to devote to steering consumers toward this lower cost option and it is simply unrealistic to think that they will not do so. When they do, smaller banks will suffer if consumers move their checking accounts to price-controlled institutions, or sever their relationships with other banks entirely.
“It is also unrealistic to think that a two-tiered pricing system will act as adequate protection for smaller banks. First, it is far from certain that such a system can be implemented due to the technically challenging nature of the task. Second, even if a two-tiered system can be implemented, such a system is not a guarantee that the interchange rate banks under $10 billion are receiving today will remain once the system is up and running.
“Senator Durbin’s suggestion that his amendment relies on the promise of higher interchange rates as an incentive for banks to reduce fraud puts the cart before the horse. Banks do not engage in fraud prevention efforts in order to maximize their interchange revenue, nor should they. Banks engage in fraud prevention as a means for ensuring the integrity of the card payments system, the security of their customers’ accounts, and the efficiency and effectiveness of the system. These efforts involve costs that interchange revenue helps cover. And, as the Senator well knows, the Fed made no provision in its proposed rule for fraud prevention cost adjustment.
“Furthermore, the Fed has not even addressed the actual cost of fraud losses, which are indeed borne mostly by banks. Retailers are guaranteed payment when they swipe a debit card and obtain authorization. Even in cases where there are insufficient funds in an account or the card is counterfeit, the retailer gets paid and the bank that issued the card suffers the loss.
“Senator Durbin implicitly recognizes the negative consequences that burdensome regulations such as his interchange amendment can have on consumers in the form of increased fees for basic banking services. His charge that fee increases have been justified as a reaction to economic circumstances and increased regulatory burden illustrates the broader point: when taken in conjunction, all these factors increase the cost to banks of providing these basic services to consumers. It is basic economics that as the cost of bringing products or services to market increases, the cost to consumers for those products and services necessarily increases as well. Unnecessary and burdensome regulations such as the interchange amendment directly increase the cost of bringing basic banking products, in this case debit cards, to market.
“Senator Durbin is correct in asserting that interchange generally has been the subject of some Congressional hearings in the recent past. However, as we noted in our February 8 letter, his specific amendment received no such hearings. In fact, it was rewritten at the last minute on the Senate floor. The amendment’s impact on consumers, on banks, and on the broader economy has not been thoroughly discussed or vetted in a Congressional hearing.
“As we stated in our February 8 letter, the harm that will result from the proposed rule is very real and immediate – for banks, for consumers and for the broader economy. Our members have made it clear that this rule should not go forward. We urge Congress to take immediate action to stop it.”
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The American Bankers Association represents banks of all sizes and charters and is the voice for the nation’s $13 trillion banking industry and its two million employees. Learn more at aba.com.