As the window for negotiations on the debit-interchange amendment narrows, its supporters seem willing to grant a narrow concession to state governments, which payment-network representatives say underscores the amendment’s potential to harm other groups.

The last-minute lobbying may continue through next week, when members of a congressional committee likely will finish hammering out differences in the House and Senate versions of the financial-reform bill, including specific language of the debit-interchange amendment sponsored by Sen. Richard Durbin, D-Ill.

Conceding his debit-interchange amendment might hurt state governments, Durbin on June 16 said during a subcommittee hearing he will exempt prepaid debit cards used to distribute government benefits to consumers from potentially harmful aspects of the bill.

Durbin said during the hearing he plans to “specifically carve out these government types of cards so they would not be affected by anything related to the private sector,” adding that electronic benefits transfer payment cards are “a special case.”

Officials from more than a dozen states have notified Durbin that his amendment, which would enable the Federal Reserve to establish new debit interchange rates and would allow merchants to set minimum-purchase amounts for accepting cards, could raise the costs to administer benefits through prepaid debit cards and could limit consumers’ payment options at the point of sale (see story).

A spokesperson for the Electronic Payments Coalition said Durbin’s exemption for state governments proves the amendment likely would have many other unintended consequences. The coalition represents the nation’s largest banks and payment networks.

“The main point of our argument all along is that if one side doesn’t pay the cost of electronic payments, someone else has to do so,” the spokesperson says. “When Durbin says he’s going to carve out state governments, he’s essentially admitting that the amendment is harmful. Otherwise, why would you need to protect a specific group that might be affected? This is proof that Durbin’s amendment will cause harm in many sectors.”

The Senate Appropriations Committee held the hearing to examine how to cut government expenses related to processing credit and debit cards. The Treasury Department earlier this week released a report suggesting the government could save $36 to $39 million annually if it could negotiate a flat interchange rate and new card-acceptance rules with the card networks (see story).

Gary Grippo, Treasury deputy assistant secretary for fiscal operations and policy, said during the hearing that during the 2009 fiscal year, federal agencies collected $8.6 billion through 80.3 million credit and debit transactions, with an average growth rate of more than 15% over the past five years. Interchange and card-network fees accounted for $116 million last year, with an average transaction cost of $1.45, based on an average interchange rate of 1.9%.

By contrast, Treasury estimates it costs an average of 65 cents to process each transaction through the automated clearinghouse network, and checks cost an average of 60 cents each to process. The costs associated with accepting cards represent 0.31% of total federal revenue but 20% of total payments-collection costs.

One potential method to cut costs is to enable Treasury to “opt out of accepting cards for particular transactions without incurring a penalty from a card network for violating the rule to accept all cards, if processing the transactions would be contrary to the public interest due to unduly high cost,” Grippo said. This measure would allow Treasury to negotiate better pricing terms with card networks, he said.

Alicia Cackley, director of financial markets and community investment at the U.S. Government Accountability Office, said during the hearing that card-acceptance costs for the U.S. Postal Service and Amtrak totaled $204 million last year, up 12.1% from $182 million in 2007. During the same period, card costs for the Treasury’s Financial Management Service grew 14.9%, to $116 million from $101 million.

“Some federal entities have attempted to negotiate with the card networks to lower interchange rates applicable to their transactions, but with limited success,” Cackley said.

Bruce Sullivan, Visa vice president and head of government services, another witness at the hearing, noted that Visa has created new, specific interchange rates for the government sector. Visa’s interchange rate for government-sector transactions has remained “essentially flat” for the last decade, while card payment volume through government channels has increased almost 600% during the same time period, to an estimated $25 billion last year, he added.

The volume-weighted interchange rate for government transactions is 1.57%, Sullivan said.

Wendy Chronister, president and CEO of Qik-n-EZ, a chain of 11 Springfield, Ill.-based convenience stores, also appeared as a witness. Interchange-fee increases are outpacing the rate of growth of other operations costs, she said.

“Over the last few years alone, interchange fees have grown more rapidly and significantly than all of our other expenses,” Chronister said.

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