In two weeks of Senate debate over regulatory reform, a provision that has nothing to do with the financial crisis may have stirred the most emotion.
The overwhelming 64-to-33 passage of an amendment to let the government regulate interchange fees on debit cards was a major blow to an industry that had successfully fought off such restrictions for years.
In the aftermath, new questions arose, including whether lawmakers would go further to unroll the interchange system, how tough regulators would be in implementing new regulations and whether banks and credit unions had any chance to get rid of — or water down — the provision before enactment. "When something this big wins by this much, part of it will stay in the bill, that's very clear," said Ed Mierzwinski, the consumer program director with the U.S. Public Interest Research Group, which supported the amendment.
The provision, included as an amendment by Sen. Richard Durbin, D-Ill., would require the Federal Reserve Board to write restrictions on the ability of card networks and issuers to set debit card swipe fees for merchants, although banks with assets of less than $10 billion would be exempt. It would also let retailers prohibit card use for transactions below a certain amount and give customers incentives for using card networks with lower fees than others.
Large and small banks as well as credit unions strongly opposed the amendment, saying it amounted to price controls and too much power in the hands of retailers. But their objections came despite multiple attempts by Durbin to appease them. Those included raising the exemption threshold from $1 billion to exclude more institutions, and inserting last-minute language to further clarify that merchants cannot encourage the use of certain issuers.
Some observers said the concessions won by financial institutions in the amendment already hurt their chances to fight it further.
"They exempted the smaller banks from this, so I think that helped neutralize their arguments," said Andy Laperriere, the managing director of International Strategy and Investment. "Even though they lobbied against it, their argument wasn't as strong."
The amendment may also have political ramifications for the bill, as the powerful credit union lobby vowed to oppose the legislation.
"I guess this is the straw that broke the camel's back, so to speak, where we are not going to be able to support the bill if it does this," said Fred Becker, the chief executive of the National Association of Federal Credit Unions.
Like community bank representatives, Becker said that the exception for smaller institutions was well intended but ineffective. If large banks are forced to cut their interchange fees, smaller institutions will have to follow suit.
"The ultimate impact would end up being the same on the smaller credit unions, because they would be driven to match the price," Becker said. "To put it bluntly, money doesn't grow on trees. If you take a credit union, although it can run in the red one year, or maybe a couple years, it can't run in the red long-term and continue to exist. Nonprofit does not mean charity."
Patrick Keefe, a spokesman for the Credit Union National Association, which had remained neutral on reg reform until the amendment, said, "Including this means we must now oppose the bill."
But community bank representatives, while continuing to oppose the amendment, had not yet turned against the overall legislation, saying only that they hoped the measure would be removed when the House and Senate meet to work out differences between the bills. (The House bill, which passed in December, does not address interchange fees.)
"A bill like this has a lot of momentum," said Steve Verdier, a senior vice president at the Independent Community Bankers of America. "Sitting here on Friday morning, I don't see a kill-the-bill option. Part of the reason is I think we're going to see a conference committee, and a conference committee has the ability to give members of Congress a chance to take a deep breath about what they're doing and consider the consequences."
But it was unclear if opponents would be able to remove the amendment at a later stage.
"This is going to be a big fight. I think some version of this will stay in a final bill," Mierzwinski said. "There is no way the merchants will give this up."
For their part, retailers said banks and credit unions cannot back up their arguments against the amendment, and are just resisting any reforms on the fee system. "The Durbin amendment makes 100% clear that it is not allowing differentiation between bank issuers of cards," a lobbyist for merchant groups said. "They're concerned about the 'camel's nose under the tent' idea that if you do anything on interchange it will lead to doing more on interchange."
To be sure, the amendment is narrower than it could have been. By only giving the Fed power to regulate debit cards, the measure addresses the inequity in charging fees for electronic check payments, while regular checks do not carry such added costs. "Debit cards are the most egregious example of this problem," the lobbyist said. "It's taking what we can get."
But others suggested the amendment could be a first step toward broader reforms, which would include credit card interchange fees. "There's no question that our industry has for years felt that the credit card interchange market is completely dysfunctional. That is going to have to be addressed, but our focus right now is on the debit cards payments system," said Mallory Duncan, the senior vice president and general counsel of the National Retail Federation.
Others also posed questions about how the Fed would respond to the mandate to set restrictions. Under the amendment, the Fed would need to ensure debit interchange costs are "reasonable and proportional" to the costs stemming from processing the payments. The central bank would need to establish the standards no later than nine months after enactment. Under the measure, the Fed essentially would have to determine if the fees for electronic checking — as opposed to normal check clearing — make sense.
Oliver Ireland, a former Fed lawyer and now a partner at Morrison Foerster, said given that the Fed has recently responded forcefully to the will of Congress in imposing stricter rules on credit cards and overdraft fee programs, it would likely clamp down as directed on debit interchange fees in this case. With "what the Fed has been doing in the penalty fee area for payment cards or with credit cards where there is similar language... they are likely to write a rule that is pretty constraining on debit card interchange," he said.