While card issuers and payments networks are focusing their attention on the potential consumer harm from a Senate amendment that could lower debit card interchange rates, how it might affect issuers’ bottom lines remains murky, observers say.

“First, it would appear very difficult to calculate issuers’ debit-interchange revenues and profits, considering it’s comprised of both signature and PIN-debit interchange rates, and interchange is tied to checking accounts, which typically have several other associated fees and profitability elements,” John Grund, a partner with Linthicum, Md.-based First Annapolis Consulting, tells PaymentsSource.

The Senate on May 13 passed an amendment to the Restoring American Financial Stability Act that would enable the Federal Reserve to control debit card interchange rates (see story).

A similar bill in the U.S. House of Representatives does not contain the amendment, and the two versions are going through the conference negotiation process to reconcile their differences.

The amendment is vague about the Fed’s role in determining the “reasonable” cost of debit interchange, Grund notes. “It is a complex question, as debit interchange rates vary by size, type of channel and merchant, and to aim for a ‘reasonable’ cost seems overly simple,” he adds.

At least one observer believes the amendment could cost USAA Federal Savings Bank $500 million in lost interchange revenue. USAA serves consumers involved in the U.S. military.

“Why would you want to mess with the military?” Glenn Fodor, vice president at Morgan Stanley, told attendees last week at during the 2010 Payments Conference sponsored by the Federal Reserve Bank in Chicago.

The amendment sparked an intense debate at the conference’s final session.

Richard Epstein, a professor at the University of Chicago’s Law School, believes Washington should leave interchange alone because politicians do not fully understand the issue. “Someone is going to mount a constitutional challenge to this,” he said. “When you don’t know what you are doing, you shouldn’t do anything.”

Wall Street is keeping a close eye on any payments-related legislation because it views the industry as a fantastic “growth story,” Fodor said.

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