From: The Hill
By Frank Keating
The Federal Reserve’s proposed debit card interchange rule has generated a lot of buzz lately. And with all the voices vying to be heard, it is more important than ever to be clear about the real harm the Fed’s proposal will cause to consumers, the financial institutions that serve them, and the broader economy.
When Congress passed an amendment directing the Fed to assess reasonable and proportional fees on debit interchange – the penny or two that retailers pay every time they choose to accept debit cards for payment – it did so at the 11th hour, without hearings, committee action or informed debate on the amendment.
The result is a proposal by the Fed that is so draconian it essentially mandates that banks lose money on every debit card transaction. This sort of government-imposed price control will have disastrous consequences.
The vast majority of consumers (over 70%) now use debit cards for everyday purchases, and every time a debit card is used, retailers pay just over a penny for every dollar spent. In return, retailers get guaranteed payment, increased sales volume, faster check-out, and reduced losses from bad checks or stolen cash. The interchange revenue generated by each transaction is used by banks to cover the cost of basic banking services and the cost of fraud protection, not to mention the cost of maintaining the operational stability and efficiency of the payment system.
But the Fed’s rule would reduce this important revenue stream by up to 85 percent, forcing debit card issuers to seek other ways to recover their costs. This will result in consumers paying more for basic checking accounts, and maybe paying per transaction fees or even finding that they can only use their debit cards for purchase below a certain dollar amount.
The very real probability of this was recently recognized by FDIC Chairman Sheila Bair. Testifying before the Senate Banking Committee, Chairman Bair said that banks are “going to have to make that up somewhere, probably by raising the fees that they have on transaction accounts.” Many lower-income Americans who cannot afford these changes will find themselves completely squeezed out of the traditional banking sector.
And because interchange revenue is also used to fight fraud, it makes no sense to reduce this revenue stream. Doing so does not help anyone, especially small businesses that may be targeted by fraudsters and have fewer resources of their own to devote to fraud protection measures.
Every bank that issues debit cards would be affected by the proposed rule, despite the illusory attempt to exempt smaller institutions from its precepts. The market will naturally drive business to the lowest price, even if that price is only mandated for some. Fed Chairman Bernanke himself recognized as much at the recent Senate hearing, noting that “it is possible that that exemption will not be effective in the marketplace.”
In the final analysis, the interchange rule represents little more than a gift to giant retailers. Home Depot’s chief financial officer noted as much on a recent earnings call when she said the company expects to pocket some $35 million per year as a result of the amendment.
No mention was made of how consumers might benefit because consumers in fact will not benefit. Quite the contrary – they will suffer very real harm as a result of the amendment and the Fed’s rule.
Frank Keating is the president of the American Bankers Association.
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