The Senate this afternoon defeated an amendment to delay the implementation of a controversial rule to regulate debit-card-related fees. It needed 60 votes to pass and received just 54, with 45 senators opposing. Because the amendment failed, the new rule will take effect July 21 — and consumers will pay the price.
According to information from the Electronic Payments Coalition — an organization working to stop the rule, Sen. Richard Durbin (D-Ill.) first proposed the new rule in May 2010 as an amendment to the Dodd-Frank financial regulation bill — and the amendment became law when the Senate passed the Dodd-Frank bill last July. But the Federal Reserve won’t begin to implement the rule until next month.
The so-called “Durbin Amendment” limits what retailers must pay to be able to accept debit cards — that is, it limits “interchange” fees. Specifically, the amendment suggests a cap of no more than a $0.12 fee for any debit card transaction. Right now, the precise price of interchange is essentially variable, dependent on the total amount of the transaction. Merchants typically pay debit card issuers — banks and credit unions — about 1.65 percent of the transaction.
On its face, interchange fee limits might sound like a good idea. Why should retailers have to pay more than $0.12 a transaction just to accept a debit card? And if merchants are able to save money by paying less for interchange, they’ll lower their prices, right? Consumers will benefit — and banks and credit unions will only be out a few cents per transaction. Right?
Not necessarily … In the first place, it’s important to note the obvious: When retailers send that 1.65 percent interchange to banks and credit unions, they’re not just paying a “fee” — they’re paying for a service. Debit cards are cheap and convenient — but, in an important sense, they aren’t free. When banks and credit unions issue debit cards, they also assume the costs of actually running the debit card program, as well as the risks of nonpayment and fraud. Durbin didn’t bother to factor those costs into his amendment. But it’s safe to say retailers probably pay the interchange fees because they’re worth it (although, of course, merchants in support of Durbin’s amendment say otherwise). If they weren’t, more merchants would have stopped accepting debit cards.
Once the Durbin amendment takes effect, even assuming retailers lower costs to pass their savings on to consumers, consumers could have to pay in other ways. Banks will have to make up lost revenue somehow. Maybe they’ll eliminate free checking or charge for online banking. Whatever it is, consumers probably won’t like it.
The point is: The rule will likely have unintended consequences. The amendment on the table today was merely a call to pause and study the issue further — to “Stop, study and start over.” Introduced by Sens. Bob Corker (R-Tenn.), John Tester (R-Mont.) and seven other bi-partisan co-sponsors, it would have delayed implementation for a year and requested a 6-month study of the costs of debit card transactions and the impact on consumers. According to the amendment, if the Federal Reserve and at least one other federal regulatory agency would have found the new rules to be unfair to financial institutions and consumers, the Fed would have had to rewrite the rules within 6 months. If not, the rules would have moved forward.
It should have been a no-brainer.