U.S. Senate OKs amendment to limit debit card swipe fees

The U.S. Senate approved an amendment that would empower the Federal Reserve to impose limits on debit-card fees collected by the biggest banks as part of the financial-overhaul bill.

Lawmakers voted 64-33 yesterday to approve the measure from Senate Majority Whip Richard Durbin, who seeks to ensure that debit-card interchange, or swipe fees, charged to merchants are reasonable and proportional to the cost of processing transactions. Payment networks Visa Inc. and MasterCard Inc., which set interchange rates and pass the fees along to card- issuing banks, fell in early trading.

Passage of this measure gives small businesses and their customers a real chance in the fight against the outrageously high swipe fees, Durbin, an Illinois Democrat, said in a statement after the vote.

Limiting the fees may crimp revenue at Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co., the biggest U.S. debit-card issuers. Merchants last year paid $19.7 billion in fees tied to debit transactions processed by Purchase, New York-based MasterCard and San Francisco-based Visa, with more than half that amount paid to banks as interchange, according to the National Retail Federation.

The legislation could hurt revenue at Visa and MasterCard, which collect royalties from banks based on card-spending volumes. Visa fell to $81.34 in New York trading from $85.73 at the close yesterday on the New York Stock Exchange. MasterCard declined to $222.50 from $232.31.

We expect Visa and MasterCard to be weak on the news, JPMorgan analyst Tien-tsin Huang wrote in a note to clients. The amendment would be very difficult to implement and disruptive to card commerce, but manageable in terms of financial impact for the processing vendors.

Huang said he continues to rate Visa and MasterCard overweight.

Earlier this week, Durbin altered his proposal to exempt lenders with assets of less than $10 billion, or 99 percent of U.S. banks. That failed to win the support of trade groups representing smaller community banks and credit unions who said the amendment would make their debit cards more expensive compared with those issued by the biggest lenders.

To make matters worse, nothing would stop Visa and MasterCard from simply applying the artificially lowered interchange rates across the board to all issuers, regardless of size, forcing many credit unions and community banks to re- evaluate their ability to offer debit cards, the Independent Community Bankers of America and the Credit Union National Association said in a May 12 letter to senators.

The amendment permits retailers to offer discounts for cash, checks or debit cards, or for a particular card brand, and would let merchants set minimums and maximums for credit-card purchases.

It will prevent the giant credit-card companies from using anti-competitive practices, allow merchants to offer discounts to their customers and restore common sense and fairness to this broken system, Durbin said in the statement.

The industry escaped previous attempts to regulate interchange on credit cards, which average about 2 percent per transaction, saying the fees are needed to compensate them for the risk of lending money. That argument isn t relevant to interchange on debit cards, which tap funds held in consumer checking accounts.

It seems to me the scaled-down version that Dick Durbin came up with is a reasonable approach, Senator Susan Collins, a Maine Republican, told reporters after voting for the amendment.

Debit transactions should pass at face value, just like checks, according to the National Retail Federation.

Debit cards formerly passed at face value, but now the biggest banks and card companies are using them to circumvent the system and are reducing the face value of debit-card transactions through higher fees, NRF chief lobbyist Steve Pfister said in a statement. This hurts retailers and merchants of all sizes, including doctors offices, restaurants and florists, and it causes all of our customers to pay more.

Durbin s proposal, if approved by the House and signed into law by President Barack Obama, would enrich big-box merchants, hurt consumers and stifle competition, according to MasterCard.

The Durbin amendment would give lobbyists for big retailers what they have been unable to achieve through other efforts -- the ability to maintain all the benefits they receive from debit-card acceptance while transferring the cost to consumers, MasterCard said in a statement distributed by spokesman James Issokson.