Skip to main content

Bloomberg: Durbin Cedes Ground on Debit Caps as Support Erodes

June 18, 2010

By Peter Eichenbaum and Patrick O'Connor

June 17 (Bloomberg) -- U.S. Senator Richard Durbin, faced with growing opposition and slipping support for his proposal to cap debit-card "swipe" fees, said he is working to exempt prepaid cards governments use to distribute benefits.

"It's a special-case situation," the Illinois Democrat and majority whip said yesterday at a hearing on fees federal agencies pay to accept debit and credit cards. "No decisions have been made as to how we'll address those concerns, but we are working on way to carve out state-issued prepaid cards from the legislation," Durbin spokesman Max Gleischman said today.

Durbin's public concession, his first on the debit legislation since the Senate voted 64-33 to approve it last month, followed mounting opposition from card-industry lobbyists and lawmakers who have said that regulating swipe fees, or interchange, will enrich merchants at consumers' expense.

U.S. Representative Maxine Waters, a lead negotiator for the Congressional Black Caucus on the financial overhaul bill, initially backed merchants in their campaign to regulate the fees, which are set by Visa Inc. and MasterCard Inc. and exceed $40 billion a year. Now, the California Democrat said she's concerned the plan will hurt credit unions and community banks, which oppose the measure.

‘Some Relief' Needed

Regulating the fees is "a very complicated issue," Waters said last week in her opening remarks as a member of the conference committee assigned to merge the House and Senate bills. The debate "must be resolved in a manner that doesn't harm community banks or credit unions but provides some relief to small businesses and merchants, while protecting consumers."

During an April 28 hearing on a separate interchange bill, Waters said the fees are boosting profits for the biggest lenders while hurting merchants. "The banks are doing everything they can to reap fees from debit-card purchases," she said. The competition between Visa and MasterCard "has become more about pleasing the banks that actually issue the cards rather than the consumers who use them."

Waters has been the focus of a lobbying blitz that included a visit last week from hip-hop entrepreneur Russell Simmons, who co-founded the Def Jam rap label, and a June 1 letter from Robert Johnson, America's first black billionaire. The two, who own stakes in firms that offer Visa-branded prepaid debit cards, said the poor and minorities with limited access to banks may be among the biggest losers if Congress limits swipe fees.

‘Turning Point'

"The Durbin amendment imposes price controls on the fees merchants pay for debit-card acceptance and it threatens to undermine the ability of banks to serve working-class customers who are often shunned by the financial mainstream," Johnson, the founder of Black Entertainment Television and the chairman of the RLJ Companies, based in Bethesda, Maryland, said in his letter. Waters declined to comment yesterday.

"Her opposition to this would be a real turning point," said Trish Wexler of the Electronic Payments Coalition, which represents Visa, MasterCard and banks.

Representative Debbie Wasserman Schultz, a member of the House majority's leadership team, persuaded 130 colleagues, including 70 Democrats, to join her in signing a letter that urges the bipartisan conference committee to strip Durbin's proposal from the bill.

"If this amendment stands, our constituents will pay more for basic banking products and credit cards and no longer receive valuable services like fraud and identity-theft protection paid for by the current interchange system," Wasserman Schultz said in a statement.

Editorial Criticism

Wasserman Schultz's opposition to the amendment isn't influenced by her husband, Steve Schultz, vice president of commercial lending at Community Bank of Broward in Florida, she said in a June 8 interview.

Last month, Representative Peter Welch, Democrat of Vermont, and Republican Bill Shuster and Democrat Chris Carney, both of Pennsylvania, wrote a letter in support of the amendment to House Speaker Nancy Pelosi.

Durbin also has lost the support of his home state's largest newspaper. "When Senator Durbin starts picking winners and losers among competing industries, anyone who cares about free enterprise should worry," the Chicago Tribune said in a June 10 editorial. "The rough-and-tumble fight over interchange fees should be settled in boardrooms, courtrooms and, especially, the marketplace -- not by federal fiat."

$48 Billion in Fees

Visa and Purchase, New York-based MasterCard, the world's biggest payment networks, set interchange fees and pass the money to card-issuing banks including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.

Merchants groups including the National Retail Federation, which estimate that U.S. merchants paid $48 billion in interchange fees in 2008, say their members are powerless to negotiate with MasterCard and San Francisco-based Visa, calling them a duopoly. The companies accounted for 91 percent of global purchase transactions made with general-purpose cards last year, according to the Nilson Report, an industry newsletter.

"There is no agency with regulatory authority over the nearly $50 billion collected per year in interchange fees," Durbin said during yesterday's hearing. "Nor is there any real competition or negotiation in the market to keep fees in check. Visa and MasterCard set the fee rates as they see fit, and tell merchants to take it or leave it."

Federal Reserve Role

Durbin's plan would empower the Federal Reserve to set swipe fees that are "reasonable and proportional" to the cost of processing debit transactions. The fees merchants paid to accept MasterCard and Visa debit cards last year averaged 1.63 percent of each sale, according to the Nilson Report.

The measure also permits retailers to offer discounts based on the form of payment, or for a particular card brand, and set minimums and maximums for credit-card purchases.

Durbin's decision to exempt governments is a "tacit admission" that his amendment is flawed, according to Wexler of the Electronic Payments Coalition.

"If it would hurt government programs, then that means it would also hurt everyday debit-card holders," Wexler said. "It is simply not possible to destroy the economics of debit- and prepaid-card networks and then attempt to shield favored constituencies from the aftershocks."