Community Banks, Credit Unions, and the Durbin Amendment
The debate over interchange fees has raged for years and recently has come to a head with passage of the Durbin amendment.
The issues surrounding interchange fees are complex because of the complexity of the debit and credit card markets in which they arise. Banks, credit unions, and other financial institutions must be encouraged to issue cards; merchants must be encouraged to accept cards; and consumers must be encouraged to use cards.
Interchange fees are part of the pricing mechanism that balances these incentives and allows the credit and debit card markets to operate.
The Durbin amendment would regulate the debit card industry by, among other things, giving the Board of Governors of the Federal Reserve System the authority to set debit card interchange fees at levels “reasonable and proportional” to costs incurred by issuers and card networks. While the amendment attempts to exempt most community banks and credit unions — those falling under a $10 billion asset threshold are not directly covered — they nevertheless oppose the amendment because of concerns that they cannot avoid the harms of interchange price controls even through an exemption.
In my view, their concerns should not be ignored. Community banks and credit unions are concerned that a dual system, in which larger issuers were subject to the regulated interchange fees while smaller issuers were not, would be unworkable.
Indeed, a successful dual system could be a challenge because it is hard to envision an outcome where the larger institutions (which are essential to achieve the economies of scale necessary to operate a national or global network) choose to continue to support a system that provides a significant revenue advantage to thousands of their competitors throughout the country.
The result would be a single system at the lower regulated rate, in effect bringing the smaller issuers under the regulation. In the event a dual system could be established, community banks and credit unions are concerned that over time merchants would discriminate against smaller issuers. To ensure that their cards are accepted by merchants, smaller issuers would be forced to reduce their interchange fees and the result, again, would be a single system at the lower regulated rate.
In any event, it is difficult to envision an outcome in which the smaller institutions are protected from the harmful effects of the Durbin amendment.
Another issue not receiving much attention so far but one that should be of considerable concern is the fact that the Federal Reserve is a competitor of the very systems regulated by the Durbin amendment. The Federal Reserve is one of the nation’s two ACH operators and, historically, has been a key provider of ACH services to smaller financial institutions.
By facilitating such products as online bill payment and “decoupled” transactions, the ACH industry directly competes with the debit card industry.
As a result, the Durbin Amendment has the effect of directing the Federal Reserve to set the prices for its competitors. It is difficult to imagine that the Federal Reserve would be permitted to remain an ACH operator if it were required to set prices for a competing industry.
Requiring the Federal Reserve to regulate debit interchange fees would be problematic for other reasons as well. It would be difficult for the Fed, or any other agency for that matter, to precisely determine the “correct” interchange fee, so the setting of interchange fees would almost certainly be somewhat arbitrary. Indeed, the Government Accountability Office observed in its report to Congress on credit card interchange fees that “determining an optimal level that effectively balances the costs and benefits among the networks, issuers, merchants, and consumers would be very difficult to do.”
Given the consequences to consumers, community banks and credit unions that could arise from government price controls in this arena, it would be far preferable to achieve desired changes in the payment card industry through market?based approaches, such as encouraging greater competition among existing and potential competitors. Rate?fixing is a blunt instrument for policymakers to be forced to rely on.
Stuart E. Weiner was formerly Vice President and Director of Payments System Research at the Federal Reserve Bank of Kansas City. The Shawnee resident is a payments consultant and a member of the Finance Department faculty at Kansas State University.
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