Bills Introduced to Delay Swipe Fee Reform

March 23, 2011

The U.S. Federal Reserve (Fed) in Dec. 2010 proposed new rules limiting the size of the fees banks can charge businesses every time a debit card is used to pay for a good or service. The Fed was required to address debit-card swipe fees thanks to an NSBA-supported amendment, introduced by Sen. Whip Dick Durbin (D-Ill.), to the Restoring American Financial Stability Act (S. 3217). The final rule is expected by April and currently is set to take effect on July 21, 2011.

The Fed proposed a number of options that would result in reduced swipe fees for debit-card transactions. One option would allow issuers to set a flat fee of seven cents per transaction. A second option would allow a sliding scale, based on the purchase price, with a maximum fee of 12 cents per transaction. The proposed rule exempts banks with less than $10 billion in assets and does not apply to credit cards.

Although NSBA supports no interchange fees being charged on debit-card transactions—since they clear, like checks, at par—the proposal represents significant progress. Currently, merchants pay, on average, debit card processing fees of about 1.3 percent. According to the Fed, the average swipe fee last year was 44 cents. This means that even the highest option would result in swipe fees more than 70 percent lower than the 2009 average.

The proposed rules also still present issuers with a large profit margin. According to one bank, a swipe-fee cap of 7 cents per transaction still would produce a profit margin of about 8 percent, compared to the retail industry’s average profit margin of one to three percent.

While the proposed rule was a significant victory for small businesses, retailers, and consumer groups, it was met with immediate howls by the banking industry, which collected $16.2 billion from debit-card swipe fees in 2009. Arguing that the proposed rule represented governmental interference in the private market (and ignoring the fact that the previous system differed greatly from any notion of a competitive “market’), the banking lobby responded to the proposed rules with a multi-million advocacy campaign aimed at undermining them.

Last week, they achieved their first success in this effort, when Sens. Jon Tester (D-Mont.), Bob Corker (R-Tenn.), Jon Kyl (R-Ariz.), Ben Nelson (D-Neb.), Tom Carper (D-Del.), Pat Roberts (R-Kan.), Chris Coons (D-Del.), Mike Lee (R-Utah), and Pat Toomey (R-Penn.) introduced legislation, the Debit Interchange Fee Study Act (S. 575), that would suspend the implementation of the Fed rule for two years.

The bill also mandates that a study on debit interchange fees by conducted by the Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration. The outcome of this study is virtually guaranteed to be flawed, given the parameters outlined by the bill.

Companion legislation (H.R. 1081) has been introduced in the House, by Rep. Shelley Moore Capito (R-W.Va..) and 27 cosponsors.

NSBA is ardently opposed to these efforts, which clearly are aimed at preventing the rules from going into effect rather than illuminating the issue. The swipe-fee system already has been the subject of three separate U.S. Government Accountability Office reports and nine Congressional hearings.

The Durbin amendment and the proposed Fed rule are beneficial to America’s small businesses. Further delay, equivocation, and another big-bank handout are not.