Debit Fee Cut Is a Rare Loss for Big Banks

Debit Fee Cut Is a Rare Loss for Big Banks
By BINYAMIN APPELBAUM
Copyright by The New York Times
Published: May 14, 2010
http://www.nytimes.com/2010/05/15/business/15credit.html?th&emc=th


WASHINGTON — Retailers have begged Congress for years, in vain, to limit the fees they must pay to banks when customers swipe credit or debit cards. Bills never reached a vote. Amendments were left on the table. The Senate did not even grant the courtesy of a committee hearing.

That long record of futility ended in a landslide Thursday night. Sixty-four senators, including 17 Republicans, agreed to impose price controls on debit transactions over the furious objections of the beleaguered banking industry.

The amendment to the Senate’s sweeping financial legislation could save billions of dollars for family restaurants and dry cleaners, Wal-Mart and Amazon.com, and every other business whose customers increasingly pay with debit cards. It does not address credit card fees directly.

Consumers also could save money, particularly at businesses like grocery stores that compete on price. But some experts warned that lower profit margins could lead banks to curtail bank card reward programs.

The Senate approved a series of amendments unfavorable to the banking industry over the last week, but this one was widely regarded as the most surprising. Meddling in dealings between businesses generally is anathema to Republicans and a relatively low priority for Democrats.

And this was not an easy vote. Lobbyists for the wounded but formidable banking industry made clear to some senators that this decision would affect future campaign donations, according to people who participated in those conversations.

But retailers mounted an unusually effective yearlong campaign to frame the issue as a chance for Congress to help small business. A leading trade group for chain retailers worked with small-business groups to make sure that every time a senator held a town hall meeting back home, a local business owner showed up to ask about card fees.

The industry also rode the support of Senator Richard J. Durbin, the Democratic whip, who wrote the amendment and pushed the sponsor of the banking overhaul bill, Senator Christopher J. Dodd of Connecticut, to allow a vote on the Senate floor.

The winning margin was provided by several conservative Republicans. Senator Johnny Isakson, Republican of Georgia, told SunTrust, the largest bank in his state, that this time he planned to vote against the bank and with Coca-Cola and Home Depot, two other Georgia companies that had lobbied him fiercely.

“This was really a decision between helping out small business or helping out large banks,” said John Emling, a lobbyist for the Retail Industry Leaders Association. “No one wanted to pick between friends and they had friends on both sides, but because of the momentum, we just felt that if Durbin pushed folks to the vote we would win.”

The banking overhaul bill still needs to pass the Senate, and then it must be reconciled with a House bill that does not mention debit card “interchange” fees. Banking industry groups said that they had not given the issue enough attention in recent weeks, focusing instead on other controversial amendments. But they said they would now redouble efforts to convince legislators that the provision would hurt customers by undermining the debit card system.

“Retailers who benefit greatly from the system will pay almost nothing for the costs of maintaining and improving it,” said the American Bankers Association.

The Durbin amendment gives the Federal Reserve new authority to regulate and limit the fees that businesses pay to card companies,. It specifically addresses payments processed through the Visa and MasterCard networks. American Express and Discover cards are not covered by the bill.

Last year businesses paid Visa and MasterCard $19.71 billion on debit card transactions, according to The Nilson Report, a trade magazine that is regarded as the best source of data on the industry. Visa and MasterCard in turn passed about 80 percent of the money, roughly $15.8 billion, to the banks that issued the cards.

The legislation directs the Fed to cap those fees at a level that is “reasonable and proportional” to the cost of processing transactions. The Nilson Report estimated that last year, fees averaged 1.63 percent of the transaction amount.

A second set of provisions applies to both credit and debit card transactions. Visa and MasterCard impose an all-or-nothing requirement on businesses, requiring them to accept cards even on small transactions, and prohibiting businesses from offering discounts based on the method of payment. The amendment strikes those rules.

Many small businesses already violate the rules. The National Federation of Independent Business reported in a 2008 survey that 13 percent of respondents required a minimum purchase before a customer could use a card, and 14 percent offered a cash discount. The amendment would provide legal shelter for chain stores to adopt similar policies.

Congress passed a major credit card reform bill last spring, imposing a series of new consumer protections but ignoring the issue of fees. In the wake of that failure, proponents developed a new lobbying plan, industry representatives said, that made the issue about small businesses.

Mr. Durbin said he embraced the issue after hearing a rising chorus of complaints from businesses in his district, including the owner of his favorite restaurant.

“I felt there was a fundamental unfairness in the relationship between the giant credit card companies and small businesses,” he said. “And it turned out that it was an issue whose time had come. I had no idea the amount of effort that businesses would put into it. It really made a difference. I think it emboldened a lot of my colleagues to stand up to the banks.”

By early in the week Mr. Durbin’s staff was confident that a majority of senators would support the measure, particularly after he made changes to limit the impact on small banks, a powerful constituency that many senators are loath to cross.

The largest change limits the new price controls to cards issued only by the very largest banks, those with at least $10 billion in assets. As a result, the pricing controls will affect only about 65 percent of debit card transactions, staff members said.

Then came what Mr. Durbin described as an “unexpected curveball.” Republican leaders insisted that the amendment had to pass with no fewer than 60 votes.

Even then, retail trade groups said they knew what they needed to win.

After the vote, Mr. Durbin flew back to Illinois late on Thursday night, and took his usual car service home from the airport. He said that his driver had cheered the victory.

“He had never commented before on a vote I cast,” said Mr. Durbin. “But he said, ‘We get killed on this.’ He told me he had followed the vote on his computer.”