For Immediate Release Contact: Rachel Wolf
February 25, 2011 202.331.2120
Washington, DC - The country’s biggest banks have resorted to scare tactics in an attempt to overturn swipe fee reforms and maintain their money-making swipe fee scheme, but all indications show that swipe fee reform will be enacted as dictated by the law and will include a highly functional small bank exemption.
The credit card and big bank use of scare tactics should not be a surprise to anyone who has been following the financial regulation and swipe fee reform debates. Eric Grover, a payments industry consultant, was quoted in a January 10 American Banker article as saying that industry efforts to draw question to the small bank exemption were “simply intended to scare credit unions and small banks to keep them lobbying.”
In his statement to the Financial Services Subcommittee on Financial Institutions and Consumer Credit, Senator Durbin responded to the rumors circulating about the small bank exemption:
Financial industry trade associations claim that interchange reform will harm community banks despite the amendment’s exemption for small banks and credit unions. Neutral observers disagree with this claim. For example, on February 4, an article in the American Banker titled “Durbin Amendment Winners and Losers” said that “[d]espite fear that has run rampant through under-$10-billion banks, we think they are winners” under the Durbin Amendment. A January 7 American Banker article titled “Visa Plans Two-Tiered Interchange Rates After Fed Rules” said the following about Visa’s announcement that it would implement different interchange rate schedules for large and small banks: “[a]nalysts say the move will put community banks and credit unions at an advantage over larger institutions.”
“It’s in the big banks’ interests to muddy the waters and convince the public that their real concern is for their smaller counterparts, but we know the truth,” said Todd McCracken, President of the National Small Business Association. “The legislation is clear: small banks are exempted from the swipe fee rule. It couldn’t be any less ambiguous.”
In fact, the debit card market operates on a perverse incentive system where banks and credit unions make decisions about whether to issue their cards under the Visa or MasterCard network based on which company offers them the highest swipe fees.
Senator Durbin explains how the setup of the payments market enforces the small bank exemption:
The financial industry argues that, in the words of the American Bankers Association, “marketplace pressures will force all banks to conform to the artificially lower government mandated rate restrictions to which large banks will be subject.” But of course banks do not set their own interchange rates—networks set them, and networks have a clear financial incentive to keep interchange rates high for unregulated small banks in order to entice those banks to issue the networks’ cards.
Visa has already committed to a two-tiered system, meaning that it will continue to entice small banks to issue its cards with its current high swipe fee rates. MasterCard would be foolish not to offer a similar two-tiered system, since exempted institutions would immediately migrate towards the Visa network where they are guaranteed a higher rate.
“I have always and will always honor all cards,” said Pat Lewis, who owns 13 Oasis Stop ‘n Go Convenience Stores in Idaho. “That’s Visa and MasterCard’s policy, and that’s my policy as a business owner who does my best to provide great customer service in my store. Nothing is going to change when this rule goes into effect.”
Merchants will continue to accept all cards, regardless of the swipe fee rates that they carry. Because of honor-all-cards rules in debit and credit card contracts, merchants are in fact prohibited from treating one debit card differently than another debit card. Just as retailers now accept corporate rewards cards in the same manner as they accept standard no-frills cards, despite the huge difference in swipe fees, they will continue to accept all varieties of debit cards after the rule has been implemented in July.
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