Merchants Payments Coalition
Federal Reserve Proposed Rule – Background Information
This memo offers the Merchants Payments Coalition perspective on the forthcoming Federal Reserve rulemaking on interchange fees, which is now predicted to be released the week of December 13.
Strong swipe fee reform is a win for consumers: In a functioning market, prices are a reflection of costs. If Congressional reforms are implemented as they were written, the reduction in merchant costs from reduced interchange fees will undoubtedly be reflected in the prices consumer pay.
The Merchants Payments Coalition welcomed the historic reforms passed Congress earlier this year, and we trust the Federal Reserve’s rule will be faithful to the clear intent of Congress. We will review the proposed rule and will continue to fight to ensure the final rule reflects the clear guidance of Congress and the best interest of merchants and consumers everywhere.
For years, big banks and credit card networks have used hidden fees and fine print to keep consumers and merchants in the dark, setting rules and raising fees with impunity. Swipe fees have tripled since 2001, costing merchants more than $48 billion in 2009.
Reining in these out-of-control fees will bring savings to small business and consumers struggling to make ends meet. The reforms bring fairness and transparency to the debit interchange system, and that is a win for consumers and merchants.
Merchants presented a case to the Federal Reserve supported by the reform legislation and sound economics that when determining the “reasonable and proportional” standard, the Fed should rule that debit card transactions clear at par, that is, at face value. The alternative merchants proposal is that the Fed should consider only those costs directly associated with authorizing, clearing and settling debit transactions, but only if it can show that this result would enhance consumer welfare.
The Durbin amendment and the forthcoming Federal Reserve rule will allow merchants to provide consumer discounts to those customers paying with less expensive forms of payment.
Background and perspective
The proposed rule was born from the bipartisan Durbin amendment that was included in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
A series of reports have validated merchant claims that credit and debit card interchange fees are harmful to consumers and create a “reverse Robin Hood” affect by funding rewards programs at the expense of low income consumers.
· Ed Mierzwinski, Consumer Program Director, U.S. Public Interest Research Group: “So, the Durbin amendment does two things. First, it gives the Federal Reserve authority to determine that most debit swipe fees are reasonable and proportional, but it carves-out credit unions from that requirement. Then, it eliminates unfair contractual practices that prevent merchants from offering legal cash discounts or telling consumers about lower-cost options. I have yet to meet the reform that improves transparency that isn’t good for consumers.” (Credit Union Times, Wall Street, Swipe Fee Reforms Are Good For Consumers and Credit Unions, July 9, 2010)
· The Hispanic Institute, in partnership with University of Pennsylvania, found that swipe fees disproportionately tax minority and low-income Americans in order to subsidize credit card benefits for the wealthiest 10%. The study found that “higher interchange fees result in higher prices for consumers.” (p. 6) and that the bottom 50 percent of income earners pay at least $669 million more in higher prices to subsidize at least $354 million in credit card frills and perks.
· In its 2009 study, the GAO found that the credit card companies and their issuing banks have been misleading the public about their increasing rates and about the benefits of credit cards to businesses. The study found that artificially high swipe fees increase costs for consumers, hurting consumers without credit cards the most, and that “if negotiations resulted in lower interchange fees for merchants, then merchants could pass these savings to consumers through lower prices.” (p. 62)
· In its recent Public Policy Discussion Paper, the Federal Reserve Bank of Boston reported that “fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or ‘cash’) users” and that “each cash-using household pays $151 to card-using households.” According to their findings, fees and reward programs have created “a regressive transfer from low-income to high-income households.” (p. 1)
The rulemaking will complement recent actions by the Department of Justice’s against Visa and MasterCard to eliminate credit card companies’ anticompetitive rules and put money back in consumers’ pockets.
There will be a comment period on the proposed rules.
The Merchant Payments Coalition will carefully study the rules the Federal Reserve has proposed today and offer its suggestions for strengthening the final rules, which the Federal Reserve expects to publish in April 2011.
The Federal Reserve Board is expected to issue a final rule by April 21. Based on the current statute, the rule will go into effect July 21, 2011.
MPC’s submissions to the Federal Reserve can be viewed here and here.
Consumer groups also submitted comments supporting strong swipe fee reform.