June 3, 2010 ETA Summary on the Durbin Amendment - What Will It Do?

On May 13, the Senate passed its version of financial regulatory reform and included a provision sponsored by Sen. Dick Durbin (D-IL) that would call for the Federal Reserve to set interchange prices for debit transactions.  The reason given for the need to include this provision is that it will benefit consumers and small businesses;   there are numerous reasons why this is an inaccurate assertion.  Moreover, this provision could have serious and far-reaching negative consequences for the electronic payments industry.

1.    The Durbin provision will not benefit consumers as it allows merchants to set minimum and maximum dollar amounts for credit card usage.  This will reduce the number of opportunities for consumers to take advantage of electronic payments and will cause consumers to buy more than they desire in order to be able to pay with a credit card.  Setting transaction maximums will steer consumers into expensive private label credit accounts for major purchases.
2.    The Durbin provision will not benefit consumers as it could allow merchants to discriminate against cards based on the bank from which they are issued or based on the type of rewards or affinity program they carry.  This corrupts the fundamental framework of global payments networks -- ubiquitous acceptance.  Consumers will have no way of knowing until checkout a) if their card(s) will be accepted and b) the actual purchase price of goods.  Consumers will need to carry more cash as a backup and/or extend themselves further into the credit markets to obtain and carry a wide variety of cards.
3.    The Durbin provision establishes an unprecedented level of government regulation in business-to-business pricing agreements.  This authorizes the Federal Reserve to review and determine what rates can be charged between two private entities. This is, in effect, government price control and rate setting.  The interchange system is not a free utility; it is a complex, innovative, and electronically secure global network that provides great value to merchants.  There are costs associated with building and maintaining systems to move funds around the world and provide the rapid credit for transactions (24 hrs) that merchants enjoy today.  Interchange and merchant acquiring services exist in a highly competitive market.
4.    The Durbin provision is exceedingly restrictive in its instruction to the Federal Reserve on factors to consider when setting a ‘reasonable and proportional’ interchange fee.  For example, the Fed is prohibited from taking into account costs associated with payment network construction, maintenance, improvement, software, data security, risk, fraud, etc.  If these costs are not taken into account, and given the current payment guarantee on debit transactions, the provision could drastically alter the debit value equation and cause the model of ‘as good as cash’ to no longer be viable.
5.    The Durbin provision was not fully considered by the Senate.  Prior to the offering of the Durbin amendment on the Senate floor last week, the Senate had not considered interchange legislation or even held a hearing on interchange.  This amendment was added at the last minute without any debate on the Senate floor.   The House of Representatives held hearings on interchange legislation in 2008, 2009, and 2010; they did not include any interchange provisions in the House version of financial regulatory reform.

As the House and Senate convene a conference committee to develop a compromise financial regulatory reform bill, it is critical that you act immediately to express your opposition to the Durbin language.  ETA remains strongly opposed to any attempt to create government regulation or to legislate rate-setting methods for the interchange system, and we need you to join us in this fight.  

Please take action today at www.voiceofpayments.org and let Congress know that you do not want the government to take over interchange!