Durbin draws opposition from advocacy groups

With debit interchange regulation looming, 33 national and state-level advocacy groups, think tanks and center-right activists have joined to lobby against premature implementation of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which could cap debit interchange fees starting as early as July 2011. The coalition includes the Americans for Tax Reform, Competitive Enterprise Institute and 60 Plus Association.

In an April 2011 joint letter to Congress, the coalition stated, "Consumers and seniors on fixed incomes will likely bear the brunt of these regulations directly, as card issuers struggle to cover the cost of artificially low price controls on interchange fees. For cardholders, this means higher fees, fewer card rewards, the elimination of banking services such as 'free checking'." The coalition also stated that smaller banks and issuers could be forced "to eliminate services or exit the market altogether."

Industry expert Ross Federgreen, founder of CSRSI, The Payment Advisors, disagrees with the notion that reward and other card programs would be restricted due to debit interchange regulation. He said that with reward card programs, merchants are charged a fee every time a card is presented. He believes merchants will continue to pass along those costs to consumers just as they are doing today.

"I don't see the need for a change to the Durbin bill is required to protect the consumers from the banking environment," he said. "I think it's going to be more adverse to the banking environment than to the consumer environment."

Dubious benefits to regulation

According to Federgreen, an often overlooked fact is that even though a consumer can pay a merchant with a debit card, many times the debit card is being run as a credit card because the consumer's not entering the PIN. "It's not like all of a sudden these debit cards or check cards are going to be handled as credit cards with higher interchange rates," he said. "That's what's happening now."

Referencing The Reserve Bank of Australia's regulation of interchange in 2002, the letter said, "Already, the Government Accountability Office found that when similar transaction fee caps were enacted in Australia, the cost was passed on to consumers in the form of reduced rewards and higher annual fees for payment cardholders. Contrary to the rhetoric of price control proponents, none of the savings merchants received in Australia were passed on to consumers."

Federgreen agreed that regulation in Australia hasn't achieved its originally stated goals. "This was all the rage to save merchants a ton of money and to help business," he said. "Well, none of that ever came to pass. They just changed the rules again, and banks figured out ways to get around it. It didn't help the masses. Now, almost 10 years later, it's a forgotten fact of life."

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