The Green Sheet Online Edition
January 24, 2011 • Issue 11:01:02
Insider's report on payments
Dodd-Frank repeal unlikely, interchange changes possible
The 19th century German chancellor Otto von Bismark once said, "Laws are like sausages; it is better not to see them being made." So if you're feeling a little squeamish, you might want to skip to another article and come back here later, because the focus is on lawmakers.
The 112th session of Congress began in January 2011, and one of the first acts of the Republican majority in the House of Representatives was to introduce legislation calling for the wholesale repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 87).
It's unclear how serious the sponsors are about repealing the massive financial services industry reform package known more commonly as the Dodd-Frank Act. But if they are serious, we can expect little in the way of substantive banking legislation until, perhaps, the next election year - the one possible exception being a revisiting of debit interchange.
Those were the days
I never could have imagined saying this in my younger years, but I long for the good old days. I'm referring to the days when Congress was controlled by lawmakers and their staffs, and lobbyists huddled in small groups outside committee meeting rooms "educating" staffers and the press and negotiating ways to lessen the impact of various provisions on their clients (primarily trade associations). Those also were the days when lawmakers had the wisdom to accept defeat and let things play out.
Financial services is a tightly regulated industry, and for good reason: banks control lending and payment systems, and money creation (through lending) and exchanges (payments) are as critical to the proper functioning of a free-market society as are air and water to the proper functioning of the human body. That's why after a series of economic collapses culminating with the Great Depression, Congress put in place a series of legislative changes that imposed strictures like the separation between commerce and banking and interest rate caps.
I wasn't alive at the time, but reading accounts leads me to believe the debates over the Banking Act of 1933 (commonly referred to as the Glass-Steagall Act) were heated - and political. But it took opponents nearly 50 years to begin dismantling the prohibitions ushered in by Glass-Steagall and corollary legislation. And despite strong opposition (which I did witness firsthand) the deregulation laws enacted in the 1980s remained basically unchallenged until the economy began tanking about 15 years later.
Dodd-Frank now invested
That ultimately led to years of political wrangling that resulted in legislation that made a significant number of people unhappy and left many pointing fingers.
I'll venture a guess that the only big winners in the debate over the Dodd-Frank Act were lobbyists and political candidates.
According to public records, the commercial banking sector contributed $18,816,944 to congressional candidates during the 2010 election cycle, and (no surprise here) Republican candidates received the lion's share.
During the previous election cycle (the period leading up to the 2008 elections), contributions to candidates topped $37 million, and Democrats were the biggest beneficiaries. (Again, no surprises: historically, the majority of big bank donations have gone to winning candidates.)
Altogether, the financial sector spent a whopping $251 million lobbying Congress (as well as the U.S. Department of the Treasury, the White House and federal regulatory agencies) during the first six months of 2010, according to an Aug. 2, 2010, report posted on CNNMoney.com. That's roughly the period during which final details of the Dodd-Frank Act were being negotiated. One can only imagine how much cash will change hands if repeal becomes a topic of serious debate during this new session of Congress.
And what about all the money, time and energy spent by the government and the private sector trying to understand and comply with mandates of the Dodd-Frank Act? That's why I believe all the hoopla over repeal of the act is just political posturing. The only possible exception may be changes to the Durbin Amendment.
The Durbin Amendment to the Dodd-Frank Act directs the Federal Reserve to implement regulations that cap debit card interchange and prohibit network exclusivity arrangements in the routing of debit card payments. The amendment was a major coup for the retail sector, which has been attacking interchange from multiple directions.
In December, the Fed proposed a set of rules implementing the Durbin Amendment and offered two options for capping interchange.
One would cap interchange on debit card payments at 12 cents per transaction for all card issuers subject to regulation under the law. The other is based on issuer's costs and would allow interchange to be set between a minimum of 7 cents per transaction and a maximum of 12 cents per transaction. Either option could slash by 70 percent interchange earned by card issuing banks, vis-ô-vis 2009, the Fed estimates.
One of the chief architects of the Dodd-Frank Act, Rep. Barney Frank, D-Mass., suggested the Durbin Amendment was an unintended consequence of back-room deal making. There weren't enough votes to get the bill passed in the Senate without the amendment, Frank told CNBC in a December interview.
As for the Fed's proposal, Rep. Frank said, "I think, the way it was written, the amount the credit card companies are allowed to charge is too low." He added that "the evidence we've seen is the consumers don't get any benefit from this."
Rep. Spencer Bachus, R-Ala., the new Chairman of the House Financial Services Committee, wants the Fed to go slowly on implementing the Durbin Amendment. "Hastily written rules may end up doing more harm than good to consumers and have negative effects on competition in the marketplace," he wrote in a December letter to the Fed.
It's rare for the incoming and outgoing (opposition party) chairmen of the House Financial Services Committee to agree on controversial issues like interchange, so there may be some real momentum for change. Don't bet the bank on it, though.
What you can and should do is download a copy of the proposal from the Fed's website (www.federalreserve.gov), review it carefully and let the Fed know your thoughts. Written comments are requested by Feb. 22. Absent an act of Congress, Fed rules implementing the Durbin Amendment must be in place by July 2011.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. She is also the founder of InsideMicrofinance.com. Email her at firstname.lastname@example.org.
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