The interchange fee storm

Jan. 1, 2020
Interchange fees auto retailers pay banks and card companies for processing debit card sales are once again in the center of a political storm.

Interchange fees auto retailers pay banks and card companies for processing debit card sales are once again in the center of a political storm as the Federal Reserve Board writes regulations to implement the 2010 Dodd-Frank law. This law contained an amendment sponsored by second-ranking Senate Democrat Sen. Richard Durbin (Ill.) that reined in interchange fees, which have been climbing fast over the past 10 years, crimping retailer profits.

But now, the big banks, Visa and MasterCard are pressing the Fed to issue rules that give them more leeway to ramp up interchange fees. The Durbin amendment requires that the Fed issue, by April 21, three final rules on interchange fees regarding a "reasonable and proportional" debit fee structure, fees for fraud prevention on debit transactions and debit transaction network fees. Beyond those rules affecting debit transactions, the Fed must produce new rules regarding the routing of transactions on payment card networks by July 21.

In its proposed rule issued in December, the Fed said it would cap interchange fees at between 5 and 12 cents per transaction. David W. Kemper, who testified before the House Financial Services Committee in February on behalf of the American Bankers Association and Consumer Bankers Association, says the Fed is interpreting the Durbin amendment, which says interchange fees must be "reasonable and proportional" to cost — hence the Fed's 5 to 12 cent per transaction ceiling in the proposed rule — very narrowly. "As bad as the Durbin Amendment is, the Federal Reserve has made things worse by proposing an extremely restrictive rule that sets caps that do not account for important costs related to ensuring the reliability and security of the vast debit card system that customers enjoy today," he says.

But Doug Kantor, a Washington lawyer and spokesman for a group called the Merchants Payments Coalition (MPC), answers: "The Federal Reserve’s rule, in fact, is more generous to the banks than it ought to be. The Fed had discretion to do just what it did for checks – prohibit these fees altogether. Instead, the Fed has written a rule that allows the banks to charge for the costs of authorizing, clearing and settling debit transactions, plus a rate of return. While this is more money than the MPC believes makes economic or policy sense, it is still movement in the right direction."

The Durbin amendment did two key things. First, it said retail merchants had to have a choice of routing debit payments over at least two networks; neither Visa nor MasterCard can insist, by whatever means, that the retailer use only their network. Second, the bill put a cap on interchange fees to retailers, which the Fed defined, in its proposed rule, of 5 to 12 cents per transaction. That is significantly less than what auto retailers, and others, are currently paying.

Kantor notes that escalating interchange fees are toughest on industries with the most tenuous profitability. He handed the committee data from Fortune Magazine, which showed automotive retailers are among the worst off of 50 industries in that regard. Also, the 2008 year was a tough one, especially for the auto industry. That was reflected in the profit as a percent of revenue for auto retailers that year — a pathetic negative 7.9 percent, putting them in the number 49 (out of 50) position in the Fortune rankings. They were in the same 48 or 49 position in previous years, too, although the sector's percent was a positive 1.2 or 1.1 percent.