Credit union group opposes Fed’s rule capping interchange fees

The Federal Reserve has proposed capping debit interchange fees charged to merchants at 12 cents for every transaction, instead of using a formula that provides an average of about 1 percent of the purchase price. 

The rule has to be completed by April 21 and be implemented by July 21 as called for in the Dodd-Frank bill. 

Estimates have shown that banks could lose about $12 billion in annual revenue. 

Rep. Barney Frank (D-Mass.) recently signaled he is willing to work with House Republicans to make changes to the Fed’s proposal. 

Amendment sponsor Sen. Dick Durbin (D-Ill.) won’t likely be amendable to changes to the rule that limits the fees credit and debit card issuers can charge retailers, which he also wants applied to credit cards.

The letter was sent to Senate Banking Chairman Tim Johnson (D-S.D.) and panel ranking member Richard Shelby (R-Ala.) along with House Financial Services Chairman Spencer Bachus (R-Ala.), ranking member Frank and copied to Federal Reserve Chairman Ben Bernanke.

“We believe repeal is needed because the Federal Reserve failed to consider as part of their proposal important factors that impact the cost of maintaining a debit card portfolio at a not-for-profit credit union,” the letter said. 

“The proposal will lead to job losses, higher costs to consumers, and may even force some small financial institutions out of business as market forces will surely impact small institutions negatively, in spite of any implied exemptions or assertions to the contrary,” the letter said. 

In the letter, the NAFCU said the language puts the government “between two industries and destroys a system that was developed by the free market and has worked successfully for the American public, as evidenced by the continued record use of debit cards during the holiday season.”  

The NAFCU suggests that the Fed should’ve given more consideration to fraud losses and data security concerns when drafting any regulation limiting interchange fees because of losses by credit unions. 

In addition, the costs of maintaining a debit card network at a financial institution also weren’t considered in either the Durbin language or the Fed’s rule, the letter said. 

The credit union group argues that supporters of the amendment didn’t recognize the debit card system provides a significant benefit to merchants because, for example, the system allows for the immediate transfer of payment at the point of sale. 

“Proponents of this amendment sold it by falsely asserting that debit cards are just like paper checks,” the letter said “However, unlike paper checks, the use of plastic cards leaves the onus on the financial institutions to recoup losses incurred by a defrauded customer. If debit cards are to be treated as equivalent to checks, then recovering the cost of a fraudulent transaction on a debit card should lie with the merchant, just as it does for a paper check.”