Fed's debit cap plan under fire

A group of Republican lawmakers wants to derail the Federal Reserve's plan to slash the allowable cap on debit card interchange. The Secure Payments Act, introduced by Senator Ted Budd, R-N.C., would instruct the Fed to hit the pause button on its interchange fee proposal until a full quantitative impact study can be conducted of the effects on consumer costs and the wider economy.

The Fed was charged with overseeing debit interchange by the Durbin Amendment to the Dodd-Frank Act, the omnibus legislation enacted in the wake of the 2008 financial crisis. The cap, which applies only to debit card issuers with $10 billion, or more, in assets is currently 21 cents and 5 basis points (0.05 percent) of the transaction amount, plus a penny to cover fraud prevention costs.

Last year the Fed proposed lowering the cap to 14.4 cents plus 4 basis points (0.04 percent) and 1.3 cents to cover fraud prevention costs.

To put this into perspective, the interchange on a $50 covered debit card payment would drop from 24.5 cents to 17.7 cents. And chances are it could be lowered even more in the future, as the Fed also is proposing to adjust the cap every two years, based on its own data and without the benefit of public comment.

The Fed's proposal has drawn criticism from key parties. Banks have complained that it's too much of a haircut, merchants have argued it's not low enough, and at least one Fed governor, Michelle Bowman, has asserted that the proposal "aims to achieve 'rough justice' by establishing a single cap that applies to all covered issuers."

Disenfranchising lower income consumers

Governor Bowman also said she was concerned lower interchange would disenfranchise low-income consumers, as banks might be forced to scale back low-cost accounts.

Sen. Budd echoed that sentiment. In introducing the Secure Payments Act he cited data showing how the percentage of financial institutions offering free checking accounts fell from 60 percent to less than 20 percent since the original debit caps went into effect in 2011.

Additionally, he noted that checking account fees at FIs covered by the caps more than doubled. And he cited a Federal Deposit Insurance Corp. survey indicating that 30 percent of low- and moderate-income households were forced to close accounts at FIs due to higher and/or unpredictable fees.

"The Federal Reserve's Regulation II [which implements the Durbin Amendment] is a misguided policy that hurts everyday North Carolinians, especially those in minority communities," Budd said in a statement. "Indiscriminately imposing government price caps on debit card services makes it harder for people to open bank accounts and forces banks to end popular perks like free checking. Before the Federal Reserve moves forward on this proposal, they must take into account the damage it will do to consumers across the country."

Enough support?

Representative Blaine Luetkemeyer, R-Mo., agreed. "Since its adoption, Reg II has proven to be a failure for everyday people. Studies from the GAO and the Federal Reserve itself show that the policy has significantly decreased access to free checking accounts for low-income families and increased the overall cost of banking services," he said when he introduced a bill in the House that mirrors the legislation Budd introduced in the Senate.

"Meanwhile," Luetkemeyer added, "the biggest beneficiaries of Reg II – the world's largest retailers – boasted on their shareholder earnings calls the profits the regulation added to their balance sheets."

Not surprisingly, the Secure Payments Act has the support of leading trade associations representing banks and credit unions.

"Credit unions need access to as many resources as possible to provide critical services in rural and underserved communities, and we've already seen that debit interchange restrictions limit those resources and ultimately hurt consumers," said Jim Nussle, president and CEO at America's Credit Unions.

Lindsey Johnson, president and CEO of the Consumer Bankers Association, said the CBA's research has shown the proposed change would further reduce availability of free checking and increase costs of banking services by as much as $2 billion a year.

Rebecca Romer Rainey, president and CEO of the Independent Community Bankers of America, added the plan to slash allowable interchange on debit cards is flawed because the Fed failed to use full and complete data from community banks.

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