New law limiting debit card fees would hurt small banks, consumers

The Durbin Amendment, the debit card interchange fee provision in the financial reform bill that allows the Federal Reserve to set the fees that banks can charge for debit card transactions, has been the subject of much debate over the past few months. That debate has heated up in recent days as a bipartisan group of U.S. senators, including Montana Sen. Jon Tester, introduced legislation to delay implementation of the Durbin Amendment until concerns about the proposed interchange rules can be addressed.

You may hear in the news and political advertisements that banks and credit unions are the only constituencies expressing concern. Not so. Concerns have been expressed by a wide variety of diverse constituencies including lawmakers from both political parties, the Consumer Federation of America, the Office of the Comptroller of the Currency, the Federal Advisory Council, FDIC Chairwoman Sheila Bair, Chairman of the Federal Reserve Ben Bernanke and even the Michigan Legislature, which issued a bipartisan resolution requesting a delay. All have expressed concern that the amendment in its current form, while directed at large national banks, could unintentionally or inadvertently harm consumers, small businesses, community banks and ultimately retailers, the group that the Durbin Amendment was originally designed to protect.

‘Certain harm’

A recent study conducted by University of Chicago Law School lecturer David Evans, Brookings Institute senior fellow in economic studies Robert Litan and MIT Sloan School of Management professor Richard Schmalensee, found that the Durbin Amendment would “impose direct, immediate, and certain harm on consumers, especially lower-income consumers and small businesses that use checking accounts.”

For Montana community banks, the harm comes in the form of the government mandating a fixed price for a banking service. I am not aware of any other business or retailer in the country that faces government price controls over the products they sell. Additionally, the price for debit card transactions as currently proposed does not accurately cover the actual, incremental costs for providing debit cards. As a result, our state’s consumers may be unintentionally harmed as they will be forced to shoulder the cost of this legislation. Already, news reports are filled with stories about the demise of free checking services across the country or plans to charge consumers fees for using debit cards, limiting debit cards transactions or simply eliminating debit card programs. This could harm consumers, retailers and small business as debit cards have become the preferred payment choice for both the American and Montana consumer. Both cash and check usage has fallen as consumers and businesses have come to appreciate and rely on the benefits of debit cards. They are convenient, occur in real time and provide the consumer and business with a higher level of fraud protection than cash or checks.

Exemption unworkable

Durbin’s interchange proposal targets large national banks, while small financial institutions are to be exempted. Unfortunately, as the legislation is written, there is widespread agreement that the exemption will be unworkable due to competitive pressures arising from multiple networks, pricing policies at those networks, and the resulting downward pressure on interchange fees. At a hearing before the Senate Banking Committee, Bernanke said he isn’t sure a small-bank exemption now in the law would work. “It is possible that the exemption will not be effective in the marketplace.”

As one of those community banks, we appreciate the efforts of Sen. Jon Tester and his colleagues in the U.S. Senate to protect our ability to remain competitive in the marketplace.

In light of the many issues outlined in this letter, it’s reasonable that delaying implementation of the Durbin Amendment be given serious consideration. Montana’s community banks, including First Interstate, are proud to serve our state’s retailers and small businesses. As such, we understand the intent of the Durbin Amendment in protecting retailers from unreasonable debit card transaction fees. In fact, we believe all constituencies involved support the intent of the amendment. However, as the legislation is currently drafted, we agree with Tester’s assessment that more time is needed to evaluate and analyze this measure to ensure that the true intent of the amendment is fulfilled and that all are protected under this legislation — Montana’s retailers, consumers, small businesses and community banks.