Bernanke to Tester: Swipe fee price-fixing could cause rural banks to fail

Senator: Failure of small banks would be ‘a nail in the coffin’ for businesses in rural America

(U.S. SENATE) – The nation’s chief economist today told Senator Jon Tester that a proposed plan to fix the price of debit card swipe fees could lead to the failure of small community banks and credit unions in Montana and across rural America.

Tester grilled Federal Reserve Chairman Ben Bernanke in a Senate hearing today about the impact of the planned government limit on debit card “swipe fees,” also known as interchange fees.  Banks charge retailers a small fee for every debit card purchase in order to pay for the cost of the electronic transaction and to protect against fraud.

Tester voted against limiting swipe fees last year because of concerns that it would hurt small businesses and jobs in Montana by forcing small banks make up for the cost of debit cards elsewhere—such as higher checking and lending fees.  Tester says if that happens, Montana’s small banks would not be able to compete with national banks, which would negatively impact rural communities.

“I’m talking about rural America here,” Tester told Bernanke today.  “I’m talking about community banks and credit unions, that if they go away, it’s another nail in our coffin.  It’s really important.”

“There’s good reason to be concerned about it,” Bernanke responded.  “It could result in some smaller banks being less profitable or even failing.”

Tester also asked Bernanke about a supposed exemption in the new proposal for small banks and credit unions.  The federal banking officials charged with implementing the new plan have raised serious concerns about whether the exemption will work. 

“We’re still not sure whether it will work,” Bernanke told Tester.  “There are market forces that would work against the exemption.”

Sheila Bair, Chairwoman of the Federal Deposit Insurance Corporation, agreed that the new swipe fee limit will mean higher fees for consumers.

“I do think this is going to reduce revenues at a number of smaller banks, and they will have to pass that on to customers in terms of higher fees,” Bair said.  “That’s going to happen.  Is that the right result—is that the result that Congress wanted?  You need to determine that, but I think that is what will happen.”

Tester has introduced bipartisan legislation to protect rural consumers by suspending the proposal for two years while the effects can be studied and better understood.

Video of Tester’s exchange with Bernanke and Bair is available HERE.