Debit card interchange fee amendment will negatively affect consumers

By Idaho Credit Union League

Credit unions across Idaho are making their voices heard in Congress, pointing out that the Durbin interchange amendment to the pending regulatory reform legislation is not in the best interest of consumers. Credit unions, serving more than 90 million American consumers, issue debit cards for consumers to make electronic payments and purchases for their goods and services.

Interchange is the fee paid by merchants for processing a single debit transaction. Debit card purchasing is a convenient payment system for consumers that provide merchants with immediate payment, no loss due to non-sufficient funds, and no liability if there is fraud. The issuing credit union must absorb all losses from fraud or insufficient funds. Interchange fees reflect the merchant's fair share of the costs of this payment system.

The Durbin amendment requires the Federal Reserve Board, not the market, to set interchange rates for debit card purchases. Instead of making the interchange rate process open, inclusive, and driven by market forces and competition, the amendment forces the Federal Reserve into the role of a price-fixing body.

To make matters worse, the Fed is statutorily limited to consider only a fraction of the expense involved in running a debit program and global payments network, with no ability for negotiations. Nothing in the amendment guarantees that consumers -- whose interest should drive public policy in this area -- will see any savings at all from the reduced interchange fee.

In fact, it is likely consumers will experience increased costs and reduced choice if this amendment is enacted. Credit unions with their exclusive focus on local communities issue debit and credit cards as a service to their local members, and continue to do so fairly and honestly, often with better rates and terms than can be found at larger financial institutions. The key that makes this possible is the existing interchange system, which allows community banks and credit unions to compete directly with the largest banks in the debit and credit card marketplace.

The interchange provision requires the Federal Reserve to set a debit interchange rate by considering only one cost factor, not all of the direct and indirect costs assumed by card issuers. Those costs are significant and include card re-issuance and the costs of card fraud.

The consequences of this provision would make it extremely difficult for credit unions to continue to provide valuable and responsible debit card services, and would further the consolidation of market share into the hands of the largest financial institutions.

According to Alan Cameron, President/CEO of the Idaho Credit Union League, "The current electronic payments system for debit transactions has been created at great cost and expense to credit unions and other financial institutions. It is a system that works well and has been widely used by consumers. The merchant-supported interchange amendment will disrupt the card payment systems and result in merchants shifting their costs to consumers."

Cameron continued, "The Durbin amendment is nothing less than government price-fixing. It is a bad bill for consumers, credit unions and community banks and should not be enacted."

To join in the message being sent to Congress to "take the interchange amendment out of regulatory reform legislation," you are invited to call or email your Congressman.