Durbin Statement on TCF's Court Challenge of Interchange Law
[WASHINGTON, D.C.] – Assistant Senate Majority Leader Dick Durbin (D-IL) released the following statement today after Minnesota-based TCF National Bank filed a lawsuit challenging the constitutionality of a Durbin-authored law regarding interchange fees. The bipartisan language passed as part of the Wall Street reform act, requires the Federal Reserve to determine if the current interchange fee structure is both “reasonable and proportional” to the real cost of processing a debit card transaction and allows small businesses to offer discounts to consumers when they use cash, checks or debit cards.
“TCF’s complaint not only fundamentally misunderstands the law regarding interchange fees, but it also ignores the facts,” Durbin said. “The law in no way addresses the fees TCF, or any other bank, can charge and it does not set interchange rates. Our language simply ensures that debit interchange fees charged to retailers by the card networks – not the banks -- are ‘reasonable and proportional’ to the cost of processing transactions and provides competition in an area of the market where there’s none.
Congress approved this language by a wide bipartisan margin in reaction to the frustrations of millions of merchants and consumers who were getting nickled and dimed by the anticompetitive interchange system set up by big banks and credit card companies – including TCF. I look forward to this provision’s day in court and am confident that our language will be found to be fair and Constitutional.”
The Durbin amendment was passed by the Senate 64-33 in May of this year during the Senate’s consideration of the Wall Street reform bill. The amendment was agreed to after Congress held six hearings on the issue of interchange fees and their effect on consumers. A modified version of the Durbin amendment was later agreed to by House and Senate negotiators and included in the final bill.
Last week, the Department of Justice (DOJ) concluded a multiple year investigation into the issuance of interchange fees by credit card giants Visa and MasterCard and concluded that the rules surrounding interchange fees exclude competition and are unfair to consumers and merchants alike. DOJ, Visa and MasterCard reached a settlement that would require the two companies to allow merchants to offer discounts, incentives, and information to consumers to encourage the use of payment methods that are less costly. Durbin’s statement on the settlement can be found here.
Interchange fees are supposedly charged by Visa and MasterCard in order to cover the cost of processing a credit or debit card transaction. These fees continue to rise even though processing costs have decreased. Nearly $50 billion in interchange fees were charged by credit and debit card networks in 2008 – coming out of the bottom lines of small businesses, charities and government balance sheets. Of these fees, 80 percent went to just ten large banks.
A summary of the Durbin interchange law is pasted below:
Summary of the Durbin Interchange Amendment to the Wall Street Reform Act
- The Durbin amendment would bring reasonable regulation to the $20 billion per year debit interchange fee system. Interchange fees are received by the card-issuing bank in a debit card transaction. However, Visa and MasterCard, which control 80% of the debit market, set the debit interchange fee rates that apply to all banks within their networks. Every bank gets the same interchange fee rate, regardless of how efficiently a bank conducts debit transactions. Visa and MasterCard do not allow banks to compete with one another or negotiate with merchants over interchange rates, and there is no constraint on Visa and MasterCard’s ability to fix the rates at unreasonable levels. This system is effectively an unregulated $20 billion per year transfer of wealth from merchants and their customers to card-issuing banks.
- The amendment will require that for transactions involving debit cards issued by banks with assets over $10 billion, any interchange fee charged on the transaction must be reasonable and proportional to the cost incurred in processing the transaction. Visa and MasterCard currently charge debit interchange fees of around 1-2% of the transaction amount. These fees are far higher than the actual cost of processing debit transactions, and they mean that small businesses and merchants always get shortchanged when they accept a debit card for a sale.
- The amendment will permit card-issuing banks to receive debit interchange fee adjustments to cover reasonably necessary fraud prevention costs. However, as opposed to the current interchange system where banks receive a guaranteed level of interchange revenue no matter how effectively they deal with fraud, the amendment will require banks to demonstrate that they have met fraud-prevention standards and taken effective steps to reduce fraud in order to receive an issuer-specific interchange adjustment that will cover their necessary costs.
- The amendment exempts government-administered debit cards and reloadable prepaid cards from debit interchange regulation so long as abusive cardholder fees are not charged. The amendment would rescind this exemption for government-administered cards and reloadable prepaid cards if consumers using these cards are charged overdraft fees or fees for their first monthly ATM withdrawal by the card-issuing banks.
- The amendment allows merchants to offer customers discounts for use of cash, checks and debit cards, and to set a $10 minimum for credit card transactions, without penalty from card networks. These provisions will enable small businesses to bring their interchange costs under control and to pass savings on to consumers in the form of discounts.
- The amendment prevents card networks from requiring that their debit cards be transacted exclusively on one debit network. There are a number of PIN debit networks that merchants can use to conduct PIN debit transactions, and until recently most PIN debit cards were able to be used on multiple PIN networks. This fostered price competition between the PIN networks. Recently, however, price competition has diminished and PIN debit fees have gone up because large networks like Visa have increasingly required banks to sign exclusive agreements under which they become the sole PIN network whose logo appears on the banks’ cards. The amendment would enhance competition by directing the Fed to issue regulations providing that a card network cannot limit a debit card to only be allowed to run on one exclusive network.
- Nothing in the amendment would enable discrimination against debit or credit cards on the basis of the bank that issued the card.
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