Interchange amendment will cost banks, consumers

By Pat Drennen and Roger Claypool

On behalf of Iowa's credit unions and community banks, we strongly oppose the interchange amendment passed by the Senate as part of the financial reform bill. This amendment will have negative consequences in the form of increased costs for all Iowans using debit cards.

The support for this amendment is being led by large merchants, who are looking to avoid paying their fair share of costs associated with the global payment network and, instead, pushing those costs to consumers.

The amendment would require the Federal Reserve, not the free market, to set interchange rates for debit card purchases. Interchange fees are expenses that a merchant pays to the issuer of the debit/credit card (the consumer's bank or credit union) for the benefit of using card networks, such as Visa and MasterCard, for payment of sales made at that merchant's place of business.

When setting the interchange rates, the Fed is statutorily limited to consider only a fraction of the expense involved in running a debit program and global payments network. Even worse, nothing in the amendment guarantees that consumers – whose interests should drive public policy in this area – will see any savings from the reduced interchange fee.

The amendment also allows merchants to set minimums and maximums so consumers never will know for sure whether they can make the purchase. This will be particularly onerous for consumers who rely on prepaid benefit cards.

It is troubling that a government benefit recipient attempting to purchase bread and milk could be denied use of the card because the purchase was not large enough to exceed a merchant-imposed minimum.

Merchants offer debit cards because they receive tremendous benefits from electronic payment. They are paid immediately, payment is guaranteed, they don't have to deal with cash or wait for a check to clear.

Financial institutions incur significant expense providing that benefit to merchants. They are responsible for administration of card programs, customer call centers and reissuing cards in cases of merchant fraud. Also, fraud losses have increased significantly for Iowa banks and credit unions in recent years, and interchange fees support these costs.

If financial institutions can't cover the cost of the products they sell to merchants, those costs either will shift to consumers or some may even curtail debit and credit card services. The Walmarts of the world will pocket millions at the expense of financial consumers.

The bottom line is this: A coalition of large merchants is seeking to reduce overhead costs by shifting the responsibility for the payments system entirely onto issuers and, ultimately, consumers.

There were no hearings on this issue and interchange rates are unrelated to the financial crisis that the financial regulatory reform bill was aimed at fixing. In these challenging economic times, Congress should not enact legislation that will harm the millions of Americans served by credit unions and community banks.

Pat Drennen is Iowa Credit Union League board chair and Roger Claypool is Iowa Bankers Association board chair. Comments: pdrennen@1stgateway.org or RClaypool@

firstnationalbankiowa.com