Interchange Cuts Expected July 21Failure of Bill to Delay Fee Reduction Will Hurt Fraud Prevention Cuts to debit interchange are expected to take full effect July 21, following the failure of the Senate to pass an amendment that would have delayed proposed interchange-income reductions for two years.
The failed measure, introduced by Sen. Jon Tester, D-Mont., and Sen. Bob Corker, R-Tenn., had aimed to delay interchange-fee cuts called for in Sen. Dick Durbin's, D-Ill., amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The highly debated Durbin amendment calls for the Federal Reserve to significantly cut interchange fees card-issuing banks and credit unions collect on debit transactions.
The Tester-Coker amendment, commonly known simply as the Tester bill, had it passed, would have given the financial industry two years to evaluate the impact a reduction in debit interchange would have on consumers and the economy. Despite getting a majority of the Senate votes, with 54 in favor, the amendment was six votes shy of the 60 needed to end Durbin's filibuster.
Now banking associations are recommending financial institutions brace themselves for the fee reduction, and start looking toward efforts to implement 'B' plans.
"In the interim, I think credit unions are watching this, and there clearly needs to be a plan B," says Fred Becker, CEO of the National Association of Federal Credit Unions. "At this juncture, realistically, I don't think there are any other things we can do." [See NAFCU Ask for Senate Support of Debit Interchange Fee Study Act of 2011.]
Becker says he's proud of the combined efforts of bank and credit union associations over the last several to educate congressional leaders about the impact of interchange reductions. "I think we made significant progress, but it just wasn't enough," he says. "Now we'll just have to see what happens."
The Fed is soon expected to issue its rule about the interchange restructure, Becker adds.
The Impact on Fraud PreventionThe Durbin amendment is the only portion of Dodd-Frank that directly mentions fraud. [See Debit Fraud and Interchange .]
The legislation says banking institutions can charge fees to cover their fraud prevention investments, which supporters of fee reductions have said could be used by banks and credit unions to recover lost interchange revenue. But Julie McNelley, an analyst at Aite Group, says the allowed amount does not come close to covering fraud expenses for banks and credit unions, and is likely not to be something institutions even consider as an option. "If that's what they're considering, then it's not going to be anywhere close to making up for the interchange cuts Durbin would represent," McNelley says.
In fact, one banker says financial institutions are more likely to cut fraud prevention than enhance it. "Durbin, as it stands today, is very poor for the payments industry and the consumer, because it would lend itself to reducing fraud prevention and detection," he says.
"Most of the financial institutions I've spoken with are coming up with plans from A through Z; it's really across the board," McNelley says. "But the one thing they all are very much preparing for is the loss of this revenue stream."