Top U.S. regulators said Thursday that small banks could be hurt by new limits on debit-card fees, comments that could fuel efforts to delay or change a provision in the Dodd-Frank financial-overhaul law.
The provision directs the Federal Reserve to cap “swipe fees” that debit-card issuers charge merchants each time a customer pays with a debit card. Banks and credit unions with less than $10 billion in assets, however, are exempted from the limit and can charge higher fees.
But two Fed officials told lawmakers they aren’t sure the exemption will work.
“It is possible that the exemption will not be effective in the marketplace,” and smaller banks will be forced to accept the same low fee as the larger banks, Fed Chairman Ben Bernanke said during a Senate Banking Committee hearing.
Fed board member Sarah Bloom Raskin told House lawmakers at a separate hearing that “there are legitimate questions” about whether the exemption will protect small banks as intended.
Federal Deposit Insurance Corp. Chairman Sheila Bair assailed the debit-card provision. “I think the likelihood of this hurting community banks and requiring them to increase the fees they charge for accounts is much greater than any tiny benefit retail customers maybe get from any savings” that retailers may pass along to them at the checkout, Ms. Bair said.
Sen. Richard Durbin (D., Ill.), who authored the law’s provision requiring the Fed to write the debit rule, said in an interview that Mr. Bernanke is “just basically wrong.”
The draft rule issued by the Fed in December capped the fees that banks can charge at 12 cents a transaction, well below the average 44 cents per transaction that banks charge now. Banks say the cap doesn’t allow them to cover what debit cards cost them and that it will lead them to offer fewer products and charge consumers higher account fees. Small institutions say they are less able to make up for the lost revenue than larger competitors.
Bernanke said there are two reasons why the small-bank exemption may not work. Merchants may choose to refuse to accept higher-fee cards from smaller banks. Or, payment networks such as those run by Visa Inc. and MasterCard Inc. may decide that it doesn’t make financial sense for them to have a two-tier system. Either scenario could lead small banks to adopt the lower fee.
Bernanke and Bair also said it’s unclear if consumers will benefit from lower debit-card fees. They said it’s likely that banks will pass some of their increased costs on to customers. On the other side of the equation, Bernanke said that retailers could pass savings on to consumers at the till, but only if competition in their particular market demands it.
The regulators’ concerns echo arguments that community banks and credit unions have made against the debit measure.
The banks’ lobby appears to be gaining some traction on the Hill. Lawmakers — including Rep. Barney Frank (D., Mass.), an architect of the Dodd-Frank law — have criticized the debit-card provision.
Durbin disputed the idea that retail merchants might discriminate against small-bank debit cards because major issuers’ networks’ rules would prohibit such a practice. “Plus,” he said, “it would cost them business to do so.”
The National Retail Federation, which backs the provision, said the rules imposed by Visa and MasterCard bar them from picking and choosing which cards they accept based on issuer.
Critics of the rule contend that there’s no way to police what each individual small-business owner does.
Several lawmakers also said Congress should delay the Fed rule so regulators can further study its likely effect. Ms. Bair endorsed such a move.
The public comment period on the Fed’s draft proposal closes Feb. 22. The final plan, if approved, would take effect in July.
