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House subcommittee questions whether interchange rule needs more time

Subcommittee Chairman Shelley Capito (R-WV) leads the interchange hearing

Thursday Feb. 17, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing on Understanding the Federal Reserve’s Proposed Rule on Interchange Fees: Implications and Consequences of the Durbin Amendment. The Subcommittee, chaired by Rep. Shelly Moore Capito (R-WV) heard from witnesses from the Federal Reserve, credit unions, card issuing institutions and retailers.

The witnesses were presented in two panels:

Panel I

  • The Honorable Sarah Bloom Raskin, Governor, Federal Reserve Board

Panel II

  • Frank Michael, President/CEO, Allied Credit Union; on behalf of CUNA
  • Gus Prentzas, Pavilion Florals
  • David Kemper, Chairman, President/CEO, Commerce Bank; on behalf of the American Bankers Association and the Consumer Bankers Association
  • Doug Kantor, Partner, Steptoe & Johnson; on behalf of the Merchant Payments Coalition
  • Josh Floum, General Counsel, Visa
  • David Seltzer, Vice President and Treasurer, 7-Eleven; on behalf of the Retail Industry Leaders Association

During her testimony, which lasted more than 90 minutes, Gov. Raskin was asked at length by numerous members of the Committee why the Federal Reserve omitted fraud-related cost adjustments. She stated numerous times that the Fed did not have an adequate understanding of the fraud cost issue, and was seeking comments on the issue. Other members questioned how the Federal Reserve arrived at the 12 cent per transaction limit as a “reasonable and proportional” amount of costs, as required under the law. Several members of the Committee asked if more time in developing the rule would be useful, and other members went a step further and stated as fact that more time should be taken to ensure that the rule was done the right way. The time frame for issuing the final rule is a matter for Congress, and the Fed’s time frame is set by Congress.

In addition, under questioning Raskin stated that the Fed did not consider how card issuers would adjust for the loss in income. At another point, Gov. Raskin stated that there was no way to guarantee that the lowered interchange costs for merchants would result in lowered prices for consumers, other than the operations of the free-market.

Allied CU President/CEO Frank Michael testifies during the interchange hearing

On behalf of credit unions, Frank Michael focused his testimony on the lack of meaningful enforcement of the small issuer exemption and the impact the lowered interchange fees would have on consumers. Citing the need to maintain capital, Frank pointed out that credit unions would stand to lose about $1.1 billion in lost revenue and it would have to be made up in some way, which will mean new or higher fees for consumers. He also urged Congress to stop final implementation of the rule and to start over in drafting the rule, as well as to revisit some of the statutory requirements of the Durbin amendment.

During the industry panel Q and A, the discussion moved away from how the rule was developed and more to support versus opposition of the rule. Most of the discussion revolved around the price limit of 12 cents maximum, and how it would affect issuers and their consumers, as well as whether this is adequate and what should be considered in setting a limit.

When asked point blank if merchants would be willing to accept a delay to ensure that the rule was developed correctly, Mr. Kantor stated that they had waited long enough and they believed the Fed got it right. Of course, in his earlier testimony he stated that their view was that under any centralized price system, such as card networks as they now exist, there should be NO interchange fees allowed.

The hearing lasted most of the day, and at times became very contentious, surprisingly more during the testimony of Gov. Raskin than by the industry witness panel. The general tone of the day seemed to revolve around two points. On one side, many Republican members took issue with the idea of the Federal Reserve setting prices to begin with, while members from both sides of the aisle expressed serious concern about how the Federal Reserve arrived at the limit and whether it was really “reasonable and proportional” to costs. A good summary was given by one witness who stated “The Fed was hamstrung in what they were allowed to consider, then they narrowed it and made it worse.’

While today’s hearing was just that, a hearing with no legislation considered, it is clear that numerous members of the subcommittee have significant concerns about the rule and how it will be implemented. Whether these concerns result in a delay and re-write of the draft rule remain to be seen, but the League and CUNA will continue to work with members of Congress to press for ways to slow down implementation of the rule and to ensure that the Federal Reserve revisits its draft and responds to the concerns addressed both at today’s hearing and the concerns we have been hearing from credit unions since the proposed rule was first published.

To read a transcript of the testimony or to watch an archive recording of the hearing, click here.