Congress may slow 'swipe' cap amid regulator concerns

A proposed cap on debit-card 'swipe' fees scheduled to take effect in July may be delayed or revised amid questions about its impact raised by the financial industry, regulators and lawmakers.

Federal Reserve Chairman Ben S. Bernanke, Fed Governor Sarah Bloom Raskin and Federal Deposit Insurance Corp. Chairman Sheila Bair, who testified at two congressional hearings today, aired concerns that could slow down the schedule for implementing the new rules.

The Dodd-Frank Act enacted in July requires the Fed to establish the cap on so-called interchange fees charged to merchants. The central bank proposed in December to set the limit at 12 cents per transaction, setting off a lobbying battle between retailers who favor the rule and lenders including Bank of America Corp. who stand to lose more than $12 billion in annual revenue if the proposal as written becomes final.

Wayzata-based TCF Financial has sued the Federal Reserve to block the cap.

Republican and Democratic lawmakers criticized the law and the Fed's proposal. "A delay of the implementation of this rule is definitely in order," said Representative David Scott, a Democrat from Georgia.

Bernanke told the Senate Banking Committee the Fed was "not certain" about an exemption in the law for institutions with less than $10 billion in assets, echoing the comments of some smaller lenders that the carve-out would have the unintended consequence of making them less competitive.

'CONGRESS'S CALL

Bair told the Senate committee that the rulemaking by the Fed wasn't "as thorough as it might have been." Asked after the hearing whether she was suggesting a delay, she said, "I think that's Congress's call. But I do think there are some policy issues that could be thought through a little bit more before this thing gets implemented."

Senator Richard Durbin, an Illinois Democrat who drafted the provision and the exemption for smaller banks, said Bernanke "echoed the financial industry's talking points and failed to acknowledge several critical realities."

"For the sake of Main Street American consumers and businesses, we need the Federal Reserve to understand and address the non-competitive practices of our largest financial institutions," Durbin wrote in a letter to Bernanke after the hearing.

Durbin, the second-ranked Democrat in the Senate, has said he will fight to block any legislative changes to the provision.

MARKET CHANGES

Raskin, in remarks prepared for the House Financial Services Committee hearing, said the law and the resulting regulations "may result in significant market changes."

The Fed doesn't have the power to delay the proposal itself, Raskin told lawmakers. The central bank would "definitively defer to Congress" if a law were passed requiring it to delay or take another route on the rulemaking.

She said that given "the novelty and unusual complexity" of the matter, the Fed governors "are reserving judgment on the terms of the final rule until we have the opportunity to benefit" from all public comments the Fed is receiving.

Trade groups representing retailers including Wal-Mart Stores Inc. and Target Corp. are pushing for the Fed to keep the proposal unchanged, saying the reduction in fees will give them freedom to reduce costs for shoppers.

CONSUMER BENEFIT

"There is no doubt that competitive market forces will allow consumers to directly benefit from this reduction in debit card rates," David Seltzer, vice president and treasurer of 7- Eleven Inc. said in testimony prepared for the House hearing.

Still, lawmakers said they were uncertain of the benefits. "I don't receive any complaints in my district from people who are complaining that their debit card fees are too high," said Representative Kenny Marchant, a Texas Republican. He said the Fed needed to "take more time" and consider the impact the rule may have on smaller lenders.

Representative Mel Watt, a North Carolina Democrat, also voiced reservations.

"I haven't been able to see how we assure that the ultimate beneficiary that we are advocating for, consumers, really get the benefit from this," Watt said.

Shares of Visa Inc. and MasterCard Inc., which set the fees and pass the money to card-issuing banks, tumbled more than 10 percent after the Fed's plan was released Dec. 16, amid investor concern that the caps will damage their business model.

COMMENT PERIOD

The comment period for the Fed proposal ends next week. Under Dodd-Frank, the central bank is required to complete work by April 21 on the cap provision, which would go into effect by July 21.

Changing the exemption for smaller lenders would require congressional action, which may delay the rules. Both Bernanke and Raskin told lawmakers the exemption may not work as intended.

"We are not certain how effective that exemption will be," Bernanke said at the hearing. "It is possible that because merchants will reject more expensive cards from smaller institutions or because networks will not be willing to differentiate the interchange fee for issuers of different sizes, it is possible that the exemption will not be effective in the marketplace."

Raskin also told lawmakers that there were "legitimate questions" about the exemption.

Durbin, the Illinois Democrat, has vowed to push back against any changes in the law or the Fed's proposal. He has criticized Washington trade groups such as the Independent Community Bankers of America and the Credit Union National Association for making points similar to Bernanke's, saying they were trying to scare their members.

Representative Peter Welch, a Vermont Democrat who proposed interchange legislation in the House last year, said the calls for delay were a result of the banking industry lobbying efforts -- and that the power of the retail industry would help protect the proposal.

"We have to defend what we achieved, and we will," Welch said in an interview. "The bottom line is that there are millions of merchants throughout this country that are relieved that they are finally going to be treated fairly."