The Dodd-Frank Act and the Federal Reserve Board: What's the deal with debit?

It all started with the words "reasonable and proportional". Recently there has been much controversy over the proposed debit interchange rate caps by the Federal Reserve board. The jury is out on who will actually benefit. Will is be consumers, small banks/credit unions, or merchants? One things is for certain–big banks are not in that line up.

You see, this particular upset in the financial services industry all started last year when the Senate passed the "Dodd-Frank" financial reform act intending to limit the banking system's exposure to the same risks that resulted in the 2008 financial meltdown. It also put the Federal Reserve in the driver's seat to set policy and implement the intended changes. Debit interchange rates were tacked onto that bill just before it was passed and without as much consideration as the rest of the bill. Now the Federal Reserve must wade through some relatively weak provisional language to set a policy with unclear consequences. That language states that interchange fees must be "reasonable and proportional" to the actual fees paid by credit card merchants to banks, credit unions, and other credit card companies.

US Senator Richard Durbin of Illinois has pushed for these caps, which would reduce the interchanges rates to 12 and maybe just 7 cents per transaction. This would cut revenue earned by the banks on these transactions by 73%-84%. The resultant fear is that these cuts will be passed on to the consumers, and that the changes have not helped the end consumers much if at all in other countries, like Australia and some European countries that have made similar rules.

Just to understand the size of this pool, last year debit card transactions generated about $16.2 billion dollars for some of the country's biggest banks. Many industry insiders point out that the resultant cut in revenue could force banks to eliminate rewards programs and start charging some customers for using their debit cards. Since this would result in the opposite of the intention of the Dodd-Frank bill, there has been much discussion about it.

The Federal Reserve is taking comments through February 22nd. You can see the press release regarding the proposed changes here and you can send your comments to the Federal Reserve board here.

Matthew Koren is the President of Priority Payments Northwest, a credit card processor and payroll service provider located in Portland, OR. He runs his company, as well as partnering with a consulting practice: Causeit, Inc. You can contact him by filling out the Contact Us page, or by calling 866-402-1485, ext 750