Letter to the Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System

Letter

Assistant Senate Majority Leader Dick Durbin (D-IL) responded to criticisms of his new interchange law today, hours after Federal Reserve Chairman Ben Bernanke questioned the effectiveness of the new law's small bank exemption at a hearing before the Senate Banking Committee.

In a letter to Chairman Bernanke Durbin wrote: "I was disappointed that your testimony about interchange fee reform today before the Senate Banking Committee echoed the financial industry's talking points and failed to acknowledge several critical realities.

The U.S. banking industry is a $13 trillion dollar industry… [and] has always fiercely opposed any reform to the current interchange fee system. After years of considering the issue, Congress has recognized that reform of this system is necessary for the sake of America's consumers, businesses and overall economy, and has passed bipartisan legislation to make this reform a reality. I urge you and the Federal Reserve to recognize these tactics for what they are, and to carry out the implementation of interchange reform as Congress intended - on the basis of facts and not the financial industry's fictions.

When you testified before Congress for your recent confirmation hearing, you said that the Federal Reserve's policymaking "is informed not just by a Washington perspective, or a Wall Street perspective, but also a Main Street perspective." 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."

A copy of the letter to Chairman Bernanke is pasted below.

Durbin also submitted written testimony to a House Financial Services Subcommittee hearing on the new interchange law. That testimony appears beneath the copy of the letter.

The Durbin-authored law directed the Federal Reserve to establish standards to ensure that debit interchange fees are "reasonable and proportional" to the real cost of processing a debit card transaction. The new law was created by a bipartisan amendment Durbin included in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Final regulations will be released in April.

February 17, 2011

The Honorable Ben S. Bernanke
Chairman
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551

Dear Chairman Bernanke:

I was disappointed that your testimony about interchange fee reform today before the Senate Banking Committee echoed the financial industry's talking points and failed to acknowledge several critical realities.

You expressed concern that the new interchange law's exemption for issuers with assets under $10 billion would not be effective in the marketplace. You said that whether the exemption will work depends on two things: 1) whether merchants might refuse to accept debit cards issued by small banks because those cards receive higher interchange fees, and 2) whether card networks might be unwilling to operate a "two-tier system" with different interchange rates for regulated large banks and for unregulated banks with assets under $10 billion.

On the first point, as every merchant knows, debit card networks like Visa and MasterCard impose "honor-all-cards" contractual rules on all merchants that accept cards from those networks. Merchants are subject to severe penalties if they decline to accept a network's card on the basis of the card's issuer. These existing network penalties (which the new law leaves intact) provide a proven deterrent against discrimination, and the marketplace experience has confirmed that merchants do not violate this "honor-all-cards" rule. Even before the new law was enacted, merchants have long been able to easily distinguish at the point of sale a network's higher-interchange cards such as rewards cards and corporate cards - but merchants have not discriminated against those higher-interchange cards because of the significant contractual penalties that would result. This reality will not change when the new law takes effect.

On the second point, I would like to bring to your attention a January 7 article in The American Banker titled "Visa Plans Two-Tiered Interchange Rates After Fed Rules." As the article points out, Visa, the largest debit network, has already announced that it would implement different interchange rate schedules for large regulated banks and for small unregulated banks. The article said the following:

Visa's move "makes total sense," said Eric Grover, the principal of the payments consulting firm Intrepid Ventures in Menlo Park, Calif. Initially Visa executives said a dual schedule was impossible, he said. "That was simply intended to scare credit unions and small banks to keep them lobbying," Grover said.

Unfortunately, that "scare" tactic became part of your official testimony today.

The banking industry may argue that, in the words of the American Bankers Association, a two-tier system will fail because "marketplace pressures will force all banks to conform to the artificially lower government mandated rate restrictions to which large banks will be subject." But as you know, banks do not set the interchange rates that they receive -- card networks fix those rates for their issuing banks, and networks have a clear financial incentive to keep interchange rates high for unregulated small banks in order to entice those banks to issue the networks' cards. As the January 7 article noted, analysts believe this dynamic "will put community banks and credit unions at an advantage over larger institutions" -- exactly the opposite of your testimony.

The U.S. banking industry is a $13 trillion dollar industry, according to the American Bankers Association. This industry has always fiercely opposed any reform to the current interchange fee system. After years of considering the issue, Congress has recognized that reform of this system is necessary for the sake of America's consumers, businesses and overall economy, and has passed bipartisan legislation to make this reform a reality. Now the banks and card companies are devoting their enormous resources to spread misrepresentations and scare tactics in an effort to stop reform in its tracks. I urge you and the Federal Reserve to recognize these tactics for what they are, and to carry out the implementation of interchange reform as Congress intended - on the basis of facts and not the financial industry's fictions.

When you testified before Congress for your recent confirmation hearing, you said that the Federal Reserve's policymaking "is informed not just by a Washington perspective, or a Wall Street perspective, but also a Main Street perspective." 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.

Sincerely,
U.S. Senator Richard J. Durbin

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