An Update on the Durbin Amendment

There has been a lot of coverage in the last week about the growing Anti-Durbin Amendment momentum.  The draft version of the amendment would prevent banks from charging merchants more than $0.12 on a debit card transaction, down significantly from the current average of $0.44.  In theory, the savings to retailers from the lower fees would be passed on to consumers.  In reality, savings likely either won’t be passed on or won’t be enough to make much difference to consumers and banks will have to come up with new ways to make up for the revenue loss.  The Fed’s final rule is due on April 21 and is expected to take effect by July 21, but the Durbin stop/study bills introduced by both Houses in Congress last week would require a more in-depth study of the changes and their impacts. 

Senators Jon Tester (D-MT) and Bob Corker (R-TN) introduced the "Debit Interchange Fee Study Act," which would  give the Federal Reserve two additional years to draft the interchange fee rulemaking and also require a study of the impact on consumers and the impact on the affected markets of reduced debit interchange fees. To date, this legislation has bipartisan support from 12 additional senators.

In the House, Financial Institutions Subcommittee Chairwoman Shelley Moore Capito (R-WV) and Rep. Debbie Wasserman Schultz (D-FL) introduced the "Consumers Payment System Protection Act." This legislation calls for a one-year delay in enactment of the Fed’s final rule and a multi-agency study and report on the effect of debit interchange regulation on consumers, issuers, merchants and financial institutions in the interim.  A bipartisan group of 41 other House members have cosponsored this bill.

An article in today's WSJ titled "Banks Find Allies in Debit-Fee Fight" notes Ben Bernanke, Chairman of the Fed, which drafted the proposed rule, and FDIC head Sheila Bair have expressed concerns.  "The costs and benefits were not perhaps as thoroughly explored as they should have been," Ms. Bair said in an interview Tuesday.  Merchants say they would pass on their reduced costs to consumers in the form of lower prices, which Ms. Bair doubts.  "I'm not sure that's going to happen, and if it does happen, the benefit would be so tiny to most retail customers," Bair said. 

In an interview on on Monday, Senator Bob Corker points out that in addition to the unforeseen consequences, this is fundamentally a problem with the US government dictating prices.  He is asking for more time to make sure the Durbin Amendment is fully vetted.  “All this bill does is slow this process down and give everyone a chance to review this in a in depth manner and do something far more thoughtful. This was done in a moment of populist fit and rushed through and I don't think there are many people, even the beneficiaries of this amendment, who would want themselves judged under this same criteria.” 

Given the recent comments, analysts including BMO Capital and Stifel Nicolaus are starting to believe that the caps will be delayed or amended.  If this is the case, we may see some adjustments to estimates since most analysts have already taken into account the 75% reduction of fees in Q3.