The Business Press: Swipe-fee reform under fire

LEGISLATION: Financial institutions cautious about fed oversight and wary of possible impact on their revenue. (Note: The Senate passed the Wall Street Reform Bill on Thursday, sending the package of reforms to President Obama for his signature.)

11:31 AM PDT on Wednesday, July 14, 2010

By CHRIS H. SIEROTY
Contributing Writer

The financial reform package set to be voted on in the U.S. Senate includes for the first time federal oversight of debit-card and prepaid credit card interchange fees, which are charged on each transaction by banks for Visa Inc. and MasterCard Inc.

Also known as swipe-fees, the compromise version of the Restoring American Financial Stability Act of 2010 includes an amendment that requires debit-card issuers to set fees at levels that reflect the actual cost of processing transactions and give merchants new flexibility to reduce their costs.

The legislation only applies to debit cards and prepaid credit cards, not traditional credit cards. According to the amendment, the Federal Reserve would set regulations resulting in “reasonable and proportional” swipe fees for debit cards.

The Fed would be required to take into account banks’ actual costs for processing the transactions and the fact that paper checks drawn on the same accounts are paid at face value. The amendment would also bar the card industry from interfering with merchants who offer a discount or other benefit to customers who pay by cash, check or debit card rather than credit cards, and would allow merchants to set minimum purchase amounts of up to $10 for credit cards.

Known as the Durbin amendment, after its sponsor Senate Majority Whip Richard Durbin, D-Ill., it would also exempt financial institutions with less than $10 billion in assets.

But the amendment has been met with caution by several Inland banking and credit union executives interviewed by The Business Press.

“The financial regulation bill that includes language about interchange fees …. is too new for us to comment on specifically, but California Bank & Trust does expect that the impact to our financial institution to be minimal,” said Steven Borg, senior vice president and corporate marketing director at California Bank & Trust.

California Bank & Trust, a subsidiary of Salt Lake City-based Zions Bancorporation, operates 11 branches in Riverside and San Bernardino counties. At the end of the first quarter of 2010, the bank reported assets of $11.2 billion, making them eligible for the new regulation.

In an e-mail, Borg said interchange fees were not a sizable part of the bank’s overall income. According to the bank’s earnings statement, it earned $124.7 million in the first quarter before provisions for loan losses, which resulted in income of $9.9 million for the last quarter. The company didn’t break out its income from interchange fees.

“We will be studying the bill and all new financial regulations that impact our bank in the future,” he said.

Mark Hawkins, president and chief executive officer of Riverside-based Altura Credit Union, questioned whether the new rule would really be able to differentiate between institutions with more or less than $10 billion in assets. He questioned if the measure wasn’t just “a dig at the big banks,” and would just “benefit the giant retailers.”

“Smaller (financial institutions) will be hit with lower interchange revenue than we are accustomed to,” Hawkins said. “Imagine how that will affect us. Anything in this climate is significant.”

Altura Credit Union, with 14 branches, 111,893 members and $883.8 million in assets, expected to earn a little over $5 million in interchange fees this year.

“We’ll make about $70 million in total revenue, so that’s about 14 percent of our total that’s at risk,” he said. “Why are we even doing this? I don’t have an answer. This system has worked well for 15 years. Prices haven’t changed in that time.”

Interchange is a fee that a merchant pays when a consumer uses a credit or debit card to make a purchase. The fee partially reimburses the issuing bank for the significant costs and risks of issuing cards, including infrastructure expenses, fraud risk, and the real risk of non-payment.

The fees charged to retailers, average 1 to 2 percent of the total transaction amount, according to the American Bankers Association.

Overall swipe fees charged to retailers and other business by Visa and MasterCard banks totaled $48 billion in 2008 and resulted in higher prices estimated by National Retail Federation at $427 for the average household

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