Interchange Fees: The Billion-Dollar Fight For Control of Your Wallet

“Well that doesn’t sound to me like they’re planning on passing that along,” says Wexler. “I don’t buy for a second that giant retailers have spent a decade and millions and millions of dollars lobbying so they can take their winnings and pass it on in the form of lower prices.”

Unlike the interchange fee market, however, retail sales are highly competitive, with profit margins of between 2 and 3.5%, according to the Michigan Retailers Association. Even if retailers pocket some of the windfall from transforming interchange fees, consumers still would benefit, advocates say.

“I think consumers should care because the interchange market is broken, and it’s forcing retailers to raise their prices,” Mierzwinski says.

The Fallout on Banks

The lobbying battle in Congress over interchange fees has focused largely on the effect of changing the interchange rules on small banks and their customers. In a survey by the Independent Community Bankers of America, a trade association, 93% of small banks said they will have to get rid of services like free checking if interchange fees go down.

“I am appalled that our members will shoulder tremendous financial burden and still be on the hook for fraud loss while large retailers receive a giant windfall at the hands of the government,” John P. Buckley Jr., president of Gerber Federal Credit Union in Fremont, Mich., testified before the House Financial Services Committee.

Supporters of the change say the small banks issue is a red herring. The Durbin amendment doesn’t apply to any bank with assets below $10 billion, and Visa already has announced its system for allowing small banks to charge higher interchange fees than big banks.

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Also, the Durbin amendment only applies to debit cards in which Visa, Mastercard and any other network dictate the prices. If Visa, MasterCard and their issuing banks negotiated the transaction price for each debit card, they could avoid the Durbin amendment altogether. Duncan, the attorney for the National Retail Federation, argues that in a truly competitive market, banks should be able to negotiate with the networks to determine fees. That would allow small banks to raise enough money in fees to cover their expenses, and let Visa and Mastercard charge more than the 7- to 12-cent cap per transaction allowed under the Durbin amendment.

“That’s what they’re not telling people,” Duncan says. “They can get around the Durbin amendment tomorrow if they want. They just have to compete, and they don’t want to do that.”

The card companies say that’s not competition. That’s chaos.

“By the same token, 7-Eleven should let every customer who comes into their stores negotiate the price of a Slurpee,” says Wexler of the Electronic Payments Coalition. “But of course they don’t do that. Businesses have to set prices. This is how businesses work.”

Down to the Wire

The Durbin amendment, passed last summer as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is scheduled to take effect April 21. However, after banks and credit unions pushed to have the implementation deadline extended, legislators in the Senate and House responded with recent bills that would delay the rule’s enforcement by either two years or one, respectively, thus buying the banking industry time to renew debate on the issue.

“This is one of the most important issues on Capitol Hill right now that’s being considered,” Wexler says.

Republicans, who control the House of Representatives, mostly agree with the banks and card networks.

“If we don’t get it right, that credit union or community bank in your town isn’t going to be there and you will be left with larger institutions,” Rep. Spender Bachus (R – Ala), chairman of the House Financial Services Committee, said in a recent speech.

Democrats have been more divided. Some agree the rules should be changed or postponed.

“I believe the Fed was given too narrow of set of rules,” said Rep. Barney Frank (D – Mass), told The New York Times.

Either way, this hidden little fee that consumers pay every day will remain at the center of an expensive lobbying battle for weeks, if not months, to come.

“Now there is genuine political pressure to do something,” Frank says. “It’s very much in play.”

By Håkan Dahlström, via Flickr