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Senate Votes to Rein in Debit Fees

May 14, 2010 - by Donny Shaw

The Amendment votes continue to roll in on the financial reform bill. The most substantial amendments adopted to the bill recently have to do with reforming the credit rating agencies — one from Sen. Al Franken [D, MN] and one from Sen. George LeMieux [R, FL]. You can read about them here.

There are smaller amendments being continually added to the bill as well, either by unanimous consent or through roll call votes that just aren’t getting much media attention. But some of these unnnoticed amendments could end up having big impacts. Sen. Dick Durbin’s [D, IL] amendment adopted yesterday to rein in the largely unregulated debit card market is a good example.

The amendment would place interchange fees — the money taken by debit companies and banks when you make a purchase using a debit card — under purview of the Federal Reserve. Specifically, the Fed would get new regulatory authority to set rules ensuring that the fees are reasonable. “The amount of any interchange transaction fee that an issuer or payment card network may charge with respect to an electronic debit transaction shall be reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction,” the amendment text states.

This amendment has had very little attention paid to it by reform advoctes. Most people following the Senate’s financial reform debate expected that it would not get a vote. The fact that it got a vote and, further, the fact that is passed, comes as a surprise to most.

On the surface, interchange fees don’t seem like they affect consumers. They are paid by merchants to banks and debit cards companies at a rate of 75 cents to $2 for every $100. But these costs are typically passed onto consumers through higher prices on goods. In January, the New York Times reported that interchange fees cost households an average of $427 in 2008. With the use of debit steadily increasing, those costs will continue to go up.

Unlike credit-card transactions, debit transactions involve no risk for card companies since the money is being drawn directly from bank accounts. But it is an anti-competitive market dominated by a single company — Visa — so there is no incentive for the fees to be lowered. This is why giving the Fed authority to make sure the fees are “reasonable” could have a big impact.

The amendment would also ban debit card companies from creating contracts with merchants that prevent them from giving discounts to consumers who use other forms of payment, like cash or check.

The vote on Durbin’s amendment was 64-33.

Voting in favor: 46 Democrats, 17 Republicans and Independent Sen. Bernie Sanders [I, VT].

Voting against: 9 Democrats, 23 Republicans and Independent Sen. Joseph Lieberman [I, CT].

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