Compromise reached on debit card fees

House and Senate Democrats reconciling the two versions of financial regulatory reform have announced a compromise on debit card fees — an issue of contention and the subject of fierce lobbying by companies like Visa and MasterCard.

The compromise on the provision, initially authored by U.S. Sen. Dick Durbin, D-Ill., keeps limits on the fees that card-issuing banks can charge businesses for accepting debit cards. Currently, banks often charge retailers 1 to 3 percent of a transaction’s cost if the customer uses a debit card, more than if the customer uses a credit card.

The deal keeps most of Durbin’s language intact. But it keeps authority over swipe fees with the Federal Reserve, rather than transferring authority to the new Consumer Financial Protection Agency. It also lets the Fed consider fraud-prevention costs when determining fee limits. The language does not impact credit card fees.

Durbin’s office released a good summary of the changes to the “swipe fee” provision, named after the banks’ term for the charges for using a debit card. Alterations are in italics. I’ve trimmed down to just some of the changes.

Government administered cards

The Senate-passed amendment would regulate the interchange fees associated with debit or prepaid cards issued by large banks on behalf of government-administered payment programs (e.g., unemployment insurance, TANF, child support).

The compromise exempts federal, state and local government program debit and prepaid cards from interchange regulation, provided that after a two-year grace period the prepaid cardholding beneficiaries are not charged any overdraft fees or fees for the first monthly in-network ATM withdrawal.

• Definition of “interchange transaction fee”

The Senate-passed amendment defined “interchange transaction fee” to include debit card fees that are established by a payment card network (e.g., Visa and MasterCard) and that accrue to either the card-issuing bank or to the network itself.

The compromise provides that the Fed cannot regulate network fees (i.e., the fees that Visa and MasterCard charge and that accrue to themselves) except to ensure that the fees are not used to circumvent interchange fee regulation. These changes are a different way of accomplishing the same goal of protecting consumers from loopholes which would allow banks to raise fees to cover any loss in interchange revenue.

• Reloadable prepaid cards

The Senate-passed amendment would regulate the interchange fees associated with reloadable prepaid debit cards, which are in common use by consumers who lack bank accounts.

The compromise exempts these cards from interchange regulation, provided that after a two-year grace period the issuing bank must not charge cardholders any overdraft fees or fees for the first monthly in-network ATM withdrawal. The compromise is an attempt to protect the unbanked from being driven to payday lenders and other non-bank entities for their financial needs. It further ensures that fees won’t be charged on those who can least afford them.

• Authority of the Federal Reserve Board vs. the Consumer Financial Protection Agency/Bureau

The Senate-passed amendment provided for regulatory authority under the amendment to migrate to the Consumer Financial Protection Agency/Bureau after the CFPA/B is established.

The compromise provides that regulatory authority under the amendment shall remain with the Fed.

Consumer advocates will be happy with the changes to exclude government-issued cards and prepaid debit cards from the new regulations. Democrats were concerned that banks would have stopped offering the products under the initial swipe-fee language.