Vote to Limit Debit Card Fees Is Unusual Loss for Banks

WASHINGTON — Retailers have begged Congress for years, in vain, to limit the fees they must pay to banks when customers swipe credit or debit cards. Bills never reached a vote. Amendments were left on the table. The Senate didn’t even grant the courtesy of a committee hearing.
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That long record of futility ended in a landslide Thursday night. Sixty-four senators, including 17 Republicans, agreed to impose price controls on debit transactions over the furious objections of the beleaguered banking industry.

The amendment to the Senate’s sweeping financial legislation could save billions of dollars for family restaurants and dry cleaners, Wal-Mart and Amazon.com, and every other business whose customers increasingly pay with debit cards. It does not address credit card fees directly.

Consumers also could save money, particularly at businesses like grocery stores that compete on price. But some experts warned that lower profit margins could lead banks to curtail bank card reward programs.

The Senate approved a series of amendments unfavorable to the banking industry over the last week, but this one was widely regarded as the most surprising. Meddling in dealings between businesses generally is anathema to Republicans and a relatively low priority for Democrats.

And this was not an easy vote. Lobbyists for the wounded but formidable banking industry made clear to some senators that this decision would affect future campaign donations, according to people who participated in those conversations.

But retailers mounted an unusually effective yearlong campaign to frame the issue as a chance for Congress to help small business. A leading trade group for chain retailers worked with small-business groups to make sure that every time a senator held a town hall meeting back home, a local business owner showed up to ask about card fees.

The industry also rode the support of Senator Richard Durbin, the Democrat whip, who wrote the amendment and pushed the sponsor of the banking overhaul bill, Senator Christopher J. Dodd of Connecticut, to allow a vote on the Senate floor.

The winning margin was provided by several conservative Republicans. Senator Johnny Isakson, Republican of Georgia, called SunTrust, the largest bank in his state, to say that this time he planned to vote against the bank and with Coca-Cola and Home Depot, two other Georgia companies that had lobbied him fiercely.

“This was really a decision between helping out small business or helping out large banks,” said John Emling, a lobbyist for the Retail Industry Leaders Association. “No one wanted to pick between friends and they had friends on both sides, but because of the momentum, we just felt that if Durbin pushed folks to the vote we would win.”

The banking overhaul bill still needs to pass the Senate, and then it must be reconciled with a House bill that does not mention debit card "interchange" fees. Banking industry groups said that they had not given the issue enough attention in recent weeks, focusing instead on other controversial amendments. But they said they would now redouble efforts to convince legislators that the provision would hurt customers by undermining the debit card system.

"Retailers who benefit greatly from the system will pay almost nothing for the costs of maintaining and improving it," said the American Bankers Association.

The Durbin amendment gives the Federal Reserve new authority to regulate and limit the fees that businesses pay to card companies. It specifically addresses payments processed through the Visa and MasterCard networks. American Express and Discover cards are not covered by the bill.

Last year businesses paid Visa and MasterCard $19.71 billion on debit card transactions, according to the Nilson Report, a trade magazine that is the regarded as the best source of data on the industry. Visa and MasterCard in turn passed about 80 percent of the money, roughly $15.8 billion, to the banks that issued the cards.

The legislation directs the Fed to cap those fees at a level that is "reasonable and proportional" to the cost of processing transactions. The Nilson Report estimated that last year, fees averaged 1.63 percent of the transaction amount.

One measure of the magnitude of the cuts that regulators could choose to impose: Visa agreed just last month with European regulators to cap some debit fees at 0.2 percent of the transaction amount pending completion of a study on the costs of various forms of payment.

A second set of provisions applies to both credit and debit card transactions. Visa and MasterCard impose an all-or-nothing requirement on businesses, requiring them to accept cards even on small-change transactions, and prohibiting businesses from offering discounts based on the method of payment. The amendment strikes those rules.