TechNet Wants Debit Card Rule Delay

TechNet, a group representing executives at major technology companies, sent a letter to senators late last week urging support of legislation by Sen. Jon Tester (D., Mont.) to delay the start-date of the Dodd-Frank law that mandates limits on interchange fees, the volume-related part of debit card fees. The limit on interchange fees, touted as a consumer protection measure, actually is leading debit card issuers to raise fees and charges on all sorts of other banking services to compensate for lost revenue from interchange fees.

The net result will an end to free checking services and higher fees for lots of other services banking customers now use. TechNet wants a delay of implementation for two years so the economic impact can be studied.

TechNet includes Facebook, Apple, Microsoft, Google, Craigstlist, Netflix and Yahoo! among other high-tech companies, along with financial companies such as card-processor Visa, which has long fought against the debit-fee proposal.

The limit on interchange revenue is important for any number of reasons. The cost of financial services will rise for consumers across a wide range of economic levels, say analysts at the Mercator Advisory Group. See http://www.mercatoradvisorygroup.com/images/durbin_analysis.pdf.

The largest card issuers will have less of an incentive to promote debit related products and services and will either shift activities toward credit-based services or will cover their costs differently by fee-based approaches to debit

accounts.

Also unknown is how consumer behavior might change if debit cards are harder to get and more expensive to use, and how retailers might react to supporting cards of various types, issued by institutions of different sizes. If small institutions, exempted from the mandatory interchange revenue caps, charge higher fees, retailers won't want to accept the cards, for example.

Merchants empowered to set minimum and maximum transaction amounts may act to increase consumer usage of cash and checks for pay-now purchasing, which are less efficient and therefore more costly to process, or will lose sales to merchants who chose not to set minimums and maximums, Mercator argues.

An overall decrease in electronic payments may lead debit card issuers to increase the cost of their products to recoup an interchange income shortfall, motivating consumers to choose other forms of payment including cash and

paper checks.

Smaller financial institutions may be faced with higher operating costs should their customers’ debit card usage decline. Any decline in transaction volumes or debit user accounts will drive small banks’ debit operations costs

higher per account and per transaction, again making it likely that consumer end-user fees will need to be increased to pay for operations.

Other prepaid programs that will likely be impacted include payroll cards, which depend on float and interchange fees to offset costs. Due to various laws, both state and federal, payroll cardholders typically do not pay upfront

fees on the cards and despite the fact ATM access is costly to the issuer, cardholders always get some ATM access for free.

The Durbin amendment to the Dodd-Frank bill is yet another illustration of activity that benefits legislators, who get to claim they are protecting the public, while the public actually does not benefit.

For Facebook, Apple, Microsoft, Google, Craigslist, Netflix and Yahoo!, the interest is a bit less direct. TechNet is worried there might be less investment in technology, and a decrease in security. Security breaches will be a negative for application providers.

Tech Giants Weigh In on Debit-Fee Cap