Debit Amendment Runs Into Buzz Saw of Opposition

State Treasurers, Russell Simmons, Community Banks, Economists, Editorial Boards and a Former Fed Official Announce Opposition to Durbin Amendment

Jun 14, 2010, 14:22 ET from Electronic Payments Coalition (EPC)

WASHINGTON, June 14 /PRNewswire/ -- Once seen as a slam-dunk victory for Sen. Richard Durbin and the big box merchant lobby, the debit price-control amendment ran into stiff and widespread opposition last week and is now one of the most controversial issues for lawmakers reconciling differences between the House and Senate Wall Street reform bills, the Electronic Payments Coalition (EPC) said today.

In opposing the Durbin amendment, state treasurers and state benefits administrators from 15 states have written letters to Congress opposing the amendment, saying that it would undermine federal and state efforts to provide benefits through prepaid or debit products. The federal government announced today that all benefits will be paperless by 2013 in an effort to cut costs.

In a joint letter to congressional leaders, 10 state treasurers explained their opposition. "Quite simply, the financial institutions that issue these prepaid debit cards do so at little or no cost to states because they are able to rely on interchange to cover their costs. If the Durbin amendment becomes law, this will no longer be the case and we are seriously concerned about the viability of these programs. Even if these programs continue, we are concerned that financial institutions will be forced to raise fees on cardholders or States to recoup lost revenue."

Adding to the chorus of government officials concerned about the effect the debit amendment will have on states' ability to deliver government benefits for low-income Americans on prepaid cards was hip hop mogul, entrepreneur, advocate for the poor, and business owner of a debit card service for the under-banked, Russell Simmons.

In an open letter to Sen. Durbin, Simmons called on the politician to change proposed legislation that could negatively impact poor and minority communities. Simmons writes: "I simply cannot believe that you are removing what is effectively a commercial business-to-business subsidy for a payment system that benefits the poor, and leaving intact the same system as used by the rich - who have access to credit cards."

Also opposing the Durbin amendment this week was the Chicago Tribune, which editorialized on June 9 that "when Sen. Durbin starts picking winners and losers among competing industries, anyone who cares about free enterprise should worry. The rough-and-tumble fight over interchange fees should be settled in boardrooms, courtrooms and, especially, the marketplace — not by federal fiat."

Last week also saw credit union and community bank associations increasing the volume on their strong opposition to the price controlling amendment, which was hastily added at the last minute in the U.S. Senate and has not been subject to any congressional hearing. In a rare joint appearance, an online press conference featured the CEOs from Credit Union National Association, Independent Community Bankers of America, and the National Association of Federal Credit Unions, who explained why the so-called "carve-out" was not something they asked for, and would put small financial institutions at a competitive disadvantage.

Additionally, the International Center for Law & Economics (ICLE) and the Mercatus Center of George Mason University held a conference and released a white paper by Professor Todd Zywicki discussing the economics of payment card interchange fees and the limits of regulation. In his paper, Zywicki writes that government intervention "ignores the extreme difficulty of devising workable political interventions in a system as interdependent and complicated as payment card systems, especially when those interventions would engage in price-setting of the interchange fee either directly or indirectly."

Mercator analysts Ken Paterson and Patricia Hewitt also called for a go-slow approach this week to assess what they say are possible unintended consequences of Durbin's proposal.

Stuart E. Weiner, former vice president and director of payments system research at the Federal Reserve Bank of Kansas City, wrote in the Kansas City Star that "it is difficult to envision an outcome in which the smaller institutions are protected from the harmful effects of the Durbin amendment." Weiner also writes that the "Durbin amendment has the effect of directing the Federal Reserve to set the prices for its competitors. It is difficult to imagine that the Federal Reserve would be permitted to remain an ACH operator if it were required to set prices for a competing industry."

SOURCE Electronic Payments Coalition (EPC)