WASHINGTON -- The Federal Reserve chairman and Federal Deposit Insurance Corporation chairwoman insisted Thursday that regulating the fees banks can charge merchants to swipe debit cards, as Congress has mandated, may be unworkable for small banks and could lead to higher bank fees for consumers. At the same time, the Fed's Ben Bernanke and the FDIC's Shelia Bair said that they were committed to implementing the law, which is scheduled to go into effect July 21, as Bair acknowledged that the new rules would not spark the failure of any banks.
Their comments were prompted by heated questioning from Sen. Jon Tester (D-Mont.) during a Banking Committee hearing. Tester is sponsoring a bill to delay the Fed's swipe fee crackdown for two years. He has also been furiously raising money from Wall Street ahead of his 2012 reelection campaign, which is expected to be a close race. Just as the banking industry is devoting everything it can to support the Tester amendment, major retailers like Walmart, Target and Home Depot are devoting tremendous lobbying resources to the fight.
The battle over swipe fees is largely taking place off the public radar. But it is consuming as much time in Congress as any other discussion -- a symbol of the true priorities of Congress. With $16 billion a year in debit card swipe fees at stake, major retailers and banks hope to convince Congress to give them as big a piece of the pie as possible. Merchants pay banks higher swipe fees in the U.S. than in other countries. Wherever possible, those fees are passed on to customers in the form of higher prices.
Both Bair and Bernanke indicated that it would be difficult for them to exempt small banks from the swipe fee crackdown in practice, even though last year's law requires the Fed to impose such an exemption. The bill orders the Fed to limit swipe fees for big banks, but it explicitly excludes banks with less than $10 billion in assets from the new fee caps. Bernanke said that market forces might prevent small banks from continuing to charge high fees if big banks are charging less. Bair suggested that the Fed was not exercising all of its powers to establish that exemption, but also acknowledged that the ultimate impact on community banks would likely be minute.
"On initial analysis, it doesn't look like it would clearly stress some institutions putting them to the point of failure," Bair said. "No, we don't -- we don't think that'll happen."
Instead, Bair is concerned that limiting swipe fees will eat into small bank profits.
Sen. Dick Durbin (D-Ill.), the sponsor of the original swipe fee amendment, said in April that Bernanke's and Bair's position is colored by their relationship with the banks.
“All I can say is that Bair and Bernanke, who I respect, have spent a lifetime around banks and bankers,” Durbin said. “I’d met with [the Fed chairman] early on, and he never said one word to me that this couldn’t be done.”
At Thursday's hearing, Tester took a (thinly) veiled swipe at Durbin while questioning Bernanke.
"I know we're in a political process here, and I know you've probably been getting a lot of pressure from people -- or at least one person from the Senate," Tester said in a clear reference to the Illinois senator.
"I can't say with certainty, but I think there's good reason to be concerned about it," Bernanke responded, referring to the impact on small banks. He claimed that the result of the rule would be "some smaller banks being less profitable or even, or even failing."
Bair, whose job requires far more engagement with small banks than Bernanke's, rejected the Fed chairman's failure prognosis moments later.
Bair also indicated that, if the Fed really wanted to exempt small banks from the rule, it could do so by simply requiring card networks like Visa and Mastercard to allow small banks to charge higher swipe fees. Visa has already indicated that it will adopt such a "two-tiered" pricing plan, and Mastercard is expected to follow suit -- regardless of what the Fed dictates.
Bernanke told the committee that unspecified "market forces" would work against the Fed, if it required such a system.
Regulating swipe fees is one half of a Durbin strategy to peel elements of the business community away from Republicans. The second half involves pushing a tax on Internet sales, which angers Amazon.com but is a priority of brick-and-mortar firms who want to level the field. (Amazon.com is largely exempt from state sales taxes.)
Bair and Bernanke gave the banks a boost this winter by wondering aloud whether it would be possible to effectively implement the Durbin Amendment -- the provision of last year's Wall Street reform legislation that caps the fees big banks can charge, but creates an exemption for small banks. Small banks have argued that merchants will simply not accept their cards for payments, but will instead accept only the cheaper cards of big banks if the amendment is enacted. They have demanded that the Fed delay implementation to continue studying the matter.
"We have plenty of information -- that is not a problem," Bernanke admitted at the hearing, giving a boost to the merchants fighting the delay.
Tester was the only panel member to question Bernanke and Bair on swipe fees.
“Chairman Bernanke’s comments confirm that Congress shouldn’t insert politics or prejudge the thorough fact-based process the Federal Reserve has conducted,” said Doug Kantor, counsel to the Merchants Payments Coalition. “Merchant groups from around the country have written to Congress demonstrating that the small bank exemption will work. The big bank-generated bloviation about the fate of their smaller competitors should not fool anyone.”
See video of the entire exchange, courtesy of Tester's office: