Community Banks Win By Losing: Inside The K Street Hustle

WASHINGTON - During the fight over Wall Street reform, community banks were most often pitted against their behemoth rivals. Small banks, which hold great sway on Capitol Hill, backed reforms to regulate derivatives, break up big banks and prevent them from trading for their own benefit with taxpayer-backed funds. But on one crucial issue, the small and big banks worked together: "Swipe fee" reform, new rules that would limit the fees big banks can charge retailers for the privilege of accepting their debit cards.

Observers at the time were puzzled by the position of the community banks; the overwhelming share of swipe fee revenue goes to big banks and reform would exempt small banks with under $10 billion in assets, allowing them to continue charging high fees.

But a key debit card would not be exempted from the new rules: The one issued by the small-bank lobby itself, the Independent Community Bankers of America (ICBA). That gave the small-bank lobby shop an incentive to oppose reform to preserve the market share of its debit card. With new rules in place, the ICBA would be deprived of swipe-fee revenue. That meant the ICBA's incentive ran counter to the goals of the members it represents in Washington, who would benefit from rules that would clamp down on the big banks but leave small banks alone. That conflict is a particularly vivid display of a Washington phenomenon, where trade associations are established with the goal of advancing their individual members' interests, but ultimately strive to preserve and extend their own influence.

Critics allege that the ICBA's own lucrative role in the debit-card business skews the position the group offers on behalf of small banks.

"We argued that ICBA is conflicted on this issue because ICBA itself is an issuer of debit cards," an aide to Senate Majority Whip Dick Durbin (D-Ill.), who led the fight in the Senate, told HuffPost.

Despite the efforts of the banks, swipe fee reform prevailed. And on Friday, a new swipe fee policy proposed by Visa backed up the earlier claims that the rules would benefit small banks and take a chunk out of big ones.

On Friday, Visa rolled out a new two-tiered pricing plan -- likely to be mimicked by MasterCard -- that would sharply limit swipe fees for Wall Street titans while allowing small banks to charge higher rates. "Visa's announcement confirms what I have long argued: that small banks and credit unions will not be hurt by this regulation and will in fact see benefits from it," Durbin said in a statement. "As the Federal Reserve moves toward final implementation of this amendment, it's time to move past the misrepresentations and scare tactics and to recognize the strong pro-consumer and pro-competitive benefits of interchange reform."

The ICBA remained unconvinced. "ICBA does not believe Visa's intent to establish a dual interchange system for large and small financial institutions will shield community banks and their customers from the negative impact of government price-fixing of debit card interchange over the long term," ICBA Senior Executive Vice President of Government Relations and Public Policy Karen Thomas said in a statement Tuesday.

The ICBA said that it launched its debit card to benefit its members, who have a hard time competing against the scale of the big banks. "We certainly responded to the incentives in the marketplace to help community banks compete against the big banks," Director of Congressional Relations Steve Verdier told HuffPost. "We also do it in the mortgage area and a lot of other areas, with pretty classic group-purchasing operations ... They've been quite helpful in allowing community banks to compete."

Consumer groups applauded the new regulations when the Federal Reserve proposed them in December. "The Fed action will give millions of consumers a needed break," U.S. Public Interest Research Group Director of Consumer Affairs Ed Mierzwinski said in a Dec. 16 statement. "Lower swipe fees mean lower prices at the checkout counter."

And it means less revenue for the ICBA, the 13th-biggest recipient of swipe fees from debit card transactions where consumers enter a PIN number, according to data compiled by the Merchants Payments Coalition, a group that lobbied in favor of the swipe fee crackdown.

That puts the ICBA above regional banking stalwarts Capital One, KeyBank and Fifth Third, all of which hold well over $100 billion in assets. For debit-card transactions that require a signature, ICBA is the 20th-largest player, ranking above international banking giant HSBC.

If the new pricing plan remains in place, it'll be a boon for small, local bank. But Verdier insisted that Visa's new pricing plan will unravel. "It really requires the marketplace to do something that is kind of unnatural, to willingly pay a higher price for a product when a lower price is available," he said. "Merchants could discourage the community bank customer from using their card -- 'why don't you run your BofA card instead?'"

The new rule may make the ICBA's debit-card program less attractive for community banks. With Congress and the Federal Reserve regulating away the advantages big banks hold on swipe fees, community banks may choose to cut out the middleman and issue their own cards directly.

"We'll see," Verdier said.