It seemed a good idea last year, when the financial crisis had turned banks into Public Enemy No. 1 and lawmakers were looking for ways to reward consumers still bitter about billion-dollar bailouts and executive bonuses.
Without much warning or debate, the Senate passed an amendment directing the Federal Reserve to reduce the hidden “swipe fees” that banks collect from retailers each time a customer makes a purchase with a debit card.
Merchants, who had complained that the $20.5 billion in annual fees were biting into their profits, were elated. Banks were stunned. Their lobbyists tried to reverse the move, but when the overhaul of the nation’s financial regulation was passed by Congress last July, the debit card cut survived.
Now, as the Fed faces a deadline in April to write the rules for the lower fees, banks and debit card companies are engaged in an all-out assault on Capitol Hill, enlisting a growing cadre of lawmakers and lobbyists to push for changes, delay or outright repeal. Banks contend the proposed cut in fees — to 12 cents per transaction from an average of 44 cents — will leave many of them unable to afford to issue debit cards to customers or will force them to raise other consumer banking charges to cover the costs. They also claim retailers will reap unfair profits.
A coalition of banks and card companies have plastered subway cars and Internet sites with ads warning, “Bureaucrats want to take away your debit card!”
“I am appalled that our members will shoulder tremendous financial burden and still be on the hook for fraud loss while large retailers receive a giant windfall at the hands of the government,” John P. Buckley Jr., the president of Gerber Federal Credit Union of Fremont, Mich., told a House of Representatives subcommittee last week.
"These fees are stunting business growth and hurting efforts to hire more workers and expand operations."
This week, a trade group of convenience store owners will storm Capitol Hill with their side of the story.
“These fees are stunting business growth and hurting efforts to hire more workers and expand operations,” Douglas Kantor, a lobbyist for the Merchants Payments Coalition, a retailer trade group, said recently.
The lobbying has been intense over the last year with the card companies and banks hiring, among others, Sam Geduldig, a former adviser to Representative John A. Boehner, Republican of Ohio and the House speaker, and Regina Mahony, formerly a senior adviser to Representative Steny H. Hoyer, Democrat of Maryland, according to OpenSecrets.org, which tracks lobbyists.
Representatives of the retailers include the former Republican Senator Don Nickles of Oklahoma, and Sheryl Cohen, a former chief of staff for Christopher J. Dodd of Connecticut, the Democratic senator who sponsored the financial regulation bill and is now retired.
This debate is but one area where the consequences — intended and not — of the sprawling Dodd-Frank financial regulation law are coming to light. In an interview with CNBC on Friday, Alan Greenspan, the former Fed chairman, predicted that portions of the law would have to be reversed. “And that’s going to create very high degrees of uncertainty,” Mr. Greenspan said, something the markets hate.
Lawmakers tried to soften the blow by exempting smaller banks from the fee cap. But now even those institutions with less than $10 billion in assets oppose the law. They say that if they continue to levy the current, higher fees, their debit cards will not be able to compete against the big banks, which will charge lower fees because they have no choice. They gained a significant ally when Ben S. Bernanke, the Fed chairman, told a Senate panel last month that he thought a two-tier fee system would not work.
Several lawmakers who supported the debit card amendment or the broader financial regulation bill as a whole are now reversing course, as the antibank climate here softens. “I believe the Fed was given too narrow of set of rules” with which to draft the regulation, said Representative Barney Frank, the Massachusetts Democrat who sponsored Dodd-Frank in the House, which never voted separately on the debit-fee amendment. “Now there is genuine political pressure to do something. It’s very much in play.”
At least two Republican senators who voted for the debit card amendment last year — David Vitter of Louisiana and Michael D. Crapo of Idaho — have expressed reservations, urging the Fed to consider “all costs to the issuers,” including the cost of protecting themselves against fraudulent use of debit cards, which totaled $1.4 billion in 2009, according to the banks.
The law requires the Fed to limit debit fees to the “reasonable and proportional” cost of each transaction, and the Fed proposed a rule that did not yet include the cost of fraud protection.
Banks encourage consumers to use debit cards by signing for their purchases, rather than entering a personal identification number at the cash register. Card companies and banks earn higher fees on signature-debit transactions, but they also incur higher rates of fraud.
The fee cap still has some powerful backers, who say it should it take effect in July as scheduled. They are led by the amendment’s original sponsor, Senator Richard J. Durbin, Democrat of Illinois.
Mr. Durbin accused the debit card companies of employing “scare tactics” by saying the government wants to take away cards, or that merchants might no longer accept them.
The banks are already trying to make up for the lost revenue, with lenders like Bank of America , JPMorgan Chase and U.S. Bancorp charging fees for things that once were free, like paper statements or online banking. TCF Financial , a Minnesota regional bank that relies heavily on revenue from debit card fees, has sued the Federal Reserve board to block the enactment of the Durbin amendment.
Banks and credit card companies contend that the fee cap will create a windfall for giant retailers like Home Depot and Wal-Mart , which they say generate the bulk of debit card transactions, while doing little for small retailers.
Banking lobbyists eagerly point to a conference call in which a Home Depot executive told financial analysts the proposed rule would lower its debit fees by about $35 million a year.
Small-business owners, for their part, cite what they say is the devastating impact of rising debit card fees. Small banks and credit unions say they depend on debit fees to allow them to offer other services, like free checking. “Under the current proposal,” Frank Michael, president of Allied Credit Union of Stockton, Calif., told the subcommittee, “we are going to lose money on every transaction.”