On May 20, the U.S. Senate approved legislation, the Restoring American Financial Stability Act, that would revamp America’s financial regulatory system. As part of that reform, the Senate also approved—as previously noted--an NSBA-supported amendment that would make reasonable and common-sense reforms to the nation’s credit and debit card systems.

The amendment (S. Amdt. 3932)—championed by Sen. Dick Durbin (D-Ill.) and eventually supported by 63 of his colleagues—addresses interchange or "swipe fees."

What are swipe fees?
Swipe fees are paid by a merchant’s bank every time a credit or debit card is used to pay for a good or service to the bank that issued the consumer’s credit card. The fees—which vary depending on the type and size of the merchant’s business, the way the transaction is processed, and the specific kind of card used—are set by Visa and MasterCard and the issuing banks and are not subject to negotiation. As much as $2 of every $100 in credit or debit card receipts goes to the card issuers, which inflates the cost of nearly everything consumers buy—since merchants are prohibited from surcharging the customers who use the most high-fee cards.

Currently, swipe fees constitute the second largest expense for many merchants, eclipsing health care—and rise unabated. This is unacceptable.

The Durbin Amendment
The Durbin amendment would direct the Federal Reserve to ensure that the swipe fees charged for debit-card transactions are “reasonable and proportional” to the actual costs incurred by the issuer in processing the transaction.

The amendment is necessary because Visa and Mastercard continue to increase their debit-card swipe fee rates, despite the fact that the costs of processing debit transactions is far less than the one to two percent of the total transaction that merchants already pay. Importantly, the amendment also includes a carve-out for small issuers with less than ten billion in assets, exempting 99 percent of all banks, 99 percent of all credit unions, and 97 percent of all thrifts. More than 80 percent of swipe fees are collected by ten banks, however.

The amendment also would stop the credit/debit-card networks controlled by Visa and Mastercard from using their market dominance to impose anti-competitive restrictions on the discounts merchants can offer for certain types of payment or from selecting what forms of payment they will accept.

Specifically, a merchant could offer, without fear of penalty, discounts to customers who use a competing card network. For instance, if Discover charges a merchant a lower interchange rate than Visa, then she could offer her customers a discount for using a Discover card instead of a Visa.

A small-business merchant who wished to offer discounts for certain types of payment, like cash, check, debit card, or stored-value card, also would be protected.

Currently, it is 43 times more expensive for a small business to process a $100 debit-card transaction than a traditional paper check. This is unacceptable in today’s digital, global market.

Finally, the amendment would allow merchants to set a minimum or maximum transaction amount for payment by card. Currently, issuers restrict—by threatening exorbitant penalty fees—merchants’ ability to set minimum transaction amounts. This leads many small-business merchants to lose money on small-dollar transactions

Outlook
In December, the House passed its own financial regulatory reform legislation, the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173), which varies significantly from the Senate bill and did not address swipe fees.

The differences between these two bills must be worked out in conference, and the banking industry, which raked in $48 billion in swipe fees in 2008.

Sen. Chris Dodd, the chair of the U.S. Senate Committee on Banking, Housing, and Urban Affairs and the lead sponsor of the overall Restoring American Financial Stability Act, and Rep. Barney Frank, the chair of the U.S House Committee on Financial Services, both have publicly stated that they intend to reach a conference agreement before the Fourth of July recess.

It is very important that the conference include Durbin’s swipe-fee amendment in its final package. Members of Congress are hearing from the big banks, their employees, and their legions of lobbyists on this issue every day. They need to hear from the small-business owners it affects too.

Please take a moment to contact your members of Congress to ensure that the Durbin swipe fee amendment is included in the final financial regulatory reform bill currently being crafted.