Durbin: Credit card issuers 'already' passing on fees to consumers

Nick Rees Jan. 25, 2011, 7:39am


CHICAGO (Legal Newsline) - U.S. Sen. Dick Durbin's amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act was meant to protect consumers and businesses from excessive credit card fees.

But six months after the law went into effect, the senator admits that the so-called excessive fees are now being passed on to consumers.

Durbin, D-Ill., said at a Union League Club of Chicago speech on Friday that credit card companies are "already" passing on fees to consumers.

The Durbin Amendment regulates interchange fees, which are the percentage of a credit card transaction -- approximately 1.65 percent for all cards -- paid by a retailer's bank to a customer's bank or credit union. The fees aid in offsetting the costs of a card issuer for processing transactions. They also cover write-offs if a customer defaults.

Durbin said that the average fee was 40 cents.

"We think it's too high," he said.

"The (Federal Reserve) may come up with a way to adjust that (fee), that remains to be seen."

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama on July 21, 2010.

Under the Durbin Amendment, fees are reduced to 12 cents, potentially forcing community banks and credit unions to impose substantial fees on customer credit cards or to simply discontinue credit cards completely.

"Consumers will really be hurt by the Durbin legislation and we have already seen evidence that they're losing free checking and other benefits," Noah Hanft, general counsel for Purchase, New York-based MasterCard, told Bloomberg in a telephone interview. "That harm to consumers is something that people who really understand the issue, are coming to realize."

U.S. Rep Barney Frank, D-Mass., the bill's House sponsor, told Bloomberg that he is "not convinced the consumer ever sees the benefits" of the amendment.

In addition to the burden of added fees for consumers, merchants are also expected to feel a negative impact as consumer spending slows in reaction, reducing sales.

Card issuers make up the difference in lost interchange fees, by increasing fees, eliminating free checking, and reducing or eliminating rewards programs.

The original announcement of the Durbin Amendment even affected major card issuers like Visa and MasterCard, which saw stock prices drop 10 percent after investors feared that the proposed rules could damage their business model, Bloomberg had reported.

The government itself could also feel the sting of the Durbin Amendment, as its prepaid debit cards, which are issued for everything from child support to unemployment, could become too costly to support through lowered interchange fees. The result could mean a loss of the significant administrative, cost-saving and practical benefits of the prepaid cards.

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