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The Politics of the Durbin Rulemaking

posted by Adam Levitin

It goes without saying that I think the Fed did a real jerk move on the Durbin Amendment rulemaking. But the more interesting issue is why? 

The Fed didn't have any new data to work with after the proposed rulemaking in December. Sure, it had lots and lots of comments, and there was some a crazy amount of lobbying. But it's hard to see what that lobbying would have accomplished in the January-June window that it hadn't in the July-December window. 

Instead, I think that the volte-face was the result of bigger picture Federal Reserve Board politics. For the Fed, interchange is the regulatory issue that they have with merchants. The Fed doesn't have to handl-vandl with merchants on other regulations. But the same can't be said about the banks. The Fed has an on-going regulatory relationship with the banks that it has to manage.  And interchange just isn't a very important issue for the Fed. It's not a regulatory duty that they wanted in the least. So the Durbin Amendment rulemaking offered Bernanke (and the other Governors) a low-cost way a chance to throw the banks a bone and build up some goodwill before the gloves come off on the real fight about capital adequacy levels. 

If that's correct, I think it's a bad calculation by Bernanke et al.  The banks are going to fight on capital as ferociously as they can and $4B annually of goodwill payments aren't going to change that. And given the way the Fed did the rulemaking, I think there are a good grounds for a litigation challenge that would defeat Chevron deference. If that happens, there'll be a lot of egg on the Fed's face. 


Ironically, a lot of retailers thought 12 cents high
and it should be much less, the fed does subsidize or require checks to be passed at face value even though checks are not free, what happens with pin debit is anybody's guess for retailers.

Its political, why should a bank with $11 billion get regulated and $9 billion not?

Of course the $10B cutoff was a political calculation. It excluded all but 3 credit unions and a lot of community banks.

The 12 cents was high, IMHO. I think the better comparison is not checks, but ACH, and that's less than 1 cents.

I have to disagree that its not politically in terms of the federal reserve, the federal reserve and its regulators would love power and studies, of course I do not bash the federal reserve all the time like many pundits do, but its hard to see why an organization would not love and use more power, its one more tool.

The durbin amendment makes no distinction between pin and signature debit, or rather online vs. offline debit, pin debit cannot authorization transactions or place holds say at the gas station or hotel, for this reason many online merchants do not take pin debit many restaurants and cafes do not, so the idea that banks are promoting offline debit for fees is not exactly a major piece of the pie but rather a smaller one. Interestingly enough while commentators attack the big banks and visa and mastercard, nobody is attacking first data-starz
although visa and mastercard do own pin debit networks.

The $10 billion is not inflation adjusted, and many larger credit unions feel less like big banks then many smaller but still big banks who have started to act like the big banks and their imposition of fees and quality of service.
The argument they make is that they are capped in rates they can charge interest and they are in no position to maintain those high fees.

Given that folks could not use debit at all at many places, offline debit was introduced so your bank account become your credit line, which is why you can use your visa or mastercard at many online retailers and your place of business but not pin debit although it changing.

I do agree that pin debit is more secure than no pin, a great example is the ebt/food/cash card, originally food stamps were paper, now for security they are electronic, however a pin is required so if someone steals the card they can't use it even though you can only buy food with it, by contrast a credit card can be used to buy anything except cash back usually without a pin, the only security a magnetic stripe offers or purpose has do with different rates charged with card not present v. card present except that verified by visa and securecode, anti counterfeiting does not seem to work, so the only security is a trained cashier or float.

Many folks though that credit as debit would be out given that fraud costs are much greater and a cap of a few cents would prompt banks to discourage its use, however many card present merchants do not accept debit so its unfeasible.

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