Banks Defeated in Senate Vote Over Debit Card Fees

WASHINGTON – The United States Senate defeated on Wednesday an attempt backed by banks and the major credit-card companies to delay new rules that could drastically cut the amount that banks can charge retailers to process debit-card transactions.

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The debit-card rules were a major part of the Dodd-Frank financial regulation bill passed last year and the Senate vote was the first major challenge to the new law.

Although 54 senators voted in favor of the delay, the measure, which was sponsored by Senator Jon Tester, a Montana Democrat who is facing a tough reelection battle next year, and Senator Bob Corker, a Tennessee Republican, failed to garner the 60 votes that were required for it to pass under Senate rules. Forty-five senators voted against the amendment.

Even with the defeat, the vote represented a remarkable come-from-behind lobbying campaign by banks to recover from the drubbing they took during the anti-Wall Street atmosphere that pervaded last year. The debit card measure, sponsored by Senator Dick Durbin, an Illinois Democrat, passed last year by a 2-to-1 margin after little debate and no hearings.

The Wednesday vote, which followed a vigorous floor debate, was a victory for retailers, who have complained that banks and the companies that control the largest debit-card networks, Visa and MasterCard, have consistently raised the fees on debit card transactions even as the market has grown rapidly and technology costs have declined.

Those fees topped $20 billion last year, according to industry reports.

The Federal Reserve, as guided by the new law, had proposed rules that would cut the average debit-card processing fee to between 7 and 12 cents per transaction from a current level of 44 cents. Though Congress exempted small banks with less than $10 billion in assets from the new limits, banking regulators warned that such a two-tiered fee system among banks would not be competitive. Opponents of the delay said that all but 100 banks and three credit unions would be exempt from the fee restrictions.

The new regulations are scheduled to take effect by July 21, and the Federal Reserve, which received more than 11,000 comments on its proposals, has said it intends to meet the deadline.

The vote also provided a victory for Senator Durbin. Mr. Durbin, who sponsored the original measure to roll back the fees that banks are able to charge on debit transactions, was opposed in the effort by Senator Chuck Schumer of New York, whose constituency includes Wall Street and the major banks.

Mr. Durbin said that a delay of the new debit rules would have kept fees at current levels and given banks “a windfall of profit that they do not deserve.”

By coming close to victory, banks are likely to be emboldened to fight other regulations being drawn up as a result of the Dodd-Frank bill. Those include rules that would subject derivatives to increased margin requirements and force derivative trades through a central exchange. Bankers and business lobbies are also opposed to the structure of the new Consumer Financial Protection Bureau, which is scheduled to take over mortgage and other consumer-related regulatory duties from traditional banking regulators.

“This shows the banking industry has mounted a very effective fight,” Bill Allison, editorial director for the Sunlight Foundation in Washington, which monitors lobbying activity, said in an interview.

Both sides sought to portray the fight as big well-financed monoliths against small-town retailers and banks. Bank lobbyists said that the rule would most harm small community banks and credit unions, while benefitting giant retailers like Wal-Mart and Home Depot that account for most of the nation’s debit-card transactions.

Similarly, a coalition of retailers framed the debate as the giant banks that issue the most debit cards – J.P. Morgan Chase, Bank of America and Wells Fargo – against mom-and-pop retailers who are simply trying to scrape by on meager profit margins.

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There were elements of truth to both arguments. Home Depot executives, for example, told financial analysts on a conference call earlier this year that a cap on debit fees could save the company $35 million a year.

Banks, in a flurry of ads in subway cars and on television, portrayed the debit-fee reduction as a $12 billion gift to the retailers. “Bureaucrats want to take away your debit card!” read a print ad that tried to argue that the fee cuts would make debit cards so unprofitable that smaller banks and credit unions would either charge for debit cards or raise fees on checking accounts or other consumer services to make up the loss.

Similarly, independent business owners testified before Congress that debit fees have cut into their costs.

The Federal Reserve already missed an April deadline to finalize the debit-card rules, and lobbyists on both sides of the issue said that Fed officials expressed a desire for Congress to take the issue out of their hands.

Though the major card companies said they would work to implement a system that allowed for two tiers of charges – one for big banks subject to the limits and another for smaller banks that were exempt – the top banking regulators at the Fed and the Federal Deposit Insurance Corp. each expressed doubts that such a system would work, because market forces would guide transactions to the lower-cost option. “It’s going to affect the revenues of the small issuers,” Ben S. Bernanke, the chairman of the Federal Reserve, told a Senate committee earlier this year, “and it could result in some smaller banks being less profitable or even failing.”

The Sunlight Foundation said in an April report that 24 lobbying firms had been hired last year to influence action on the debit-card rules. Eighteen of those firms were registered as representatives of the two major debit-card networks, Visa and MasterCard. A large portion of those lobbyists have gone through the revolving door between government and industry; 68 of the 79 individuals who registered as lobbyists for Visa or MasterCard previously worked in government, according to the Center for Responsive Politics in Washington.

Among the heavy hitters who worked to influence votes on the debit card fight were former House Majority Leader Dick Gephardt, a Democrat, who represented Visa, while the retailers had the former Republican Senator Don Nickles of Oklahoma in their corner.