WASHINGTON — Bankers lost the Senate fight over interchange fees, but they are hoping the vote will help convince the Federal Reserve Board to raise its proposed 12-cent cap.
A measure by Sen. Jon Tester, D-Mont., to delay the debit interchange rule garnered 54 votes — six shy of the 60 necessary — but still sends a strong signal to the central bank that its December proposal was overly harsh.
"The Fed had to have taken note of that," said Chuck Gabriel, managing partner for Capital Alpha Partners LLC. "It adds to the pressure that will compel the Fed towards a modified and more constructive final take on the Durbin rules."
Brian Gardner, a political analyst at Keefe, Bruyette & Woods Inc., said that it was significant that 21 senators who previously voted to adopt the interchange limitations authored by Sen. Richard Durbin ultimately switched sides and voted to delay the pending rule.
"That 21-vote swing was very, very significant and shouldn't be underappreciated," Gardner said. "You're basically asking over a quarter of the Senate to just flip and admit that they didn't realize what they were doing."
The banking industry is using the vote tally as a new lobbying tactic against the Fed, noting that a majority of the Senate wants the central bank to revamp its approach.
"It's interesting that the majority of the Senate said to the Fed, 'You've got it wrong,'" said Ken Clayton, senior vice president and general counsel of the American Bankers Association.
To be sure, the Fed, which remained neutral on the Tester bill, faces pressures on the other side. Retailers and other business interests have argued the central bank should hold the line at 12 cents, while the proposal has received more than 11,000 comment letters that must be taken into account before crafting a final rule.
Still, industry observers said they expect the Fed to raise the cap.
"My understanding is that they have taken the comments very seriously in terms of reassigning the numbers and I think the expectation, even though they haven't formally said it, is that the number is going to be higher than 12 cents," said Gil Schwartz, a partner at Schwartz & Ballen LLP and a former lawyer for the central bank.
What remains unclear is exactly how high it will go, or what other substantive changes the Fed could make.
"We are expecting some changes, but exactly what they will be and how far they will go; we do not know," said Karen Thomas, senior executive vice president of government relations and public policy for the Independent Community Bankers of America.
Under Dodd-Frank, the Fed was required to ensure debit interchange fees were "reasonable and proportional." But the industry said its December proposal did not take into account certain costs, such as fraud. The Fed has already acknowledged it has discretion to include such costs in its calculation, and most observers expect it to do so.
Additionally, issuer network fees, which are used to pay for the cost of each transaction, are also anticipated to be included.
Industry estimates have suggested the cap could be raised as high as 20 cents per transaction. It is a significant improvement from a mandated 12-cent cap, but would still be far short of the industry's average charge of 44 cents.
"No matter what price the Fed sets, it's hard for the industry to take it as a sort of victory," said Jaret Seiberg, an analyst with MF Global Inc.'s Washington Research Group. "But 20 cents would be a lot better than 12 cents."
Even if the cap is raised that high, banks said they will be forced to find new ways to replace the lost revenue by eliminating free checking accounts for consumers and taking other steps.
"We want to be able to recoup the cost we incur to provide a service," said Richard Hunt, president of the Consumer Bankers Association. "So even if they came up with 15 cents, 20 cents, so what? You're still more than 50% down. It's absurd what the U.S. Senate did."
For its part, industry groups are still pressing the Fed to include a host of fixed costs used to process each transaction, and allow for banks to keep at least some profit.
"We argue the Fed should read the statute to allow it to take account of all the costs plus a reasonable profit and set the fee that way, because the statute says the fee is supposed to be 'reasonable and proportional' to the cost, not necessarily equal to the cost," said Thomas.
Many believe the Fed is close to finalizing its rule, but is taking the extra time needed to ensure it gets everything right, especially as it faces pending litigation over the rule.
"The direction is pretty clear - dotting Is and crossing Ts," said Schwartz. "I'd be very surprised if it's still up in the air at this point. They've had several months to look at the comments and revaluate and reassess where they want to go, and while it may not be a completely done deal, I think they're pretty much done."
Many in the industry wonder how much time the Fed will give the industry to prepare for the final rule, which is effective July 21. Most observers said the central bank will put its final rule out shortly, to at least give banks 30 days to make necessary changes. Still, some industry representatives are hoping the Fed will give banks extra time to comply.
"No one can snap their fingers and change the whole system so it will take time to make the adjustments that will be needed," said Thomas. "The Fed has to be realistic about that."
Analysts agreed it will take more time to make the changes required by the final rule.
"It's just not the same as changing a light bulb," said Seiberg. "It's more complicated, and whether it can be crammed into three week or comfortably in five weeks, the fact is, it's a major change to the way services are priced, and when you are making a major change it's better to have the time so that you're not rushing things."
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