Senate Wall Street Reforms Stall Credit Card Overhaul

Caroline Dobson

The U.S. Senate had a majority vote against setting limits on credit card interest rates, which could have saved consumer』s $5 billion according to USA Today. The proposed changes were an amendment to the broader financial reform bill going through Congress aimed at regulating Wall Street, which the Senate will endeavor to settle next week.

The amendment, proposed by Sen. Sheldon Whitehouse, (D-R.I.), would have allowed each state to impose interest rate limits on out-of-state lenders. Another amendment, backed by Senate Majority Whip Richard Durbin (D-Ill.), passed last week, which could lead to potential limits on the fees charged for using debit and credit cards.

Based on data sourced directly from banks and credit card companies: from the 10 institutions with the most substantial amount of credit card receivables, seven gave estimates about the potential impact of the now rejected credit card amendment's consequences.

In summary, institutions such as —Citigroup, Bank of America, JPMorgan Chase, Wells Fargo, U.S. Bancorp, HSBC North America, and Barclays Group US — would have relinquished at least US$2.5 billion to US$3.1 billion in fees in 2010 alone. Also, 7 of the top 10 depositary institutions expected to take a combined $2.4 billion to $2.6 billion hit according to the initial proposed new overdraft rules and banks' voluntary policy changes.

Currently when a consumer makes a $100 transaction with a credit card, the retailer gets approximately $98. The remaining $2 is the interchange fee broken down into three parts: about $1.75 goes to the card issuing bank, $0.18 goes to the Visa or MasterCard association, and the amount left over, $0.07, is returned to the retailer's merchant account provider. The interchange fee can vary from around 1 to 3 percent of every purchase made on a debit or credit card.

In 2008, banks accumulated an estimated $50 billion in interchange fees. Also, Visa and MasterCard collected interchange fees of at least US$35 billion in 2007, according to government estimates. The interchange fees have constituted a viable avenue for revenue for these institutions during a period where many consumers are failing to repay debts and face financial losses.

According to The Nilson Report, consumers made US36 billion debit and prepaid card transactions and US20 billion credit card transactions in 2009. Last year, the interchange fees averaged 2.23 percent for American Express, 2.06 percent for Visa and MasterCard and 1.88 percent for Discover.

The Durbin reform bill amendment has several implications:

First, it mandates that the fee be "reasonable and proportional to the actual cost incurred" by the payment network or issuer for processing the transaction.

There will be some scope for The Federal Reserve to decide the grounds that comprise a "reasonable" fee, however it could result in lower fees than the current arrangement. This move would be similar to other parts of the world where, for instance, due to an antitrust investigation, Visa Europe was prompted to cut its interchange rate to 0.2 percent on some debit-card purchases, following an earlier initiative by MasterCard. Rates in Australia have also been capped by regulators at 0.5 percent.

In 2003, The Reserve Bank of Australia made reform changes and cut the interchange fee in half, to less than 1 cent. According to the New York Times, banks and credit card companies claim the lower fees have cost them about US$919 million annually, and the Australian credit card industry has been further revamped, with banks reducing their credit card reward programs and also requiring customers pay their bills in a shorter period of time. Annual fees have also been hiked up for reward programs.

Second, it enables a merchant to provide incentives for customers to provide a discount to customers who pay with cards that have lower transaction fees.

Previously sellers were constrained to accepting all cards at a flat rate.