The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

JPMorgan Chase may begin capping debit card purchases at $100 or even $50. Chase stopped issuing new debit reward cards in November of last year and recently announced that it will end the reward program for existing customers as well. Chase is also testing monthly fees on debit cards and checking accounts in select states. These are just some of the ways that banks and credit card issuers are responding to proposed regulations on interchange fees.

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act gave the Federal Reserve the authority to regulate the amount of interchange or swipe fees (i.e., the fees that a card issuer can charge retailers for transactions involving their cards) to ensure that they are “reasonable and proportional” to card issuers’ costs. About $16 billion in interchange or “swipe” fees were collected in 2009; averaging around 44 cents per transaction. However, a report issued by the Federal Reserve (Fed) found that the median total processing cost for debit and prepaid card transactions is 11.9 cents per transaction.

Using its new authority, the Fed has proposed rules that would cap interchange fees at 12 cents, starting in July. Since such caps could cost card issuers billions, they are examining potential sources of new revenue. For instance, a cap on interchange fees could cost Chase over $1 billion a year. In addition to getting rid of rewards programs, banks are considering “unbundling,” (i.e., dividing debit card services into components and charging for each of them separately). Some banks are also considering limiting the amount of debit card transactions.

At the same time, banks are also challenging the proposed regulations. TCF filed a lawsuit against the Fed claiming that the proposed regulations are unconstitutional because (1) they apply only to 1% of U.S. banks with assets of $10 billion or more and (2) they constitute an unlawful taking by the government of TCF’s property (i.e., debit card income). Although the U.S. Justice Department sought to dismiss the lawsuit the judge denied this motion.

In Congress, legislators are also concerned and have taken action to delay the proposed rules. Senator Jon Tester (D-MT) introduced the Debit Interchange Fee Act of 2011 (S. 575) and Representative Shelley Capito (R-WV) introduced the Consumer Payment System Protection Act (H.R. 1081). Sen. Tester’s bill would place a two-year delay on the implementation of any regulations and require a study examining the debit interchange payment system, including the costs and benefits of electronic debit card transactions and alternative forms of payment, the structure of the current debit interchange system, and the impact of the proposed rule reducing debit card interchange fees. Rep. Capito’s bill calls for a one-year implementation delay and a study of the various categories of all costs and investments associated with debit card transactions and the impact of any proposed rules. On the other hand, the Oregon State Legislature introduced a Senate joint memorial (SJM 18) urging Congress to proceed with interchange fee limits.

While consumer groups agree that swipe fees should be regulated, they are somewhat divided on how to achieve these objectives. Consumer advocates such as U.S. PIRG, Public Citizen and the Hispanic Institute support the new rule while the Consumer Federation of America has expressed concerns and has asked the Fed to increase the proposed rate cap.

For more information on interchange fees including other countries’ experience with similar debates, see the American Antitrust Institute (AAI)'s March 2010 report, “Electronic Payment Systems and Interchange Fees: Breaking the Log Jam on Solutions to Market Power” by Albert A. Foer.

For more information on the proposed regulations and the potential impact on consumers, see the resource page of the Sargent Shriver National Center on Poverty Law’s recent webinar, The Next Frontier in Public Benefits: Electronic Benefit Cards.

This blog post was coauthored by Ji Won Kim.

• Email This
• Print
• Comments
• Trackbacks

Urban Partnership, a new institution, bought out ShoreBank on Friday ending the bank’s 37 years of service and its title as the oldest and longest serving community development bank in the country. In a previous blog, the Shriver Center outlined the numerous opportunities ShoreBank offered to low-income communities, including underwriting homeownership loans for working families, providing alternative lending options to small businesses, and countless community development projects that improved low-income neighborhoods.

Recent reports have linked the failure of ShoreBank to the Obama Administration’s clear decision not to affiliate itself with any one bank or institution. Why did the White House push so hard for bailouts to Wall Street firms, the purveyors of the economic crisis, and not community banks, such as ShoreBank, the institutions hit hardest? Why did the White House bow to political pressure to avoid the impression that ShoreBank was only being saved because of its supposed ties to President Obama and other senior White House staff?  Why weren’t there lobbyists fighting on behalf of ShoreBank and others like it?

It is hard to understand how allowing the failure of ShoreBank fits into the administration’s promise to make the middle class a priority. What message is the government sending by allowing ShoreBank to fail, while allowing irresponsible banks like Wells Fargo and AIG, who shoulder a heavy proportion of blame for the current economic crisis, to come out ahead?

The reality is that community banks are coming under intense pressure from a crumbling commercial real estate market, a weak economy, and lop-sided competition with banking goliaths deemed too big to fail. Champion for working families, Elizabeth Warren agrees that small banks serve an important function in this economy and disproportionally lend the money to small businesses.

What those that opposed the bailout of ShoreBank failed to realize is that community banks are integral to the health and well being of our economy. Using large Wall Street banks as the only option not only ignores the needs of the small business community, but puts consumers at risk of a monopoly. In addition, if this trend continues, the needs of entrepreneurs and community rehabilitation projects may never see the light of day. It is widely known that small businesses are responsible for most of the net job creation in the United States, which makes it clear why we need community investment banks to remain alive and thrive.

Small banks need a different program than TARP if they are going to make it through this crisis. Small banks and big banks do not look like each other and certainly don’t act like each other. There needs to be differences in how they are treated, but these differences should not reward big banks over community banks, which have historically made significant strides in solving problems relevant to low-income families, blighted neighborhoods, and small businesses. One way to ensure that this occurs is to reform the Community Reinvestment Act (CRA) to reward community banks for their efforts while requiring big banks to do more. The recently introduced H.B. 1479 would do just that and should, therefore, be supported.  Additionally, the banking regulatory agencies recently held hearings to determine what updates are needed in the CRA regulations. These agencies should be encouraged to include these kinds of reforms.

Susan Ritacca coauthored this article.
 

• Email This
• Print
• Comments
• Trackbacks

ShoreBank, a staple of the Chicago Community, may be in jeopardy of seizure if it does not receive TARP funds from the Federal Reserve Bank. Unfortunately, as a recent article in the Chicago Tribune noted, current political jockeying around more bank bailouts has ShoreBank in the eye of the storm.

In 2008, the largest banks in the country received up to $25 billion in taxpayer funds. According to CNN, these banks included Wells Fargo, Citigroup and JP Morgan Chase. Even though many argued that Wells Fargo was particularly guilty of the worst subprime lending abuses against working families, support for its bailout was bipartisan. Congress was convinced that the government needed to step in or risk a major financial calamity. Yet a year and a half after the Wall Street bailout, Republicans are beginning to question the value of smaller, community banks such as ShoreBank, the very banks that are addressing the needs of working families and underwriting community investment projects.

Since its inception in 1973, ShoreBank has been a model bank committed to social justice.  ShoreBank’s mission has been to develop a triple bottom line of social responsibility, environmental responsibility and profitability, or “people, planet, profit.” ShoreBank’s website describes it as, “America's first community development bank.”

ShoreBank is not the only community bank to come under attack by Congress. The Shriver Center recently blogged about Park National Bank, another community bank with an outstanding community service record that was allowed to fail by the federal government. In particular, Park National was seized on the same day that U.S. Treasury Secretary Timothy Geithner presented Park National with $50 million in federal tax credits for its community development projects.

The failure of Park National, and now the potential failure of ShoreBank, raises grave concerns. It appears that large “too big to fail” banks which caused irreparable harm contributing to both the housing and economic crisis, should be bailed out, but the smaller, community banks which have been meeting the needs of low-income neighborhoods for decades should be allowed to fail. This is just another indication of how heavy lobbying by the financial industry has swayed Congress to put the needs of working families aside in exchange for campaign contributions and cash.

This time, however, things are not going unnoticed. The Coalition to Save Community Banking, a group of concerned neighbors and activists formed on Chicago’s Westside when rumors arose about the possible take-over of Park National by US Bank, another financial institution which received billions from TARP. Members of the coalition traveled from Chicago to D.C. to support then Park National CEO Mike Kelly. Today they are rallying to promote the interest of local banking including supporting bailouts for banks that help the community, as opposed to banks that suck money from working families giving little to nothing in return. We cannot afford to let ShoreBank fail the same way that Park National was allowed to fail. It’s time to tell the regulators that too important to fail should also include small, community focused banks. Chicagoans should be outraged by threats of another assault on our community and demand action from their congressperson to ensure ShoreBank and others like it remain protected in our state and in our country.

Susan Ritacca coauthored this article.

• Email This
• Print
• Comments
• Trackbacks