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.

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Remember the show, Let’s Make a Deal, with Monty Hall? Well, it's back--sort of. For more than a year, Congress has been saying that it’s close to making a deal on legislation to overhaul America’s health care and financial systems. 

The original Let’s Make a Deal show was based on the show’s host, Monty Hall, offering deals to members of the audience. The contestants usually had to weigh the possibility of an offer being for a valuable prize, or an undesirable item. In its simplest format, a contestant was given a prize of medium value (such as a television set), and the host offered the contestant the opportunity to trade for another prize. However, the offered prize was unknown. It might be concealed on the stage behind one of three curtains, or behind "boxes" onstage, or within smaller boxes brought out to the audience.

Congress seems to have brought this classic TV game show back. “We’re close to a deal,” on health care legislation. “We’re close to a deal,” on financial reform legislation. 

Health Care Reform

The need across the country for health insurance reform has not abated. Americans agree that the nation's health insurance system is broken, but Congress still hasn’t sent a bill to President Obama to fix it. The current deal on the table is for the House to pass the Senate’s bill and then for both chambers to pass a budget reconciliation bill that resolves their differences. The proposed deal would ban insurance companies forever from denying coverage to children with preexisting conditions and from dropping coverage when an individual becomes sick. Insurance companies would no longer be able to randomly hike premiums or to impose lifetime or annual limits on the amount of care someone can receive. All new insurance plans would be required to offer free preventive care so that illnesses may be caught early. Young adults will be able to stay on their parents’ insurance policies until they are 26 years old. Uninsured individuals and small business owners would have the same kind of choice of private health insurance that members of Congress get for themselves. And individuals who do not have insurance coverage through a large group could be part of a bargaining pool that negotiates lower rates. Also, if an individual is ineligible for Medicaid but still can’t afford the insurance offered through the pool, she or he would receive a tax credit to assist with this cost. Finally, this deal would provide a new, independent appeals process if a claim has been unfairly denied.

It’s time for Congress to take the deal and make health insurance available and affordable for all.

Financial Regulation Reform

After the catastrophic financial crisis, President Obama called for the creation of an independent Consumer Financial Protection Agency, which would have as its sole mission the protection of consumers. It would create and enforce clear rules to ensure fairness of credit card terms and conditions, overdraft loan programs, payday and car title loans, and mortgages. In the fall, the House of Representatives passed legislation creating such a new Consumer Financial Protection Agency, which would provide the type of consumer protections that should have been in place all along. The Senate, however, has been debating the issue for months.

Specifically, Senate Republicans and the financial-services industry have opposed the creation of such an entity. Instead they would prefer that the Federal Reserve continue to be responsible for consumer protection as part of its regulation of nationally chartered banks. The central bank has always been responsible for the health of the nation's largest banks and the safety of American borrowers; however, its failures in both roles have been well documented. For years, the Federal Reserve primarily focused on monetary policy over bank supervision and often made consumer protection an afterthought. As a result, millions of American families have been left unprotected and financially unstable.

Additionally, the Federal Reserve only regulates banks, which would mean that the so-called shadow banking system of payday lenders, debt collectors, and loan originators and servicers would remain unregulated. The power of these entities has been demonstrated by the huge role they had in the current economic crisis. Allowing them to continue their predatory practices without being regulated would not be a deal on reform but rather a continuation of the status quo. Lawmakers have repeatedly said that they are close to a deal on this very divisive issue. Yet, proposals to let the Federal Reserve remain the primary regulator of consumer protection laws, is not a deal, it’s just the status quo. 

Well Monty, Where’s the Deal?

Congress seems to be weighing the possibility of whether reforming health care and financial systems will ultimately be valuable prizes, or undesirable items. Yet, rather than holding onto its existing undesirable prizes, Congress should choose Door #1, quality, affordable health insurance reform NOW and a dedicated agency to monitor and rein in the reckless behavior of financial institutions. 

Well Congress, where’s the deal?
 

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