The proposal to limit overdraft fees received 2,500 responses

The Federal Reserve’s proposal to lower caps on debit transaction fees prompted an outpouring of responses – about 2,500 responses, in fact – from industry organizations representing merchants and financial services companies, from bank executives and unrelated people.

Generally, a comment period after a rule is proposed allows for insight from various stakeholders who will be impacted by changes in process, fees, or management. This information helps inform the regulator or agency on how it can address concerns or recommendations, sometimes leading to fine-tuning of new regulations.

The comment period was scheduled to end in February but was extended to May 13.

Under the terms of the proposal unveiled last October, the Fed would reduce interchange fees charged to merchants to 14.4 cents, down from the previous rate of 21 cents. In addition, the ceilings will be reviewed every two years. The revised fee structure will apply to financial institutions with assets of at least $10 billion. As reported on Wednesday (May 22) on this issue, legislation is expected to be passed in the House of Representatives that would raise the asset “threshold” to $50 billion, which would exempt more FIs from overdraft restrictions.

An analysis of several letters and emails shows a cross-section of the controversy surrounding the Fed’s restrictions and proposed actions.

Banks say the revenue is essential in the fight against fraudsters

On the banking side, people associated with smaller banks say the Fed isn’t accurately assessing the impact and risks of fraud. Some opponents of restrictions believe that the revenue streams provided by exchanges are crucial to offset the increased spending needed to invest in anti-fraud efforts and in providing innovative payment solutions to consumers.

In a letter issued by the National Association of Federally Insured Credit Unions to the Fed, the association states that “Regulation II and the Durbin Amendment have created significant challenges for credit unions, exemplifying regulatory overreach to the detriment of small financial institutions.” Instead of supporting a competitive market, these measures favored one industry over another, leading to disastrous results and further consolidation of an already shrinking financial services sector. Proponents of re-pricing overdraft interchange rates under the guise of consumer benefits are disingenuous….”

The letter goes on to state that “credit unions, due to their smaller size and community-focused operations, do not have a large transaction volume or a broad infrastructure base to spread the fixed costs associated with issuing overdrafts. Credit unions often incur higher transaction costs for issuing direct debits, which can be largely attributed to their limited scale of operations.

Retailers: fees will remain too high

Separately, the National Retail Federation said in its own comments on the matter that even after adjustments are made, fees will still be too high and reduced issuer transaction costs will still mean that “the nation’s largest issuers will continue to underwrite higher profit margin under the proposed rule than that which the Board found to be “reasonable and proportionate” at the time it adopted Regulation II.”

In a letter from the International Center for Law and Economics, the authors wrote that fee caps, as originally introduced under Regulation II more than a decade ago, ultimately harmed lower-income consumers and “benefited shareholders of large commercial companies.” A University of Pennsylvania study found that banks lost more than $5.5 billion a year and made up at least some of those losses by reducing the availability of free checking accounts and raising account fees.

“Monthly minimum amounts to avoid these fees have increased by 21 percent, and monthly fees for interest-bearing checking accounts have also increased by almost 14 percent,” the Center said, adding in its summary that “because it is “difficult to empirically determine” the effectiveness of the Interchange Fee for any card networks, the Council should recognize that markets are the best mechanism for setting such fees and remove price controls altogether.”