Striking at a lucrative bank business, the Senate on Thursday voted to force credit card companies to reduce fees for debit card transactions and permit merchants to offer customer discounts based on their payment method.
The 64-33 vote inserted the fee requirement in a package of new financial rules the Senate is considering to ward off a repeat of the financial crisis.
The vote was a major defeat for banks, which lobbied hard against it. But the measure attracted heavy bipartisan support and surpassed a 60-vote threshold for passage. Seventeen Republicans voted for the amendment; 10 Democrats voted against it.
The measure from Sen. Richard Durbin, D-Ill., would force credit card companies to charge businesses less for debit card transactions than for credit card payments.
Under current practice, a business that accepts major credit cards signs agreements with the card companies to pay a percentage of each transaction, usually about 2 percent to 3 percent. But credit card charges cost more to process than swipes with a debit card.
The measure still needs to survive negotiations with the House, which has already passed its version of regulations on Wall Street. The House bill does not contain the debit card provision.
The change could represent the most direct and tangible consumer benefit of the regulatory overhaul and would amount to a triumph for Durbin, who failed to get a similar proposal attached to an overhaul of credit card regulations last year.
"Left alone, this is going to get worse for small businesses that face higher fees, for consumers who face higher prices, and for everyone but banks and credit card networks," Durbin said moments before the vote.
The Electronic Payments Coalition, an industry group whose members include Visa, MasterCard and American Express, said the Durbin plan would harm many small banks and credit unions that already lose or barely break even in their card operations.
The credit card companies said the change would force consumers to pay more for their cards and result in higher profits to large retailers. In a statement, MasterCard argued that similar regulations in Australia did not result in savings to retail customers.
"This amendment helps big merchants, but consumers will pay the price," MasterCard said.
The Senate put off a vote on a contentious amendment to the regulatory bill. The amendment would place auto dealers that offer loans to car buyers outside the reach of a proposed consumer financial protection agency. President Barack Obama argued against the exemption Wednesday, but Democrats feared that even by requiring 60 votes to pass it, they would be unable to defeat it.
The debit card issue pitted the politically popular appeals of small business owners against the influence of community banks and the lobbying power of the credit card companies.
Durbin wants the Federal Reserve to ensure the fees that credit card companies charge for debit card use are proportional to the costs of processing the transaction.
Durbin's measure requires that once merchants can pay lower fees for debit card purchases, they then would be able to offer discounts to their customers based on their method of payment. Merchants would be prohibited from placing minimum purchase requirements for the use of a debit card.
In an effort to win more support and avoid community bank opposition, Durbin included an exception from the fee requirement for banks with assets of less than $10 billion. Durbin said even with that exception, his legislation would affect 65 percent of all card transactions in the United States.
Still, the Independent Community Bankers Association opposed the proposal, arguing that large retail merchants may choose to accept only the cheaper cards offered by large banks or that small banks will be forced to accept the lower fees big banks would receive.
Retail groups countered that any reductions in fees would be passed on to consumers. Henry Armour, president and CEO of the National Association of Convenience Stores, said credit and debit card fees are the second biggest expense in his industry, behind labor costs.
"This is an issue that is not just a Main Street small business issue, this is an issue that affects in our industry 160 million consumers a day," Armour said.
The vote came on a day when the Senate continued to move through the complexities of the far-reaching regulatory legislation. The debate was expected to extend into next week, with a handful of major issues still unresolved, including how to police complex and unregulated securities known as derivatives and how far to go in prohibiting commercial banks from engaging in speculative trades on their own accounts.
Federal Reserve Chairman Ben Bernanke waded into the derivatives debate, raising objections in a letter to a provision by Sen. Blanche Lincoln, D-Ark., that would require banks to spin off all their derivatives business into subsidiaries. Bernanke said the move would weaken regulation of derivatives.
The Senate is not expected to take up that provision until after Lincoln's re-election primary contest Tuesday.
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