Change for the Better? Local Financial Institutions Lament Lower "Swipe Fees" 

Politics makes strange bedfellows, but it can also produce unlikely adversaries. Consider the current case of Congressman Peter Welch and Vermont’s credit unions, community banks and small retailers.

On money matters, these interest groups are often in sync with one another and with Welch’s populist politics. But convergence has given way to conflict over a major component in the financial regulatory reform package expected to become law in the coming week.

At issue is the “swipe fee” merchants must pay to financial institutions and to companies such as Visa and MasterCard every time a customer makes a purchase with a debit or credit card. The fee usually ranges between 1 and 2 percent of the sales price, which is enough to erase the profit a mom-and-pop shop might make on, say, a bag of peanuts.

“Take out two cents on some small item and you might as well be giving it away,” says Courtney Handy, whose family owns Simon’s convenience store across from Battery Park in Burlington.

Welch calls the slice taken by Visa, MasterCard and big banks “a rip-off that has to end.” Action to limit the swipe fee is “so overdue it’s shameful,” adds Vermont’s sole member of the U.S. House. He notes that swipe fees in the United States are among the highest in the world because many countries regulate how much card companies and banks can charge on a transaction.

The second-term Democratic representative demonstrated his clout on Capitol Hill by attaching a swipe-fee amendment to the House version of the megabill assembled in response to the near meltdown of the global economy in 2008. The provision that Welch cosponsored with Illinois Senator Richard Durbin empowers the Federal Reserve to reduce the swipe fee on debit-card sales by an amount the Fed decides is “reasonable and proportional.” It also allows the fee to be kept fully in place for banks and credit unions with less than $10 billion in assets. And the amendment forbids retailers from discriminating against cards with higher swipe fees.

These stipulations were sufficient to satisfy key House Democrats concerned about the Durbin-Welch amendment’s potential impact on credit unions and community banks. But the institutions themselves aren’t satisfied. The heads of their Vermont trade associations dislike what Welch has done, and are also unhappy with senators Patrick Leahy and Bernie Sanders for supporting the amendment.

Joseph Bergeron, president of the Association of Vermont Credit Unions, worries that the Fed may go along with a potential refusal by Visa and MasterCard to implement a two-tier system. The two debit-card giants have argued that assessing the full swipe fees for some cards but not for others would so complicate their processing procedures that they might apply a single reduced rate to all cards, including those issued by credit unions and small banks. A two-tier setup will be “very complex and difficult to program — so much so that it won’t be worth the revenues lost” by the card companies from a reduced swipe fee, adds Mike Tuttle, president of Merchants Bank.

Vermont community bankers don’t think the Fed can be trusted to uphold the Durbin-Welch amendment’s intent of protecting the revenues that accrue to small financial institutions through swipe fees. “Every time they say ‘Don’t worry, this won’t cost you,’ you can probably count on it costing you,” Tuttle comments. He says Merchants has already been hit with higher costs imposed by stricter federal requirements “that don’t benefit our customers one bit.”

Ken Perine, head of the National Bank of Middlebury, calls Durbin-Welch’s exemption for community banks and credit unions “meaningless.” Even if the Fed and the card companies do allow small institutions to retain the full swipe fee, many retailers won’t go along with that, Perine warns. “If you’re a merchant and you know a Chase card has a fee of X and our card carries a fee of X-plus, you’re going to discourage use of our card,” he reasons. “I don’t know how it will happen, but it will,” Perine says in regard to the amendment’s ban on such discriminatory practices by retailers.

The loss in revenues from a reduced swipe fee would be “significant” in the case of VSECU, the second-largest credit union in Vermont, says its CEO, Steve Post. He and the community bankers warn that lowered swipe fees would force them to slap their cardholders with new or higher charges and possibly end free checking as well.

Chris D’Elia, president of the Vermont Bankers Association, says it’s “totally unfair” that community banks are being made to a pay a price in response to a financial disaster they didn’t cause. Narrowed banking options for Vermonters could be an unintended consequence of the swipe-fee reform, D’Elia adds. He warns that further consolidations could occur in the state’s banking industry due to the increasing costs and declining revenues associated with heavier federal regulations.

Merchants’ Tuttle points out that the swipe-fee provision “has nothing at all to do” with financial regulatory reform. Durbin-Welch represents “an opportunity by a special interest to grab something and put it into the bill,” Tuttle says of retailers.

Whatever savings merchants enjoy as a result of reduced swipe fees are unlikely to be passed along to consumers, the amendment’s opponents argue. “It’s most of all going to benefit Wal-Mart and other big chains,” Tuttle observes. “Are they going to cut prices or add to their earnings?” he asks rhetorically.

Bergeron, the Vermont credit union association president, says he met with Welch on this issue “many times,” but that the congressman could not be persuaded to change his position. D’Elia is less diplomatic. “It’s frustrating to banks in Vermont that we did not create the problem, yet members of Congress and our own delegation to a degree are taking this broad, sweeping, one-size-fits-all approach,” the bankers association head declares.

Welch, for his part, finds it “puzzling” that credit unions and community banks are so unyielding in their opposition to an amendment that expressly addresses their interests. “I do understand their concerns, but we’ve taken concrete steps to meet them,” Welch says. “And just because they have a worst-case scenario doesn’t mean it’s going to happen.”