Correction to This Article
This article about the debate over an amendment to the financial regulation bill, which would limit "swipe fees" for credit and debit cards, said critics have asserted that shoppers using government-issued prepaid cards could be turned away if their purchases did not meet a minimum threshold. The article should have noted that the amendment allows merchants to set minimum purchase thresholds for credit cards but not for prepaid or debit cards.

States join the fight against proposed limits to credit card fees

By Ylan Q. Mui
Washington Post Staff Writer
Tuesday, June 1, 2010

State governments have become an unlikely ally of the banking industry in a fight against putting limits on the fees that credit and debit card issuers can charge to retailers.

Treasurers from at least eight states are considering sending a letter to lawmakers this week over concerns that proposed limits on the fees card issuers charge for processing purchases could endanger state programs that use prepaid cards to dispense crucial benefits such as unemployment insurance. The limits are included in an amendment to the overhaul of financial regulations that passed the Senate last month.

Nebraska's state treasurer, Shane Osborn (R), was the first to voice his worries to Congress last week.

"The cost savings achieved as a result of moving from check to electronic distribution of benefits are significant to states and their taxpayers," Osborn wrote. The "amendment will drastically alter this equation."

The amendment, sponsored by Sen. Richard J. Durbin (D-Ill.), passed with bipartisan support in the Senate but was not in the bill passed by the House in December. Lawmakers must reconcile the two versions before sending the legislation to President Obama, and the fees -- known as interchange or "swipe" fees -- have become the focus of intense lobbying.

The amendment allows retailers to give customers discounts for paying with cash and to set price thresholds for accepting cards. It also tasks the Federal Reserve with determining whether swipe fees for debit cards are "reasonable and proportional" -- the provision that most troubles the banking industry. Typically, the fees range from 1 to 2 percent of the purchase price, and retailers argue that the amount can wipe out their profit on small sales.

Durbin fired off a letter last week to Visa and MasterCard, which receive a portion of the swipe fees, that accused them of threatening higher fees for small banks if the amendment remains in the bill. Meanwhile, several congressmen from both parties joined forces to support the amendment.

"They're throwing everything they can at this to hang on to their pricing power," said Rep. Peter Welch (D-Vt.), who had introduced a similar provision in the House.

Opponents had focused their criticism on merchants that were shifting the costs of doing business to shoppers. Now, critics seem to be adding a new strategy: highlighting the impact on government benefits -- and the often-distressed consumers receiving them.

Card issuers typically provide prepaid cards to governments for little or no cost, relying on interchange fees to fund the program. States, in turn, save money on printing and mailing checks and the labor costs of processing and managing the accounts.

Osborn said that limiting the swipe fee could force governments to pick up the tab at a time when budgets are already strained. Nebraska adopted the cards in 2004 and now uses them to distribute unemployment insurance, child support and even wages for state employees who do not use direct deposit. Osborn said the state used to spend about 60 cents to print and mail each check and now pays only 1.5 cents to load money onto the cards, which translates into hundreds of thousands of dollars in savings.

"All of the liability is placed on the bank," he said. "It's a great way to do this efficiently and lower the cost."

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