Banks and credit unions are using a recent
debit-card scam at Michaels Stores Inc. as fresh ammunition in their
fight against a federal proposal to reduce the amount they can charge
merchants for processing such payments.
The new attack is aimed at part of the Dodd-Frank financial-overhaul
law enacted last year that limits the fees banks can charge retailers
each time a consumer swipes a debit card. The measure has pitted banks
against merchants and has been one of the most contested provisions of
the financial overhaul law on Capitol Hill.
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A data breach at Michaels
Stores, whose logo on a shopping-cart child’s seat is seen here, is the
latest flash point over debit-card fees.
The
debit-fee measure requires the Federal Reserve to write a rule
restricting what are called swipe fees. The central bank issued a draft
proposal in December, capping the fees at 12 cents a transaction for
large banks, down from the current average of 44 cents.
Banks have assailed the proposal, in part because they say it doesn’t
take into account the cost of losses that result from a bank data theft
or breach. Customers aren’t liable for unauthorized debit
transactions; those costs are typically absorbed by the bank that issued
the plastic. In a survey, the Fed estimated that industry-wide fraud
losses to all parties involved in a debit transaction in 2009 were about
$1.4 billion, while roughly $15.7 billion in debit swipe-fee revenue
was collected.
Now, banks have a handy, real-world example to use in their argument.
Industry lobbyists said they have raised the Michaels breach with
several lawmakers in recent meetings as they push for legislation
delaying the debit-fee rule. “It has gotten their attention,” said one
of the lobbyists, Camden Fine, head of the Independent Community Bankers
of America.
Michaels, an Irving, Texas, chain of arts-and-crafts stores, this
month said thieves had collected customer debit-card data by altering
the devices that they use to swipe their cards. The thieves stole
personal-identification numbers, created duplicate cards and withdrew
cash from customer bank accounts.
Though Michaels said fewer than 100 customers have reported
fraudulent transactions, the company said it found that equipment had
been compromised at 80 stores in 20 states. As a result, banks have been
reissuing cards and taking calls from customers worried that their
accounts could be at risk.
The situation at Michaels just “illustrates the point that customers
who have their account information breached can get that money back from
the banks because of the way the debit-card product works today,” said
one executive at a big bank.
Fraud costs won’t go away when the Fed caps
swipe fees, banks say, so they will have to find other ways to address
those costs, such as raising fees on consumers and eliminating rewards
programs. Banks have said they may protect themselves from fraud losses
by capping debit-card transactions at $50 or $100. They haven’t said
they would stop reimbursing consumers.
The National Association of Federal
Credit Unions sent a letter Monday to Senate leaders urging them to
support a bill that would delay the start of the proposed debit-fee
rule, which is scheduled to take effect in July. The letter cited
comments from John Menzer, chief executive of Michaels, who encouraged
customers to consult their banks if they were concerned about
unauthorized charges.
“This is a prime example of the role that debit interchange plays in
ensuring the payment system operates smoothly and efficiently for
consumers and financial institutions,” wrote Dan Berger, executive vice
president at the credit-union trade group.
“These issues aren’t being dealt with by Michaels. They are being
dealt with by the card issuers,” Mr. Berger added in an interview.
The retail industry is pushing back.
Retail officials say in many cases banks make merchants cover the cost
of fraud incidents. Retailers say they also have invested billions of
dollars helping to plug security holes while the banks refuse to take a
step that, according to retailers, would make the system far safer:
Issuing consumers cards embedded with computer chips, which retailers
claim are less vulnerable to fraud than debit cards that require a
signature.
“Their argument that they need even more swipe fees to protect the
system they’re not already protecting is really just a load of bull,”
said Mallory Duncan, senior vice president and general counsel for the
National Retail Federation, a trade group.
The effort to delay the fee rule faces
the biggest challenge in the Senate, where Sen. Richard Durbin (D.,
Ill.)—author of the provision—is the No. 2 Democrat and any measure must
get 60 votes to overcome a potential filibuster. Mr. Durbin, backed by
retailers, is fiercely resisting efforts to delay the debit-fee rule. He
has repeatedly blasted regulators for raising what he calls
“speculative” concerns that the debit-fee measure will hurt small banks
and credit unions, which are technically exempt from the fee cap.
Lobbyists say a delay-bill written by Sen. Jon Tester (D., Mont.) is
close to having enough votes, but that he may need to scale it down from
a two-year delay to a one-year delay to get it over the 60-vote
threshold.
—Ann Zimmerman contributed to this article.
Write to Robin Sidel at Robin.Sdel@wsj.com and Victoria McGrane at Victoria.McGrane@wsj.com.
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