May 27, 2010 / 9:43 PM / 9 years ago

UPDATE 1-Senator blasts Visa, MasterCard on antitrust fears

* Durbin warns against fee changes for small banks

* In letter, Durbin warns against collusion (Adds byline, MasterCard comment, ICBA opposition, details on Durbin proposal)

By Joe Rauch

CHARLOTTE, N.C., May 27 (Reuters) - The author of a U.S. Senate proposal to limit debit card network fees said “serious antitrust concerns” could be raised if Visa Inc (V.N) and MasterCard (MA.N) Inc punish small banks that use their payment networks.

Illinois Democrat Richard Durbin sent a letter to Visa and MasterCard’s chief executives on Thursday accusing the companies of trying to “frighten” small banks into opposing his plan to regulate fees that merchants pay when customers pay with their debit cards.

“I would caution you not to collude with your largest member banks to change your fees and rules in an effort to protect the big banks against competition from smaller card-issuing banks,” Durbin wrote. “Such steps would also raise serious antitrust concerns.”

Durbin’s limits for debit card merchant fees, included as part of his amendment to the Senate’s larger financial reform legislation, only applies to banks with assets of more than $10 billion.

Still, small banks oppose the limits because they believe they will ultimately have to abide by them.

Earlier on Thursday, the Independent Community Bankers of America — the primary trade group for small U.S. banks — asked Members of the House of Representatives to reject the Durbin amendement.

“The amendment would dramatically alter the electronic payments system and make it very difficult for card-issuing credit unions and community banks to continue to provide a wide array of products and services to consumers,” the group said in letter to U.S. House representatives.

A MasterCard spokesman said small banks were opposing the legislation independent of any pressure from the company.

“This opposition appears to be based on community banks’ and credit unions’ recognition that the Durbin amendment would turn the economics of the entire payment system on its head with negative consequences for all participants, including consumers,” said MasterCard spokesman Jim Issokson.

A Visa Inc spokesman was not immediately available for comment.

CARVE-OUT MOOT?

Under Durbin’s proposal, the Federal Reserve would receive the authority to regulate interchange fees that merchants are charged by banks and by payment processors like Visa and MasterCard.

The fees are a key source of revenue for banks’ debit card programs and Visa and MasterCard, which operate large U.S. payment networks.

Durbin’s amendment also would allow merchants to provide discounts for customers who use one payment type over another, and allow merchants to bar debit transactions.

Even if smaller banks are exempted from the provisions, the ICBA says that Visa and MasterCard would change their fee structures for all banks, rendering the carve-out moot.

“In practice, the networks and the merchants will make the government-set rate applicable to all issuers the only practical course of action limiting the interchange revenue on which small issuers rely to sustain their debit card offerings,” ICBA’s letter states.

Visa and MasterCard are the dominant U.S. card transaction processors, and would be among the most affected by Durbin’s proposed rule change.

Durbin has previously said the industry’s current debit card fee structure costs too much for the service provided to businesses.

The amendment does not cover credit card transaction fees. (Reporting by Joe Rauch. Editing by Robert MacMillan and Carol Bishopric)

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