In a sign of a coordinated pressure campaign, the Fed reports that it has received "more than 2,124 form letters" from credit unions that are opposed to the legislation. While the legislation and the proposed rules specifically state that debit card issuers with less than $10 billion in assets are not bound by the 12 cent cap, these point out that there is no enforcement mechanism to make sure their rates are protected. While the American Banker (subscription required) on January 10, 2011 that Visa would support a two-tier pricing system, this does not seem to have changed anyone's thinking; comments posted after the report are just as hostile as those posted before. The feared scenario seems to be one of the following:

Assuming that the other debit networks follow whatever Visa does (and I think they would have to, to avoid losing debit issuers), how realistic are these fears? It is true that with the and acquisitions, Visa will be less dependent on financial institutions for its revenues, but the card issuer relationship is still at the heart of everything they do. The ultimate goal of these acquisitions is more likely a response to moves by , , , and to create bridges between existing payment systems and the emerging mobile marketplace, which should benefit financial institutions by increasing volume.

If the Fed adopts a broader interpretation of the routing rules (see my on Part 1 for more on this), merchants could actually steer customers away from smaller issuers by routing transactions on less expensive networks: all it would take is one network willing to set a universal cap of 12 cents (and this network could be owned by the merchants) to force small issuers to accept a lower interchange rate. However, as I said last time, there are many other problems with the broad interpretation, which makes it unlikely that the Fed will use it in the final rules. In short, I think the steering worries are overblown.

As I am writing this, the just finished holding hearings on whether the implementation of the Durbin Amendment should be delayed or modified so that the interchange cap includes a broader range of costs. It seems unlikely to me that any major dilution would make it through the Senate, where (D - Illinois) is chair of the and General Government as well as the Majority Whip, and could easily stop anything from getting to the floor. However, since the small issuers seem unanimous in their dislike of the $10 billion exemption, and since it creates a host of operational and incentive problems, the Congress may decide to simply do away with it, perhaps as part of a broader package of changes that would also include a broader range of allowable costs. This would still likely result in a revenue drop of 50% or more, but at least it would be better than what we have now. On the other hand, the House is playing "who can cut the most," so it is unlikely that they will have the time to take this up, no matter what happens in committee.

If anyone has been able to find a small issuer that is in of the exemption, please let me know; I am also curious to hear if you agree that the prospects for meaningful action in Congress are low.