As the House Committee on Financial Services readies for next week's hearings to discuss new regulations for the banking industry, lobbyists lined up to battle over the changes, extending a battle between small banks, big banks and big retailers.

In a letter submitted to Congress on Tuesday, Feb. 8, the American Bankers Association said the potential changes, "will cause severe harm to the entire banking industry and, in particular, to community-based banks and the communities they serve."

The ABA's dire warning is a response to proposed regulations by the Federal Reserve on debit card and credit card fees paid to banks by retailers every time a customer pays with plastic. The current proposal would reduce the fees paid by merchants to banks to a maximum of 12 cents per transaction. In 2009, the average cost charged to merchants per transaction was 44 cents. While a win for retailers, the new cap could result in a 70 percent decrease in profits for big banks. Smaller banks, like those represented by the ABA, are exempt from the regulation. They warn that retailers will favor big banks, which charge lower fees, over small banks.

An amendment, sponsored by Sen. Richard Durbin, D-Ill., to the Dodd-Frank Wall Street Reform and Consumer Protection Act gave the Federal Reserve the power to cap the fees, known as interchange fees, that issuers of debit and credit cards charge to retailers for every transaction. 

Big banks, which oppose the measure, have said that in order to recoup the lost revenue from interchange fees they might have to charge customers in other ways, such as placing fees on checking accounts or charging annual fees in order to hold debit cards.

Ed Meirzwinski of U.S. PIRG, an advocacy group that lobbied on the Dodd Frank bill, thinks it will ultimately benefit consumers. According to Meirzwinski, the Durbin amendment "is an answer to a broken marketplace." He believes that merchants will ultimately pass savings from lower interchange fees on to their customers in the form of lower prices in an effort to beat out competition. "Merchant business is competitive, bank business is not," Meirzwinski said. 

Last year, after House approved the amendment, a lobbyist for the Retail Industry Leaders Association told the New York Times that the issue is, "really a decision between helping out small business or helping out large banks." The Retail Industry Leaders Association reported spending $1.9 million in 2010 lobbying on issues that include interchange fees. Large retailers that also included interchange fees among the issues they lobbied on also disclosed spending lots of money influencing Washington. Apple, Inc. reported spending $1.6 million on lobbying; CVS Caremark, the nationwide pharmacy and convenience story operator, reported $8.9 million in spending; and Starbucks, the ubiquitous coffee store operator, reported $730,000.

Because small banks are exempt from the provision, they may continue to charge what they were charging before Dodd-Frank. And based on what small banks have reported as the actual cost they bear for offering debit cards—31 cents per transaction, according to one Iowa bank—lowering fees could endanger their business. 

Further, Peter Garuccio, a spokesman for the ABA, said the Durbin amendment might end up providing an incentive for retailers to entice customers to use the big banks through promotions. This could ultimately void the benefit the small bank exemption was supposed to provide. 

Meirzwinski said any enticement to encourage discrimination against small banks by large retailers would be severely frowned upon by Congress. He thinks that something like that might warrant more action by the government. 

According to OpenSecrets.org, the ABA was the top political contributor among commercial banks in 2010 at $2.8 million, and spent $7.4 million lobbying — the most among commercial banks.

Bank of America, a big bank that will be affected by the new regulations, has also submitted an analysis to the Federal Reserve counseling the agency on how it should move forward. The bank reported spending $2.8 million on lobbying in 2010. Bank of America was also a contributor to Rep. Spencer Bachus, R-Ala., now the chairman for the House Committee on Financial Services, which is holding next week’s hearing.

Credit card companies such as Mastercard will also be affected by the new regulations because of a provision in the amendment that mandates changes in the way payments are routed, something that Mastercard and Visa handle. Mastercard reported spending more than $4 million dollars lobbying Congress last year on issues including interchange fees and they have submitted comments to the Fed to shape the final rule.