Fed: Small Financial Institutions Not Harmed By Debit Reform

Banking, credit union representatives dispute Federal Reserve's report

WASHINGTON -- A Federal Reserve report indicates that debit-card reform has not harmed small banks and credit unions, said the Merchants Payment Coalition (MPC), which represents merchants concerned about rising credit-card and debit-card interchange or "swipe" fees.

In a new report, the Fed said banks exempted from debit card reform--banks with less than $10 billion in assets--received the same amount of revenues per transaction as before passage of the Durbin Amendment, which cut debit-card swipe fees in half for large banks. In comparison to the nonexempt banks, small banks doubled their revenues on debit-card transactions requiring a signature, the report found.

"It's official. Debit reform has not hurt small banks. For years, the card industry has pushed the line that small banks would be hurt by debit reform in spite of the fact that they were exempt," said Doug Kantor, counsel to the MPC. "The Federal Reserve has definitively shown that small banks are getting every penny as much as they were getting from debit transactions before the reforms. This should finally end the card industry's attempts to fool the public."

The report also found small banks are not experiencing any "significant compliance costs" despite the banking lobby's repeated assertions that they are.

Previous studies conducted by the Fed, the U.S. Government Accountability Office (GAO) and the Federal Trade Commission (FTC) also found no financial impact on small banks and credit unions, according to MPC.

The big banks and their lobbying groups continue to circulate inaccurate and misleading information to consumers about the impact on smaller banks as a way to kill further reforms on credit-card swipe fees, which have more than tripled since 2004 and generate more than $50 billion in annual revenue for banks, the MPC said.

The MPC is a group of retailers, supermarkets, drug stores, convenience stores, gas stations, online merchants and other businesses fighting against unfair credit card fees and fighting for a more competitive and transparent card system that works better for consumers and merchants alike. The coalition's member associations collectively represent about 2.7 million stores with approximately 50 million employees.

A cap on swipe fees, which went into effect on Oct. 1, 2011, was part of the Dodd-Frank financial-overhaul law.

Banking and credit union industry representatives questioned the study, noting the rule is less than three years old and that anecdotal evidence from lenders suggests it is driving down the swipe fees, said a Dow Jones report.

"Time will tell whether offering a product for twice as much as your competitors is sustainable in an environment where merchants are always looking for the lowest cost," said Ken Clayton, chief counsel at the American Bankers Association (ABA).

Patrick Keefe, a spokesperson for the Credit Union National Association (CUNA), said the short-term results were welcome, but the data were limited. "We continue to have grave concerns about debit-interchange income for credit unions over the longer term and question whether these results will stand over time," Keefe said.

Retailers said the Fed report shows the banks' complaints are groundless.

"Once again the data prove that the law is working just as we predicted and Congress intended, focusing reforms narrowly on just the largest banks," said Brian Dodge, spokesperson for the Retail Industry Leaders Association (RILA).