WASHINGTON -- The Federal Reserve Board released statistics Tuesday that show small and medium-sized banks and credit unions are prospering under reform of the interchange fees that banks charge merchants to process debit-card transactions.
"Just as reform advocates argued and Congress intended, today's data confirms that small institutions are unaffected by swipe fee reform," said Douglas Kantor, counsel to the Merchants Payments Coalition (MPC). "The gloom-and-doom predictions of reform opponents have proved false."
Congress passed the Durbin Amendment as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010, which required Visa and MasterCard to end the practice of setting fees together in secret. It took effect in October.
Small banks and credit unions argued they would be harmed even though the amendment exempted financial institutions under $10 billion in assets.
The Fed report (click here for details and charts) shows the average swipe fee on a purchase for these small institutions was 43 cents in the fourth quarter--the same as it was in 2009.
For large banks, though, the average dropped to 24 cents. That is benefitting consumers when they buy things every day, said MPC.
"While problems remains, swipe-fee reform has significantly improved the debit market, resulting in countless benefits for small businesses and consumers," said Kantor. "The intense competition that exists among merchants means consumers are winning with swipe-fee savings."
The Fed's numbers show debit-card swipe fees collected by the nation's largest banks have dropped significantly since reform regulations took effect last fall, but the National Retail Federation (NRF) expressed disappointment that the fees did not fall further.
"We believe the numbers for the big banks are too high and had the Fed followed the law there would be significantly greater savings for merchants and their customers," NRF senior vice president and general counsel Mallory Duncan said. "This is working the way the Fed set it up to work, but the Fed didn't fully comply with what Congress required. This is better than paying the full monopoly prices we paid before but they are still partial monopoly prices."
The fees are largely in accordance with the cap set under the regulations, but NRF and other merchant groups filed a lawsuit against the Fed in federal court in November arguing that the agency set the cap nearly twice as high as what was allowed under Dodd-Frank.
Dodd-Frank said the Fed could consider the incremental costs of acquiring, clearing and settling each transaction and specifically prohibited any other expenses from being used to inflate those costs. Under those guidelines, the Fed initially determined that it costs banks an average four cents to process a debit transaction, and proposed that the fees be capped at between seven and 12 cents per transaction. After intense lobbying by banks and the card industry, however, final regulations adopted in July 2011 set the cap at more than five times the actual cost--21 cents plus 0.05% of the transaction and, in most cases, an additional 1 cent for fraud prevention.
The banking industry said that time will tell on the rule, warning that market forces will eventually make the rule a bad deal for not only small banks, but consumers as well.
"The Durbin Amendment's primary beneficiaries continue to be big-box retailers who want to reap the benefits of our nation's payments system without paying for it or passing along their savings to customers as promised," said Frank Keating, president of the American Bankers Association (ABA). "ABA firmly believes the Durbin Amendment's small-bank exemption can't work long-term."
Bill Cheney, president and CEO of the Credit Union National Association, warned that the "jury is still out. Credit unions continue to be concerned that market forces will ultimately drive down the fees that the exemption for smaller institutions is intended to protect."
Meanwhile, financial ratings company Standard & Poor's has published an article entitled "U.S. Banks Are Changing Their Strategies to Mitigate the Financial Impact of the Durbin Amendment."
"Consistent with our original expectations, the implementation of the Durbin Amendment has had no immediate impact on U.S. bank ratings," said Standard & Poor's credit analyst John K. Bartko. "Banks have responded to the lost swipe fee revenue by introducing new bank service and product fees. Furthermore, there is little direct evidence that merchants have passed on the savings from lower interchange fees to their customers, suggesting that the legislation may be falling short on its goals for consumers."
The Durbin Amendment has affected the financial industry in a number of ways, but perhaps not in the ways legislators intended, S&P said. The benefits to consumers seem largely negligible as banks have sought other ways to generate revenue or cut services. "U.S. bank earnings suffered an initial negative impact to revenue," said Bartko. "But this is unlikely to remain a concern as the banks adapt their operations to the new regulations."
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