Everybody was wrong. But that’s no reason to stop fighting.
One year after the Durbin Amendment slashed debit interchange payments to banks, there’s scant evidence that retailers are lowering prices as promised. There’s also little indication, however, that the fee caps pose a long-term threat to the profitability of processing transactions, as banks claimed during the debate over Durbin.
True, income from debit transactions fell sharply after the amendment took effect Oct. 1, 2011. Setting aside banks with massive credit card portfolios—which would have seen a smaller overall effect in total interchange—bank holding companies’ quarterly interchange income plunged 34% million, to $1.68 billion, between June 30 and Dec. 31 of last year.
But data from SNL Financial shows that interchange income climbed is already starting to rebound, thanks primarily to increased volume. At June 30, debit income was up 15% from just six months earlier, to $1.93 billion.
Many industry analysts anticipated revenues would bounce back. Mike Moebs of Moebs Services, a retail financial services consultant, predicted in an interview last year that total revenues would recover within two to three years.
That seemingly optimistic estimate was off, he now says—total debit interchange will return to peak levels by the end of next year. “Those who are using the debit card are using it more often, and more people are using debit cards.”
The continued profitability of interchange leaves plenty of money on the table for merchants, banks and payment processors to fight over.
On Friday, the Electronic Payments Coalition—representing financial institutions and payment processors—released a broadside against the merchants that championed Durbin, hyping secret shopper data from 18 big-box stores nationwide. According to the EPC, the average price of an unspecified basket of goods rose 1.5% between late September 2011 and one year later.
“Let’s just call a spade a spade—this was a political handout to big box retailers, who are now scrambling to make excuses for why they couldn’t pass these savings along to customers,” says Trish Wexler, a spokeswoman for the EPC.
Retailers may not be able to point to lower prices, but they argue that savings they have reaped from lower swipe fees have allowed them to hold prices steady. Without the interchange caps, retailers surely would have raised their prices, asserts Matthew Shay, the president and CEO of the National Retail Federation.
“Merchants haven’t necessarily labeled the savings from reform as a ‘debit discount’ but they have nonetheless found a variety of ways to pass the value along to their customers,” says Shay. His group estimates that consumers are saving “up to” $18 million a day, based on the competiveness of retail and the drop in bank swipe fee income.
It was never plausible that consumers would see a noticeable drop in prices due to debit interchange fee caps because other factors, says Gil Luria, an analyst at Wedbush Morgan Securities, and the initial effect of Durbin was almost certainly to pad retailers’ bottom lines. But given the relatively high level of price competition among retailers, “we should expect the gain for retailers to get competed away,” he says.
“The noise has not gone away by any means. There has been a multi-decade struggle, it’s been fought in courts, it’s been fought in Washington, and it’s been fought on a day-to-day basis through proxies,” says Luria, pointing to the terms of the proposed credit card interchange settlement as a victory for card issuers.
As for the effect on consumers? Despite the proliferation of industry-funded analysis, “I’m going to leave that to my friends at Columbia and Harvard,” he says.
Harry Terris contributed to this story.