A new Federal Reserve Bank report opens the door for retailer groups to push again for even lower transaction fees by deflating the argument that small banks have been harmed by the Durbin amendment's reduced debit transaction fees for larger banks.
Small or mid-size banks, those below the $10 billion asset threshold the Fed established for exemption from the new interchange rates, have long claimed that the debit cap on larger banks would create a competitive atmosphere between large and small issuers that would drag the small banks into a similar cap ceiling.
While the reduction in debit interchange from about 44 cents per transaction to about 22 cents has affected larger banks, it has resulted in no such revenue decline for smaller banks, the Federal Reserve Bank of Philadelphia stated this week in a report on Durbin's effect.
Instead, the Fed has found that the volume of transactions conducted with cards issued by exempt banks grew faster than it did for large banks, leading to a rise in interchange revenue for small banks. However, the report did state that "it is possible that long-term competitive effects might yet put small banks at a disadvantage."
The Merchant Payments Coalition and National Retail Federation were quick to praise the findings, arguing that the data indicates room for rates to be further lowered.
"The Fed is now free to go back and set the fee closer to where it should be for the larger banks," said Mallory Duncan, senior vice president and general counsel of the National Retail Federation and chairman of the Merchants Payments Coalition.
The Federal Reserve can use this data to revisit the Dodd-Frank Act's Durbin amendment fee cap and move it closer to the 7- to 12-cent range "where costs actually are for big banks and closer to where the sponsors originally intended it," Duncan said.
Industry organizations serving small banks and credit unions aren't buying it.
“Small financial institutions such as credit unions and community banks are indeed feeling the pinch from price controls introduced by the Durbin Amendment, despite recent claims by retailers pushing a self-serving agenda,” said Molly Wilkinson, executive director of the Electronic Payments Coalition.
A recent study from the Credit Union National Association found the Durbin rule has led to a $1.1 billion decline on interchange income to credit unions, Wilkinson said, adding that there is now real data in the form of costs of processing changes and declining fees since Durbin's implementation.
Such data counters claims that credit unions and small banks below $10 billion in assets are not feeling the pinch, Wilkinson said. "The CUNA study is informed by a combination of Fed data and a rigorous survey of dozens of credit unions of various sizes throughout the country,” she added.
It was hoped, when the Durbin rule became law in 2011 as part of Dodd-Frank, that it would result in fairer fees for merchants and translate to cost savings for consumers.
A report from the Richmond Federal Reserve last summer showed that 90% of merchants had not seen any savings from Durbin, or were not aware if they had any savings. Some saw their costs actually rise.
Other findings published in October, the fourth anniversary of Durbin, concluded that consumers had not seen any benefit from the regulation in terms of lower prices at retail stores.
Still, it is not fair to say that retailers have not benefited from the lower interchange at all, Duncan said.
"There were savings, with the average swipe fee going down as much as 20 cents," he added. "Of those savings, about two thirds went to the consumer in lower costs, and half of the merchant's third went to shareholders, the other half went into investments in their stores."
The Merchant Payments Coalition and Association for Convenience and Fuel Retailing have said consumers are enjoying price reductions, using that development as a basis for how an even lower fee cap would stimulate more savings.
But nothing has changed to help the small-ticket merchants, who saw costs go up with the introduction of Durbin. Those merchants previously had interchange rates adjusted to the value of the transactions, but the 22-cent became more of a "floor" than a ceiling for all transactions, Duncan said.
In that environment, the retail organizations are seeking more regulatory help on their debit costs, which they expect will be less contentious than their battle over credit interchange.
"There have been a lot of complaints about Dodd-Frank from the banks, even when there was no basis for the attacks," Duncan said. "When people stop blowing smoke, you can actually see what is going on, and it is always good when the facts finally get out there."
Considering that small banks have almost always had the tougher time dealing with regulations, it was hard to pinpoint why those banks feared Durbin so much, considering they were exempt from the fee cap, said Mark Horwedel, CEO of the Merchant Advisory Group.
"This is the one situation that I can ever recall where an exemption was made for the smaller banks," said Horwedel, who cut his teeth in the financial industry working at small banks.
It turned into a benefit for small banks because their large-bank counterparts had to raise other fees, drop rewards from debit programs and stop free checking account services to make up for lost revenue. "Consumers are moving checking accounts to small banks or credit unions because that's where totally free checking still lives; it's a huge competitive advantage," Horwedel added.
Merchants will raise their voices about the debit fees again, in light of the findings about small banks.
"The key takeaway from the report is that it exposes what has been a charade from small banks since before the reforms even passed," said Doug Kantor, a partner at Steptoe & Johnson LLP who has represented merchants in the interchange fight. "They are exempt and therefore helped, rather than hurt, by reforms."
The only institutions negatively affected by the reforms are very large banks, Kantor said. "If the small banks admitted that, there would be almost no controversy left regarding the reforms."
The large banks "simply are not sympathetic on this issue" and continue to do quite well regardless of the debit card regulations, Kantor said.
On another front, retailers have been voicing concerns with regulators for nearly a year over the inability of merchants to comply with the debit routing requirements of Durbin when accepting tokenized transactions and mobile payments such as Apple Pay.
The amendment gave merchants greater access to various PIN networks, to avoid being locked to Visa or MasterCard rails. However, the tokenization process in some mobile wallets forces transaction routing along the card brands' networks.