WASHINGTON — Small banks continue to pull in significant revenue from interchange fees on debit cards despite fears a new rule directed at larger institutions could have hurt them too, according to a report issued this week by the Federal Trade Commission.
The report, requested by Congress in last year's appropriations bill, examines the impact of the so-called Durbin amendment, a provision of the Dodd-Frank Act that required the Federal Reserve Board to limit interchange fees on debit cards. The measure included a carve-out for smaller institutions — one that many community bankers said wouldn't work, raising concerns that payment networks would coordinate with larger banks.
But the report found that is not taking place.
"The Senate Appropriations Committee asks whether the FTC has identified any evidence that payment card network companies have taken steps to diminish the ability of small banks and credit unions to successfully compete with large financial institutions in the debit card issuance market, and if any such steps have been taken by the card network companies in coordination or collusion with large financial institutions," the FTC said in its Dec. 24 report. "To date, FTC staff has not uncovered evidence that this type of conduct is occurring, but we will continue to collect and evaluate information related to this concern."
The report is in line with earlier reports that found interchange revenue has held up for smaller institutions in the wake of the new rules.
The report details the agency's research, education and enforcement of rules set by the Fed last year. The fee cap of 21 basis points, plus adjustments for fraud prevention, went into effect for institutions with more than $10 billion of assets in October 2011. Exclusivity restrictions requiring cards be routed over at least two networks went into effect in April 2012.
Jaret Seiberg, a managing director at Guggenheim Partners, called the finding "a mixed message."
"On the plus side, the report indicates that small banks are still collecting higher interchange fees. Yet the big banks are getting less. For Visa and MasterCard, the benefit here is that the report provides no additional ammunition for critics of interchange fees," he said in a note on Thursday.
The FTC report also confirms that the agency has issued a request for information from one unnamed payment card network to assess whether its merchant rules operate as a penalty that would influence a merchant's routing decision for a transaction, in violation of the Durbin amendment regulations.
"FTC staff continues to assess whether any payment card network rules and fees may operate as a penalty inhibiting merchants' routing or otherwise violate Regulation II. Certain provisions of the law and regulations were not effective until April 1, 2012, and many of the fees potentially at issue are assessed or invoiced on a quarterly basis, so merchants may not yet be fully aware of their effects," the report says.
The agency said in the report that it is also engaged in related consumer education and research, such as submitting comments to the Consumer Financial Protection Bureau in May on general-purpose reloadable prepaid cards, along with pursuing unrelated charges against payment processors and others involved in deceptive or unfair conduct.
Industry representatives said the study was too early to show the harm the Durbin amendment will do to banks.
"The report doesn't show much new," said Trish Wexler, spokeswoman for the Electronic Payments Coalition. "Credit unions and community banks remain concerned that they will also feel the Durbin damage, just like their larger counterparts. Merchants will soon start routing transactions over cheaper networks, meaning lower revenue for all."
Merchants, who argued the carve-out would work, said the report proved their case.
"The FTC report confirms what merchants have been saying all along, that after the reforms small banks and credit unions would not only not be harmed by debit but also would benefit from reform, along with consumers, merchants and the overall economy," said Doug Kantor, counsel to the Merchant Payments Coalition, in a statement on Thursday.