The Fed’s decision earlier this month to leave swipe fee caps untouched following a recent report on the subject has reignited a feud nearly as contentious as the one between the Hatfields and the McCoys, setting off a debate between the banking and retailing lobbies over which party stands to lose the most by the present fee cap.
Bankers and retailers alike are disgruntled with the interchange fee caps set forth in the Durbin Amendment, presently at 21 cents plus five basis points, plus a one-cent fraud-prevention adjustment, when eligible.
Retailers say the caps are too high and that if the interchange fees were lowered, they could pass those cost savings onto consumers.
“It’s a disappointment, but not a surprise,” Jon Hurst, president of the Retailers Association of Massachusetts, said of the Fed’s decision not to touch the interchange fee cap.
The contention from retailers hinges on the profit motive of banks.
Like others advocating for the retail industry, Hurst argues that the cap set by the Durbin Amendment is disproportionate to the cost of actually processing debit card swipes.
“The cost to actually electronically move that money is about five cents. If you went into the same place and wrote a check, it would cost the bank about 80 cents to process that check. Banks have really benefited a great deal by people moving away from checks and moving to debit cards,” Hurst said.
And the National Retail Federation (NRF) is awaiting a court ruling on a lawsuit it filed against the Fed in November 2011, arguing that the Fed ignored the requirements set under the Durbin Amendment that only “authorization, clearing and settlement” costs be considered in establishing the cap, J. Craig Shearman, the NRF’s vice president of government affairs and public relations, told Banker & Tradesman.
Retailers aren’t exactly wrong when they make that point, but Viveca Y. Ware, senior vice president of regulatory policy at the Independent Community Bankers Association, said that banks incur other costs than those the Fed accounted for by offering debit cards to customers. Those costs include card production, marketing, research and development, and network membership fees.
Banks and credit unions have contended that the fee cap eliminates or reduces an important source of non-interest income for financial institutions and that the rules set forth in the Durbin Amendment have especially hurt smaller banks and credit unions.
“The retailers are not answering your question. Have they passed the savings onto consumers, yes or no? Claiming the swipe fee is still too high does not negate the fact that retailers are saving $8 billion a year. Consumers are saying, ‘Show me the money – as you promised,’” said Bruce Spitzer, spokesman for the Massachusetts Bankers’ Association, in an email.
“The whole thing is a sham to save the likes of Wal-Mart many millions of dollars while Mom and Pop stores who rely on banks for loans, lines of credit, and other business services could suffer if their banks are not compensated fairly. Congress should have realized that price controls are dangerous – the free market is free for a reason. The Durbin Amendment – thrown into the Dodd-Frank Act without much debate – was bad public policy, not even supported by the original author of the legislation for whom the act was named: Barney Frank,” Spitzer continued.
More To Come
And while banks and credit unions under $10 billion were supposed to be exempt from the fee caps set out in the Durbin Amendment, a recent report from the Federal Reserve – titled “2011 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transations” – showed that smaller banks and credit unions nevertheless experienced a decline in their interchange fee revenue.
In the report, the Fed’s Board of Governors writes that “… exempt issuers received an average interchange fee of 43 cents per transaction, a 4 percent decline from the 45 cents per transaction average during the first nine months of 2011.”
Banking advocates say the worst is yet to come.
“The Fed study is based on three months in 2011. That’s only a snapshot, and the market place continues to respond to capped interchange. This study is a benchmark for capturing data that will further measure the impact of Durbin and capped interchange,” Ware said.
Ware expects interchange fee income for smaller institutions to drop even further, as merchants exert pressure on card networks to drop their interchange fees across the board. Networks will respond especially to big merchants – such as Wal-Mart, for example — because they want the volume of purchases. And in turn, small banks and credit unions, who were originally supposed to be exempt from the fee cap, will suffer.
Since financial institutions will have to make up those losses somewhere, that may well translate into service charges and maintenance fees that are actually passed onto the consumer.
“Back in the ‘90s before debit card usage was prevalent, it was quite common for banks to charge monthly service fees. As debit card revenue increased, banks eliminated those monthly maintenance fees,” Ware pointed out. “Also, banks don’t charge for debit cards, and that’s because they’re getting revenue from interchange.”
Email: lalix@thewarrengroup.com
