Promised Consumer Savings Fail to Materialize
By Laura Alix
It is sometimes said that the definition of a true compromise is one in which neither party is really happy about the end result. If you accept that definition, perhaps the Durbin Amendment represents the ultimate compromise.
The Durbin Amendment – that pesky, last-minute provision crammed into the Dodd-Frank Act at the eleventh hour – put a cap on the fees banks over $10 billion in assets could collect on debit card transactions. But the cap on interchange fees was supposed to make up for it, at least to consumers, by enabling merchants to lower their prices because they would save a bundle on swipe fees.
Not so much. According to a recent study out of the Federal Reserve Bank of Richmond, the Durbin Amendment resulted in neither cost savings to consumers, nor (interestingly enough) savings to merchants.
Durbin’s impact on the banking industry has been known for some time now. A Federal Reserve study released last year estimated that Durbin slashed yearly interchange fees to banks over $10 billion in assets by as much as $14 billion, or 5 percent of noninterest income. The impact to banks under that asset threshold has been less clear – many in the banking industry have argued that Durbin would ultimately apply to smaller banks anyway – but that particular Fed paper found that bigger banks coped with the loss of interchange revenue by hiking deposit fees, thereby recouping around 30 percent of the loss in swipe fees.
However, Durbin’s impact on merchants had gone largely unexamined, and that prompted the Richmond Fed to partner with Javelin Strategy & Research on a study of Regulation II’s effects on 420 merchants across 26 sectors.
Among the retailers surveyed, two-thirds reported either no change or they did not know whether their debit costs had changed as a result of Durbin. Less than 10 percent reported a decrease in swipe fees, and strikingly, a quarter of respondents said their debit fees had actually increased post-Durbin.
The Law Of Unintended Consequences
The Durbin Amendment was supposed to limit the fees that merchants paid for the privilege of accepting payment by debit card – so what happened?
Well, a few things. First, in a pre-Durbin world, different types of retailers paid different interchange fees, depending on the incidence of fraud and chargebacks across different sectors. When the debit interchange fee was standardized at 21 cents, plus 5 basis points, some sectors benefitted and others did not.
Second, while Durbin capped the interchange fee paid by a merchant to the cardholder’s issuing financial institution, it said nothing whatsoever about the merchant discount rate, the fee the merchant pays to his or her own financial institution in order to accept debit card payments.
Finally, pre-Durbin, card networks would offer merchants discounted fees on small-dollar transactions. In the Richmond Fed’s example, Visa and MasterCard set the debit interchange rate at 4 cents, plus 1.55 percent of the transaction value for transactions under $15, meaning a $2 sale would incur only a 7-cent interchange fee.
When Durbin was implemented by the Federal Reserve in the form of Regulation II, card networks standardized that swipe fee, meaning that small-dollar transactions got a whole lot more expensive.
Not discounting the impact of smaller banks, the Richmond Fed noted in its paper that small issuers – that is, those financial institutions under $10 billion in assets and exempt from Durbin – accounted for around 37 percent of debit transaction volumes in 2013, the year they conducted the study.
Durbin may not have resulted in quite so much downward pressure on interchange caps as was originally anticipated, but it may be the banks just over the $10 billion asset threshold hurting the most, as they compete with banks just under the asset threshold but without the benefit of that additional interchange fee.
And did that cap on swipe fees result in lower prices to consumers? Just about 2 percent of those merchants surveyed by Javelin and the Richmond Fed actually cut prices in response to the regulation, while 23 percent raised prices and 75 percent made no changes.■
Laura Alix is a staff writer for The Warren Group, publisher of Banking New York.