Six months since the amendment from Sen. Dick Durbin, D-Ill., went into effect to reduce the swipe fees merchants pay banks for debit card transactions, the opposite is happening for those whose businesses sell cheaper goods, say representatives from merchant and bank groups who fought in opposite camps over the reform legislation.
The Federal Reserve Board is due to file a brief next week in response to a lawsuit by retailers alleging it unfairly set interchange fees too high and, separately, is collecting data due later this month on the provision’s impact. But to date, merchants groups that lobbied hard for the reform give it unenthusiastic reviews and large financial institutions still overwhelmingly oppose it, arguing it is forcing them to make up a projected $8 billion in annual losses by raising fees on customers and cutting back on services.
“The Durbin amendment did not solve all the world’s problems and we are very clear about that,” said Doug Kantor, a partner at Steptoe & Johnson LLP who is counsel for the Merchants Payments Coalition and is representing several retail groups in their suit against the Fed, including the National Association of Convenience Stores and the National Retail Federation. “But if the Fed had written the rule correctly then there would not be these very mixed results … you wouldn’t have some of these negative impacts that we have seen.”
The Durbin amendment, which was included in the Dodd-Frank financial overhaul law and took effect in October, required the fees banks charge merchants for processing debit card purchases to be “reasonable and proportional” to the costs of processing the transaction. The Federal Reserve Board originally proposed capping the fees at between 7 and 12 cents, but ultimately decided to factor in other costs like technology, labor, and fraud prevention, and raised the base to 21 cents, with the average fee set at 24 cents. The end result essentially cut in half the average debit-swipe fee, which was 44 cents.
The Fed and other banking regulators have yet to disclose any data on the impact on the financial industry, but American Banker newspaper reported in February that larger institutions with more than $10 billion in assets experienced losses in interchange-fee revenue of about 26 percent or about $2.2 billion, in the fourth quarter. The smaller community banks that are exempt actually came out ahead, experiencing an increase in interchange revenue of about $507 million, during the same time.
Bankers and retailers, who engaged in a massive multimillion-dollar lobbying campaign on the issue, disagree on most aspects of the Durbin amendment with one notable exception. They both say it has benefited retailers who sell expensive items like flat-screen TVs and home appliances, but hurt those that sell cheaper goods and tend to register “small-ticket” transactions of $15 and less, like coffee shops, fast-food restaurants, and convenience stores.
Before the Durbin amendment, banks charged an average of 1.1 percent of the cost of the transaction for debit purchases that require signatures, and .08 percent for debit transactions where the customer enters a PIN or “personal identification number,” said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents banks and card networks like MasterCard and Visa on interchange issues.
But now that the Fed has set essentially flat rates that only allow a tiny percentage to relate to the size of the transaction, banks have mostly raised their fees on smaller-ticket sales up to the limit, and they’ve decreased them as required on more expensive items.
“That has translated into a sixfold increase for these smaller merchants selling everyday items and a massive decrease for merchants selling bigger-ticket items,” Wexler said.
Neither merchants nor banks can point to any hard data on the impact on consumers, and the Federal Trade Commission is supposed to study the issue. Merchant groups say that some gas stations are offering discounts for debit and cash purchases. For banks, fee increases on consumers have been the issue to watch. Most notably, institutions like Bank of America had to shelve plans last fall to start charging consumers monthly fees of up to $5 for debit-card purchases after overwhelming public outrage.
Ed Mierzwinski, consumer program director with the U.S. Public Interest Research Group, said his group is currently studying trends in bank fees, but fee increases on products like checking accounts remain a constant concern.
As for the lawsuit, the Fed conducted a lengthy analysis when it issued its rulemaking and Fed watchers say the central bank rarely loses.
“It’s a tough one to win,” said Mierzwinski.