New Ruling on Swipe Fee Cap; Same Tired Arguments from Banks

Last week, federal judge Richard Leon handed merchants and consumers a win in the courtroom when he rejected the Federal Reserve's roughly 24-cent per-transaction debit card swipe fee cap. Leon found that the Fed disregarded Congress' directives in its final rulemaking. These directives were outlined in the Durbin amendment, which called for the swipe fee to be "reasonable and proportional to the cost incurred by the issuer with respect to the transaction."

The banks' PR machines were at work immediately claiming that this ruling will cripple the banking industry. Frank Keating, president of the American Bankers Association, stated that the decision "will harm banks of all sizes and make it more difficult for institutions to serve their customers."

Other bankers have stated that bank fees will increase for consumer checking accounts as a result of a lower cap. But these are the same lines large banks have been using for years to combat banking regulation.

Even casual observers will recall Bank of America's threat to charge $5 per month for debit card transactions to make up for supposed lost swipe fee revenue back in 2011. This fee never came to fruition due to the rash of criticism and consumer complaints.

As the Fed considers appealing the recent court decision or revising its rules, there are a few important items to keep in mind that somehow seem to get lost in the rhetoric of swipe fee proponents.

First, despite the fact that debit card swipe fees had increased almost fourfold prior to the enactment of the Durbin amendment, there was no related decrease in other charges to consumers. Consumer costs have been going up consistently for 10 years. For example, overdraft fees hit a record $38 billion in 2009, which was double what they were in 2000. 

Second, banks are not starving post-Durbin, and they will not starve as a result of this ruling. Swipe fee proponents claim the community banks would suffer as a result of Durbin. This has not happened.  According to the Federal Reserve Bank of Kansas City, the Durbin amendment has had little impact on revenue of community banks.

Additionally, the Government Accountability Office found that swipe fee income actually increased on a quarterly basis at 6,450 exempt banks after the Fed's final rule became effective. It is important to remember that the Durbin amendment only applies to financial institutions with over $10 billion in assets. Most of the financial institutions in the U.S. are not affected by Durbin.

The banks that are affected by Durbin aren't struggling to turn a profit. For example, Wells Fargo recently reported record earnings for the second quarter of 2013 with net income of $5.5 billion, which is up 19% from this period in 2012. In the same vein, Bank of America reported a jump of $2 billion in net income compared to this period last year and Citigroup has seen revenues increase 11% since 2012. 

Third, the experiences of other debit-reform countries suggest U.S. consumers may ultimately benefit from the reform. According to the Australian payments experts Transactions Resources, since the debit swipe fee reforms were introduced in Australia in 2006, debit card transactions have increased by 290%. There has also been strong growth in new debit accounts and cardholder fees for debit cards have declined steadily, following the reform. Moreover, directly contrary to arguments by the banks, the decline of interchange income from debit cards to issuers has not led to increased cardholder fees or attempts by issuers to increase such fees.

Fourth, consumers continue to win in the post-Durbin amendment world. As I reported this time a year ago, consumers began to see the benefits of the Durbin amendment at the cash register. I observed that retail profit margins fell since the amendment rule was implemented in 2011, indicating that retailers have been passing on the savings from the lower swipe fees to consumers. Dwaine Kimmet, Home Depot's treasurer and vice president of credit, stated "the money saved [by] Durbin goes into the pool of savings, lowers our overall operating costs and allows us to reinvest in the business to lower prices."

Now, with the Fed likely faced with reducing the debit card swipe fee cap, consumers will benefit even more. One unintended consequence of the Fed's final rule was the increase in swipe fees to merchants on small-ticket items. With "reasonable and proportional" swipe fees in place, merchants will be able to pass the savings of all goods on to consumers.

David Balto is an antitrust attorney and former policy director at the Federal Trade Commission.