Debit Earnings Regain Steam After Durbin Swoon: Interactive Graphic

Big banks’ interchange revenue appears to be climbing out of the Durbin crater. At banks exempt from the Dodd-Frank price controls, meanwhile, such revenue is speeding along unscathed.

Swipe fees jumped at an annual rate of 40% in the second quarter among a group of institutions with more than $10 billion of assets, despite weakening trends in debit transaction volume. (The graphic below shows interchange earnings for about 900 individual companies, along with aggregate data on swipe fees and transactions activity. Interactive controls are described in the captions.)

That performance follows an annualized free fall of almost 90% in the fourth quarter, the first period affected by a roughly 50% cut in the rate merchants pay banks when customers make purchases with debit.

At banks with less than $10 billion of assets, which are exempt from the price controls in 2010’s Dodd-Frank Act, interchange revenue was undented, and grew at an annual rate of about 25% in the second quarter.

To focus on debit card operations, the aggregate data here excludes companies where credit card loans exceeded 5% of total loans at June 30.

Credit card swipe fees were unaffected by the legislation, and have been a growing source of earnings for issuers. Even so, interchange revenue at large card lenders like Bank of America (BAC) and JPMorgan Chase (JPM) tumbled in the fourth quarter.

Interchange revenue has rebounded despite softening debit card transaction volume. The year-over-year growth in the dollar amount of purchases made on MasterCard (MA) debit products in the United States slowed about six percentage points from the first quarter to 13% in the second quarter. At Visa (NYSE: V), such volume contracted 10% in the second quarter after eking out growth of 2% in the first quarter.

Meanwhile, the average size of MasterCard and Visa debit card purchases has held roughly steady in the range of $37 to $39. Since the bulk of debit card swipe fees are capped at a fixed 21 cents per transaction, increases in the proportion of “small-ticket” purchases consumers put on plastic help support interchange earnings even if total dollar volume holds steady.

The growth in revenues in the second quarter could reflect success that issuers have had in steering purchases toward credit cards, where interchange rates have come under pressure because of lawsuits by antitrust authorities and merchants but remain relatively unhampered. Banks have terminated debit card rewards programs en masse, and are aggressively pursuing new lines of business untouched by the Durbin amendment.

Figures for volume under MasterCard and Visa programs almost certainly overstate the decline of debit, however. Visa, which operates the largest debit network in the country by far, was hit the hardest by another element of the Durbin amendment that went into effect in April and requires issuers to enable their cards to run on competing networks. Some business lost by Visa has been picked up by entities other than MasterCard that are not represented here.

Moreover, growth in interchange revenue appears to be seasonally strong in the second quarter, ranging from roughly 30% to 50% annualized over the last few years.

Still, whether by pivoting to different products or reinstituting checking account fees, banks are demonstrating the ability to quickly recapture revenue lost to the Durbin amendment.

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