There has been much debate over whether a provision in the Dodd-Frank Act imposing government price caps on debit card interchange will impact community banks. In an attempt to shield smaller institutions from the provision sponsored by Sen. Richard Durbin, D-Ill., the law includes an exemption for institutions with less than $10 billion of assets.
But as community bankers have long argued, this exemption is simply not going to work.
The exemption will not protect community banks or their customers because the Dodd-Frank Act shifts control over routing debit card transactions from issuers to merchants, allowing them to bypass small financial institutions and negating any benefit for exempt community banks and credit unions. Further, large retailers will be able to steer customers to use the rate-controlled cards issued by the largest financial institutions. Ultimately, the market will, over time, drive pricing for community banks in line with rates required at larger institutions.
A recent Independent Community Bankers of America survey of community bankers demonstrates the tangible impact the debit interchange plan will have on the industry. According to the survey, 93% of respondents said they will have to charge their customers for services that are currently offered for free if the Federal Reserve's proposed rule implementing the Durbin Amendment is adopted. Additionally, 72% said they will have to implement charges for using debit cards, 61% said they will have to impose a checking account minimum-balance requirement and nearly 20% said they will have to eliminate jobs or halt plans to open branches.
Price mandates will lead not to lower costs for consumers, but rather higher fees and fewer choices for consumers as community banks re-evaluate their ability to offer debit cards. Rather than helping consumers, the new interchange pricing system will instead butter the bread of those who lobbied intensely for the amendment — big-box retailers. Large merchants will use the new government pricing restrictions to minimize their costs and shift transaction costs to consumers.
The Dodd-Frank Act was designed by Congress to address the abuses and risky behavior that triggered the financial crisis. It would be a shame if the community banks that played by the rules and the Main Street customers they serve get caught in the crossfire.