Some of the movement afoot on the debit card interchange issue is good.
Consider that a cap of 12 cents results in a 73% reduction in debit card interchange income, and the ROA impact is likely to range from a low of 11 basis points for institutions with a relatively weak retail franchise to more than 20 basis points for those institutions with a strong retail franchise.
In the midst of a very subpar economic recovery, low loan demand, high and persistent assessments and high loan chargeoffs, a 10- to 20-basis-point hit to earnings is not easy to stomach, especially when it will result in no real benefit to consumers and a windfall for merchants, especially the largest merchants, with some, of course, expected to find its way into political campaign coffers.
The inclusion of the small-bank carve-out was a political consideration more than a concession to community-based financial institutions. After all, if this could be positioned as affecting only the Wall Street banks, who was going to object, other than the Wall Street banks?
However, there has been a dawning realization that the carve-out concept probably is not workable; this has brought community-based financial institutions back into the discussion and thereby brought this issue back into the congressional spotlight. I thought a fairly poignant moment during the House hearings on this issue was when the vice president and treasurer of 7-Eleven, representing merchants, was asked how he would react if the government told him he could only price his Slurpees at the cost of the ice and syrup.
I'm in favor of an outright repeal of the Durbin amendment. But I realize the likelihood of this is not, at the present, all that high.
If repeal is not an option, delaying implementation of the Durbin amendment is the only reasonable action. The bills introduced by Sen. Tester and Rep. Capito need the strong support of the industry. The Federal Reserve did not incorporate fraud and security costs into its estimates. Pressure by the industry and Congress between now and April 22 could result in the Fed's revising its cap to a level deemed more "reasonable and proportional." But even if the Fed revises the cap to 24 cents, which is double the current proposed cap and more than the fee currently earned on PIN transactions, financial institutions would still be hit with a negative-13-bp impact.
I urge financial institutions to make the impact of this legislation tangible and meaningful to Congress. Illustrate the cost of this regulation in real terms. For example, to cover the losses generated by the Fed's proposal, an average $750 million financial institution would have to do one of the following:
- Eliminate 18 full-time employees, assuming $4.5 million in assets and $65,000 in salary and benefit costs per employee.
- Lower deposit rates by 16 bp.
- Require a $6.08 monthly fee on checking for balances below $1,000, assuming 60% of accounts don't meet the minimum.
- Impose a monthly debit card fee of $3.65.
Communicate this impact to Congress. These measures will not benefit consumers or voters. If your institution has assets under $10 billion, don't be satisfied with a stronger carve-out provision.
If Reg II is implemented, even with a better-designed carve-out, we have entered the slippery slope of price-setting by the federal government, and this is dangerous territory.
How long do you think it will be before the merchants go after credit card interchange? If the government can set price on debit card interchange, why not deposit and loan interest rates, or dictate how much an institution can charge on checking accounts?
Don't forget the lesson of the alternative minimum tax. First implemented in 1969 to make sure that millionaires weren't able to use tax loopholes to avoid paying any income tax, it now impacts a vast swath of the middle class, as incomes have risen over the years. The same could easily be true of the debit card interchange carve-out.
What seems like a very large threshold will be crossed by many institutions eventually. With the carve-out, 62 banks and credit unions are subject to the interchange cap. If industry assets grow 7% annually, by 2020 more than 150 banks and credit unions will hit the cap.
Smaller financial institutions may decide they would be satisfied with a more enforceable carve-out. However, the long-term health of the entire financial services industry would be better achieved by the complete repeal of this provision.
