A new report on debit card swipe fees suggests that the 2011 law that capped fees large banks could charge is not crimping revenues at smaller institutions.
Community banks, credit unions and thrifts earned $7.4 billion last year in revenue from the swipe fees, up nearly 40% from 2009, according to survey released Thursday by the Federal Reserve Board.
The results are significant because small institutions had feared that would feel the impact of the law even though it only directly affects banks and credit unions with more than $10 billion of assets. The law requires issuers of all sizes to connect their debit cards to at least two unaffiliated networks - a mandate that comes with a cost. Another concern among small banks was that, because swipe fees are far lower on cards issued by large banks, some merchants would choose not to accept smaller banks' cards.
In its report Thursday, the Fed aimed to quell those concerns.
"The exemption designed to protect small debit card issuers from interchange fee standards applied to large issuers is working as intended," the Fed said in a press release.
The Federal Trade Commission reached a similar conclusion in a report it released in December.
The swipe-fee initiative was championed by Illinois Sen. Richard Durbin, a Democrat, and was enacted as part of the 2010 Dodd-Frank Act. The provision itself is widely referred to as the Durbin Amendment.
For large banks, the law caps swipe fees at 21 cents per plus a small percentage of the transaction. The Fed report did not document the impact the law has had on large banks, but most have seen income from swipe fees decline sharply since it took effect.
By contrast, issuers with less than $10 billion of assets received fee revenue of 43 cents per debit card transaction last year, roughly the same amount per transaction the issuers received before a cap on interchange fees by the Fed took effect in 2011.
The voluntary survey reflects response from 102 institutions received from roughly 1,000 issuers whom the Fed excluded from the cap. Of the institutions that participated in the survey, 97 reported having debit card programs, most of which were "fairly small," the Fed said.
Three issuers reported having received complaints from cardholders about merchants' treatment of their cards, although the Fed said it was unclear the complaints tied to the cards' being exempt from a cap on swipe fees.
Of the 97 issuers with a debit-card program, 84% said they had no need to add a payment card network to their card to satisfy the requirement the card ties to at least two unaffiliated network. Among the 16 issuers who added a network, the median cost of compliance was roughly 38 cents per card.
According to the Fed, the average transaction size for debit cards issued by the participants was roughly $41, which was roughly the same as the average transaction value for large issuers.
Because responses were conditioned on the willingness and ability of participants to provide information, the survey's results may not be representative of the experience of small issuers overall, the Fed cautioned. "Instead, the results reflect the effects of the regulation on this set of respondents and may be suggestive of some of the potential effects of the regulation on small issuers more broadly," the Fed said.
The Merchants Payment Coalition, a trade group representing retailers, says the Fed report should put to rest any suggestion that the changes in interchange fees would hurt small banks.
"The Federal Reserve has definitively shown that small banks are getting every penny as much as they were getting from debit transactions before the reforms," said Douglas Kantor, an attorney representing the merchants' group.