The Senate's refusal to allow for a critical study into the full impact of the Durbin amendment delivers a crushing blow to Main Street America. Often we hear politicians speak of Main Street as the backbone of society, making community banks the pillars for national economic stability, yet Congress is now ushering in an era of increased failure and consolidation of community banks in favor of big box retailers, bringing an already sluggish economic recovery to a crawl.
Were our elected officials listening when both Fed Chairman Ben Bernanke and FDIC Chairman Sheila Bair testified that community banks need to be concerned by the Durbin amendment, or when Rep. Barney Frank said he supported delaying implementation of the interchange fee regulation and that the provision should be amended?
Although there is a chance the House could pass its own delay bill, signals point to any legislation being dead on arrival to the Senate.
Any hope now lies with Bernanke as the Fed sets its final rules on interchange fees. The original proposal from the Fed was a cap of $0.12, lowered from the current average of $0.44, resulting in a 73 percent reduction in debit card interchange income.
Yet the Fed's analysis neglected to take into account fraud and security costs, and these costs will not go away with lowered caps on swipe fees. Since banks are responsible for reimbursing consumers who are victims of fraud, to protect themselves from losses, banks may put a ceiling on debit card transactions at $50 or $100, forcing restrictions on services for consumers.
Since banks are responsible for reimbursing consumers, who are victims of fraud, to protect themselves from losses, banks may put a ceiling on debit card transactions at $50 or $100, forcing restrictions on services for consumers.
Unfortunately, service restrictions stemming from the Durbin amendment are something consumers will need to get used to, as another unintended consequence will be the disappearance of free checking. One-third of all households would switch their primary bank if it stopped offering a free checking account, according to research from Raddon Financial Group. Since the nation's biggest banks have all eliminated truly free checking, in theory this bodes well for our community institutions.
However, to offer free checking, a bank must have customers that bring in other business, or incur enough fees to cover the maintenance and servicing expenses on the account. These types of accounts used to be subsidized by accounts that generated significant non-interest income such as debit card interchange fees. The Durbin amendment severely alters the non-interest side of income, making free checking a loss leader product, and a burden that community banks will not be able to offset, forcing them to charge for checking.
Consumers are not the only ones who stand to lose from the looming implementation of this legislation, as small businesses also will suffer. A recent study conducted by University of Chicago Law School Lecturer David Evans, Brookings Institute Senior Fellow in Economic Studies Robert Litan and MIT Sloan School of Management Professor Richard Schmalensee concluded:
- During the first two years, the proposed rules will eliminate $33.4-$38.6 billion of interchange fee revenues for banks, forcing small business to face higher retail banking fees and loss of valuable services as banks offset the loss of revenue.
- As a result of the anticipated increase in banking fees, the number of unbanked individuals will increase, meaning many low-income individuals will have to use higher-priced alternative financial service providers, such as check-cashers.
- Small businesses will lose up to $4.2-4.8 billion in the first 24 months. Many small businesses will see an increase in bank fees and will not receive any offsetting benefit from lower debt card interchange fees because they do not accept debit cards.
- Large retailers will receive a windfall of $17.2-$19.9 billion dollars in the first 24 months of the proposed rule being in effect.
The implementation of the Durbin amendment will cause more harm to the parties it was created to help. Even a revised cap from the Fed that is deemed more "reasonable and proportional" may not provide assistance. Say the Fed doubles the cap to $0.24 per transaction in its final ruling; ROA would still be reduced to 13 basis points for a typical institution, putting no stop to the trickledown damage on consumers and small business.
The compounding of these modifications and other regulations to the financial services industry makes it harder to be a bank today than ever before. Community banks are being handcuffed by unnecessary compliance costs when they were not responsible for the subprime mortgage crisis, are not responsible for the state of the economy, and went into the recession healthy but emerged weaker. Ultimately, does any of this protect us from the too-big-to-fail scenario?
Louis Hernandez Jr. is chairman and chief executive of Open Solutions, serves on the board of directors of HSBC North America Holdings Inc., and is the author of "Too Small to Fail: How the Financial Industry Crisis Changed the World's Perceptions."