Merchants Ignore Durbin's Toll on Their Customers
Not only does evidence point to small banks escaping interchange restrictions as Congress intended but there are also signs smaller institutions are gaining retail market share because of the exemption.
Issuers exempt from the interchange fee cap should continue to promote activation and use of their debit cards by way of issuer-sponsored and merchant-funded rewards.
Retailers who claim that restrictions on debit card fees benefit credit unions and community banks miss the point: These price controls are bad for consumers.
After Congress passed the Durbin amendment — which was authored by Sen. Dick Durbin as part of the 2010 Dodd-Frank Act — merchants promised to pass the savings on to consumers in the form of lower prices.
The price controls lawmakers were able to impose on those providing electronic payment options have resulted in an $8 billion annual handout to retailers that they have not passed on to consumers. Five years after the Federal Reserve issued a rule to implement the amendment, retailers have kept most of this revenue — an estimated $32 billion — for themselves.
While Congress may have thought this legislation would provide a benefit to consumers, data from a survey of merchants contained in a recent Federal Reserve Bank of Richmond study indicates that the amendment is simply not working as intended. The report found that "few merchants are found to reduce prices or debit restrictions as debit costs decrease." This just reinforces the argument that the Durbin amendment is essentially a merchant handout from Congress.
Consumer research echoes the reality that retailers are not passing on this revenue in the form of savings for customers. In September, Phoenix Marketing International conducted its fourth annual survey of nearly 2,000 consumers and found that the vast majority of shoppers have not experienced a price drop at the point of sale. In fact, in each of the 15 categories measured, at least 92% of shoppers reported that prices rose or stayed the same over the past year.
In October 2013, the National Retail Federation said retailers have seen significant savings from swipe fee reform and are sharing that savings with their customers in a variety of ways. But the findings from the Richmond Fed and Phoenix Marketing International illustrate this is simply not the case.
Merchants are now trying to claim that these restrictions benefit credit unions and community banks. This is also not the case.
A study released last week by the Credit Union National Association reported estimated reduced revenue of $1.1 billion for credit unions resulting from Dodd-Frank's regulatory costs, all of which the report attributed to the swipe fee provision. Real data in the form of costs of processing changes and declining fees since 2011 debunks claims that credit unions and small banks below $10 billion in assets are not feeling the pinch. Further, there has been a decline in the interchange rate since the price controls went into effect. It continues to remain around 4 or 5 cents below where it was pre-Durbin, according to a survey by the National Association of Federal Credit Unions.
Unlike merchants, financial institutions do not simply pocket interchange revenues. Instead, in addition to the many costs of supporting a global payments network, they invest in developing the latest security technologies, such as real-time predictive analytics, EMV, tokenization, biometrics and end-to-end encryption, to help keep consumers' data safe. The financial industry has put billions of dollars toward these and other technologies, and many of the security solutions being implemented today were originally developed by this industry.
Unfortunately, lack of competition, market regulations and price controls have produced an economic environment beneficial to retailers and harmful to credit unions, small banks and — most apparent of all — the people they serve. Under the current price-controlled environment, Durbin has been a failure for everyone but retailers.
Instead of trying to convince credit unions and community banks that price controls are good for them, the retail industry's time is better spent identifying ways to pass along their $8 billion annual boon to their customers.
Jim Nussle is the president and CEO of the Credit Union National Association. Camden R. Fine is the president and CEO of the Independent Community Bankers of America. B. Dan Berger is the president and CEO of the National Association of Federal Credit Unions.