The Durbin Amendment in Dodd-Frank lowers the interchange paid to large banks on debit card purchase transactions, and hence takes money away from these banks to give it to merchants, almost dollar for dollar. When passed, this provision was politically popular. It was a time for bank-bashing.

Now this component of Dodd-Frank is much less popular. Maybe legislators have noticed that even if Wal-Mart passed through every last penny of the 0.7% of debit card sales it's apt to save to customers in the form of lower prices, the consumer benefit is likely to be invisible to voters. In any event, the banks have made themselves highly audible to voters in shrill but absurd threats to cap debit card purchases at $50 and the like. Another form of lobbying.

One of the arguments made against the Durbin restriction on interchange is that it will hurt community banks.


Since Durbin explicitly excludes banks with assets under $10 billion from the restriction on interchange, it takes a hyperactive imagination to see how these banks could be hurt by it. Lobbyists have the requisite inventiveness.

If large banks get 75% less interchange than they do now and small banks continue to get today's interchange rates, then obviously this confers a substantial competitive advantage on the small banks. They can impose lower fees, pay more interest, and give greater rewards to depositors. Anything that reduces revenue for big banks but not for small ones should help the latter compete more effectively against the former.

In opposition to common sense, bank lobbyists have put forward some very far-fetched arguments about how, in some upside-down world, small banks are still going to be losers rather than winners from Durbin.

One argument is that the clearing networks, of which there are only four that matter, will not support the "two-tier" interchange system envisaged by Durbin. Ridiculous. Visa is the largest of the networks. It's already announced that it will implement Durbin. (Maybe this is an object lesson as to why Visa remains No. 1.)

For the small banks, MasterCard is the only other significant player. If MasterCard finds it politic not to add one more wrinkle to a skein of interchange levels that is already of Byzantine complexity, then let the small banks gravitate to Visa in order to benefit from Durbin.

A second argument of the big-bank lobbyists is that merchants will reject the debit cards of small banks if these carry a 1% interchange cost, versus 0.3% for the large banks. Really? Then why don't these merchants reject all credit cards, with interchange of 2% or more, if the customer could instead use a debit card? When is the last time a merchant politely asked you whether you could pay with a debit card instead of a credit card?

The reason merchants don't do this, apart from association rules that purport to prohibit it, is that the retailer's top priority is sales, not interchange. Selective "suppression" of cards by merchants has occurred with extreme rarity. One instance took place long ago when merchants in Boston revolted against higher interchange rates from American Express. This can't happen now. Are cashiers in stores going to look at a list of small banks in order to discriminate against their cards — and then have customers walk out and leave their would-be purchases at the cash register? The fraction of customers who would be persuaded to change banks or carry two debit cards is infinitesimal.

The notion that merchants will give discounts on big-bank debit cards but not small-bank debit cards is equally silly. Since when did they offer an incentive to use debit rather than credit cards? If they are not motivated to do so by 2.3% versus 1% interchange, then why should they be motivated by 1% versus 0.3%?

Finally, we are warned that a second, utterly unrelated provision of Durbin that mandates competitive network routing will somehow injure small banks. Impossible. It is predominantly the biggest banks that have negotiated exclusive or volume-dependent routing deals with Visa or others. This too gives them an advantage over small banks that Durbin will undermine or erase — to the benefit of the small banks.

The charm of the Durbin debate on interchange is that it largely amounts to "Who's going to get the money, big banks or merchants?" (In other words, "Which do you like less, Congressman, big banks, or big merchants?")

Outside the realms of taxation and appropriations, it is unusual to see such a choice so sharply focused for our representatives in Washington.

Ben Bernanke and other regulators would like to see less pressure on big-bank earnings and capital. That's understandable. Maybe it's even a winning —though illogical — argument.

But let's not talk nonsense about bogeyman danger to community banks.

Andrew Kahr is a principal in Credit Builders LLC, a financial product testing and development company. He was the founding chief executive of Providian Corp. and can be reached at