Another Durbin Outcome Could Be More Unbanked, Chase’s Dimon Contends

Up to 5% of banked consumers might be forced to leave the banking system if financial institutions must alter pricing to make up for reductions in debit card interchange, Jamie Dimon, CEO of JPMorgan Chase & Co., told analysts during a conference call to discuss fourth-quarter earnings (see story).

Dimon was referring to proposed rules by the Federal Reserve Board that would cap debit card interchange at 12 cents per transaction (see proposal).  The Fed was directed to come up with a debit-rate plan that is “reasonable and proportional” under the so-called Durbin amendment of the Dodd-Frank Act.

During the earnings call, Dimon noted that part of what was behind the Durbin amendment was the notion that retailers paid nothing to accept cash or checks and that they paid issuers 0.7% to 0.8% of each debit card sale.

“Well, the fact is cash costs retailers, and there are a lot of studies done on this,” he said, citing 0.3% to 0.7% as estimates of what merchants pay per cash sale. “They have got to process it, handle it, move it, insure it, bank it. They need registers, and there is a lot of defalcation. What is that called when checks also cost 70 basis points for all the same basic reasons?”

Debit cards essentially represent a “guaranteed check,” and merchants do not assume the fraud or credit risk, he added. Debit cards offer “an enormous benefit for consumers, even for retailers. It was faster. And how [the Durbin amendment gets approved] is completely beyond us, and we have to figure it out,” Dimon said.

Consumers ultimately will have to pay more for banking services if debit rates drop as proposed, he said, suggesting whatever Chase does to counter the reduction in debit card revenue will have to be “consumer-friendly.”

“We are going to test a whole bunch of things,” Dimon said.

One option would be to just charge for checking accounts or for debit cards, or require higher balances to avoid fees. “That is all going to sort out both in the competitive sense and a legal sense as we figure out how to deal with it,” Dimon said.

TCF Financial Corp. has filed a lawsuit seeking to block the Fed from capping debit card interchange rates (see story).

“We also think it will have the adverse consequences of making a portion of current bank clients unbanked,” Dimon said, referring to pricing adjustments necessitated by reduced debit card interchange revenue. “You will not be able to profitably serve them.”

Dimon estimated that about 5% of consumers would be pushed out of the banking system, “and I am not sure that was a good public policy issue either.”

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