Surprise! PIN Interchange Drops for Durbin-Exempt Issuers

Now that four years have passed since the Durbin Amendment to the Dodd-Frank Act took effect, the payments industry has had time to assess its effects. One interesting twist is that, for issuers exempt from the law’s rate caps, PIN-debit interchange has actually slid downward.

To be sure, issuers generally are generating less in interchange for PIN and signature debit card transactions than they were 10 years ago, according to the Pulse electronic funds transfer network’s 2015 Debit Issuer Study released last month.

The study examined transactions made in 2014 from more than 70 debit issuers involving 147 million debit cards and approximately 68,000 ATMs.

Debit issuers received a weighted average interchange of 41 cents for each consumer debit transaction in 2004, the year studied in the report’s first release. That has fallen to 24 cents for financial institutions subject to Regulation II, but held steady overall—at 40 cents—for smaller banks and credit unions.

Regulation II is the formal name for the Federal Reserve’s rule implementing the Durbin Amendment in 2011 that imposed a cap of 21 cents plus 0.05% (5 basis points) of the transaction, along with a 1-cent fraud adjustment. The regulation applies to financial institutions with $10 billion or more in assets.

Digging deeper into interchange patterns for exempt financial institutions, however, one finds that their signature-debit interchange rates in the past few years have varied little, from a low of 47 cents in 2013 to a peak of 48 cents in 2014. It’s on the PIN-debit side that marked changes show up, with the interchange rate for these transactions steadily sliding in recent years.

“The reduction is the result of increased competition for transaction routing, combined with more routing options,” Steve Sievert, Pulse executive vice president of marketing and communications, tells Digital Transactions via email. “But interchange is only one-side of the P&L equation. When you look at costs, PIN debit is more cost efficient in every category—including network fees, processing fees and especially fraud losses.”

Indeed, despite the drop in PIN interchange per transaction, smaller banks and credit unions earned annual debit interchange revenue of $112 per card, compared with $59 for those subject to the interchange cap.

In other findings, debit card issuers should harbor little fear that the popularity of debit cards among consumers might wane. Consumers are spending, on an annual average basis, $9,291 with their debit cards, a 19% increase from $7,807 in 2005.

Consumers also are making more transactions with their debit cards, using them on average 21.2 times per month in 2014 compared with 16.1 times in 2005, a 31.7% increase. The average ticket size—$37 in 2014—is a 7.5% decrease from $40 in 2005.

“This tells us that cardholders are using their debit cards for many small-ticket purchases for which they previously would have used cash,” Sievert says. “This includes buying a cup of coffee, making a purchase at a fast-food restaurant, paying at the vending machine, paying on toll roads, etc.”

In 2014, 54% of all debit transactions were under $20, up from 47% in 2009, and one in three were for less than $10.

—Kevin Woodward