New Fed Data Give a Glimpse of the Durbin Amendment’s Early Effects

The Federal Reserve Board on Tuesday released data about banks’ debit card interchange income now that the Durbin Amendment is in effect. Not surprisingly, the numbers show that interchange for regulated card issuers plunged. The nation’s leading retailer trade group took the occasion to decry the Fed, even though merchants are paying almost 50% less to accept most debit cards than they did a year ago, as did an association of small banks that fears its members’ interchange revenues will decline over time despite their exemption from price controls.

The Fed noted in a report and accompanying spreadsheet that the average per-transaction interchange fee collected by regulated financial institutions, those with more than $10 billion in assets, declined 45% in 2011’s fourth quarter to 24 cents from 43 cents in 2009. The decline came after the Fed’s cap of 21 cents and 0.05% of the sale, plus a 1-cent fraud-prevention adjustment, took effect Oct. 1. The cap implemented price controls mandated by the Durbin Amendment in 2010’s sweeping Dodd-Frank Act and affects about two-thirds of U.S. debit cards. Debit interchange for exempt debit card issuers remained steady at 43 cents, the Fed said.

The Fed’s new data as well as its 2009 figures come from the general-purpose card networks as well as 13 electronic funds transfer networks that provide PIN-debit card-acceptance services at the point of sale to merchants.

The Federal Reserve rule implementing Durbin made no distinction between signature and PIN debit, and the new data show that the formerly wide gap between debit’s more lucrative signature version and the PIN variety narrowed considerably. The average interchange fee per signature-debit transaction plunged 57% percent for regulated issuers and slipped 8% for exempt issuers. In contrast, the average interchange fee per PIN-debit transaction declined less than 1% for big issuers but rose 32% for exempt issuers.

In fact, the run-up in PIN-debit interchange may be one of the biggest surprises in the Fed’s tide of statistics. The figures show that for the PIN-debit networks, the average interchange fee in 2009 for all issuers was 23 cents per transaction and the fee as a percentage of the average transaction value was 0.58%. In 2011’s first nine months, before the price controls took effect, the respective figures were 33 cents and 0.80%. In last year’s fourth quarter, with the price controls newly in place, the average PIN-debit interchange revenue for all issuers fell to 26 cents and 0.62% of the sale. But respective figures for exempt issuers were 31 cents and 0.72% versus 23 cents and 0.55% for regulated issuers.

The Fed also said that the incentives paid by signature networks to financial institutions to issue debit cards with their brands (Visa Inc. and MasterCard Inc. dominate signature debit, but the Fed’s report also includes Discover Financial Services) declined from an average of 3 cents per transaction in 2009 to 2 cents in 2011’s fourth quarter.

Spokespersons for Visa and MasterCard declined to comment, referring Digital Transactions News to the Electronic Payments Coalition, a Washington, D.C.-based lobbying group of payment card networks and banks. The EPC noted that while the Fed says exempt issuers’ interchange revenues held steady, a review of the spreadsheet shows their average interchange revenue actually fell from 1.16% of the sale in 2011’s first nine months to 1.10% in the fourth quarter, a decline of 5%. “It is a drop that we think is kind of foreboding,” an EPC spokesperson says. “That’s really just the beginning.”

The Independent Community Bankers of America issued a statement saying that it is too soon for Durbin’s impact to be felt, but still blasted the price controls. “ICBA continues to believe that community banks and other small issuers will experience a sizeable decrease in debit interchange income over time as payment card networks and merchants continue to implement the Fed’s rule,” the statement says. “A model in which community-bank debit cards cost twice as much to accept as large-bank debit cards because of a government intervention is simply not sustainable.”

Meanwhile, the National Retail Federation issued a statement reminding the public that the Fed originally proposed a much lower cap of 7 to 12 cents per transaction but revised it upward “after intense lobbying by banks and the card networks.” The NRF is suing the Fed, saying it didn’t follow the law in raising its cap.

The Fed’s numbers would not yet reflect another major part of the Durbin Amendment, the provision that took effect in April requiring that each debit card allow merchants to have at least one unaffiliated debit-network transaction-routing choice. That provision outlaws exclusive deals in which a card had only affiliated networks for signature and PIN-debit, the most common combination being Visa Inc. for signature debit and the Visa-owned Interlink network for PIN debit, and theoretically will allow merchants to put more transactions onto lower-cost networks.

The Fed said it will collect and monitor debit card data annually as part of its effort to inform policymakers, card issuers, and merchants about the Durbin Amendment’s effects. The new report and spreadsheet are available through this link.

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