Banking Industry Wrong About Impact Of Durbin Amendment

Financial industry experts and three separate government agencies have confirmed that small banks and credit unions have benefitted from debit reform, putting to rest the banking lobby's negative and false claims about the impact of the Durbin Amendment.

Studies by the Federal Reserve, the Federal Reserve of Kansas City, the Federal Trade Commission and the Government Accountability Office have shown that fee revenues for banks exempted from the interchange fee limits have remained unaffected or have even grown thanks to the two-tier fee system mandated by debit reform for exempt and non-exempt banks.

As a result of the reform, small institutions can now compete with large banks and have attracted new customers with improved customer service and offerings.

For more information read the Merchants Payments Coalitions’ latest fact sheet: The Verdict Is In:  Small Banks Win With Debit Reform

Customer Dissatisfaction With Banks On The Rise

Americans don’t trust financial institutions even when it comes to their own banks and judging by the enormous amounts financial industry spends on public image campaigns and advertising, banks are well aware that their consumers are getting fed up with lack of transparency, high and unfair fees and poor customer service.

Doug Kantor, counsel to the Merchants Payments Coalition says:

“The big banks’ multi-billion dollar campaigns aren’t moving the needle on the favorability meter because they continue to stick consumers and Main Street businesses with unfair, hidden fees. With good reason, Americans still do not trust big banks”

The MPC has put together results of a few surveys that looked into Americans’ perception of banks. Findings show:

• 64% say they do not fully trust big banks.
• 87% do not feel their bank is transparent
• 68% do not perceive their bank as being “on their side
• 30% say they are sometimes surprised by unexpected bank fees
• 31% claim their bank’s fees are simply unfair
• Americans’ confidence in U.S. banks is at a record-low 21%, down from 23% in 2010.

Passing the costs onto the customer in the form of high fees is a sure way to drive them away. ATM fees, checking fees, debit and credit card fees, swipe fees are all on the rise with swipe fees being eight times higher in U.S. than Europe. No wonder Americans are not happy.

An Insider Talks: Banking Industry Admits Debit Reform Helps Small Banks

The banking and credit card industry has used small banks and credit unions for years as the excuse for resisting changes to their system of centrally price-fixing swipe fees. They insisted that smaller institutions would be hurt by the debit reforms that became law late in 2011. Now, an insider has admitted the truth – small banks are actually better off as a result of debit reform and bankers knew this all along.

On January 8, 2013, the American Banker ran an article headlined, “Durbin Exemption Proves a Real Edge for Small Banks.” The article was written by Lee Wetherington, Director of Strategic Insight for ProfitStars. In the article, Wetherington reveals that:

• “Studies by the Federal Reserve, [Oliver] Wyman and most recently the Government Accountability Office indicate that exempt issuers have experienced little if any compression in their signature debit interchange rates and virtually no compression in their PIN rates.”
• “According to Wyman, exempt issuers' gross margin per debit transaction is now more than double that of regulated institutions.”
• Small banks have an opportunity to capitalize on the most profitable part of the debit world – business accounts.
• Wetherington explained to small bankers that this would work to their advantage before the reforms came into being, but he was intimidated into silence by a banking association executive who insisted that bankers needed to deny the truth for the sake of “unity”.

Wetherington’s portrayal is completely consistent with other glimpses of the truth from the industry.

For example, Andrew Kahr authored an article in the American Banker on March 3, 2012 headlined, “Nevermind the Lobbyists, Durbin Amendments Helps Small Banks.” In it, he called small bank arguments that they would be hurt by debit reform “Poppycock.”

In fact, following Kahr’s article and a response from ICBA last year, the American Banker polled its own readers and found, “Sixty percent of online voters took the side of industry consultant Andrew Kahr, who wrote in a recent Viewpoint that the Durbin amendment will actually help banks under $10 billion in assets . . .”

And, industry analyst Eric Grover commented to American Banker in January 2011 that the card industry lied about the potential for small bank and credit union fees to go down in order to keep those institutions lobbying against reform. He said, “Initially, Visa executives said a dual schedule [of interchange rates for exempt and non-exempt financial institutions] was impossible . . . That was simply intended to scare credit unions and small banks to keep them lobbying."

All of these insiders verify what every objective observer, from the Federal Trade Commission and the Government Accountability Office to the Federal Reserve, has found: Debit reform has not hurt small banks and credit unions, it has given them a competitive advantage.

The big banks and their associations can keep scaring and bullying the rest of the industry into saying the sky is falling, but thankfully some out there are willing to say the truth – debit reform has been good for the vast majority of banks and credit unions.

Credit Union Survey Echos Other Reports: Durbin Amendment Works

In an interview with the Credit Union National Association, the Credit Union Times reported that credit union profits from debit cards have been largely unaffected by a reduction in the debit card swipe fee.

Just like recent reports by the FTC, the Federal Reserve and GAO, the CUNA survey shows that debit reform, as legislated by the Durbin Amendment, has benefited small banks, credit unions and consumers, disproving the big banks' false claims that reduced debit fees have harmed small banks and credit unions.

In a recent press release by the Merchants Payments Coalition, Lyle Beckwith, Sr. Vice President for Government Relations at NACS, talks about how big banks are misleading the public with false statements about the impact of debit card swipe fee reduction in order to avoid further reforms.

“The big banks have pushed the line that small banks are suffering as a way to stymie further reforms on rising swipe fees on credit cards, but the facts simply don't back them up,”

MPC’s full release can be found here.

Swipe Fees Drastically Slashing Supermarkets’ Thin Profits

Not many of us realize that when we quickly grab a $3 carton of milk from the neighborhood grocery store and pay with a debit card, the swipe fee that the store operator must pay the bank to process the transaction can be higher than the fee the store pays on $200 worth of groceries.

How can this be? Because the Federal Reserve is allowing banks to charge the maximum for a debit card transaction -- 22 cents -- under the Durbin Amendment, which reduced debit card fees from 42 cents a transaction.  The Durbin Amendment did not intend for banks to be able to charge 22 cents for a carton of milk or a cup of coffee, but that is the way the Fed is implementing the law.  A group of merchants have sued the Fed to make changes.

“These transaction costs have been eating into profit at an increasing rate,” says Bill Bishop, chairman of Willard Bishop, a consulting firm based in Barrington, Ill. “Retailers have been focused on trying to reduce them.”

Read more from Richard Turcsik, editor of Grocery Headquarters Magazine, here. 

BoA's Recent Move Proves Durbin Amendment A Success

The Durbin Amendment forced big banks to lower their swipe fees on debit cards and gave smaller banks a chance to compete with the financial giants. Bank of America’s recent cancellation of plans to charge for checking only proves debit reform is working.

Banks have been blaming the Durbin Amendment for everything wrong with the world, but as Doug Kantor, counsel to the Merchants Payments Coalition, wrote in a Huffington Post blog, debit reform has brought greater competition among banks to the marketplace.

 “The truth is, checking fees are set by competitive market dynamics, while swipe fees on debit cards haven't been. The fees were decided by Visa and MasterCard and every bank that belonged to one or the other charged the same thing - that looks just like price-fixing in every other part of the economy. The fact that swipe fees tripled over the past decade didn't prevent banks from increasing checking fees at the same time. Fluctuations in checking fees and other banking fees since debit reform are fundamentally the same as what was happening in the consumer banking market before the reforms were enacted with checking fees going up at the same or a lesser rate.”

In other words, debit reform forced big banks to compete for customers. The rest of Kantor's article can be found here.