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.