Capping debit interchange rates for large-asset issuers has given consumers more access to no-fee checking accounts, not less, according to research from the Federal Reserve Bank of Kansas City.
The study, authored by the bank's senior economist, Richard Sullivan, has been submitted for publication in an upcoming edition of the Economics Review.
The debit interchange cap was the chief result of the Durbin Amendment to the Dodd-Frank Act. It caps debit interchange for issuers of over $10 billion and demands the debit issuers provide multiple networks for processing debit transactions.
Prior to its passage, opponents predicted that capping debit interchange income would lead financial institutions to add more fees to checking accounts in an attempt to recoup lost debit interchange revenue. The study found some large-asset debit issuers did start adding fees to some of their accounts, but it also found that many other did not.
“Regulated banks were more likely to raise checking account fees, but exempt banks were more likely to reduce or eliminate fees.” Sullivan wrote. “Thus, consumers’ net increase in access to free checking stemmed mainly from the greater availability of free checking at exempt banks.
“At some banks, both regulated and exempt, there were also other changes in the terms of the checking accounts offered to consumers. This article finds evidence that access to free checking has expanded most in cities and regions where banks are engaged in vigorous competition: banks in such markets may offer free checking to attract customers from other banks or to ensure retention of their own established customers.”
The study only included banks in the grouping of financial institutions which live under the cap as well as those who do not.
The Merchant Payments Coalition, an association of retailers and retail associations which lobbied Congress before the Durbin cap and who defends the idea of a debit cap, celebrated the study.
“This important study puts to rest the myth that big banks use to complain about reform limiting their ability to fix prices. The bottom line is that consumers win and competition is strengthened when debit fees are reduced,” said Doug Kantor, counsel to the Merchants Payments Coalition.