Durbin Consequences Came as Expected … Now What?
With implementation of the Durbin Amendment approaching its four-year anniversary on Oct. 1, studies are accumulating that substantiate what the credit union industry argued all along during the enactment of the Dodd-Frank legislation.
The Federal Reserve Bank of Richmond, specifically, has published at least two studies in its Economic Quarterly by Zhu Wang and other researchers (third quarter of 2012 and third quarter of 2014). Some key points of the earlier study include:
Interchange income to financial institutions with more than $10 billion in total assets under control has been substantially reduced. And, at least so far, interchange income to financial institutions with less than $10 billion has been shielded.
Merchants as a whole have greatly benefited from the reduced interchange fees under the regulation. However, merchants specializing in small-ticket sales have been adversely affected and small merchants have reported seeing no benefit.
The regulation's impact on consumers is less clear. However, there is limited empirical evidence on the change in retail prices. At the same time, 50% of debit rewards programs have been eliminated and another 18% are planned for elimination. In addition, there has been an approximately 25% increase in noninterest checking account fees.
To summarize the bullet points above, merchants are benefitting, while consumers and financial institutions are not. The words sound like an echo from five years ago.
We as an industry may have foreseen the future accurately – but what does that mean for the credit union movement now? And, what can be done about it now?
CO-OP Financial Services believes that we can start with the basic observation that price regulation rarely works, so no one should be surprised by the outcomes found in the report.
In the particular case of the Durbin Amendment, there have been the unintended negative consequences of higher small-ticket interchange, the rapid decline of debit rewards programs and higher checking account fees.
Among the unintended consequences could also be Visa's PAVD (PIN-Authenticated Visa Debit), which creates an alternative path for PIN transactions. The network routing change – which the merchant dictates – can and has negatively impacted both expense and income for credit unions.
Post-regulation, covered banks’ annual interchange revenues dropped by 27%, while exempt banks’ annual interchange revenues increased by 4%, according to the Federal Reserve Bank of Richmond's Economic Quarterly for Q3 2012.
In the long term, we believe market equilibrium forces will eventually reduce exempt interchange rates as well (impacting debit card issuing institutions with less than $10 billion in assets, i.e., virtually the entire credit union industry). In the meantime, the $10 billion-total-assets cliff remains entirely arbitrary and will continue to materially harm institutions crossing that line.
So, the Durbin Amendment has not been good for either consumers or credit unions, which brings us to the second question: What can be done now?
First, we can continue to work with our industry associations to influence reform of the Dodd-Frank legislation. The Durbin Amendment cap on interchange fees took effect on Oct. 1, 2011, cutting the average interchange fee for non-exempt (those with more than $10 billion in assets) institutions from $0.44 to $0.24 per transaction. The threshold for non-exempt status and the per transaction rate are as arbitrary today as they were then. We can support our trade associations in their advocacy to ameliorate the current situation.
Second, we need to be vigilant in working against similar legislation on credit cards. Credit card and prepaid card interchange fees were not regulated by the Dodd-Frank legislation. However, the CARD Act of 2009 is now more than six years old. The political rallying cry of reducing credit card fees even more – by whatever means – will always be a popular one and may include interchange with future rounds of legislative activism. Again, it is imperative to support our advocacy organizations and be ready to “hike the hill” both figuratively and literally.
Our industry's experience with the Durbin Amendment shows that being proven right doesn't always feel good. We can, however, use the well documented consequences to work toward a better solution for our members and all consumers.
Stan Hollen is president/CEO for CO-OP Financial Services. He can be reached at 800-782-9042 or firstname.lastname@example.org.