One of the most contentious parts of the Dodd-Frank financial reform legislation enacted in the wake of the credit crisis was the Durbin Amendment. You may not know it by name, but you know its primary effect: higher bank fees. It’s also the reason behind those infamous debit card fees banks were threatening to implement last year. Trade groups that pushed for the fee cap said the trade-off would be worth it, because customers would see lower prices in stores. So how’s that working out?
Not so great.
First, some background: The Durbin Amendment set a cap of roughly 24 cents on interchange or “swipe” fees — the money a store has to pay your bank when you buy something with a debit card. Before, the average swipe fee was around 43 or 44 cents (the stats differ slightly because the fee was calculated both with and without including purchases that were later returned by the customer). Now, small banks — which were exempt from the cap — still get an average of 43 cents per swipe, according to a new Federal Reserve study.
Big banks get an average of 24 cents. The cap was intended to be just that — a cap — but it wound up becoming a de facto floor as well as a ceiling, because banks are trying to maximize how much they can collect under the new law. Still, some in the industry say Durbin is costing banks big bucks. A study conducted recently by CardHub.com says big banks are losing a little more than $8 billion a year because of the fee cap.
This is similar to the estimate the National Retail Federation gave when the amendment went into effect last fall, when the organization said, “Debit card swipe fees currently total about $20 billion annually, and analysts have estimated the cap will save merchants and their customers about $7 billion.”
You’d think this would be great news for consumers. “Consumers are winning with swipe-fee savings,” retail industry advocate Douglas Kantor says in a recent statement. Stores are paying a little more than half what they were to accept big bank cards, on average, and CardHub’s data shows that fees charged by banks with more than $10 billion in assets dropped by 59% for signature transactions and 32% for PIN transactions.
So, uh, where’s that $7 billion? There’s plenty of finger-pointing among financial industry players.
Retailers say they don’t have it: A survey of online merchants conducted recently by Internet Retailer found that since the swipe fee cap took effect, only around 15% say they’re paying less, while nearly 18% say they’re actually paying more. Maybe it’s too soon, the site suggests, pointing out that many merchants might not have renewed their contracts with the processing networks that act as go-betweens for banks and retailers. Still, it cites an analyst who says, “I would have expected Internet retailers to have appreciated a benefit from the rate reduction.”
The NRF says customers are losing out because the Fed didn’t adopt its suggested cap of between 7 and 12 cents per swipe. “We believe the numbers for the big banks are too high,” senior vice president and general counsel Mallory Duncan says in a recent statement. A lower cap, he adds, would mean “significantly greater savings for merchants and their customers.”
But payment processors say it’s retailers, not them, hoarding the cash. “Industry data shows that the retail industry has already seen $2.8 billion in savings since the government regulation on debit cards went into effect,” a trade group representing banks and processors says on a website it set up called wheresmydebitdiscount.com.
This group, the Electronics Payment Coalition, says gas stations alone are on pace to keep $1 billion a year in savings. They point to research showing that debit cards are the most popular method of payment at gas stations. But some stations have two prices — one for cash, one for cards — and don’t distinguish between credit cards, for which retailers are charged higher interchange, and debit cards with their 24-cent cap.
Admittedly, some gas stations are making themselves easy targets. A Mobil station on Long Island, N.Y., gained notoriety a couple of weeks ago for charging $2 more — that’s around $6 a gallon — for customers using credit cards.
Unsurprisingly, the National Association of Convenience Stores — The Association for Convenience and Fuel Retailing, disputes the Coalition’s conclusion, contending that it displays “an immense ignorance of the fuels markets” in a statement. NACS recently came out with a study of its own contending that gas station customers pay an average of 10 cents per gallon more than they should because of the interchange fees they have to pay to banks.
And banks say the swipe-fee cap means customers lose because they have to jack up checking account fees to make up for the lost revenue. “Customers pay higher fees as institutions adjust to government-imposed losses in revenue,” the American Bankers Association said in a statement issued last week.
Unfortunately, about the only thing everyone agrees on is that customers are losing out while these respective industries battle over swipe fees.