Debit Reform's Impact on Small, Big Banks Realized

NEW YORK -- When the swipe fee reform debate was making its way around Capitol Hill a year ago, many remained skeptical that the exemption for small banks would result in any savings. Now, at least one news report confirms that it has.

According to American Banker, earnings at banks with assets of less than $10 billion appear to have been entirely untouched by the cap in the first quarter since its Oct. 1 implementation. Revenue from swipe fee (also known as interchange fees) at banks identified as exempt by the Federal Reserve rose a few tenths of a percentage point from the third quarter to about $507 million in the fourth quarter, according to regulatory financial reports.

In late June, the Federal Reserve approved changes to debit card transaction fees, or swipe fees. The changes capped those fees at 21 cents per transaction, but also allow issuers to tack on 5 basis points of each transaction, or almost 2 cents based on the average debit ticket of $38, and a conditional 1-cent adjustment for lenders that follow certain fraud-prevention standards, as CSNews Online previously reported.

The final rule exempts community banks and credit unions with assets of less than $10 billion.

But as small banks saw an uptick, banks that are not exempt saw their interchange revenue fall 26 percent, to about $6.2 billion. Excluding the 15 banks where credit card loans exceeded 5 percent of total assets from this group -- credit cards, which were not targeted by 2010's Dodd-Frank Act, account for much of the interchange income at such banks -- interchange fees plummeted by almost 40 percent, to $2.5 billion, the news outlet reported.

The increase in interchange income at exempt banks and the subsequent crash at large banks, occurred as overall debit transactions volume grew, but at a decelerating pace, American Banker added.

Time may be the deciding factor. Small banks concerned over spillover from the Durbin amendment have argued that it will take time for competitive pressures to become apparent. One main concern is that retailers will give preferential treatment to large bank cards that carry lower interchange rates, according to the report.

Also, part of the measure that requires bank cards to be tied to at least two debit networks, and allows merchants to choose the lower-cost option, does not take effect until April. Small banks are not exempt from that provision.