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Debit Interchange Post-Durbin: Some Early Numbers

posted by Adam Levitin

The Fed released some data on debit interchange fees since the Durbin Amendment went into effect (here in spreadsheet and here as a memo with more data). It's all still very early numbers, and things may well change. But so far a few noteworthy things have caught my eye:

(1) There is two-tier interchange pricing, just as I and other supporters of Durbin predicted. Big banks (>$10B in assets) have one pricing scheme and small banks, which are exempt from Durbin's "reasonable and proportionate" requirement have another. Many Durbin opponents said that there wouldn't be two-tier pricing and that Durbin would spell the ruin of small banks. So far that hasn't happened.  This won't fix our too-big-to-fail problem, but it's a small move in that direction. 

(2) The small banks are getting a leg up on the big guys in the two-tier system. Small banks are making on average 19 cents or 50bps more on every transaction than the big boys.  That breaks down to 31 cents advantage of signature and 8 cents on PIN (where the pricing was lower to begin with, making less room for differentiation). 

(3) Interchange fees for small banks haven't moved much. It's possible to have two-tier pricing with small banks still losing revenue. That doesn't seem to have happened. (It's also possible to have two-tier pricing with interchange fees continuing to rise for small banks...)

(4) The small banks' debit card transaction market share grew slightly. It's not clear to me that this is a real trend, but it's possible that this is a side-effect of the big banks like BoA clumsily trying to recapture reduced debit interchange revenue with direct consumer fees. It seems that some consumers don't take well to hidden fees being replaced with direct fees. It's still not clear how many accounts were really moved to small banks/CUs in response to BoA and the like, but that could explain the growth in debit card market share for small banks.   In any case, merchants aren't steering away from small banks as we were told they might do. (It was never clear how they would steer anyhow).

(6) There may be other, harder to measure benefits for small banks from Durbin. To the extent that it makes their deposit account/debit product more competitive, this could have spillover benefits for their other products.  The deposit account (monetizable via debit or check) is the gateway relationship.  It enables the cross-selling of other products (loans, investments, insurance). So the benefits to small banks may be more than just on the debit revenue side. 

(5) The big issuers are paying lower network fees (4 cents lower for sig, 2 cents lower for PIN), which means that small issuers are really getting a 23 cent/transaction advantage of signature and 6 cents/transaction advantage on PIN.  It's not clear, however, what the network breakdown of small issuer transaction is.  

Again, it's still early in the game. There's still the merchants' litigation challenge to the Fed's Durbin Amendment rulemaking, and we could well see a bunch of market moves. Visa seems to be trying to go back to tying credit and debit products via its network fee, and there's always the possibility of either some innovation (think mobile), a new settlement network (PayPal?), or a new entrant buying an existing player and shaking things up (Google or Apple buying MC?). 

A final thought. The more distance we get from Durbin, the more I like the amendment. It's public utility regulation: rate regulation (section 920(a)) and open access (section 920(b)). That's not a totally new move in bank regulation (think Reg Q), but it really encourages thinking of at least some banking functions as being public utility functions. There might be something to that.  


Excerpt from the letter: "There were approximately 46.7 billion debit card transactions in 2011, with a value of more than $1.8 trillion."

Excerpt from the Spreadsheet: "Average interchange fee per transaction,All Networks at mean average of All networks $0.43" calculates out a value of $20,081,000,000.

What is missing, is a complete set of numbers reflecting the interoperability of multiple usages.

Bits and pieces make it all look good. But is it?

If they were thinking of this as a public utility there wouldn't even be an interchange fee.

We saw something new attempted in Iowa by the merchants this spring: legislation that would exempt taxes and other government fees from being included in the total purchase price, for purposes of calculating the interchange fee.

It did not get out of subcomittee this year, but I suspect the bill will be back next year. The merchants made a "fairness" argument that wasn't all that convincing (Though their main complaint seemed to be with interchange fees on credit card transactions, it was the small banks and credit unions that primarily lobbied against the bill because of its impact on debit transactions.) The merchants are clearly not finished pursuing this issue.

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