By Lauren Ratcliffe
Published Nov. 7, 2011
Merchants might be rolling in money with the banks’ responses to a new financial reform law still unfolding.
When the Durbin Amendment, part of the Dodd-Frank Act, went into effect Oct. 1, many banks responded by piloting new debit card fees.
By Nov. 1, all of the major banks, including Bank of America, Wells Fargo, JPMorgan Chase & Co., SunTrust and Regions, had backtracked on the fees, citing public outrage.
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When customers use their debit cards, merchants now get to keep money that had been lost to banks via swipe fees prior to the law.
The CEOs of several local banks and credit unions recognize the shift and said they understand the big banks’ initial reaction.
“They’ve had a major hit to their income stream,” said James McDaniel, CEO of Heritage Trust Federal Credit Union. “They are being forced to assess fees on things they had been giving away.”
While fees for using debit cards have been taken off the table, banks are likely to make up the lost revenue in other ways.
Charles Rivers, CEO of Harbor National Bank, said he sees larger banks as merely making choices any business facing revenue loss would have to make.
“I they think they are making business decisions that they have to make,’ Rivers said “They’re probably good business decisions.”
While many people misunderstand the new law’s intent and much is not yet known about its consequences, from the banks’ point of view, merchants are overwhelmingly the winners.
And it’s potential unintended consequences that have some outraged.
“The Durbin Amendment is a bad law,” McDaniel said. “We do not see merchants lowering their costs to consumers as a result of no longer having the interchange fee.”
The law stipulates several changes to the way electronic cards are processed during a transaction, specifically debit cards.
Under the new legislation, an interchange fee, or swipe fee, of about 21 cents per transaction will be assessed, instead of the former charge of 1% of the transaction amount.
Prior to the Oct. 1 enactment of Durbin, the average interchange fee on debit transactions was 44 cents.
The changes affect only debit cards, however. Swipe fees for credit cards have not been changed and are approximately 1.65% of the total transaction cost.
Other changes imposed by Durbin include the introduction of competition among card processing networks.
Now, every transaction must be able to be processed over at least two networks, and merchants can select the network offering the most competitive rate.
The amendment changed the way banks impose fees on merchants. After Durbin, Bloomberg Government and other analysts are estimating banks will lose between $7 billion and $8 billion in fees annually.
That money was used to cover the costs of running debit card programs and protecting the programs from fraud.
As if on a tipping seesaw, money is being shifted from banks to merchants.
The debit card fee reduction now leaves that money up for grabs for merchants to either pocket or pass on to consumers via lower prices.
Upset from the banks
Scott Woods, CEO of S.C. Federal Credit Union, said the intent of the Durbin Amendment was for merchants to pass their newfound revenue on to consumers.
“I sincerely believe that there are some in Congress who think they are helping the consumer,” Woods said.
What has been seen thus far, however, is anger and upset on the part of banks and credit unions.
Even small institutions exempted by the $10 billion asset threshold see the law as negatively affecting the way they do business.
Woods said he understands why larger banks would charge fees.
“There’s this cost to providing this (debit card) service to their consumers,” Woods said, adding that he feels the government set the interchange fee arbitrarily and in a manner not reflective of the market.
“The government has well overstepped its role in this process, in my opinion, and was reckless,” he said.
Credit unions and small banks are also concerned about how the regulation might affect them down the road.
Trish Wexler, spokeswoman for the Electronic Payments Coalition, an organization that lobbies on behalf of banks, credit unions and card processors, said merchants’ ability to route transactions through multiple networks might lead to smaller institutions facing their own losses.
The law allows merchants to choose among multiple networks when routing transactions. Some networks might run all debit transactions at the 21-cent fee; others might differentiate based on bank.
If retailers choose the network with the flat fee, to save money, the small community bank or credit union, which was supposed to be exempted from the law, must deal with the reduced interchange fees.
Heeding public outcry
Of the major banks, Bank of America was the last to nix plans to charge a fee, announcing its cancellation Nov. 1.
Other banks that had been either planning or testing fees responded to public outcry by rescinding those plans and tests. SunTrust even plans to refund customers who were charged during the testing period.
Bank of America, which had been the target of much public anger since it announced its $5-per-month fee, reversed course after all of its major competitors took their fees off the table.
“We have listened to our customers very closely over the last few weeks and recognize their concern with our proposed debit usage fee,” David Darnell, co-chief operating officer at Bank of America, said in a news release.
“Our customers’ voices are most important to us. As a result, we are not currently charging the fee and will not be moving forward with any additional plans to do so.”
A chance to grow
Small banks and credit unions have seen customer outrage with larger banks as an opportunity for them to grow.
Although the fees are now off the table, the damage might already be done, as many customers are looking for alternatives.
“The consumer is the one ultimately making that choice,” Harbor National Bank’s Rivers said.
“And if a Bank of America or a Wells Fargo makes decisions on their fees based on what is happening in their company, then the consumer has a choice to make.”
The smaller banks and credit unions are hoping customers choose to switch to their institutions.
Bank of South Carolina CEO Hugh Lane said his bank anticipates losing $71,000 per year in income because of merchants’ decisions on routing of transactions, despite the bank’s exemption from the Durbin law.
“We don’t see how we can make that up,” he said. “We thought that we would re-examine our service charge structure, and we opted not to do that.”
S.C. Federal’s Woods and Heritage Trust’s McDaniel both said their credit unions have seen an increase in new accounts in recent weeks.
McDaniel cautioned, however, that time is still needed to determine how many of those accounts are the result of customers’ being disgruntled with larger banks.
The shift to smaller institutions hasn’t come because of widespread incentives, such as lower interest rates.
Local community banks and credit unions said they aren’t doing anything specific to lure customers, other than making their presence known in the marketplace.
“I don’t think it’s going to be necessary to market specifically to them (disenchanted customers) because I think they will make those decisions on their own,” said Rick Arthur, executive vice president of retail banking at First Federal.
“There is a certain threshold customers reach where they say ‘I’m finished. I’m going to look for a new bank,’ ” he said. “And we’re seeing that happen naturally in the marketplace today.”
The retail equation
How much a merchant benefits is dependent on the average transaction amount for debit purchases.
Under Durbin’s changes, merchants will be paying less in transaction fees if their average transaction is more than $21.
Heartland Payment Systems, the fifth-largest payment processor in the United States, studied the effects of the new law on the processed volume on two of its cards: the Visa and MasterCard signature debit and credit cards.
For every $100,000 processed on those specific cards, the average savings per merchant in the United States was $260.24.
In South Carolina, the average merchant saved $250.47.
Not all merchants will save big, though. In the Charleston City Market, many items sell for less than $20, so if a customer purchases just one item, the new 21-cent fee will be more than 1% of the transaction cost.
“If you are a mom-and-pop business that sells big-screen TVs, you are psyched,” Wexler, of the Electronic Payments Coalition, said. “But if you are a coffeehouse or a Redbox for example, this is a huge increase for you.”
Justin Stout, a retailer with Sweet Gourmet, said that his average daily sale ranges from $5 to $10 and that the new fees will have an impact.
“It hurts us a little,” he said. “But it’s only a few cents.”
Those pennies could add up for many small-purchase retailers who process customers’ cards as debit.
On a day with a cruise ship in port, Stout said Sweet Gourmet’s location in the City Market might make 300 sales. Under the new law, the company would pay $63 in interchange fees, as opposed to between $15 and $30, based on an average sale of between $5 and $10.
Retailers with average transactions larger than $21 stand to gain from the new rules, and large retailers might be the biggest beneficiaries of the reduced debit interchange fees.
Wexler said the reduction large retailers will see in interchange fees will allow them to consider running promotional prices or special offers on shipping, thereby increasing sales.
A spokesman from Target Corp. said interchange fees represent one of the company’s largest expense categories and cost the retailer millions of dollars annually.
“We are in a competitive marketplace as a retailer, so any reduction in industry operating costs may likely result in lower prices to consumers,” the Target spokesman said.
Woods said that, despite being exempted, small banks and credit unions might not be able to escape the law’s effects.
“The Durbin Amendment itself is an example of unintended consequences,” he said.
Reach Lauren Ratcliffe at 843-849-3119.