Debit Interchange Fee Chutzpah

Debit Interchange Fee Chutzpah

Chutzpah, according to the traditional definition, is killing your parents and then pleading for mercy, because you are an orphan. I found myself thinking about that when reading National Journal’s Stacy Kaper’s account of the latest goings-on in the lawsuit that several retail groups had filed against the Federal Reserve last year. The merchants are unhappy with what they see as the failure of Ben Bernanke’s outfit to comply with the Durbin Amendment to the Dodd-Frank act, which directed it to ensure that debit interchange fees were “reasonable and proportional.”

Well, as most of you know, the Fed fulfilled its duty by placing an upper limit of about $0.24 on the amount card issuers could charge merchants for each debit transaction they processed, which is 45 percent lower than the pre-reform average of $0.44. The upshot of the Fed’s decision was that billions of dollars ($7 billion is our estimate) of annual interchange revenue was transferred from the banking industry to the retail one. So what’s the retailers’ problem? Well, let’s hear them.

Fed Unfairly Set Debit Interchange Fees too High

That’s the main issue the retailers have with the Fed’s decision, as Kaper reminds us. But Doug Kantor, one of the lawyers representing them, puts it differently:

[I]f the Fed had written the rule correctly then there would not be these very mixed results ?Ǫ you wouldn’t have some of these negative impacts that we have seen.

The rule has indeed caused plenty of side effects, as the issuers were forced to make up for the lost interchange revenues by raising fees elsewhere. While some of their attempts have failed (spectacularly so in the case of the debit card fees tested by Bank of America and others), the cost of banking has nevertheless gone up.

So how could the Fed have written the rule so that such “negative impacts” could have been precluded? Well, Kantor doesn’t say, but he clearly believes that the interchange limit was placed too high. I don’t see how this could’ve helped anyone other than the retailers. See, courtesy of SNL Financial, we now have data on the issuers’ interchange losses in the fourth quarter of last year, which began on the day the fee limit was enacted. The table below ranks the twenty largest US card issuers by interchange revenue (debit and credit) and it shows how the total has changed on a quarterly and yearly basis.

Debit Interchange Fee Chutzpah

American Express has thrived, because it doesn’t issue debit cards, but you can see how almost everyone else has been hit hard, even as other data have shown that the aggregate transaction volume has increased. Had the interchange limit been placed lower, these losses would have been greater, so the issuers would have had to be even more aggressive in their revenue recouping efforts. How could that have benefited anyone other than the retail industry?

Now, financial institutions with less than $10 billion in assets were exempted from the interchange limit, so they continued collecting interchange fees at the old rates. Naturally, as the transaction volumes grew, so did their revenues, by $507 million in Q4 2011, according to an American Banker estimate cited by Kaper. However, that amount is less than a quarter of the $2.2 billion loss suffered collectively by the bigger banks, according to the same source, so on balance the retailers have been the recipients of a $1.7 billion revenue transfer.

The Issue with Low Transaction Amounts

There is, however, a group of retailers who were genuinely hurt by the reform. As Kaper says, the interchange limit

benefited retailers who sell expensive items like flat-screen TVs and home appliances, but hurt those that sell cheaper goods and tend to register “small-ticket” transactions of $15 and less, like coffee shops, fast-food restaurants, and convenience stores.

Well, that was another one of the reform’s inevitable side effects. As it happens, we ran the numbers back in early August of 2011 and warned that “the new pricing structure will allow issuers to make more money from debit transactions in amounts of up to $11 or so than they currently do.” We used the table below to shows how the pre- and post-Durbin interchange structures compare for amounts of $5, $10, $15, $20 and $25.



Transaction Amount






Old Interchange

1.55% + $0.04






New Interchange

0.05% + $0.22






So yes, that was an easily predictable and predicted consequence of the reform.

The Takeaway

The Durbin Amendment represented a government-mandated transfer of revenues from one industry to another. That much has always been clear. What we have now is that the industry, which benefited from the exchange, is complaining for not getting enough. Of course, the retailers and their lawyers couch it in different terms, but the bottom line is that they want more. If the retailers won the lawsuit, we should prepare ourselves for even higher banking fees and fewer services. Fortunately, the Fed is unlikely to lose this one.

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