It's official. A study released May 1 by the Federal Reserve Board indicates the so-called Durbin amendment to the Dodd-Frank law has accomplished its mission of essentially halving the average debit card interchange fee acquirers pay card issuers to 23 cents from 43 cents.
The problem is that the savings are not going to the intended recipients-small merchants and consumers, according to a random sampling of payment industry insiders.
"It was almost childish to think that would work," contends Joe Bizzarro, CEO of PE Systems LLC, a Philadelphia-based interchange consulting firm.
Problems occur partly because most of the nation's independent sales organizations have chosen not to pass along the savings to merchants, says Mark Dunn, president of Hartland, Wis.-based Field Guide Enterprises, a consultancy for ISOs.
"I haven't talked to a single person who thought it has worked the way it was supposed to for small merchants," Dunn says.
"It was predictable but not sustainable" that most ISOs would keep the savings at first," says Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based consulting firm. Competition should erode the ISOs' gains within 24 to 36 months, he predicts.
In a statement, the American Bankers Association noted that, because of the Durbin amendment's phased implementation, it's impossible for the Fed's initial report to fully reflect or predict the consequences of upending the marketplace with government price controls.
"It's just too soon to tell," the association said.
Still, the impact on consumers and small businesses has never been more apparent, it said.
"While retailers pocket $7 billion annually from lower interchange costs, their customers pay higher fees as institutions adjust to government-imposed losses in revenue," the staterment reads. "At the same time, many small businesses now face higher interchange rates for low-dollar transactions, a classic example of strange things that occur when government creates unnatural pressures to make up for lost revenue."
Meanwhile, the rules also present another problem for some merchants, says Gil B. Luria, senior vice president at Los Angeles-based Wedbush Securities LLC. Retailers selling small-ticket merchandise, such as independent coffee shops or Red Box video rentals, have seen an increase in debit card interchange rates because of the amendment, he notes.
One provision of the new rules seems to have worked, at least in the short term, observes Patricia Hewitt, director of the Debit Advisory Service at Mercator Advisory Group in Maynard, Mass.
The Fed decreed that banks with assets of less than $10 billion
However, the smaller banks' transaction volume could decline if larger banks succeed in their effort to shift spending from debit cards by offering rewards for paying with credit cards, Hewitt says. Fewer transactions would quickly offset the advantage of charging higher interchange rates, she notes.
While some smaller merchants have suffered, consumers have had to bear fees imposed by larger banks to recoup revenue lost because of the amendment, notes Grover.
But some implications of the reduction in debit card interchange fees may not surface until the payments industry has amassed 12 months of data, says Dunn.
In its report, the Fed compared the debit-interchange rates during last year's fourth quarter, when the rate reduction took effect, with those in effect two years earlier, in October 2009.
The Fed's regulation provides that issuers subject to the cap may not receive an interchange fee of more than 21 cents plus 0.05% multiplied by the value of the transaction and a 1-cent fraud-prevention adjustment, the Fed's report said.
Broken down, the average rate for signature debit in the fourth quarter of 2011 was 51 cents at exempt banks and 24 cents at nonexempt banks, the report said.
The average for PIN debit was 31 cents at exempt banks and 23 cents at nonexempt banks.
