Small Banks' Durbin Shield Worked in 4Q

Many small banks have never accepted that an exemption from the Durbin amendment will protect them from the measure's roughly 50% cut in debit interchange rates.

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, however.

Interchange revenue at banks identified as exempt by the Federal Reserve ticked up a few tenths of a percentage point from the third quarter to about $507 million in the fourth quarter, according to regulatory financial reports.

Meanwhile, at banks that are not exempt — those with assets of $10 billion or more (including affiliates) — interchange revenue fell 26%, to about $6.2 billion. Excluding the 15 banks where credit card loans exceeded 5% 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%, to $2.5 billion (see the first chart).

The uptick in interchange income at exempt banks, and the crash at large banks, occurred as overall debit transactions volume grew, but at a decelerating pace (see the second chart).

Last week, Visa Inc. Chief Executive Joseph Saunders attributed some of the slowdown to "expected de-emphasis by issuers of debit card marketing and debit rewards programs."

He said it was difficult to quantify the impact, but, "Obviously, issuers seem to be pushing their credit businesses a little bit more strongly or a lot more strongly than they do their debit businesses."

All of the largest institutions were hit hard. At JPMorgan Chase & Co.'s JPMorgan Chase Bank NA, interchange income fell 37%, to about $509 million. (Most of its credit card assets are housed in other units.) At Bank of America Corp.'s Bank of America NA, interchange income dropped 50%, to about $413 million.

Exempt banks like Eastern Bank, the bank subsidiary of Eastern Bank Corp. in Boston, and First Financial Bank NA, a unit of First Financial Bancorp in Cincinnati, showed quarter-over-quarter growth in interchange revenue (see the tables).

To be sure, small banks concerned by spillover from the Durbin amendment have argued that it will take time for competitive pressures to become apparent — a chief worry is that retailers will give preferential treatment to large bank cards that carry lower interchange rates.

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

Indeed, the prospect of the $2.1 billion drop in interchange income among banks that took place in the fourth quarter (pointing to an annual hole of about $8.5 billion) has already rearranged the banking business in unpredictable ways. Notably, there was B of A's aborted $5-a-month debit card fee.

Still, while authorities will be keeping a close eye on whether the exemption effectively protects small banks, it appears that in the fourth quarter it did just that.