A Federal Reserve study released May 23 says the small-banks exemption from the debit interchange fee limit of 21 cents required for large banks has worked as intended in holding constant swipe fee revenue for small banks.
Regulation II of the Dodd-Frank Wall Street Reform and Consumer Protection Act called for the Fed to finalize limits on swipe transaction fee amounts that large banks could charge merchants. Made effective in October 1, 2011, large banks were limited to charging retailers 21 cents per transaction, while banks, thrifts and credit unions with assets under $10 billion were exempt. As this is the first study to observe the impact that the rule has had on interchange fee transaction costs for businesses, retail treasurers and managers of payments processing should find the study compelling.
Upon finalization of the rule, concern had been raised that, despite a small issuer exemption, the fee cap would put downward pressure on general interchange fees. Further worries from small banks pointed to a provision ending network exclusivity, where instead of allowing banks to group with a single payment network, they now were required to offer at least two unaffiliated networks per debit card. The network exclusivity prohibition, small banks argued, would impose burdensome additional costs for them.
The study notes that exempted smaller institutions have continued collecting the same revenue fee of 43 cents per transaction that was standard for all banks prior to the swipe fee cap. Large issuers have remained subject to compliance of a 21 cent limit, plus additional minor fraud-related costs. Surveying 97 debit card issuers, the Fed points to its data to suggest swipe rates are consistent with the competitive restructuring sought to have been triggered through the law.
“Of the 97 respondents with debit card programs, three reported having received complaints from their cardholders about treatment of their debit cards, although it is not clear that any complaints were directly due to the fact that the cards were exempt from the interchange fee standard,” the study reported.
Retail groups have praised the Fed report, while organizations representing small banks and credits unions remain skeptical, fearing the data is too limited in its short-term span to truly reflect the ultimate costs incurred for issuers, as well as whether their exemption proves effective against market competition with large banks.