In the weeks preceding last November’s US election, bankers spoke of finding ways to apply common-sense tweaks to the edges of onerous regulations like the Dodd-Frank bill. A few short months later, talk has shifted to an outright repeal of the Durbin Amendment, if not of Dodd-Frank itself. We had expected such efforts to gather steam over the next 90-120 days. However, the general pace of reform has been slow, which will likely mean attempts to streamline Dodd-Frank may not begin this soon.
The primary impetus for a revision of Dodd-Frank is to ensure creditworthy businesses can secure loans. More broadly, the grievances aired by bankers about the current economic environment are the sheer amount of time consumed to meet the requirements of regulators. As one industry executive related, “They practically live here. It doesn’t leave enough time to focus on the stuff we need to be doing for our customers.”
While Dodd-Frank is likely better suited for a “repeal and replace” approach, and the net effect of this or any approach is hard to predict, the Durbin Amendment is more straightforward. Although its mandated interchange reductions were sold as a pro-consumer initiative, there is no empirical evidence to show that consumers have benefited from this regulation. On the contrary, some studies suggest Durbin had the unintended effect of diverting spending from debit to credit cards, which created a greater financial burden for consumers who carry balances.
The hasty passage of this legislation led to further complications, most notably the arbitrary $10 billion asset threshold chosen as the cutoff for enforcement. Not only is it difficult to find meaningful operational differences between say, an $8 billion and $12 billion bank, but two $10 billion banks may behave differently from one another, depending on their retail or corporate orientation.
The Debit Corral
A Durbin repeal will have a more dramatic and rapid impact for the >$10 billion banks. We expect this to create a competitive environment for payment networks that approaches a “Wild West” style fever pitch. Because Durbin restricted the upfront bonuses networks could provide to secure FI business, more money is likely to flow into the system. Large FIs can also expect to negotiate higher interchange rates, boosting their fee income.
Because debit card interchange rates were artificially suppressed, debit is where we can expect major adjustments. This could lead to rejuvenation of debit reward programs, which most large banks discontinued post-Durbin for a lack of sufficient revenue to cover the cost. Consumers may then respond by shifting more transaction volume to debit, although the rewards offered on credit card programs will almost certainly remain more generous.
Banks’ payment network contracts tend to be long-term in nature, which is logical given the significant switching costs involved in changing vendors. This gives incumbent providers a valuable head start in presenting revised terms reflective of the new regulatory environment to pre-empt moves by their competitors. Of course, financial institutions must be equipped to wield their newfound leverage to their own advantage, as well.
Market Forces, Common Sense Regulation
A few years ago I attended a Texas bankers’ conference where Steve Forbes sagely opined that the US didn’t have a regulation problem before Dodd-Frank; it had an enforcement problem. In Forbes’ view, the necessary rules were already on the books, regulators simply weren’t enforcing them.
When competition is removed from the equation, market pricing becomes distorted. We at SRM expect debit card dynamics in the >$10 billion bank market post-Durbin to converge with those in the <$10 billion market. Competition remained relatively unfettered within the small FI segment, but with big game at stake it will be more intense. Having a partner with expertise in the <$10 billion market (PIN optimization, knowledge of the vendors and moving parts, etc.) is imperative.As we wait for the regulatory landscape to shake out, bankers should use the time to familiarize themselves with all relevant vendor contract provisions; identify logical opportunities; and line up the resources to take action once appropriate.