Just the phrase, “The Durbin Amendment” is enough to drive some less reserved bankers to punch a wall, scream out a window, or initiate whatever coping mechanism helps them most effectively blow off steam. While the mere mention of this law, at a minimum, elevates the blood pressure of those responsible for managing banks and credit unions, these executives recognize that the sensible approach to Durbin is to find ways to thrive within its constraints.
One such area is found in Federal Reserve’s Regulation II, created in support of Durbin, which sets “reasonable” interchange fees for debit transactions. Within this provision an exemption is made for financial institutions (FIs) with less than $10 billion in assets that offers these organizations the potential of protecting their current level of interchange revenue.
The regulation further directs the Fed to publish debit interchange data every two years. Recently, the Fed released 2016 information on interchange rates. Interestingly, this information contained some good news for FIs.
No News is Good News
Well, actually, the good news in the recent Fed interchange document is the absence of bad news. Since a one-time reset in 2012 coinciding with Durbin’s effective date, average interchange fees per debit transaction at “covered” institutions (those with >$10 billion in assets) have remained at 23-24 cents. Though many industry observers expected Durbin to trigger “a race to the bottom” with networks continually reducing prices to attract new merchants who, in a post-Durbin world, control routing decisions, it has not.
The most recent information published by the Fed confirms that the fee level averages for the “covered” institutions remain remarkably stable. The fact that the market quickly found a new equilibrium is good news for FIs, on balance. This is especially true given that the number of debit transactions continues to grow at a healthy clip. Interchange fees have not only weathered 2012’s storm, but have now resumed their upward trend at most banks and credit unions.
For exempt institutions (<$10 billion in assets) the story is somewhat more nuanced, however. While these FIs did not experience the one-time 2012 reset, their average interchange on single-message (PIN) transactions has been drifting downward – from 31 cents in 2011 to 26 cents in 2016. On the other hand, exempt dual-message transactions have held at 51 cents, roughly double the other categories. As a result, exempt institutions reap a blended average of 42 cents per transaction; nearly double that of covered FIs and down just a single cent from their own pre-Durbin levels. Another mild surprise is that the share of transactions at exempt institutions has held steady at 37 percent, despite continuing consolidation of assets at the largest banks.
Is Interchange Interchangeable?
The Fed report also provided specifics on a wide array of networks. From a consumer standpoint, debit brand and routing are almost completely commoditized, so long as the card is connected to their FI. Consumers only care about their transactions settling promptly and showing up accurately on their statement (which is essentially a given at this point). Consumers also expect their card is widely accepted.
Overall, the card networks have concluded that dramatic price changes aren’t necessary to acquire (or maintain) volume. Until someone slashes rates in a market share grab, the current period of stable pricing is likely to persist. While this type of grab would be most likely to generate the most dramatic change, the slow, steady decline in ticket size – the average transaction was over $39 in 2011; it’s under $38 today – should be monitored. Since the majority of interchange is driven by transaction value, this trend exerts ongoing downward pressure on fees. Yet, it very well maybe offset by growth in the volume number of transactions if current trends in this area hold.
We suspect the Fed’s interchange data has prompted similar conversations within FIs. Despite Durbin’s constraints, there are proven strategies available to optimize this important revenue line. As with most things so goes it in this instance – information is power.