By Anne Leisz
The topic of interchange reimbursement fees is always sure to draw a heated reaction from any of the varied participants in the payments industry, especially from the hordes of merchants who feel that the benefits from payment cards are grossly overstated by issuing banks in the United States.
After decades of legal court battles, the merchant community was finally rewarded with fee reductions incorporated in the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The amendment was introduced by then Sen. Richard Durbin, D-Ill., and is commonly referred to as the Durbin Amendment. After two years of implementation, however, it does not appear that merchants have passed much of the benefit back to consumers.
The Durbin Amendment is one small part of the gargantuan 2,200-page Dodd-Frank legislation that was adopted in 2010. It required that the Federal Reserve place limits on fees charged to retailers for accepting and processing debit cards. Credit cards were left out of this ruling, but the legal wrangling has continued.
The Merchants Payments Coalition, a merchant advocacy group, has argued and persuaded a Federal Court judge that the Fed was remiss in establishing what it felt were the most appropriate fee levels. The Fed recently filed an appeal against this ruling.
The Fed had made an original proposal to set debit interchange at 12 cents a transaction back in 2010, but after the typical comment period that precedes implementation, the fee morphed to 21 cents and a 0.5 percent fraud tax, which is still less than the average 44 cent debit interchange fee before the amendment.
Shortly after this new fee structure took effect, the "Big Three" – Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. – began complaining in quarterly reports that the new rules had resulted in hundreds of millions of dollars in lost revenue. The stage was set for more acrimony. Merchants wanted fees reduced to 12 cents a transaction; banks wanted more fee revenue; consumers were not at the table to be heard.
In the vein of timing is everything, a new research report titled The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis, was published recently by David S. Evans, Howard H. Chang and Steven Joyce at the University of Chicago Law School.
Evans summarized the findings in a related blog post that read, "All in all, consumers took it on the chin for $22 billion and possibly more. That $22 billion is the present discounted value of the losses to consumers, starting in October 2011 when the caps went into effect, and off into the future."
It is interesting to note that one of the arguments proffered by the merchant side of the business was that high interchange fees disadvantaged consumers, since merchants had to charge more to recover them over time. This populist appeal may have swayed opinions, but reports by economists in the past have often revealed that pass-through of direct cost reductions are rarely realized in equivalent price reductions at the POS, especially for fee changes of this magnitude.
But as the report relates, on a gross basis the Durbin Amendment did produce over $7 billion on an annual basis in cost reductions for merchants and an equal amount in lost revenue for banks. Did merchants pass any savings onto consumers? The authors admit that it is difficult to measure this pass-through. If "perfect competition" existed, then basic economic principles support an ensuing consumer benefit, but the market is far from perfect.
The upshot is that banks have raised their fees significantly across the board, much more than the perceived losses in revenue. Does this result really surprise anyone?
Anne Leisz has been the Head Editor of Processingfinder.com since 2012. A 2006 graduate of Daytona State College, she writes articles based on her international payments knowledge gathered in the field alongside her esteemed colleagues of payments industry professionals and financial analysts. She can be reached at firstname.lastname@example.org.
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