By Simon Johnson
It’s not hard to understand why large banks oppose any attempt to reform the financial arrangements currently surrounding credit cards and debit cards – in the duopoly run through Visa and MasterCard, big banks earn fees that far exceed their costs. This excess profit gap for debit cards would be substantially reduced by a Federal Reserve proposed regulation now on the table, which would implement the Durbin Amendment from the Dodd-Frank 2010 financial reform act. Senator Jon Tester (D., Montana) has proposed legislation that would delay and effectively derail implementation of the Durbin Amendment; the big banks are very much in his camp.
It’s much harder to understand why Independent Community Bankers of America (ICBA), the lobby group for small banks, is also working so hard for the Tester bill – because community banks are explicitly exempted from having to lower their fees and individual executives from at least some small banks publicly support the Durbin Amendment (e.g., see Senator Durbin’s letter to the ICBA last year).
The most plausible explanation is that ICBA is also one of the country’s largest issuers of credit cards and debit cards – so the representative of small banks actually has, in this regard, the incentives of a big bank. This is a major conflict of interest that is undermining the interests of community bankers and distorting the political process. The ICBA needs to declare this conflict in a transparent manner and step back from its involvement in the Durbin-Tester debate. (UPDATE: The ICBA says that it derives no revenue from debit interchange, despite the fact that the leading industry sources list it as #20 for “Signature Debit Card Interchange” and #13 for “PIN Debit Card Interchange”; for a full explanation, see the note from Cam Fine that appears with the NYT.com version of this column.) It also needs to publish the full details of a “survey” that it uses to claim that most community bankers are against the Durbin Amendment.
The open secret of the American financial system is that while you and your friends might like to rail against banks over dinner, when the time comes to pay (at the grocery store or in the restaurant), you likely offer the merchant some form of plastic card. While this transaction may seem “free” to you, the merchant is charged a fee by the bank that issued the card – administered through a card network run by Visa or MasterCard (or American Express or Discover). Specifically, the merchant’s bank (known as the “acquirer”) has to pay “interchange fees” to the card issuing bank.
For debit cards – which draw directly from your checking account — these fees average 44 cents per transaction in 2009 (which was 1.14 percent of the relevant average retail transaction, according to the Fed, adding up to $15.7 billion economy-wide). The actual cost of these operations varies, mostly depending on the extent of potential fraud. But over our current systems, the cost is very low – on average it is 4 cents per transaction, according to the Fed. (For the most detailed publicly available study on the effect of lower interchange fees, look at this report on what happened in the Australian debit card payment system.)
The Durbin Amendment charged the Federal Reserve with lowering the debit card fees to a reasonable level that will cover costs, and the Fed is proposing to set this rate at not more than 12 cents per transaction. But this rate would apply only to larger banks. This is by design — the Durbin Amendment does not apply to banks with less than $10 billion in total assets – and the Fed has confirmed that this exemption can be implemented (see this statement by Fed Chair Ben Bernanke).
Global megabanks are now regarded as “too big to fail” by policymakers, these firms benefit from huge implicit government guarantees. When you talk with community bankers, they understand and are seriously irked by this arrangement.
But the lobbyists for these community bankers have been unwilling or unable to take on the big banks in any part of the political arena. The Durbin Amendment is a determined attempt to give the small banks an advantage – but the ICBA is not interested.
The ICBA argues that the “carve out” for small banks will not work – through moves by merchants and the card networks, these banks will be squeezed out of the payments system. This is not the view of the Federal Reserve Board staff, who have studied this closely.
And Senator Richard J. Durbin is quite categorical that,
“my amendment does not allow discrimination by merchants against issuers of debit cards. As is the case today, under my amendment a merchant who accepts Visa debit cards from large banks would be required to accept Visa debit cards from small banks and credit unions as well. They would also be prohibited from offering discounts for large bank cards and not providing the same discount for small bank cards from the same network.” (From his June 11, 2010 letter to the ICBA)
Perhaps there are legitimate reasons for the ICBA’s views, but it is also the case that the ICBA Bancard is a significant player.
This is ironic because the ICBA Bancard’s stated purpose is admirable — to help small banks compete.
“Today, ICBA Bancard also serves as an advocate for independent community banks in national policy discussions about payment systems. Part of our mission is to educate community banks about the need to actively offer payment services in order to retain their best customers, earn profitable returns, and be respected as full-fledged participants in the marketplace.”
By some rankings, ICBA Bancard are among the top 25 debit cards and credit cards in the country.
The ICBA’s main justification for its position is a “survey” of independent community bankers that shows they are opposed to the Durbin Amendment – i.e., lowering the debit fees of banks with which they compete. This result is odd, particularly given that a simple online poll by the American Banker showed that 60 percent of its readers thought that small banks would gain from the Amendment – as this was despite the fact that the ICBA tweeted that it wanted votes against Durbin.
The ICBA’s website does not reveal details who was surveyed, by whom, and what questions they were asked. It’s time for the ICBA to publish those details. Is this a real survey or another instance of lobbying posing as research? The ICBA should share all this information both with its membership and with the broader public.
An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.
The Baseline Scenario 
The credit union analysis also concurs with the facts, Durbin’s well-intended carve out for smaller institutions will not work–and all card issuers, regardless of size, will be trapped into the lower pricing. Fine, except the price is below the fully-weighted actual institutional cost of running a transaction-based deposit account.
Simon, while you sense a need for vengeance upon big banks which is admirable, hurting small firms that were not at fault for the global crisis is disruptive to the sovereign US financial system.
The ICBA ask is only to stop, better-study the methodology for achieving the policy objective — and start over without the unintended harm.
I’m a big fan of credit unions. Why aren’t they and the ICBA more explicit in their call to simply delay and re-work the reg? I am sure the credit unions would get a lot of help from their members if they were able to make this clear. Right now, their position makes them look more like banks than credit unions.
I’m a big fan of cash. I hear it’s been getting a big following of late!
@Simon Johnson “The Durbin Amendment is a determined attempt to give the small banks an advantage”
What do you mean with an advantage… that they will be allowed to charge more… and so in the medium and long run will lose their clients?
What Simon Johnson fails or does not want to understand is that current bank regulations by means of the way they discriminate their capital requirements are favoring the big banks and turning the community banks into feeders of business for the too big to fail.
Good post. One thing you do not mention but very relevant is the degree of capture of the DC ICBA staff by large bank tendency in my home town. The Fed, Treas, OCC, etc are all predisposed to favor the larger, biggest paying players. The ICBA is a subsidiary of much larger interests in the industry, including through some of the personalities running this and other associations, who you correctly note do not represent the true interests of small community banks. This is why the smaller banks love FDIC Chair Sheila Bair BTW.
This all began with Glass-Steagall. I know that before that measure was abrogated, all banks were already issuing and using credit and debit cards to make money. The real issue is that somehow, when Gramm-Leach-Bliley passed, it was suddenly a shameless “every man (bank) for himself” greedy, rent-seeking banker that emerged from the stodgy old banking business, with an ever greater appetite for profit from anywhere. Morality be damned, arm the torpedoes, full speed ahead. This is what has happened as a trend, not just in America, but world wide. Suddenly, the wealthy have decided that they no longer owe their fellow citizens any measure of stewardship at all, but that, as before the French Revolution (as only one example, of course), the rest of us, so far as they are concerned, can eat cake, even if we can’t afford bread.
The ICBA move is only explicable in the sense that there are enough independent community banker “wannabes” to aspire to ever higher rent seeking, that they are spoiling the waters for the many who just believe that community bankers are what is left of core financial services for the least of our citizens. Sadly, in recent years, with the megas getting endless, lobby created, special favors from our public leadership, these folks have experienced more and more stress as they try to do business the old fashioned way. With so many small banks being squeezed into smaller and smaller spaces and going out of business, I simply believe that they are afraid of Durbin, not specifically, but emblematically, as another possible inroad. Sure, they won’t be specifically harmed by Durbin, but they also, under the Federal Banking system, don’t get any kind of special support from the FED as do the TBTF’s. Perhaps, if we were to carve out a bit more in the way of these banks competing more easily, they wouldn’t be objecting to such things.
But, then again, pursuant to your survey argument, it seems that there may be some TBTF moles in their organization intending to cloud the waters in the debate. It’s time we knew, as you suggest and as Paul Harvey used to say, the rest of the story.
I’d sum up Simon’s lucid {frustration[?]} loathing acquiescence as – “umbra and adulterated stealthy malfeasance via the, Big Six Shills”…in just two word’s!
“Procrustean Operation”
Thankyou, Simon and James
rc whalen is correct. It may seem that the “masses” are silent or apathetic, but this is not the case. What is happening is that the big money players are capturing and co-oping what would normally be the “gatekeepers” – media, top regulator positions, top law enforcement positions, and even some smaller organizations. With these avenues of expression cut off, and with an economic crises to occupy most people’s time, the false perception can more easily be propagated that no one cares about being robbed blind.
But when individuals are directly polled without a “gatekeeper” to present its opinion as though it belongs to the collective masses, the Truth is more apparent.
Will the change from ‘No TresPass’ to ‘All Speculators Will Be Shot’ posted on my trees deter..
nerdwallet reported via CSMonitor on this:
http://www.csmonitor.com/layout/set/print/content/view/print/376788
The int’l comparison is brilliant, also the point that the effect is wealth transfer upwards. Living in Germany I note that when plastic is used it’s usually a debit card. There seems to be not enough money in credit cards over here, perhaps because the banks can’t rig the interchange fees, and can’t generate chronic indebtedness among sufficient numbers of “customers”.
The persistence of the magnetic strip in the US (vs chip) reminds me of the persistence of checking – also a dinosaur technology that banks held onto, perhaps because of the rich flow of bounced check fees.
@ Sneelock
Wow! I guess that CSMonitors’ research article sums up Simon’s argument in a nutshell. :-)
“The Devil can cite scripture for his purpose”..Shakespeare (Merchant of Venice)
Now let us scramble the words to fit the timely objectives and what-do-ya-know, we get;
“The nefarious Bankster can cite fiduciary constitution for his simony avarice”
Thanks very good site !